A Little Pigou Is A Dangerous Thing, Part 1

by Mario Rizzo  

A little Learning is a dang’rous Thing;
Drink deep, or taste not the Pierian Spring:
There shallow Draughts intoxicate the Brain,
And drinking largely sobers us again.  

Alexander Pope 

Sometimes in the course of scientific development an idea gets introduced with various qualifications and limitations that are “forgotten” in an effort to simplify or make ideas textbook-ready. In other cases the innovators may look to how their ideas are being used and, after some time, seek to caution practitioners.  

I recently came across an article by Arthur Cecil Pigou in a 1954 issue of the journal Diogenes that seems to illustrate the second phenomenon mentioned above. (It was also reprinted in the third edition of the fantastic collection, Great Political Thinkers: Plato to the Present edited by William Ebenstein.)  

I have often taught in my classes that Pigovian taxes for negative externalities and subsidies for positive externalities work fine in textbooks where the relevant information is simply given. However, the mechanism is actually rarely (never?) used. One reason is that we often do not know what the correct tax or subsidy should be. Furthermore, in practice such correction of market prices is fraught with the public choice problems that distort “corrections” in the direction of the partial, rather than general, interests.  

With that in mind, this is what Pigou said in 1954:  

It must be confessed, however, that we seldom know enough to decide what fields and to what extent the State, on account of them, could usefully interfere with individual freedom of choice. Moreover, even though economists were able to provide a perfect blueprint for beneficial State action, politicians are not philosopher kings and a blueprint might quickly yield place on their desks to the propaganda of competing pressure groups. ‘Fancy’ finance, like a fancy franchise, whatever its theoretical attractions, has, at all events in a democracy, dim practical prospects.  

I call this to the attention of the members of the Pigou Club.  

In the next part I will discuss a new application of the Pigovian tax idea.

13 thoughts on “A Little Pigou Is A Dangerous Thing, Part 1

  1. Mario:

    Actually, Arthur C. Pigou said the same type of things in the 1930s. In 1934 Pigou delivered a series of lectures at the London School of Economics that was published the following year, 1935, under the title, “Economics in Practice.”

    In one of the lectures on, “State Action and Laissez-faire,” Pigou said:

    “We have further to inquire how far, in the particular country in which we are interested and the particular time that concerns us, the government is qualified to select the right form and degree of State action and to carry it through effectively.”

    He warned that there was the issue of the people in government bodies who would implement public policy, which will depend upon:

    “. . .the intellectual competence of the persons who constitute it, the efficacy of the organization through which their decisions are executed, their personal integrity in the face of bribery, their freedom from domination of privileged class, [and] their ability to resist the pressure of powerful interests or of uninstructed opinion.”

    Pigou also warned that due to the benefits that may accrue from various forms of government intervention, “logrolling and lobbying [and] powerful forces” were “certain to be called into play.”

    In other words, decades before the passages that you quote from Pigou’s 1955 article, he was pointing out rather clearly the wide gap between hypothetical philosopher-kings supposed to be in possession of a perfect knowledge of how to repair supposed “market failures,” and the reality of the powers and pressures of everyday politics and the bureaucrats assigned to implement such policies.

    (I might mention as an unrelated aside, that in the same lectures delivered at the LSE in 1934, Pigou argued against a “reflationary” monetary policy to try to combat the depression of that time. Better, to allow the wage and price structure to appropriately adjust, he said, than to superimpose further distortions on the economy through reflationary manipulations!)

    Richard Ebeling

  2. Mario,

    The fact that Pigou in his later years turned on the very concept that was later named for him as impractical and dubiously grounded theoretically was made known to Greg Mankiw, de facto leader of the Pigou Club, several years ago. What did he do with the information?

    Ignore it, of course.

  3. Richard,

    The first issue mentioned by Pigou evokes a “knowledge problem” which is then supplemented by a “public choice” problem. Perhaps he came to the realization of the first earlier too. I do not know.

  4. It is interesting how ideas often go down a memory hole at various times.

    These concerns about both a “knowledge problem” and a “public choice” dilemma run through many of the Classical Economists and some of the early Marginalists.

    The clearest and most “modern” of the explanations of the problem of “concentrated benefits and diffused burdens” from government interventions was, in fact, made by Vilfredo Pareto in 1896.

    And the same phenomena was explained in passages to be found in Jean-Baptiste Say and Nassau Senior. And there is another clear explanation of the dynamics of and causes behind the process in Wicksteed’s 1910 “Common Sense of Political Economy.”

    And concerning the “knowledge problem” Jeremy Bentham was very aware of this in his “Manual of Political Economy” in the 1790s.

    Richard Ebeling

  5. Coase has an essay in which he claims that Pigou’s solution to the public choice problem associated with democracy is to have regulatory boards of technocrats using the best available expert knowledge; it also allegedly comes as close to solving the knowledge as we can, since experts have the best available knowledge. This solution is quite similar to Oskar Lange’s idea that technocratic central planners will be able to take externalities into account.

    I’ve not read much Pigou, but I assume Coase knows what he’s talking about. If so, Pigou and Lange both underestimate the difficulties of the public choice problem, and are practically oblivious to the knowledge problem.

  6. “Sometimes in the course of scientific development an idea gets introduced with various qualifications and limitations that are “forgotten” in an effort to simplify or make ideas textbook-ready.” – Mario

    After recently enjoying Selgin’s “Good Money,” Gresham’s law immediately comes to mind as a prime example.

  7. This passage from Pigou is quoted by Hayek — and last year I included it in the Wikipedia entry for “Pigou Tax”.

  8. On a similar note, Alexander Pope contradicts himself in the essay you quote from: “Words are like leaves and where they most abound, much fruit of sense is rarely found.”

    This is mentioned in “Fahrenheit 451”.

    So, it’s a good quote to use.

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