The First Serious Optimist: A.C. Pigou and the Birth of Welfare Economics

The First Serious Optimist: A.C. Pigou and the Birth of Welfare Economics Since Adam Smith gave birth to political economy, the subject has suffered moral emasculation. Smith was a moral philosopher in the great European tradition inherited from Ancient Greece. He sought to understand human beings and how they behaved—and should behave—to one another and in relation to the world around them. The three subjects he wrote about, ethics, jurisprudence, and political economy, are closely connected. The Theory of Moral Sentiments, full of fascinating observations about human nature and infused with the religious values of his time, lives in the background of The Wealth of Nations in which, with many references to history and current conditions, he advocated the freeing of markets from anachronistic restraints and also the provision by the government of infrastructure and a modicum of public education to facilitate the growth of the economy. Since the middle of the 20th century, the subject has been taken over by mathematicians who have produced abstract economic models of a market economy based on unrealistic reductionist assumptions and who appear to lack moral values—or to suppress them. The exaggerated claims for the virtues of markets derived from this kind of ‘economic science’ have been discredited by the economic crash of 2008. But the amoral mathematical style of reasoning goes on. The critics of market economics use it no less than its defendants. Like Sraffa in his Production of Commodities by means of Commodities, they use deductive mathematical logic to attack the mainstream. Consequently, they become bogged down in their enemies’ realm of unrealistic amoral debate. During the evolution of economics from morals to maths a British man who stands out for his preoccupation with morals is A.C. Pigou (1877–1959). His concept of ‘externalities’ lives on in economic textbooks, and his proposal, derived from it, for the taxation of pollution is being actively applied to climate change. But for the rest, he has been forgotten, which is probably what he wanted since he destroyed all his papers. Now a young American from Harvard, Ian Kumekawa, has reminded us of him. In this biography he, with careful scholarship and in words that are accessible to the general reader, beautifully portrays this elusive man and his remarkable achievements. He tells us that Pigou (who was never known by his Christian name, only as Pigou or, reverentially, as ‘The Prof’) was a product of the Victorian middle class, imbued with the sense that the privileged should help the needy. He was born in 1877 to an Army father whose family of Huguenot origins had made money in the East, and a mother from the minor Anglo-Irish nobility. He had a privileged education and never lacked money. A brilliant boy, he won a scholarship to Harrow, a private boarding school of which he became head boy, and then a scholarship to King’s College, Cambridge, to which went in 1896 and where he, a Platonic homosexual, was based contentedly for the rest of his life. After achieving a first-class degree in History, he turned to Moral Sciences, of which economics was still a part, and rapidly gained another first. Havering between philosophy and economics, he competed for a Fellowship at King’s with a thesis on ‘Robert Browning as a Religious Teacher’. When that failed, he turned to economics and the very next year was successful with a thesis on ‘The Causes and Effects of Changes in the Relative Prices of Agricultural Produce in the U.K. during the Last 50 Years’. That was in 1902. In the following year Alfred Marshall, who had published his Principles of Economics in 1890, managed to establish the Cambridge economics tripos, thereby separating economics from moral sciences and giving it a deductive mathematical basis in the form of marginal analysis. Pigou, who amongst his other gifts was an able mathematician, was Marshall’s protégé. In Kumekawa’s words, ‘….Pigou was personally plucked from the study of history and mentored by the greatest economist then working in Britain’. In no time, he was lecturing successfully and writing on tariffs and other issues; and in 1908, Marshall who had faith in ‘his quite extraordinary genius’ managed to get him at the age of only thirty-two appointed to the chair of political economy as his successor. Marshall’s faith was soon justified. In 1912, Pigou produced his great work, Wealth and Welfare, 493 pages long, followed in 1921 with The Economics of Welfare, a revised version that ran to 876 pages. It is a wide-ranging treatise on the economy using marginal analysis with a moral emphasis. In the synopsis at the start of the book, Pigou says ‘The main motive of economic study is to help social improvement’. Its central theme is that welfare depends on the size of the national dividend (nowadays called the national income) and on how it is distributed between rich and poor. Having discussed the definition and determinants of the national dividend, including the problem of externalities and the case for redistributing money to the poor from the rich (which follows from the declining utility of income), he concluded that cautious redistribution would increase welfare so long as it did not lead a reduction in output that offset its benefits. Lionel Robbins and others objected to this analysis on the grounds that the utility of different persons could not be compared. The outcome was much refined disputation under the rubric of welfare economics. Pigou’s simpler and more humane moral views were obscured. Kumekawa reminds us that Pigou also produced an extraordinary number of substantial books across the whole field of economics, including industrial relations, preferential and protective tariffs, unemployment, the political economy of war, applied economics, public finance and industrial fluctuations; and that the political positions he took were diverse and changed. On unemployment, the burning issue of the inter-war years, Pigou was orthodox: he supported the return to gold at the pre-war parity in 1925 which caused massive unemployment; he prescribed wage cuts; and he rejected Keynes General Theory (but later recanted in some degree). Earlier, at the time of the First World War in which he served as a volunteer ambulance man, his sense of injustice was so intensely roused by the carnage he witnessed that he publicly advocated making the rich pay for the war through heavy income tax or a capital levy, so that they were made to sacrifice their money as the young were made to sacrifice their lives. Kusekawa casts some new light on Pigou’s strange character, having dug into the copious archives of Philip Noel-Baker (né Baker) his favourite pupil and lifelong friend to whom he sent often frivolous notes till the end of his life, and other sources. One has known that Pigou, an extreme misogynist, was happiest at King’s or with male friends in the Lake District, where he built an isolated house on Buttermere, or in the Alps; and that he changed from being a playful, sociable young man at King’s to a recluse, possibly soured by his experiences in the war; and that he distanced himself from the world, wearing shabby clothes and keeping his thoughts to himself until publication. I remember meeting him during or just after the war on the road that runs beside Buttermere, a tall old shabby figure, alone and palely tottering round the lake. He resembled Don Quixote portrayed by Daumier. That was the outer image. It is disconcerting to learn from Kusukawa that inwardly Pigou felt, and privately expressed, contempt not just for women but for the common people or ‘goats’; for civil servants; for politicians; and for government committees on which he served with lofty disdain. Towards the end of his life he softened. He welcomed, at least privately, the Beveridge report and the welfare state as expressions of his ideas. ‘Ironically, only as a surly old don considered by many to be a recluse, did Pigou truly embrace people.’ Kusukawa, a historian from another country, has no axe to grind and draws no political conclusions. But the story he tells (in only 211 pages, plus many pages of references) is of great interest at this time of resurgent inequality. It prompts one to ask, where is the Pigou of today? and what will he be like? I recommend the book without reservation. © The Author 2018. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Contributions to Political Economy Oxford University Press

