Locating financial capabilities within capability approach – theoretical survey
Potocki, Tomasz (2018). 'Locating Financial Capabilities within Capability Approach – theoretical survey' Paper presented at the annual conference of the HDCA, Buenos Aires, Argentina 2018.
An increasing part of the population around the world suffers from excessive level of financial conflict and stress as a consequence of financial instability [Deaton 2011, Shiller 2012]. Income volatility, financial insecurity, lack of financial tools have become representation of financial functionings and capability failure of millions of families, especially the poor ones [Rutherford 2001; Wolff and De-Shalit 2007; Collins et al. 2009; Morduch and Schneider 2017]. The income level as well as the ability to generate income is not the entire picture of the following problem and may not fully reflect constraints in converting income into valuable capabilities and functionings [Sen 2009: 256-257, compare with: Sen 1985; 1997; Atkinson 1987]. To better understand this problem more attention should be given to financial capabilities (being financially secured, avoiding financial stress, having related income-using abilities like responsible borrowing, ability to cope with financial shocks, being financially literate inter alia), which may prevent families from falling into the so-called “spending poverty” [Sen 2002: 524; Morduch and Schneider 2017: 164]. Collins et al. has proposed for this financial capability failure the phrase “triple whammy”, which includes: low income, irregularity and unpredictability, as well as lack of tools [Collins et al. 2009: 16]. This inability limits financial opportunities and choices available for individuals and their families and referring to achieving what they value and becoming a kind of people they want to be.
First, in many cases the lack of financial capability and the related income-using abilities have intrinsic constraints (as a result of personal conversion failure) for example in the form of cognitive predispositions such as the lack of self-control, short-term thinking, impulsive buying, underestimation of financial risk, risk and financial illiteracy or trusting the wrong advisor interalia [Bertrand et al. 2004, 2006; Mullainathan 2007; DellaVigna 2009, Robeyns 2016, Akerlof and Shiller 2015]. Therefore, growing financial insecurity and lack of valuable financial tolls are indications of financial capability failure (inability to transform income and social benefits into valuable and real financial freedom and opportunities) [Sen 1985, 1997; Alkire 2002; Robeyns 2005, 2016; Wolff and De-Shalit 2007, 2013; Dubois and Rousseau 2008]. The consequences of that conversion failure may be growing vulnerability to financial shocks [Atkinson et al. 2002; Nolan and Whelan 2011; Dubois 2009]. This kind of deprivation may increase vulnerability to poverty, finally resulting in increase of poverty risk or inability to escape from poverty trap [Dubois and Rousseau 2008, p.425].
Second, it may be the result of structural constraints (as a result of environmental and social conversion failure) mainly due to a dynamic financial development and financialisation around the world, which makes the financial inclusion an only panacea for poverty reduction [Roy 2010]. This financial evolution has brought enormous load of risk and uncertainty, consequently additional factors of instability in everyday financial decisions [Shiller 2012]. However, poor financial services, product complexity, lack of transparency create an even bigger insecurity gap and deepen the lack of control over the financial environment [Morduch and Schneider 2017: 177].
The challenge of understanding the enormous complexity of financial market and the lack of ability and opportunity to manage household finances have initiated a social movement of financially capable people as the answer to personal finance insecurity phenomena [Hoelzl and Kapteyn 2011; Sherraden 2013; Sherraden and Grinstein-Weiss 2015]. Financial capabilities have become a high priority public policy objective that aims to empower people and improve their financial functionings as well as the quality of life. The idea of financial capabilities derives mainly from two scientific directions: behavioural economics and customer studies [Xiao et al. 2014, 2015, Anand and Lea 2011]. Both of them share the same objectives – reduce personal financial insecurity and improve financial responsibility. It is accomplished by supporting decision-makers in taking good financial decisions. This way of thinking is in line with many researchers’ argumentation concerning the inability of some poor people to take up the opportunities [Ravallion 2001, Sen 1999, 2009, Duflo 2006, Banerjee and Duflo 2011, Shafir and Mullainathan 2014]. However, recently more and more attention is given to Capability Approach as a theoretical foundation for financial capabilities [Sherraden 2013; Sherraden and Grinstein-Weiss 2015]. Unfortunately, it is done in a very limited way, because it mainly utilizes the Nussbaum definition of capabilities [Sherraden 2013, Kempson et al. 2013]. In our opinion financial capabilities ought to take an significant place in the discussion, not only in customer studies and behavioral economics but most of all in Capability Approach. It is of great importance, because the lack of such capabilities may expose at risk different capability sets or prevent people from sustaining or achieving them (for example general education, treatment of chronic diseases, active participation in socio-cultural life). Moreover, in extreme situations it may even pose danger to the so-called basic capabilities, when a failed financial decision leads to a drastic reduction of quality of life or social exclusion of some household members or even the entire household (for example it may result in suicide) [Sen 1999: 39].
This paper aims to present a theoretical survey of financial capabilities which are framed within Sen’s Capability Approach in an interdisciplinary way (using Robeyns’s module framework) [Robeyns 2016]. It focuses on fundamental conceptual aspects of the Capability Approach, and on how we may use that framework for the evaluation and assessment of financial capabilities. Moreover, the following paper pays attention to difficulties with defining financial capabilities,mainly by addressing the critical role of rational deliberation and financial functionings and also proposes the framework based on Capability Approach [Qizilbash 2008: 61]. On top of that, this study may, as stated by Robeyns, “integrate functionings and capabilities as general categories in theories of behaviour and decision making” [Robeyns 2016: 109, 213].