Pigou's Influence On Clark: Work and Welfare

Pigou's Influence on Clark: Work and Welfare
Author(s): Donald R. Stabile

Source: Journal of Economic Issues, Vol. 29, No. 4 (Dec., 1995), pp. 1133-1145
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JeI JOURNAL OF ECONOMIC ISSUES
Vol. XXIX No. 4 December 1995
Pigou's Influence on Clark: Work and Welfare
Donald R. Stabile
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 institution-
alism because "these potential foundations were never discovered" by institutional-
ists [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 im-
pression 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 argu-
ment 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
The author is Professor of Economics and Chair of the Economics Department, St. Mary's College of
Maryland.
1133
1134 Donald R. Stabile
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 influ-
ence 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 legis-
lation 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 competitive-
ness. 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 recog-
nized 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 cal-
culation 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.
Maximum output required the proper allocation of resources, productive effi-
ciency by those resources, and sound industrial relations. Pigou's aim was finding
policies to create growth in the national dividend through manipulating these vari-
ables. He also sought to determine the impact a more equal distribution of income
would have on growth and welfare [Pigou 1920, 107].
Pigou based his brief for a more equal distribution of income on a process of cu-
mulative causation he learned from Marshall. Marshall insisted that income redistri-
bution could take luxuries from the rich to provide necessities to the poor and
improve their productive efficiency, arguing "that the income of any class in the
ranks of industry is below its necessary level when any increase in their income
would in the course of time produce a more than proportionate increase in their effi-
Pigou's Influence on Clark 1135
ciency" [Marshall 1895, 137-9]. He then added that higher wages would increase
"the efficiency not only of those who receive them, but also of their children and
grand-children." Parents would spend higher pay on improving their children and
"an increase in wages, unless earned under unwholesome conditions, almost always
increases the strength, physical, mental and even moral of the coming generation"
[Marshall 1895, 567-71, 596-7].
In short, Marshall saw a cumulative process where high wages enhanced the
productive efficiency of both the present and the next generation. The next genera-
tion, being more efficient, would raise its standard of living, do a better job of edu-
cating its children, and improve its prospects. On the cycle would go, leading to
great improvement of the economy and the quality of its work force. As he con-
cluded, "any change in the distribution of wealth which gives more to the wage re-
ceivers and less to the capitalists is likely, other things being equal, to hasten the
increase of material production" [Marshall 1895, 308-11].
Pigou took these lessons to heart, and his Economics of Welfare elaborated on
Marshall's advice. As might be expected in a lengthy book, Pigou's analysis of eco-
nomic welfare ranged far and wide. The key to assessing the level of welfare was
the impact an action might have on either allocative efficiency or productive effi-
ciency. Changes in the distribution of income that improved productive efficiency
but impaired allocative efficiency had to be appraised in terms of their total effect.
Pigou attempted to develop an analytical framework to make this appraisal.
To lend precision to the need to have allocative efficiency include welfare effects
from changes in the national dividend, Pigou defined two key concepts. The mar-
ginal social net product (MSP) was the total flow of output to society from a new in-
vestment in resources [Pigou 1920, 114-5]. The marginal private product (MPP)
reflected the flow of income from the actual sale of that output by private enterprise
[Pigou 1932, 136]. A proper allocation of resources required that MSP be equal in
all industries just as was required for MPP. Pigou, however, did not think that
equalization of MSP would take place, except where MSP equalled MPP, because
business owners did not let it enter into their profit calculations [Pigou 1920, 149].
Pigou admitted that the equality of MSP and MPP would not guarantee maxi-
mum welfare. He recognized cases of multiple equilibria and the possibility that an
inequality of MSP and MPP could be the case where "a point near the summit of
the highest hill may be higher than any summit except the highest itself" [Pigou
1932, 140]. The tentative nature of this approach meant that "economic science
must always speak with an uncertain voice" [Pigou 1932, 10]. In this instance, that
voice said that private enterprise did not ensure maximum welfare.
