Arthur Pigou, an british economist.

Arthur Cecil Pigou was one on the most outstanding economists of the 20^th century. In the beginning of the 19^th century he began his academic career as a lecturer of various subjects in the University of Cambridge, UK where later on he was elected to be a Professor of Political Economy.His field of expertise encompassed different areas of economic science such as measurement of national output, public finance, theory of value, index numbers, industrial fluctuations and others. Particularly extensive was his vision of welfare economics, including resource allocation, income redistribution, unemployment,and business cycles.

In 1920 Pigou first published The Economics of Welfare, a book where he improved the understanding of the concept of externalities (previously developed by A.Marshall). An externality can be defined as a cost or benefit not transmitted through prices[i]. So his key insight was that actions in one part of the economy can have unintended consequences in others. In this way he argued that the government has the right to intervene if externalities are present. For example,a factory emitting poisonous fumes is polluting the air and this way creating a negative externality. In order to depress such activities, Pigou proposed to tax them. This tax is now known as Pigovian tax and should equal the social cost of negative externality.On the other hand, as to encourage activities with positive externalities, such as public organizations that coordinate the control of infectious diseases preventing others in society from getting sick, he recommended offering subsidies. However, in 1960 R.Coase contradicted this theory by showing that taxes and subsidies are not necessary if the people affected by the externality and the people creating it can easily get together and bargain. Nevertheless, most economists still advocate Pigovian taxes as a much more efficient way of dealing with pollution than government-imposed standards.

Also, some of Pigou’s work on labor-market has been opposed modern economists. He proposed a theory called “real balance effect” (also known as “Pigou effect”) that a large fall in prices would stimulate an economy and create the 'wealth effect' that will generate full employment. That is, as prices fall, more money becomes available to consumers for spending whose purchases create demand for more production and lower unemployment. This mechanism, however, does not work out in practice. Because, if a fall in prices is steep enough, many firms will go under carrying some banks with them because they would not be able to pay their debts. If the fall is gradual, no body would know where it will stop and both consumers and producers will hold on to their cash, thus creating a liquidity trap[ii] (liquidity trap is a situation in which injections of cash into the private banking system by a central bank fail to lowerinterest rates and hence to stimulate economic growth).
During the 1930s and 1940s, many economists were pessimistic about the market system's long-term prospects. Mr. Pigou's message, on the other hand, was optimistic. He believed in progress, the power of rational analysis, and the ability of well-intentioned people, such as himself, to effect meaningful reforms.
He did not put much store in elaborate mathematical theories. Above all else, he was practical. "We shall endeavor to elucidate, not any generalized system of possible worlds," he wrote in The Economics of Welfare, "but the actual world of men and women as they are found in experience to be."[iii]

Publicat per: Ruta

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[i]H.Fang,Externality vs Public Good, Duke University
http://public.econ.duke.edu/~hf14/teaching/econ681b_spring03/ExternalityVersusPublicGood.pdf

[ii]Pigou Effect, Business Dictionary
http://www.businessdictionary.com

[iii]J.Cassidy, An Economist’s Invisible Hand, The Wall Street Journal, 2009
http://online.wsj.com/article/SB10001424052748704204304574545671352424680.html