Wellbeing economics and capabilities

Posted: October 2018

A key principle for designing effective policies to support regional economic development is to recognise and reinforce local capabilities for innovation. Fabrizio Barca, Philip McCann and Andrés Rodríguez-Pose (2012), for example, concluded their authoritative review with the following observation (p. 149, emphasis added):

The place-based argument suggests that development strategies should thus focus on mechanisms which build on local capabilities and promote innovative ideas through the interaction of local and general knowledge of endogenous and exogenous actors in the design and delivery of public policies…

This principle is an essential element in the smart specialization strategies of the European Union’s Cohesion Policy. Indeed, Philip McCann and Raquel Ortega-Argilés (2015, p. 1300) observe that success “can only be achieved if a smart specialization regional policy logic is accompanied by a rigorous self-assessment of a region’s knowledge assets, capabilities and competences”, among other requirements.

Other branches of the literature also emphasise the value of the capabilities concept. An influential example is the dynamic capabilities theory of the firm, introduced by David Teece, Gary Pisano and Amy Shuen (1997). As recently summarised by Teece (2017, p. 3): “The basic argument is that firms differentiate themselves through learning, entrepreneurship, innovation, and astute decision making; in short, firms are differentiated by their capabilities, especially their capabilities to decide, to innovate, and to change”.

Another famous usage is Amartya Sen’s capabilities approach, which has been further developed by other scholars including Martha Nussbaum, Ingrid Robeyns and Sabina Alkire. Sen (1999, p. 18) explained that his analysis is based on the freedoms of individuals: “Attention is thus paid particularly to the expansion of the ‘capabilities’ of persons to lead the kinds of lives they value – and have reason to value.”

It is not difficult to think of other ways in which the capabilities concept can be used to understand how major institutions foster wellbeing. A Nation State, for example, has distinctive capabilities, if only because it has a monopoly on the legitimate use of physical force within its territory (Weber, 1919). On the world stage, the global community is being challenged to develop new capabilities needed to address serious issues affecting all of humanity. The Intergovernmental Panel on Climate Change is an obvious example.

These observations open up an interesting possibility. If wellbeing depends on expanding personal capabilities, if capabilities can be expanded by dynamic firms operating in the market economy, and if the competitiveness of firms is influenced by the local capabilities in regions where they are based, can these insights be integrated to create what might be called “the capabilities approach to prosperity”?

I and two colleagues (Caroline Saunders at Lincoln University and Joe Saunders now at Durham University) have sought to answer this question in a book recently published as an Open Access Palgrave Pivot (Dalziel et al, 2018). It is the second book in the Palgrave Macmillan series on Wellbeing in Politics and Policy, launched earlier this year.

The book starts with the individual person, paying particular attention to how education can expand capabilities. It then analyses how capabilities grow by people forming households and families, and through collective action with others in the institutions of civil society. The middle chapter incorporates David Teece’s capability theory of the firm before the second half of the book considers how local government, central government and international collaboration have distinctive capabilities that can be used to enhance wellbeing.

Throughout the book, our focus is on how people and communities can invest in different types of capital to expand wellbeing. This follows the OECD (2017) wellbeing conceptual framework, but our approach highlights a wider range of capital stocks that in that model: human capital, cultural capital, social capital, economic capital, natural capital, knowledge capital and diplomatic capital.

We call the resulting analytical framework Wellbeing Economics, which is the title of our book. We do not suggest this is a new theme in economics, but we do argue it is no longer credible for economists to assume that the best contribution they can make to wellbeing is to design policies that will increase the growth of gross domestic product. Instead, the book provides practical analysis of how local and central government policies can contribute to enhanced wellbeing, beyond what persons could otherwise achieve in their households, families, communities and market transactions.

Bio

Paul Dalziel is Professor of Economics and Deputy Director of the Agribusiness and Economics Research Unit at Lincoln University, New Zealand. His research focuses on economic and social policy, with an emphasis on regional economic development. He is a Fellow of the Regional Studies Association and is the current RSA Ambassador for New Zealand. He has authored or edited 11 books, and written 105 refereed chapters and articles. His latest book is Wellbeing Economics: The Capabilities Approach to Prosperity, published in September 2018 as an Open Access Pivot by Palgrave Macmillan.

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References

Barca, F., McCann, P. and Rodríguez-Pose, A. 2012. The Case for Regional Development Intervention: Place-based versus Place-neutral Approaches, Journal of Regional Science, 52:1, 134-152.

Dalziel, P., Saunders, C. and Saunders, J. 2018. Wellbeing Economics: The Capabilities Approach to Prosperity. London: Palgrave Macmillan.

McCann, P. and Ortega-Argilés, R. 2015. Smart Specialization, Regional Growth and Applications to European Union Cohesion Policy, Regional Studies, 49:8, 1291-1302.

OECD. 2017. How's Life? 2017: Measuring Well-being. Paris: OECD Publishing, https://doi.org/10.1787/how_life-2017-en.

Sen, A. 1999. Development as Freedom. Oxford: Oxford University Press.

Teece, D. 2007. A Capability Theory of the Firm: An Economics and (Strategic) Management Perspective. New Zealand Economic Papers, https://doi.org/10.1080/00779954.2017.1371208.

Teece, D., Pisan, G. and Shuen, A. 1997. Dynamic Capabilities and Strategic Management. Strategic Management Journal, 18:7, 509-533.

Weber, M. 1919. Politics as a Vocation. Lecture delivered in Munich on 28 January 1919. Translated and edited as chapter 7 in Waters, T. and Waters, D. (Eds) Weber’s Rationalism and Modern Society: New Translations on Politics, Bureaucracy, and Social Stratification (New York: Palgrave Macmillan, 2015, pp. 129-198).