The First Serious Optimist: A.C. Pigou and the Birth of Welfare Economics

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Publisher
Oxford University Press
Copyright
© The Author 2018. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved
ISSN
0277-5921
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1464-3588
D.O.I.
10.1093/cpe/bzy003
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Abstract

Since Adam Smith gave birth to political economy, the subject has suffered moral emasculation. Smith was a moral philosopher in the great European tradition inherited from Ancient Greece. He sought to understand human beings and how they behaved—and should behave—to one another and in relation to the world around them. The three subjects he wrote about, ethics, jurisprudence, and political economy, are closely connected. The Theory of Moral Sentiments, full of fascinating observations about human nature and infused with the religious values of his time, lives in the background of The Wealth of Nations in which, with many references to history and current conditions, he advocated the freeing of markets from anachronistic restraints and also the provision by the government of infrastructure and a modicum of public education to facilitate the growth of the economy. Since the middle of the 20th century, the subject has been taken over by mathematicians who have produced abstract economic models of a market economy based on unrealistic reductionist assumptions and who appear to lack moral values—or to suppress them. The exaggerated claims for the virtues of markets derived from this kind of ‘economic science’ have been discredited by the economic crash of 2008. But the amoral mathematical style of reasoning goes on. The critics of market economics use it no less than its defendants. Like Sraffa in his Production of Commodities by means of Commodities, they use deductive mathematical logic to attack the mainstream. Consequently, they become bogged down in their enemies’ realm of unrealistic amoral debate. During the evolution of economics from morals to maths a British man who stands out for his preoccupation with morals is A.C. Pigou (1877–1959). His concept of ‘externalities’ lives on in economic textbooks, and his proposal, derived from it, for the taxation of pollution is being actively applied to climate change. But for the rest, he has been forgotten, which is probably what he wanted since he destroyed all his papers. Now a young American from Harvard, Ian Kumekawa, has reminded us of him. In this biography he, with careful scholarship and in words that are accessible to the general reader, beautifully portrays this elusive man and his remarkable achievements. He tells us that Pigou (who was never known by his Christian name, only as Pigou or, reverentially, as ‘The Prof’) was a product of the Victorian middle class, imbued with the sense that the privileged should help the needy. He was born in 1877 to an Army father whose family of Huguenot origins had made money in the East, and a mother from the minor Anglo-Irish nobility. He had a privileged education and never lacked money. A brilliant boy, he won a scholarship to Harrow, a private boarding school of which he became head boy, and then a scholarship to King’s College, Cambridge, to which went in 1896 and where he, a Platonic homosexual, was based contentedly for the rest of his life. After achieving a first-class degree in History, he turned to Moral Sciences, of which economics was still a part, and rapidly gained another first. Havering between philosophy and economics, he competed for a Fellowship at King’s with a thesis on ‘Robert Browning as a Religious Teacher’. When that failed, he turned to economics and the very next year was successful with a thesis on ‘The Causes and Effects of Changes in the Relative Prices of Agricultural Produce in the U.K. during the Last 50 Years’. That was in 1902. In the following year Alfred Marshall, who had published his Principles of Economics in 1890, managed to establish the Cambridge economics tripos, thereby separating economics from moral sciences and giving it a deductive mathematical basis in the form of marginal analysis. Pigou, who amongst his other gifts was an able mathematician, was Marshall’s protégé. In Kumekawa’s words, ‘….Pigou was personally plucked from the study of history and mentored by the greatest economist then working in Britain’. In no time, he was lecturing successfully and