Pigou gave many examples of the divergences between MSP and MPP and the
impact on welfare [Pigou 1920, 159-68]. With the notion of externality, he looked
at the shifting of production costs onto third parties and included as "third par-
ties . . . the public in general" [Pigou 1920, 162] to show that welfare losses from
individual bargains were levied on society. This tool formed one way of looking at
the welfare of workers.
The Side Effects of Work
In general, Pigou argued that improvements in the size and distribution of the
national dividend that alleviated poverty had long-term effects on the capabilities of
the work force. He maintained, in recognition of the importance of institutions, that
"environments, in short, as well as people have children." Pigou was concerned
with the institution of the family and the development of children over time. En-
hancement of the income of workers created a better home life for their children.
Those children would help their own offspring, setting off a process capable of
modifying "the human qualities for which the current environment is in part respon-
sible" [Pigou 1920, 98-100].
At the time Pigou wrote, genetic experts contended that a "correlation exists be-
tween poverty and 'bad' original qualities" [Pigou 1920, 104]. His defense of the
idea that changes in the social environment, in this case family life, influenced hu-
man behavior was akin to Veblen's views on instinctual versus institutional behav-
ior. The parental bent needed to be nurtured by the right conditions.
This point showed clearly when he employed his third-party effect to one work-
related problem:
The crowning illustration of this order of excess of [private] over social net
product is afforded by work done by women in factories, particularly during
the periods immediately preceding and succeeding confinement; for there can
be no doubt that this work often carries with it, besides the earnings of the
women themselves, grave injury to the health of their children [Pigou 1920,
163].
A society that obliged women to work during pregnancy was reducing its current
and future welfare. Grave injury to the health of children imposed costs on them
and on society. In the long run, this injury impaired the quality of the work force.
The cumulative causation leading to improved production would be hindered. Laws
to keep pregnant women from working might improve total welfare, even if, as
Pigou recommended, they were accompanied by subsidies to those families who
needed the earnings of women to survive.
Pigou also utilized his welfare measure to analyze low wages in one specific
case. Critics of capitalism had contended that payment of low wages indicated busi-
nesses were not replacing human capital and thus imposed a cost on society. Pigou
thought this an invalid argument, except in cases where "if the setting to work of
people at some industry wears out and destroys productive powers which, had they
not been set to work in that industry, would be available to augment the national
dividend, then the destruction of this productive power ought to be strictly debited
against that industry. Its social net product falls short of its private net product to
that extent." If those workers had been employed in other low wage industries,
there was no loss of human capital and no "general presumption" of a welfare loss
[Pigou 1932, 600].
Pigou's applications of the MSP/MPP approach to labor were rare and limited,
with no uniform pattern. In the first example, he held productive efficiency in the
future to be a more powerful force than allocative efficiency in the present; he gave
greater weight to allocative efficiency in the second. The only point to be made here
is that he did apply the approach to labor, and it was this application that Clark
would later extend. His consistency was in asking whether labor market conditions
altered the national dividend. If they did, there were welfare implications for Pigou
to investigate.
Underlying the analysis of wages, allocative efficiency and changes in the na-
tional dividend was the notion that fair wages meant that workers earned either what
workers of similar ability obtained elsewhere, ceteris paribus, or the value of their
marginal product. Pigou understood that wages depended on a number of factors in-
cluding age and experience, discrimination, skills, education, location, industry
structure, demand for the product, and state of the economy. This definition of a
fair wage was his way of bringing order to all these variables. It also embodied "the
ideal distribution of labor" [Pigou 1920, 505].
Pigou recognized instances of unfair wages due to regional differences in wages,
caused by labors' immobility, or through exploitation from employers' bargaining
power. When wages were unfair, policies to make them fair would not diminish the
national dividend and might enhance it. Bargaining power in favor of employers
routinely made them seek low wages to improve their profits instead of looking for
new ways to improve production, placing a drag on technological development.
Higher wages would give them an incentive to improve the productive efficiency of
their workers, with no loss in allocative efficiency. Pigou also defended intervention
to raise unfair wages if the national dividend grew "resulting from increased
strength due to better food and better conditions of life" [Pigou 1920, 516-19, 548-
9].
Pigou did not want intervention in labor markets where wages were fair but low.
