How would you react to an expert coming on national television and warning the public of the negative effects of spending the holidays in space, the invention of flying cars, and diplomatic ties with other planets? Because these issues are far from our reach, many people would overlook and ignore them. In relation to the frustrated expert, British economist, Arthur Cecil Pigou, faced the same opposition in the early 1900s. Ahead of his time, Pigou was concerned with issues such as “the belching chimneys and car exhausts that contaminate our air, the waste materials of our fully employed factories that pollute our streams, and the noise of our blaring auto horns that disturb the nightly tranquility” (William, 1998). Pigou strongly believed that the reason for economics was to improve society as a whole. “Economists were to wait almost a half-century before realizing that the issues Pigou had grappled with were among the most important facing an opulent economy, indeed were to threaten the very legitimacy of the system (William, 1998).

A.C. Pigou was born on November 18, 1877 to Clarence and Nora Pigou at Ryde, on the UK’s Isle of Wright (Arthur Cecil PigA.C.Pigou_Pic1.jpgou Biography). His father was a British officer and his mother’s family “came from a line of won fame and fortune in Irish administration” (Pigou, Arthur Cecil). Pigou attended Harrow, an elite English school, where he was active in both athletics and academics. After graduating from Harrow as head of the school, Pigou attended King’s College and majored in history. In his third year, he was enlightened by two of his professors, Alfred Marshall and Henry Sidgwick, who introduced him to the study of political economics (Pressman, 1999). “Like Marshall, Pigou was attracted to economics for its practical value. He sought to teach his students that ‘the main purpose of learning economics was to be able to see through the bogus economic arguments of the politicians’” (Pressman, 1999).

“As the prize student and successor of Marshall, Pigou personified the ‘Cambridge Neoclassicals’- the heart of the Marshallian orthodoxy in the first third of the century” (Arthur C. Pigou/). Upon Marshall’s retirement, Pigou took over the position as Chair of Political Economy. Marshall and Sidgwick’s teachings formed the foundation by which Pigou built his theories on. Pigou’s contributions in economics are grouped into two broad categories: his contribution to the theory of welfare economics and his strong opposition against the Keynesian Revolution that took rise in the early 1930s (Pressman, 1999).


Pigou is “known as the father of modern welfare economics and public finance, which studies how to make economics operate more efficiently as well as the trade-off between efficiency and equity” (Pressman, 1999). In his first work in 1912, Wealth and Welfare, Pigou discredited the classical laissez-faire view of government intervention and raised disturbing questions about the social consequences of private actions (William, 1998). He felt that in some circumstances, the government could increase the national well-being. Further explained in Economics of Welfare, he stressed the idea that “the private production costs to a firm may not reflect all the social costs of production” (Pressman, 1999). In his analysis between private costs and social costs, he explains that private costs are the costs that physically go into producing the product, such as raw materials, labor, and overhead costs whereas social costs are costs that society as a whole accumulates as a result of the product. These deviations between private and social costs are termed externalities. “Pigou stressed that in the presence of expic3.jpgternalities, the market system is inefficient and that this might justify government intervention into the market place” (Pressman, 1999).

With a firm’s intention to maximize profits, the production of the product can pollute the environment creating social costs that exceed the actual costs of production. These additional costs are being paid for by third parties who are neither consuming nor producing these products. Because firms do not have to incur these costs, they have no incentive to take the negative effects into consideration. “As a result, the market system produces too much polluted air and water, as well as excessive noise and congestion in urban areas” (Pressman, 1999).To discourage the practice of engaging in negative externalities, he believed in government executing a tax on the activity.

On the other hand, production of goods can provide benefits greater to society as a whole than to the consumers who actually purchase it. These benefits are known as positive externalities. He used one of his professor’s, Henry Sidgwick’s, example of a lighthouse: it does not directly benefit only those who pay for its establishment but rather has “spillover effects” and benefits all ships who cross its path, whether they pay for it or not. Other examples include national defense, spending on education, police protection. Often referred to as the “free rider effect,” people feel that they can obtain the benefits without the need to pay (Pressman, 1999).To encourage the public to create positive externalities, he advocated the government to issue subsidies (Arthur Cecil Pigou: The Concise Encyclopedia of Economics).


With the rise of the Keynesian theory during the 1930s, Pigou’s ideas were the prime target of attack. “Keynes lumped Pigou with the classical school of economics and attributed to this school the belief that supply creates it’s own demand, known as Say’s law” (Pressman, 1999). Unemployment, the Classicals believed, was impossible due to the fact that if employers did not demand their labor, the wage would fall just enough until someone was willing to hire them. In his work, Unemployment, Pigou argued that in the long run unemployment was because of the effect of fixed wages (Arthur Cecil Pigou Biography). In 1933, he published another book called Theory of Unemployment where he stressed the fact that businesses will pay a worker a wage equal to the marginal productivity of the worker. Keynes wrote the General Theory, in which Keynes used Pigou’s books as “the example of everything that was wrong with neoclassical macroeconomics” (Arthur C. Pigou/Biography).


“He had the rather odd name of Pigou, but his personality and eccentricities were well suited to the oddness of his name” (William, 1998). Throughout his teaching career at Cambridge, Pigou would spend his vacations with the Ambulance Corps on the front line during the First World War. This was a life-changing occurrence for Pigou as his close friend, Johnson, reported: “This experience was responsible for transforming the gay, joke-loving, sociable, hospitable young bachelor into an eccentric recluse” (Pressman, 1999). His hermit-like behavior was often the topic of conversation amonpigou_2.jpgg his students and faculty members. Despite his odd behavior, he would often invite students and faculty to his cottage where they took pleasure in rock climbing and hill walking (William, 1998).

Arthur Cecil Pigou’s career was between the shadows of two very powerful economists, Alfred Marshall and J.M. Keynes. Although small in comparison to their economic contributions, his theories of welfare economics and public finance were never fully recognized for their greatness until later in time (Pigou, Arthur Cecil). Pigou passed away on March 7, 1959 at the age of 81. While his presence is no longer here, his theories will live forever


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