Sen’s seminal contribution highlights the importance of positive freedom in the measurement of human welfare. The present paper attempts to measure this freedom aspect in an integrated approach. The main contribution of the paper is the simultaneous estimation of capability, functioning, and conversion efficiency with explicit modeling of freedom by latent variable modeling approach. The knowledge dimension of capabilities is modeled and estimated by integrating exploratory and confirmatory statistical methods in a two-stage procedure. In the first stage, Partial Least Squares method is employed to construct latent variable scores. These scores are transformed to relative scores for the sake of comparison and then used to estimate the proposed simultaneous-equation capability model by 3SLS in the second stage. The results show that capability is inversely related to resources and positively related to freedom and functioning. The computed relative capability and freedom inequality ratios are very high whereas relative functioning and efficiency inequality ratios are at a moderate level. The conventional income inequality ratio is lower as compared to the capability dimensions’ ratios and close to the Gini-coefficient. The paper extended the measurement of conversion inefficiency into voluntary and involuntary inefficiency. The paper also suggests criteria for evaluating empirical research within the capability approach framework. The paper recommends development of specific survey instruments in order to create better indicators for capability dimensions and use of latent variable modeling for constructing latent variable scores, and their subsequent use in estimation. These findings suggest a capabilities-oriented public and education policies for the enhancement of knowledge dimension of capabilities in particular and human welfare in general. The focus of education policy should be extended from investment oriented (human capital approach) to value-oriented (human capability approach).