A Two-Capability Illustration

Abstract

The theory developed so far is completely general. Relevance requires operational specification, in particular of capabilities and of a number of essential parameters, such as elasticities of substitution. Such operational specification will be initiated in Chapters 7 and 8. In this chapter, the nature of the theory and its implications will be brought out by adding some restrictions on the parameters in a two-capability specification. While these restrictions are made only to illustrate what may be accomplished with the theory, it is nevertheless believed that they are sufficiently close to reality to claim some degree of validity for real-world problems.

But people earn incomes by means of several different sorts of capacity, among which the principal division is between manual capacity and mental capacity. From the point of view of income-getting, therefore, it cannot properly be assumed that we are dealing with a single homogenous group.

—A.C. Pigou (1924)