Arthur Cecil Pigou

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Lore & Background

Pigou was born at Ryde on the Isle of Wight, the son of Clarence George Scott Pigou, an army officer, and his wife Nora Biddel Frances Sophia, daughter of Sir John Lees, 3rd Baronet. He won a scholarship to Harrow School, where he was in Newlands house and became the first modern head of school. In 1896 he was admitted as a history scholar to King's College, Cambridge, where he first read history under Oscar Browning. He won the Chancellor's Gold Medal for English Verse in 1899, and the Cobden (1901), Burney (1901), and Adam Smith Prizes (1903), and made his mark in the Cambridge Union Society, of which he was President in 1900. He came to economics through the study of philosophy and ethics under the Moral Science Tripos. He studied economics under Alfred Marshall, whom he later succeeded as professor of political economy. Pigou began lecturing on economics in 1901 and started giving the course on advanced economics to second year students on which was based the education of many Cambridge economists over the next thirty years. He became a Fellow of King's College on his second attempt in March 1902, and was appointed Girdler's Lecturer in the summer of 1904. In 1908 Pigou was elected Professor of Political Economy at the University of Cambridge in succession to Alfred Marshall, holding the post until 1943. His most enduring contribution was The Economics of Welfare, 1920, in which he introduced the concept of externality and the idea that externality problems could be corrected by the imposition of a Pigovian tax. He argued that negative externalities (costs imposed) should be offset by a tax, while positive externalities should be offset by a subsidy. Pigou was a conscientious objector to military service during World War I when it required an obligation to destroy human life. He remained at Cambridge, but during the vacations was an ambulance driver at the front for the Friends' Ambulance Unit, and insisted on undertaking jobs of particular danger. Towards the end of the war he reluctantly accepted a post in the Board of Trade, but showed little aptitude for the work. He reluctantly served on the Cunliffe Committee on the Currency and Foreign Exchange (1918–1919), the Royal Commission on the Income Tax (1919–1920), and the Chamberlain Committee on the Currency and Bank of England Note Issues (1924–1925). In later years he withdrew from national affairs and devoted himself to more academic economics and writing weighty letters to The Times on problems of the day.

Reader's Guide

Pigou's significance lies primarily in his development of welfare economics and the concept of externality. His work The Economics of Welfare, 1920, introduced the idea that negative externalities (costs imposed) could be corrected by a tax (later called a Pigovian tax) and positive externalities by a subsidy. This concept remains central to modern welfare economics and particularly to environmental economics. The Pigou Club, named in his honour, is an association of modern economists who support the idea of a carbon tax to address the problem of climate change. Pigou also contributed to the analysis of labour-market phenomena including collective bargaining, wage rigidity, internal labour markets, segmented labour market, and human capital. His Theory of Unemployment, first published in 1933, described factors contributing to unemployment such as sticky wages and an unwillingness to work at the market price. He developed the idea of the Pigou effect on real money balances to argue that the economy would be more self-stabilizing than Keynes proposed. In a couple of lectures delivered in 1949 he made a more favourable, though still critical evaluation of Keynes' work: 'I should say... that in setting out and developing his fundamental conception, Keynes made a very important, original and valuable addition to the armoury of economic analysis'. Pigou's reputation was affected adversely by influential economic writers who used his work as the basis on which to define their own opposing views. In the early 1960s his analysis was criticised by Ronald Coase, who argued that taxes and subsidies are not necessary if the partners in the transaction can bargain over the transaction. Despite this, the externality concept remains fundamental to modern economics. Pigou and Keynes had great mutual affection and regard for each other, and their intellectual differences never put their personal friendship seriously in jeopardy.

Did You Know?

• Pigou won the Chancellor's Gold Medal for English Verse in 1899.
• He was President of the Cambridge Union Society in 1900.
• Pigou was a conscientious objector to military service during World War I but served as an ambulance driver at the front for the Friends' Ambulance Unit, insisting on jobs of particular danger.
• He introduced the concept of externality in The Economics of Welfare, 1920, and argued that negative externalities should be offset by a tax.
• Pigou's first attempt at a fellowship of King's College was a thesis on 'Browning as a Religious Teacher'.