Pigou effect

In economics, the Pigou effect is the stimulation of output and employment caused by increasing consumption due to a rise in real balances of wealth, particularly during deflation. The term was named after Arthur Cecil Pigou by Don Patinkin in 1948.

Real wealth was defined by Arthur Cecil Pigou as the sum of the money supply and government bonds divided by the price level. He argued that Keynes' General Theory was deficient in not specifying a link from "real balances" to current consumption and that the inclusion of such a "wealth effect" would make the economy more 'self correcting' to drops in aggregate demand than Keynes predicted. Because the effect derives from changes to the "Real Balance", this critique of Keynesianism is also called the Real Balance effect.

History

The Pigou effect was first popularised by Arthur Cecil Pigou in 1943, in The Classical Stationary State an article in the Economic Journal. He had proposed the link from balances to consumption earlier, and Gottfried Haberler had made a similar objection the year after the General Theory's publication.

Pigou

Note: The surname Pigou forms part of the terms Pigou Club and Pigouvian tax, both derived from the name of the English economist Arthur Cecil Pigou.

Pigou is an English surname of Hugenot derivation.

The Pigou family originated from Amiens in France. The name was related to pique or pike, and the Pigou arms consist of three pike heads. Two sons of Lawrence Pigou of Amiens – Jacques and John - fled from persecution in France and settled with their families in England in about 1685. All branches of the Pigou family became involved in trade with India.

Family of Jacques Pigou

The descendents of Jacques died out but there were two notable members of this family. The Gentleman’s Magazine (January 1792) reprinted the letter of Captain Peter Pigou (1732-1783) describing his adventures in conveying a huge hydraulic organ from Madras to Aurengabad, for a speculative sale to the Nizam.

Thomas Pigou (1765-1796), the son of Peter Pigou was an officer in the British East India Company and a close friend of Francis Light. He succeeded Light as governor of Penang.