Professor Pigou

Diary Entry: March 18, 2025

I’m back in the 1960 paper, and I’m forced to focus on the guy Coase sets up as his main villain: Arthur C. Pigou. The entire paper is framed as a response to him. Coase opens by saying the “economic analysis of such actions had followed the treatment of Pigou,” which he claims is “not necessarily, or even usually, desirable.”

So, I had to figure out who this Pigou guy was and what he said that was so wrong.

From what I’ve gathered, Pigou was the father of “welfare economics.” His big idea was the concept of “externalities”. He was trying to explain why markets fail. He defined externalities as “divergences between the values of marginal social and marginal private net product”. In plain English: it’s when a factory pollutes, creating a “disservice” for the public, but the cost of that pollution isn’t part of the factory’s “private product.” The factory owner doesn’t pay for the harm, so we get too much pollution.

Pigou’s solution, which Coase frames as the great evil, was that when private bargaining can’t solve this (and he did acknowledge bargaining), the government should step in. It should “make the owner of the factory liable for the damage,” “place a tax on the factory owner,” or use zoning to “exclude the factory from residential districts”. This is the famous “Pigouvian tax.”

So, Coase, the supposed libertarian, is here to show how this government intervention is wrong. Fine. That’s a normal academic debate.

But the tone of his attack isn’t normal. It’s... vicious. It’s personal.

Coase doesn’t just disagree with Pigou; he tries to humiliate him. He writes, “It is difficult to resist the conclusion... that Pigou had not thought his position through”. In a later publication, he claimed Pigou’s analysis was “based on the reading of a few books or articles”, as if he was a lazy amateur. He even wrote a separate paper about Pigou’s appointment at Cambridge, just to imply he wasn’t qualified. Who does this remind me of?

And then I found this detail: Pigou died in 1959. The FCC paper was published in 1959. The Problem of Social Cost was published in 1960. Coase’s harsh, dismissive critique was aimed at a man who had just died and couldn’t defend himself. It’s... well…

But here is the part that makes my head spin. After all that character assassination, after setting Pigou up as the intellectual enemy... Coase quietly admits that Pigou’s analysis is correct.

I’m not kidding. He doesn’t criticize Pigou’s substantive analysis. He even “acknowledges that Pigou’s ‘analysis as such is correct’”. He just says Pigou “does not seem to have noticed that his analysis is dealing with an entirely different question”.

This changes everything.

Why would you be so vicious to a man you basically agree with? Why build a straw man, paint him as a fool, and then say “oh, by the way, his math is right”?

This is all getting very complicated. I even made a list of questions for Professor Moore. I wanted to ask him what the real difference is between Pigou’s “externalities” and Coase’s “social cost.” I was also going to ask him about the Adam Smith connection. I did have a meeting scheduled with him in February to discuss all these. I wanted to get to the bottom of it. I guess.