3. The neglect of buying power in traditional economic theory, and its practical implications

This paper was first published in Advances in Economics & Business 2017; 5(8): 435-439. For the full paper, see: http://www.hrpub.org/download/20170730/AEB1-11809448.pdf

Michael Joffe

Imperial College London



Buying power, the causal consequence of income and wealth, is ubiquitous in the real world, but not prominent in economic theory. Its importance can be seen e.g. in the relative power of rich and poor consumers, the effective demand that supports each industry, the power that firms have to build their premises and to exercise authority over their workers, the influence of shareholders over firms, and in international economic relationships. Adam Smith remarked that having money gives one the ability to “command” the labour of others, and Keynes based The General Theory on the concept of aggregate demand, but buying power is seldom recognised when analysing the detailed working of the economy – the main focus is on willingness, not ability, to pay. An important exception is Sen’s work on famines and entitlements. The source of buying power for individuals is income/wealth, and also transfers and borrowing. For firms, buying power derives from profit, and also from a promising investment plan. Buying power is an essential concept not only for understanding how the economy works, but also because it is central to three important practical modern problems: inequality and its consequences, including displacement; debt and financial instability; and environmental degradation.