One Hundred Years Ago. The Book That Inspired the Carbon Price: Pigou’s The Economics of Welfare

Abstract

While Arthur Cecil Pigou has slipped from the ‘first eleven’ of economics, his ideas have never been more relevant. His most important work was The Economics of Welfare, published in 1920. The book was well reviewed in contemporary economic journals. It is not, by the author’s own admission, a light read. But it lives up to Pigou’s ideal of offering ‘instruments for the bettering of human life’. The most influential idea developed in it is the ‘externality’ which can be corrected by what was later termed a ‘Pigouvian tax’. Nicholas Stern, in his eponymous report on the diabolical economics of climate change, referred to Pigou’s writings and a carbon price is an example of a Pigouvian tax. Pigou foreshadowed some of the insights of behavioural and environmental economics, noting how excessive discounting of the future caused environmental degradation. Among other areas covered in this extensive book are business cycles and many policy issues such as taxation, monopolies and industrial relations. Pigou famously would tell his students ‘it’s all in Marshall’. For many aspects of economics, it could be said ‘it’s all in Pigou’. On its centenary, this is a book deserving of more recognition.