Efforts to establish high wages through a national minimum wage, for example, had
limited efficacy in raising fair but low wages. Workers in the lowest condition
would be forced out of work, so additional programs were needed to help them im-
prove their productivity [Pigou 1920, 553-58]. Enhancement of workers' knowledge
was as crucial to Pigou as it was to Marshall and institutionalists [Jensen 1990, 410-
11].
Although he objected to a minimum wage, Pigou supported a redistribution of
income through transfer payments to provide a minimum standard of living. Trans-
fers would neither upset the allocation of labor nor cause unemployment to the ex-
tent that a minimum wage would. Pigou was skeptical, however, about setting "a
national minimum standard of real income," due to information and monitoring
costs. Establishing what the standard might be in terms of real goods and services
would take resources and might involve government dictation of what an income
transfer would be used to purchase to do the most good for improving the quality of
the work force: "It is a very delicate matter for the State to determine authoritatively
in what way poor people shall distribute scanty resources among competing needs"
[Pigou 1920, 788]. The data to make this type of decision was not available to poli-
cymakers, so the best rule was that the larger per capita income in a country, the
higher the minimum that could be set [Pigou 1920, 787-96].
Pigou gave qualified assent to a minimum living standard, because higher in-
comes could set off the cycle of cumulative causation. Income transfers had an indi-
rect welfare gain from improvements in the quality of the work force. If low wages
were unfair, government policies to raise them to their fair level would bring about
this more equal distribution of income by taking profits away from powerful busi-
ness groups. When low wages were fair, government programs could improve the
knowledge of workers or give them additional support to improve themselves; these
would be financed by progressive taxes that would also hit the wealthy heavily. In
all these cases, Pigou suggested only the possibility of indirect welfare gains due to
higher incomes for workers. Efforts to raise workers' incomes might reduce labor
mobility and alter allocative efficiency. But even if workers' incomes were in-
creased, there could still be a loss of welfare due to working conditions.
Working Conditions and Welfare
Pigou accepted Marshall's perception that the welfare effect of higher wages in-
cluded the provision that they be earned under wholesome conditions. He appreci-
ated that gains from higher output could be offset by the dissatisfaction involved in
producing it. As a result, he asserted, somewhat rhetorically, "Suppose, for exam-
ple, that the whole community was compelled by law to work for eighteen hours a
day, and .. . that this policy made the national dividend larger. It is practically cer-
tain that the satisfaction yielded by the extra product would be enormously less than
the dissatisfaction caused by the extra labor" [Pigou 1920, 43]. The manner by
which goods and services were produced also had implications for the level of wel-
fare.
With regard to hours of work, Pigou observed, "after a point, an addition to the
hours of labor normally worked in any industry would, by wearing out the work
people, ultimately lessen rather than increase the national dividend" [Pigou 1920,
412]. He then analyzed why employers and employees, under conditions of perfect
competition, might desire hours of work in excess of what would maximize total
welfare.
The analysis focussed on the way hours and wages were negotiated for in blocks
of time at fixed rates and on a lack of foresight by both parties. It included the
stronger bargaining power of employers "in matters of the hours of labor." This
power could be abused. Pigou quoted one employer who revealed: "The employer
as such is not primarily interested in keeping labor in excellent condition. What he
wants is a sufficient supply of efficient labor to meet his immediate demands; and
though ultimately this supply will be curtailed unless the whole nation allows a mar-
gin for wear-and-tear and for the stimulation of progressive efficiency, he cannot af-
ford, under our present competitive system, to take a very long view."
This attitude Pigou interpreted as a reflexive response brought about because
employers had no long-term relationship with their workers and no interest in their
well-being. If workers wore out, they could be replaced. The outcome was a poten-
tial for negative side effects that would reduce the national dividend in the future,
causing a welfare loss.
On the supply side, because of pressing needs, workers equally neglected the
possible degeneration of their own effectiveness in the pursuit of employment. Be-
yond pressing need, however, they showed a lack of foresight from the human ten-
dency of overestimating their abilities. Hence the attitude of workers empowered
them to work harder than was for their own good, as well as for the good of the na-
tional dividend.
