On the Demise of Pigovian Economics

Abstract

Much has been written on the emergence of the Keynesian and Hicksian research programs in the 1930s. Yet the demise of the Marshallian research program to the extent that it was preserved, extended, and/or amended by Pigou has attracted little attention. As a result, Arthur Cecil Pigou, who contributed extensively to the theories of welfare economics [58; 54] and unemployment [57; 56; 53; 48; 47], is seldom credited with more than discovering the divergence between social and private costs and developing such concepts as the Pigovian tax or the Pigou effect. A broader, more encompassing view of Pigovian economics deserves our attention on at least two grounds. First, recent literature argues that modern welfare economics is no more scientific than the Pigovian analysis it meant to replace [59; 16].' On methodological grounds, therefore, the advantages of modern welfare economics over its Pigovian counterpart are not obvious. Pigovian welfare analysis, however, does possess a nontrivial welfare criterion2 which deals with issues concerning both equity and efficiency.3 Pigou's welfare economics, therefore, can be found relevant to the growing literature on social choice, inequality, and income distribution [70]. The second basis for continued interest in Pigou's economic analysis is his extensive treatment of unemployment which has received much less attention than his welfare writings (perhaps because it is befogged by many undeserving myths). This work, however, is important for macro-