writing on tariffs and other issues; and in 1908, Marshall who had faith in ‘his quite extraordinary genius’ managed to get him at the age of only thirty-two appointed to the chair of political economy as his successor. Marshall’s faith was soon justified. In 1912, Pigou produced his great work, Wealth and Welfare, 493 pages long, followed in 1921 with The Economics of Welfare, a revised version that ran to 876 pages. It is a wide-ranging treatise on the economy using marginal analysis with a moral emphasis. In the synopsis at the start of the book, Pigou says ‘The main motive of economic study is to help social improvement’. Its central theme is that welfare depends on the size of the national dividend (nowadays called the national income) and on how it is distributed between rich and poor. Having discussed the definition and determinants of the national dividend, including the problem of externalities and the case for redistributing money to the poor from the rich (which follows from the declining utility of income), he concluded that cautious redistribution would increase welfare so long as it did not lead a reduction in output that offset its benefits. Lionel Robbins and others objected to this analysis on the grounds that the utility of different persons could not be compared. The outcome was much refined disputation under the rubric of welfare economics. Pigou’s simpler and more humane moral views were obscured. Kumekawa reminds us that Pigou also produced an extraordinary number of substantial books across the whole field of economics, including industrial relations, preferential and protective tariffs, unemployment, the political economy of war, applied economics, public finance and industrial fluctuations; and that the political positions he took were diverse and changed. On unemployment, the burning issue of the inter-war years, Pigou was orthodox: he supported the return to gold at the pre-war parity in 1925 which caused massive unemployment; he prescribed wage cuts; and he rejected Keynes General Theory (but later recanted in some degree). Earlier, at the time of the First World War in which he served as a volunteer ambulance man, his sense of injustice was so intensely roused by the carnage he witnessed that he publicly advocated making the rich pay for the war through heavy income tax or a capital levy, so that they were made to sacrifice their money as the young were made to sacrifice their lives. Kusekawa casts some new light on Pigou’s strange character, having dug into the copious archives of Philip Noel-Baker (né Baker) his favourite pupil and lifelong friend to whom he sent often frivolous notes till the end of his life, and other sources. One has known that Pigou, an extreme misogynist, was happiest at King’s or with male friends in the Lake District, where he built an isolated house on Buttermere, or in the Alps; and that he changed from being a playful, sociable young man at King’s to a recluse, possibly soured by his experiences in the war; and that he distanced himself from the world, wearing shabby clothes and keeping his thoughts to himself until publication. I remember meeting him during or just after the war on the road that runs beside Buttermere, a tall old shabby figure, alone and palely tottering round the lake. He resembled Don Quixote portrayed by Daumier. That was the outer image. It is disconcerting to learn from Kusukawa that inwardly Pigou felt, and privately expressed, contempt not just for women but for the common people or ‘goats’; for civil servants; for politicians; and for government committees on which he served with lofty disdain. Towards the end of his life he softened. He welcomed, at least privately, the Beveridge report and the welfare state as expressions of his ideas. ‘Ironically, only as a surly old don considered by many to be a recluse, did Pigou truly embrace people.’ Kusukawa, a historian from another country, has no axe to grind and draws no political conclusions. But the story he tells (in only 211 pages, plus many pages of references) is of great interest at this time of resurgent inequality. It prompts one to ask, where is the Pigou of today? and what will he be like? I recommend the book without reservation. © The Author 2018. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/about_us/legal/notices)

Journal

Contributions to Political EconomyOxford University Press

Published: May 9, 2018

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