The possibility that the pressure for excess work reduced total welfare was a real
one to Pigou, and to have established it, he concluded, "is to have made out a prima
facie case for State intervention" through the regulation of the hours of work. The
key to the reduction in hours was how long it would take for the improved quality of
the work force to make itself felt in increased productivity. He felt that the time
would be short, at least shorter than for the productivity gains that might come from
higher pay [Pigou 1920, 417-18]. As a result, he later pointed out that "in so far as
a diminution in the hours of work leads to a more than corresponding increase in ca-
pacity, both the national dividend and the absolute share of labor will benefit"
[Pigou 1932, 668].
Pigou also scrutinized the welfare implications of the mental degradation of
work. In his analysis of the then-emerging field of scientific management, he looked
favorably upon the improvements in efficiency that it would bring. But he cautioned
that "there is a real danger that this new-found science should be pushed too far."
There was more than one good way to perform any operation, and these might be
differently applicable to diverse workers. He noted that the new approach might
eliminate workers' proposals for improving their methods by reducing their capabil-
ity to undertake individual initiative. Unless the government took steps to limit the
efficiency methods, "this method of industrial organization may be carried further
and applied more widely than the interest of the national dividend-not to speak of
the general interest of society-when viewed as a whole, demands." If scientific
management imposed a welfare loss on society through a reduced national income,
government should curtail it [Pigou 1920, 186-8].
The deterioration of workers during periods of unemployment was another prob-
lem Pigou considered, especially where enforced idleness diminished the skills of
workers or caused a decline in their work ethic [Pigou 1920, 485-8]. In this case, he
favored putting workers on short-time rather than laying them off [Pigou 1920, 483]
and recommended that government and industry try to shift their purchases to keep
the demand for labor more constant [Pigou 1920, 878-81].
Pigou's analysis of excessive hours and degrading working conditions reflected
the paradox that individual self-interest did not result in maximum welfare. Instead,
competition and the lack of cooperation led individuals to actions that were neither
in their interest nor in society's. In labor markets, individual employers were forced
by competition to overwork their employees, for to do less would put them at a dis-
advantage compared to their competitors. Workers, following their own uninformed
self-interest, agreed to work long hours in degrading conditions, and any worker
who objected to the standard would not find a job. If extra hours of work or poor
working conditions impaired the work force, the gain in national dividend came at
too high a cost; policies to set maximum hours and healthy working conditions had a
welfare gain.
In sum, Pigou's guiding principle for the welfare of labor was evaluation of the
impact that any action had on the national dividend and economic welfare. He pro-
ceeded on a case-by-case basis, carefully totaling benefits and losses in good utilitar-
ian fashion, using a variety of analytical tools such as the marginal social product
and externalities. Underlying his analysis, however, was the allocation of labor. Ef-
forts by policymakers to manipulate wages or working conditions could produce ad-
verse affects on the distribution of labor.
As a result of his holding to a static definition of the allocation of labor, Pigou's
approach to labor had a limited applicability to a dynamic economy. For example,
he believed that forcing employers to raise unfair wages to their fair level would en-
courage them to improve their efficiency and thereby raise the marginal product of
labor. Whether raising low but fair wages through a minimum wage would also
have this effect he did not say. The maintenance of an ideal distribution of labor as a
standard of efficiency limited Pigou's perception of the process of cumulative causa-
tion that he and Marshall embraced. This was a limitation that Clark avoided.
Pigou and Clark
Indications of the influence of Pigou on Clark are easy to ascertain, because

Clark was unreserved in his own attribution. In Studies in the Economics of Over-
Pigou 's Influence on Clark 1141
head Costs, he referred to the problem of excess capacity and how "Alfred Mar-
shall's brilliant successor in the Cambridge chair of economics" used MSP and
MPP to solve it [Clark 1923, 449]. In Social Control of Business, after an example
of how a business' reduction of costs by layoffs did not lead to an equal reduction of
costs for society, Clark wrote that in such cases "there is likely to be a discrepancy
between private interest and social interest as to how far production should be
pushed." He then added, "This type of case affords a considerable portion of the
material in A. C. Pigou's books, Wealth and Welfare and Economics of Welfare"
[Clark 1926, 182n]. Clark felt he and Pigou were on common ground.
