Pigou, Arthur Cecil (1877-1959)

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James Knight

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Updated: Aug 20, 2021

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A pupil of Alfred Marshall, whom he succeeded to the Chair in Political Economy at Cambridge in 1908, Pigou continued in this chair until he retired in 1944. His major publications include Principles and Methods of Industrial Peace (1905), Wealth and Welfare (1912), Unemployment (1914), Economics of Weifare (1919), Essays in Applied Economics (1923), Industrial Fluctuations (1927), The Theory of Unemployment (1933) and Employment and Equilibrium (1941). His work on monetary theory, employment and the national income, which was in the tradition of the classical school, led him into controversy with J. M. Keynes. He was the first to enunciate clearly the concept of the real balance effect, which, as a consequence, became known as the Pigou effect. The Pigou effect is a stimulation of employment brought about by the rise in the real value of liquid balances as a consequence of a decline in prices – as the real value of wealth increases, so consumption will increase, thus increasing income and employment. This was one of the processes by which the classical model envisaged that full-employment equilibrium could be obtained as a result of a reduction in real wages. Although his work on macroeconomics was partly superseded by Keynes, he made a lasting contribution with his original work in welfare economics. He strongly resisted the belief that practical policies based on propositions from welfare economics were impossible, because interpersonal comparisons of utility cannot be made. He argued that, though this may be true for individuals, it was possjble to m·ake meaningful comparisons between groups. His distinction between private and social product now plays an important role in the formation of government economic policy in the field of public expenditure.

Reference: The Penguin Dictionary of Economics, 3rd edt.