Pigou and the "Pigou Effect": Rendez-Vous with the Author

Melitz, Jacques (1967): Pigou and the "Pigou Effect": Rendez-Vous with the Author. Published in: Southern Economic Journal , Vol. 34, No. 2 (October 1967): pp. 268-279.

Abstract

This article attempts to show that Pigou does not rely on the "wealth effect" in his attack on the doctrine of "unemployment equilibrium" with flexible money wages (a doctrine which, incidentally, he never considers clearly Keynesian). Instead, he depends on a form of "substitution effect," hinging on a change in the "convenience yield" on money relative to the yield on physical capital. This particular line of thought is much closer than the "wealth effect" to the sort of reasoning concerning stock adjustments to differences in yields which has become popular today. In this view of Pigou's position, the principal mechanism in his work for restoring full employment under flexible wages is the "substitution" rather than the "wealth effect" of wage-price reductions. The "substitution effect" requires a mere rise in the ratio of real money to real wealth, while the “wealth effect” requires a rise in real wealth.

• Item Type: MPRA Paper
• Language: English
• Keywords: Pigou effect, Monetary policy, Wealth effect
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B0 - General; B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates

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