PIGOU DIED OF AN ABDOMINAL DISORDER in March 1959 at the age of eighty-one. He was buried in the churchyard in Grantchester, the small village just south of Cambridge. The graveyard stands in the shadow of the fourteenth-century parish church, just across from meadows owned by his beloved King’s College that stretch down to the River Cam. It is an idyllic English landscape, with thatched roofs and grazing livestock. Just down the road is the bend in the river where Lord Byron used to take his swims.
It is a fitting resting place for a man who spent his entire adult life in Cambridge, but a somewhat ironic one for an economist whose name would be associated with the economics of pollution for the next seven decades. Little more than a year after Pigou’s death, Ronald Coase published his famous essay called “The Problem of Social Cost.” Coase set out to investigate “those actions of business firms which have harmful effects on others . . . the standard example is that of a factory the smoke from which has harmful effects on those occupying neighbouring properties.” He noted that the economic analysis of such a situation customarily “followed the treatment of Pigou.”1 Coase went on to dispute this treatment, arguing that externalities arose not from a major divergence of public and private interests, but because of barriers to negotiation and poorly defined property rights. Nevertheless, the fact remained that Pigou set the stage for all subsequent discussions about external diseconomies.
Today, Pigou’s ideas seem more germane than ever, and a renewed understanding of his influence is coming into clearer focus. In an age beset by increasingly arresting predictions of climate change, the external effects of the normal operation of the economy have never been more headlined. For it is widely recognized that the ramifications of pollution extend far beyond those “occupying neighbouring properties.” Historians of the Anthropocene now chart the unintended impact of human activity on truly massive planetary, geological scales.2 Climate change and its accompanying existential anxieties have provoked a realization that externalities will not resolve themselves without some sort of intervention.
In this way, much of the world has awakened to the fact that it is, and has been for some time, in a post-Pigovian age. In 2006, a Harvard economist, N. Gregory Mankiw advertised himself as a Pigovian and subsequently labeled scores of other prominent figures from the left and right alike as the same. Pigou’s suggestion to tax industries that produced socially undesirable effects was just “good sense” according to Mankiw. The Economist seemingly agreed. So too did the Washington Post. So did the Obama administration. The future of environmental policy in the United States looks less certain after the 2016 presidential election, but it is likely that calls to treat climate change as a negative externality will only continue to grow in number and in intensity.
Many in the public sphere have recognized and called attention to the fact that Pigou stands behind these suggestions. A web search for Pigou turns up droves of editorials suggesting that one of the most sensible ways to deal with the climate crisis—to tax it out of existence—was thought up by a largely forgotten English economist with “wavy hair and a luxuriant moustache.”3 “One way to think about global warming,” the New Yorker intoned in 2012, “is as a vast, planet-wide Pigovian problem.”4 The New York Times argued that “taxes on activities with harmful side effect” were “one of the few realistic hopes for progress.” These taxes, the Times noted, “are known as Pigovian taxes, after the British economist Arthur C. Pigou, who advocated them.”5 Other commentators have found Pigou’s work useful in confronting different contemporary challenges. The New Yorker staff writer John Cassidy suggested, for instance, that Pigou’s work “provides a guide to the financial crisis.” Failures in the financial system, Cassidy argued in the Wall Street Journal and his book How Markets Fail, should be seen as massive market failures that require a Pigovian solution.6 Amartya Sen, writing in the New York Review of Books, invoked Pigou’s own treatment of financial crises as well as his stress on the importance of distribution.7 Others, writing in the American Prospect and the New York Times have claimed that excessive inequality itself is a market failure and that as such, it calls for a hefty corrective Pigovian tax.8
It is tempting to look back on Pigou’s life and work to find lessons for our current predicaments. There is a tendency to worship long-dead economists as sages who presaged the crises of the future. And, in light of Pigou’s work on external diseconomies, his analysis of the costs of pollution, his distaste for massive disparities in wealth, and even his preference for a stable financial sector, there is a powerful urge to review his corpus of work and conclude that he was ahead of his time—that quite simply, he got things right.
Pigou certainly endowed future generations of economic thinkers with a powerful set of tools, tools that current economists may do well to reexamine. There is, however, something uncomfortable about the conclusion that Pigou was “correct” or that he presaged some of the developments after his death. The principal lesson of Pigou’s life is that his work grew out of a specific historical moment. It emerged from personal interactions with government officials, from conversations with his friends, from contemporary economic and political conditions, and from the shifting sands on which economic ideas rested. Pigou responded to a growth in heavy industry that was destroying the environment, to a growing national perception of inequality, and to a major financial crisis. Is it any wonder that his ideas resonate today?
But whether or not Pigou’s ideas are borne out in reality, there is a clear lesson to be drawn from his life’s work. Pigou, like almost all of his contemporaries, was an ethical economist. He set himself to explaining and solving the most pressing crises of his day. And he did not shirk in his diligence. His justification for his career, maybe even for his very existence, was to serve a moral end. Perhaps it is this part of Pigou’s systematic framework—its self-conscious motivation—that present-day economists would do best to revisit. The world is today faced with a host of economic crises, but they are equally moral crises. Returning to a truly Pigovian way of thinking would mean honoring this fact and acknowledging it publicly. It would mean accepting what Pigou had declared in 1908, that “Ethics and Economics are mutually dependent,” and that “economics cannot stand alone.”9