Testing a Social Welfare Theory of Financial Capability: Personal and Governmental Capabilities

We posit that financial capability is a higher order construct that consists of both personal and governmental capabilities. Conversely, previous definitions of financial capability exclusively focus on an individual’s personal capability. However, because people live in society, their capabilities are not only what they can do or be from the perspective of their own personal capabilities, but also what they can do or be with the assistance of government. In the social welfare theory of financial capability presented here, government has the responsibility to ensure all citizens are financially included enough, have enough income, and enough wealth that they are given the freedom to pursue their financial happiness. From this perspective, governmental capability consists of the government’s financial inclusion-generating functioning, its income-generating functioning, and its wealth-generating functioning. As a set of functionings, we posit they make up what we refer to as, governmental capability. Our findings show that the model matches the data well and the social welfare measure of financial capability is trustworthy. We also find that the social welfare definition of financial capability is a strong predictor across three asset poverty measures and median net worth of U.S. households. In the last part of the main analysis, we find that financial capability is a positive predictor of life satisfaction. However, in the multigroup analysis, financial capability is not invariant by race. We posit this is likely the result of the gross inequality Black individuals have faced in the mainstream economy as a result of the unequal allocation of governmental capabilities dating as far back as the American Constitution and their designation as property. Implications discussed.