Much Ado about Pigou ….and other defunct economists

I  wanted to write on these two profile together – Schumpeter and Pigou. But Schumpeter one became too long so had to write a fresh post on Pigou.  

Bruce Yandle of Clemson University has a nice profile of Pigou. He starts pretty nicely: 

Economists, policy analysts, and politicians often rattle the bones of brilliant economists long passed when making a case for a favorite policy or legislative action. John Maynard Keynes has again become a popular icon for justifying deficit spending in the face of severe recession. There are other days when Joseph Schumpeter’s name and “creative destruction” surface to justify marketplace tough love.We hear references to Friedrich von Hayek and his notions about property rights, common law, and spontaneous order when the market process is being defended. And of course, Milton Friedman is brought forth when education and monetary policy are discussed.

 The latest long-dead economist to enthrall bloggers, policy wonks, and entrepreneurial analysts is Arthur Cecil Pigou, whose authority is now being used to justify a blizzard of taxes and other actions proposed to serve the public interest. It is Pigou who suggested that a tax be placed on activities that generate negative externalities in order to make beneficiaries of the activity consider its full cost. 

He then looks at various proposals that centre around Pigou’s name – Bank Tax, carbon tax etc. All these are from spillovers either because of pollution or bank failures. And taxing to mitigate spillovers is a Pigou idea. Then other issues are also picking in the name of Pigou. It has become kinda fashionable and things become acceptable as you associate with Pigou:

Today, there is much ado about Pigou. To cite a few more instances of this, there are non-returnable bottle taxes to fight litter, snack and soda taxes to fight obesity, carbon and nitrogen oxide taxes in Scandinavia to fight global warming, and petrol taxes across Europe and the United Kingdom. All are justified in part as Pigouvian taxes that happily and harmlessly nudge human behavior in the right direction.

 However, despite the thinking that Pigou would have advocated these taxes and thus a greater role of government,  he was a govt sceptic:

As strange as it may seem, Pigou did not believe that government could improve human well being by fine-tuning behavior with taxes, subsidies, and regulation. His concern was grounded in what we today call Public Choice.He did not accept the notion that politicians, given constitutional constraints, would be capable of implementing an efficient and effective set of taxes and subsidies. Put simply, he did not believe the politicians could get the calculations right. Instead ofmaking things better, the chances were just as good that things would be made worse. Instead of keeping faith with implementing a welldesigned tax, the politicians’ interest for favored interest groups and finding ways to generate evermore revenue.

It would seem that Pigou was not much of a Pigouvian.

 Applied today, his warning suggests that instead of offsetting the cost of systemic risk, the purpose of the bank tax likely is to punish high-paid bankers (or at least make the public believe the bankers are being punished), or just simply to raise revenue for a deficit-plagued government.

And what about the more traditional idea of taxing to reduce pollution/carbon etc.

Are such taxes truly intended to reduce harms efficiently, or are they about something else, like raising government revenue? In an effort to answer this question for  environmental taxes, in 2003 Elizabethtown College professor Cristina Ciocirlan and I analyzed tax revenues generated by all of the green taxes used by oecd countries, presumably to improve environmental quality. These include taxes on electricity and cement production, coal, petroleum, natural gas, waste, and packaging materials.

Ciocirlan’s statistical estimates enabled us to test hypotheses about the underlying purpose of the tax system: was the purpose to protect human health or just to raise government revenue? 

Our robust findings did not support the classic Pigouvian goal, but rather supported Pigou’s later concern. The end result seemed to be more about generating money for government than about protecting human health.

 In the end he says:

Today there is much ado about Arthur Cecil Pigou  But much of it is unjustified, at least in the view expressed by Pigou himself. Clearly, politicians and pundits need intellectual justification for their actions and opinions, but it is inappropriate to hang taxes and regulations that are claimed to make things better around the neck of Pigou. It is not that taxes, regulation, and subsidies are ineffective in changing behavior. Indeed, we all know that incentivesmatter.Nudges work. But the real question is, do those political instruments make things better? That remains an open question.

Fascinating really. There is also a nice account of intellectual fight between Pigou and Coase.

The main lesson is don’t quote works of economists without knowing their full ideas. Another lesson is don’t stretch an old economits ideas too much. We just club everything to do with government as Keynesian. Keynes suggestion to push govt spending was at the time of depression. He made many other contributions to economics which are equally important. Somewhere down the line, it all boils down to the followers of a particulr economic thought. As pointed in this paper, followers of both Tinbergen and Friedman took their economic thoughts to a different level which finally brought bad name for the main thinkers.

Koopmans carried forward the Tinbergen approach but lost contact with the real world and turned economics into an exercise of optimal resource allocation. Lucas – with the help of Koopmans – carried forward the Friedman approach to assume rationality in economic behavior, but he also lost touch with reality and grounded his models on super-rational  individuals. Both Tinbergen and Friedman regretted this development and with hindsight they may be right. The Koopmans approach was constructed in a time of optimism, and thinking that all problems can be solved on a blackboard was understandable but deep down not plausible.

The Lucas approach was constructed in a time of pessimism and thinking that every policy act is a waste of money was a logical thought in timesof stagflation and opportunistic politicians but it ignores the power of institutions and the insights that people are boundedly rational. In our age of diminished expectations it may turn out that the hi-tech economics of Koopmans and Lucas is ill-suited for thinking about today’s economies and that a return to the pragmatism and rationality of Tinbergen and Friedman may offer more value for the penny of an economist’s thoughts.

 

, Keynes and now I am also seeing it happen to Minsky as well. PigouSame is the case with

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2 Responses to “Much Ado about Pigou ….and other defunct economists”

  1. Harlan Green Says:

    “Indeed, we all know that incentives matter. Nudges work. But the real question is, do those political instruments make things better? That remains an open question.” This Pigouvian debate is nonsensical! We know that human behavior is irrational, and some regulation necessary. Pigou advocated market-based incentives (such as negative externality taxes) that actually work–Krugman has talked about the Sulfur Dioxide tax)–vs. outright government regulation that bans certain behaviors–such as criminal acts. Taxes are a market-based solution, folks, and who administers taxes–governments!…Get real!

  2. Understanding Jevons Paradox is as critical… Says:

    […] picked Arthur Cecil Pigou for his lessons in the crisis. Then Bruce Yandle of Clemson University reminded not to misinterpret Pigou’s […]

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