A close reading of Clark's writing on labor will indicate that he had the same
concerns as Pigou, i.e., low wages, long hours, and the negative impact of scientific
management [Stabile 1993, 174-79]. Instead of measuring economic welfare by total
output as had Pigou, Clark concentrated on social efficiency.
Clark's definition of social efficiency differed from Pigou's static concept of al-
locative efficiency as the proper distribution of resources, especially labor, as deter-
mined by marginal productivity. In his own approach to labor welfare and social
efficiency, Clark took more account of the problem of cost shifting, whereby eco-
nomic actors avoided costs that were their responsibility by placing them on others
or on society in general. Pigou had come close to this concept with his notion of ex-
ternalities, but applied it tightly. Clark transformed it into his notion of social costs
and gave it a broader function.
Clark's Social Costs
In specific terms, Clark pondered over how the pecuniary institutions of busi-
ness, as embodied in private accounting methods, made an arbitrary distinction be-
tween fixed and variable costs. From the perspective of social efficiency, all costs
were fixed costs, and Clark meant by social costs the using up of society's overhead
of a fixed stock of resources.
Clark advanced this perspective by investigating how high levels of fixed capital
made the allocation of overhead costs crucial in business decisionmaking. Equally
important, the proper allocation of overhead costs was needed in social decisions.
At any time, society had a fund of social capital and social labor. The more they
were used in production, the faster they would depreciate. The depreciation of these
funds of capital and labor constituted Clark's definition of social costs.
Businesses accounting methods did allow for capital's depreciation, which trans-
lated into an allotment of resources for investment to replace social capital. Allow-
ance for the costs of using up the fund of social labor was never made, however. To
the extent that these overhead costs were improperly allocated, Clark argued, prices
charged by business would not reflect the true contribution to production of the fund
of social labor and resulted in inefficient production and a misallocation of re-
sources. Consumers would not pay the full cost associated with the resources used
to satisfy their wants.
Clark perceived that labor, like capital, had fixed overhead costs, including sub-
sistence, health care, and training. For the individual business, only capital repre-
sented a fixed cost; labor was a variable cost that could be avoided simply by
discharging workers. Workers were responsible for their own maintenance. But
when their wages were not adequate to tide them over during periods of unemploy-
ment, and if the community did not make additional provisions for them, members
of the labor force might themselves deteriorate [Clark 1923, 16, 361-66].
Overhead costs existed at any level of production, even when that level was
zero. This held for social overhead costs as well as business overhead costs. In the
case of workers, they must feed, clothe, and house themselves and their families,
whether they were working or not; if they were unemployed, sick, or elderly, they
must still take care of themselves with training, medical care, and a retirement fund.
Since these costs will not go away, if workers cannot pay them, someone else must,
whether friends and relatives, eleemosynary institutions, or government. When
these other agencies help to cover the social costs of work, the businesses that pay a
wage below the social cost level were being subsidized by them. This was the prob-
lem Clark raised.
Under the institutional framework of capitalism, businesses shifted many of the
costs of maintaining the social fund of labor onto society through layoffs and wage
reductions, leaving it to society to help sustain the work force. To avoid this cost
shifting, a community approach to industrial production was needed. As an illustra-
tion of a community approach, Clark asked, "If all industry was integrated and
owned by workers, what would be the relation of constant to variable expense?" He
answered, "It would be clear to worker-owners that the real cost of labor could not
be materially reduced by unemployment." Workers understood that laying them off
did not reduce their costs of living, but shifted them [Clark 1923, 27-29, 357-86,
402].
Clark had discovered a contradiction in assuring that the fund of social labor was
maintained. What was a fixed cost for society was a variable cost for business.
Markets allowed business to shift its burden onto society. These costs of labor be-
came a social cost when unmet, because either they were paid by workers through
their personal deterioration or they were paid by society through some form of re-
lief. As Clark stated the case:
Whether through ignorance, inertia or sheer necessity, workers will work

under conditions that will shorten their work lives or injure their future effi-
ciency, and they are not able to charge any adequate premium for such kinds
of work. This might perhaps be treated as nobody's business but the work-
ers', save for the fact that their children and other dependents have an inter-
est in their working-efficiency, also their future employers, or the taxpayers
or contributors to charity who must pay for the rescue work which may be-
come necessary, or the business out of whose product the funds for relief
must come-in short, there is a "public interest" in the avoidance of such
wastes [Clark 1926, 130].
