The English economist Arthur Cecil Pigou (1877-1959) is best known for his basic contributions to the theory of welfare economics and for his defense of neoclassic economics against the attacks of the Keynesian school.
Son of an army officer, A.C. Pigou was born on Nov. 18, 1877. Educated at Harrow and King's College, Cambridge, he compiled a brilliant record that included numerous prizes. He was made a fellow of King's College in 1902 and, in 1908, succeeded Alfred Marshall in the chair of political economy.
Like Marshall, Pigou felt that the study of economics could be justified only as a means of improving human society. Building upon the base of Marshallian economics, he set out modifying, expanding, and adapting the apparatus so that it could be directly applied to the exploration of ways and means by which social intervention would yield benefits in terms of economic welfare.
Wealth and Welfare (1912) contains, in embryonic form, the central core of Pigou's contribution to economic theory. Beginning from the proposition that economic welfare depends upon the size, the manner of distribution, and the variability of the national dividend, Pigou carefully analyzed the competitive economic system to find how it falls short of the ideal and the means by which the ideal can be achieved. The central concept of his analysis was the distinction between private and social net product—private product being the product that accrues to the individual making a decision concerning production, and social net product being the net product that accrues to society as a result of the decision. In a competitive economy, decisions are made in such a way as to maximize private net product but not necessarily social net product. Appropriate taxes and subsidies could, however, make private and social net products equal, thus leading each individual to behave in a way that maximizes social welfare.
In 1933 Pigou published The Theory of Unemployment, a book that was held in great esteem by orthodox economists. As such, it became a prime target for attack by John Maynard Keynes in his General Theory of Employment Interest and Money (1936). Pigou answered with several books and articles in which he attempted to reformulate his position in the light of Keynes's criticisms. In the end, his most lasting contribution was to point out that, as long as wage and price flexibility exists, the value of assets, the prices of which are fixed in money terms, will rise as wages and prices fall, reducing the propensity to save and, consequently, increasing the propensity to consume. It follows from the "Pigou effect" that Keynes's "under-employment equilibrium" is not a true equilibrium but a state of disequilibrium occasioned by inflexible wages and prices.
Pigou died on March 7, 1959, at the age of 81.
Further Reading on Arthur Cecil Pigou
No biography or complete bibliography of Pigou's work has been published. The King's College Library catalog lists almost 30 books and over 100 pamphlets and articles. For background see Philip Charles Newman, The Development of Economic Thought (1952); Edmund Whittaker, Schools and Streams of Economic Thought (1960); and Ben B. Seligman, Main Currents in Modern Economics: Economic Thought since 1870 (1962).
A. C. Pigou and the Birth of Welfare Economics
A groundbreaking intellectual biography of one of the twentieth century's most influential economists
The First Serious Optimist is an intellectual biography of the British economist A. C. Pigou (1877–1959), a founder of welfare economics and one of the twentieth century's most important and original thinkers. Though long overshadowed by his intellectual rival John Maynard Keynes, Pigou was instrumental in focusing economics on the public welfare. And his reputation is experiencing a renaissance today, in part because his idea of "externalities" or spillover costs is the basis of carbon taxes. Drawing from a wealth of archival sources, Ian Kumekawa tells how Pigou reshaped the way the public thinks about the economic role of government and the way economists think about the public good.
Setting Pigou's ideas in their personal, political, social, and ethical context, the book follows him as he evolved from a liberal Edwardian bon vivant to a reserved but reform-minded economics professor. With World War I, Pigou entered government service, but soon became disenchanted with the state he encountered. As his ideas were challenged in the interwar period, he found himself increasingly alienated from his profession. But with the rise of the Labour Party following World War II, the elderly Pigou re-embraced a mind-set that inspired a colleague to describe him as "the first serious optimist."
The story not just of Pigou but also of twentieth-century economics, The First Serious Optimist explores the biographical and historical origins of some of the most important economic ideas of the past hundred years. It is a timely reminder of the ethical roots of economics and the discipline's long history as an active intermediary between the state and the market.