Capabilities and production theory

The paper draws on a specification by Sen to model consumer capabilities and welfare, and extends this to modelling capabilities of producers and other agents. ‘Dynamic interactive capabilities’ are the outcome of successful interaction between evolving consumer and/or supplier capabilities and evolving producer capabilities, all occurring in ‘real time’ to meet the needs of dynamic competition in Schumpeter's sense. This involves learning on each side, as well as interactive learning between them. The paper then investigates the direction of both product and process changes in producers, driven by demand as well as supply factors through historical time and during structural change. Some consideration is given as to why orthodox production theory should have failed to broach so many of the issues which appear to be driving dynamic capabilities and productivity change in historical practice. Paths for further development of the capabilities approach are suggested.