Pigou's Influence on Clark: Work and Welfare
Stabile, Donald R., Journal of Economic Issues
In an earlier article, Hans Jensen documented institutional elements in the work of Alfred Marshall but concluded that they did not have an influence on institutionalism because "these potential foundations were never discovered" by institutionalists [Jensen 1990, 405-411]. While Jensen's analysis may be correct, Marshallian economics did have an impact on institutionalism in a roundabout way. Marshall's student, A. C. Pigou, through his advancement of welfare economics, made an impression on J. M. Clark. Clark once said that Pigou "put 'Welfare Economics' on the map relative to social productivity vs. private acquisition" [Seligman 1962, 203].
Clark's statement needs a context, however, because Pigou's welfare economics employed utility theory, a perspective of little appeal to institutionalists. Following Marshall, Pigou attributed welfare gains to the greater marginal utility a dollar of income had for the poor compared to the rich; a transfer of income from rich to poor increased total utility. Neoclassical economists have since dismissed this argument by pointing out the problem of making interpersonal utility comparisons [Little 1957, 8-14, 55-6]. Clark sided with Marshall and Pigou and deplored the reversal of their welfare conclusions [Clark 1957, 59].
Clark's regard for Pigou's welfare economics had a still stronger footing. Pigou also argued that welfare gains came from improving the quality of the work force through changes in the distribution of income or by improved working conditions, and he devoted much effort to the study of "The National Dividend and Labor." This article focusses on Pigou's link between work and welfare as a stimulus to Clark's development of the concept of the social overhead costs of labor. The focus and evidence presented in this article is limited by time and topic. Pigou and Clark had lengthy careers and well-rounded views on economics. In the 1920s, however, both wrote a great deal on labor issues, more than in the rest of their careers. The analysis that follows rests on their writing of that time.
The case offered here depicts more than a historical oddity of neoclassical influence on a prominent institutionalist. The 1920s were the last era when labor was without a social safety net. That lack of a safety net for workers was important to Pigou and Clark in their studies of work and welfare. As a result of New Deal legislation and the growth of industrial unionism in the 1930s and 1940s, a safety net for workers was put into place. It became easy to leave the costs of work out of modern welfare economics by taking the social safety net for granted.
Business now threatens that safety net with cost cuts in the name of competitveness. Pigou and Clark asked whether such cuts really improved welfare. From their perspective, higher wages for workers improved their capabilities and led to higher production, adding to economic welfare. Lower wages meant the impairment of the work force. This point needs to be addressed again, and a good starting point is Pigou's welfare economics.
Pigou's Welfare Economics
The basic premise of Pigou's welfare economics was that economic welfare could be estimated in terms of the total annual production of an economy, what he called the national dividend, valued by "the measuring rod of money." He recognized that there were shortcomings in that approach; economic welfare was not total welfare, and the standard definition of the national dividend left out a number of items that influenced economic welfare. He did not intend to provide a precise calculation of total welfare, but to evaluate "how its magnitude would be affected by the introduction of causes which it is in the power of statesman or private persons to call into being" [Pigou 1932, 10-12]. For this purpose, the national dividend served as a surrogate for total welfare, and Pigou's gauge of welfare was if a public policy or private activity increased or decreased it. …