The Reference Model of Open Distributed Processing - written by the International Organisation for Standardization - defines the following concepts:
Entity: Any concrete or abstract thing of interest.
Object: A model of an entity. An object is characterised by its behaviour and, dually, by its state.
Behaviour (of an object): A collection of actions with a set of constraints on when they may occur.
Interface: An abstraction of the behaviour of an object that consists of a subset of the interactions of that object together with a set of constraints on when they may occur.
Encapsulation: the property that the information contained in an object is accessible only through interactions at the interfaces supported by the object.
These, you will appreciate, are quite broad. Let us see, however, whether putting functionality within a function can logically be considered to constitute towards encapsulation in these terms.
Firstly, a function is clearly a model of a, 'Thing of interest,' in that it represents an algorithm you (presumably) desire executed and that algorithm pertains to some problem you are trying to solve (and thus is a model of it).
Does a function have behaviour? It certainly does: it contains a collection of actions (which could be any number of executable statements) that are executed under the constraint that the function must be called from somewhere before it can execute. A function may not spontaneously be called at any time, without causal factor. Sounds like legalese? You betcha. But let's plough on, nonetheless.
Does a function have an interface? It certainly does: it has a name and a collection of formal parameters, which in turn map to the executable statements contained in the function in that, once a function is called, the name and parameter list are understood to uniquely identify the collection of executable statements to be run without the calling party's specifying those actual statements.
Does a function have the property that the information contained in the function is accessible only through interactions at the interfaces supported by the object? Hmm, well, it can.
As some information is accessible via its interface, some information must be hidden and inaccessible within the function. (The property such information exhibits is called information hiding, which Parnas defined by arguing that modules should be designed to hide both difficult decisions and decisions that are likely to change.) So what information is hidden within a function?
To see this, we should first consider scale. It's easy to claim that, for example, Java classes can be encapsulated within a package: some of the classes will be public (and hence be the package's interface) and some will be package-private (and hence information-hidden within the package). In encapsulation theory, the classes form nodes and the packages form encapsulated regions, with the entirety forming an encapsulated graph; the graph of classes and packages is called the third graph.
It's also easy to claim that functions (or methods) themselves are encapsulated within classes. Again, some functions will be public (and hence be part of the class's interface) and some will be private (and hence information-hidden within the class). The graph of functions and classes is called the second graph.
Now we come to functions. If functions are to be a means of encapsulation themselves they they should contain some information public to other functions and some information that's information-hidden within the function. What could this information be?
One candidate is given to us by McCabe. In his landmark paper on cyclomatic complexity, Thomas McCabe describes source code where, 'Each node in the graph corresponds to a block of code in the program where the flow is sequential and the arcs correspond to branches taken in the program.'
Let us take the McCabian block of sequential execution as the unit of information that may be encapsulated within a function. As the first block within the function is always the first and only guaranteed block to be executed, we can consider the first block to be public, in that it may be called by other functions. All the other blocks within the function, however, cannot be called by other functions (except in languages that allow jumping into functions mid-flow) and so these blocks may be considered information-hidden within the function.
Taking these (perhaps slightly tenuous) definitions, then we may say yes: putting functionality within a function does constitute to encapsulation. The encapsulation of blocks within functions is the first graph.
There is a caveate, however. Would you consider a package whose every class was public to be encapsulated? According to the definitions above, it does pass the test, as you can say that the interface to the package (i.e., all the public classes) do indeed offer a subset of the package's behaviour to other packages. But the subset in this case is the entire package's behaviour, as no classes are information-hidden. So despite regorously satisfying the above definitions, we feel that it does not satisfy the spirit of the definitions, as surely something must be information-hidden for true encapsulation to be claimed.
The same is true for the exampe you give. We can certainly consider n = n + 1 to be a single McCabian block, as it (and the return statement) are a single, sequential flow of executions. But the function into which you put this thus contains only one block, and that block is the only public block of the function, and therefore there are no information-hidden blocks within your proposed function. So it may satisfy the definition of encapsulation, but I would say that it does not satisfy the spirit.
All this, of course, is academic unless you can prove a benefit such encapsulation.
There are two forces that motivate encapsulation: the semantic and the logical.
Semantic encapsulation merely means encapsulation based on the meaning of the nodes (to use the general term) encapsulated. So if I tell you that I have two packages, one called, 'animal,' and one called 'mineral,' and then give you three classes Dog, Cat and Goat and ask into which packages these classes should be encapsulated, then, given no other information, you would be perfectly right to claim that the semantics of the system would suggest that the three classes be encapsulated within the, 'animal,' package, rather than the, 'mineral.'
The other motivation for encapsulation, however, is logic.
The configuration of a system is the precise and exhaustive identification of each node of the system and the encapsulated region in which it resides; a particular configuration of a Java system is - at the third graph - to identify all the classes of the system and specify the package in which each class resides.
To logically encapsulate a system means to identify some mathematical property of the system that depends on its configuration and then to configure that system so that the property is mathematically minimised.
Encapsulation theory proposes that all encapsulated graphs express a maximum potential number of edges (MPE). In a Java system of classes and packages, for example, the MPE is the maximum potential number of source code dependencies that can exist between all the classes of that system. Two classes within the same package cannot be information-hidden from one another and so both may potentially form depdencies on one another. Two package-private classes in separate packages, however, may not form dependencies on one another.
Encapsulation theory tells us how many packages we should have for a given number of classes so that the MPE is minimised. This can be useful because the weak form of the Principle of Burden states that the maximum potential burden of transforming a collection of entities is a function of the maximum potential number of entities transformed - in other words, the more potential source code dependencies you have between your classes, the greater the potential cost of doing any particular update. Minimising the MPE thus minimises the maximum potential cost of updates.
Given n classes and a requirement of p public classes per package, encapsulation theory shows that the number of packages, r, we should have to minimise the MPE is given by the equation: r = sqrt(n/p).
This also applies to the number of functions you should have, given the total number, n, of McCabian blocks in your system. Functions always have just one public block, as we mentioned above, and so the equation for the number of functions, r, to have in your system simplifies to: r = sqrt(n).
Admittedly, few considered the total number of blocks in their system when practicing encapsulation, but it's readily done at the class/package level. And besides, minimising MPE is almost entirely entuitive: it's done by minimising the number of public classes and trying to uniformly distribute classes over packages (or at least avoid have most packages with, say, 30 classes, and one monster pacakge with 500 classes, in which case the internal MPE of the latter can easily overwhelm the MPE of all the others).
Encapsulation thus involves striking a balance between the semantic and the logical.
All great fun.