Clark believed that low wages and overwork for all types of workers imposed
social costs on others. If the market could not guarantee workers proper working
conditions and wages, Clark felt it appropriate to remedy this through legislation,
because it was in the public interest to take care of social costs.
Having pinpointed social costs of low wages and poor working conditions, Clark
looked for government intervention to remedy them by establishing a "social mini-
mum" of a standard of living [Clark 1926, 176]. Policies to help the working poor,
he argued, echoing Pigou, might "actually pay for themselves in the long run by in-
creasing the working efficiency of the personnel." Even if they did not, ending the
system that permitted unmet damages to the work force was crucial to social effi-
ciency.
Clark justified his support of minimum wage laws "on the ground that an indus-
try which does not pay a living wage is really imposing part of its costs on other in-
dustries, since it is out of those industries that the living expenses of the underpaid
workers must be made up, if they are to be made up at all. And if not, there is a
loss of working-power which falls as a diffused burden, often handicapping succeed-
ing generations" [Clark 1926, 451-2]. Through the shifting of costs onto society, in-
dividual businesses were receiving a subsidy.
For an opinion that subsidies were detrimental to overall efficiency, we may
look to Pigou, who wrote, "For the State to subsidize wages in particular industries
must, in general, worsen the distribution of productive resources and damage the
national dividend" [Pigou 1932, 699]. This was precisely what Clark saw happening
with the shifting of the social costs of labor.
As a result, Clark found the partial and disorganized shifting of social costs to
be an inefficient use of subsidies. In its place he proposed his "social minimum"
funded by government to produce a general system of subsidy. A system of wage
subsidies could make workers' jobs permanent, however. Workers would rarely
change jobs and business less likely to lay them off. Cost shifting could be pre-
vented by making labor a fixed cost for business. Clark downplayed any loss of al-
locative efficiency in this strategy, but Pigou did not agree.
Pigou granted that many employees-white-collar workers, judges, and college
professors-were paid no matter what the work level, leading some to suggest the
same policy for all workers. He knew that acceptance of this plan meant that "labor
would have become a fixed charge." He argued against this policy, pointing out that
it would hinder the mobility of labor and diminish the national dividend [Pigou
1932, 529-30].
This inference followed from Pigou's reliance on a static equilibrium where the
market wage equalled the marginal product of labor. Clark argued that in a dynamic
economy no equilibrium was possible and if labor were defined as a fixed cost, the
marginal product curve could not exist even in its static sense.
Clark's own approach had limitations, however. As with Pigou, his definition of
a social minimum ran afoul of meager data, due to the weakness of social cost ac-
counting. A proper social cost accounting system, according to Clark, "would un-
dertake to set a true social value on all the human values and costs of industry"
[Clark 1926, 180]. He wanted a measure of the value of production that accounted
for society's values [Hickerson 1981, 291]. Instead of an economist's measure of
welfare that Pigou provided, Clark wanted a community standard of welfare.
One advantage of Pigou's measure of welfare was its simplicity; national income
accounts were readily available and easy to understand. For example, William
Nordhaus and James Tobin [1972, 4-13] once recalculated GNP to take into account
some negative externalities, to count some final products such as health care and
education as intermediate goods, to add in estimates of human capital, to include the
value of leisure time, and to leave out spending on items such as national defense or
commuting that do not add to welfare.
Pigou might have approved of this procedure and extended it to labor, even
though it ignored his notion that welfare depended on the distribution of GNP as
well as its size. Pigou also would have applauded Robert Fogel's recent finding
"that the average efficiency of the human engine in Britain increased by about 53
percent between 1790 and 1980. The combined effect of the increase in dietary en-
ergy available for work, and the increased human efficiency in transforming dietary
energy into work output, appears to account for about 50 percent of British eco-
nomic growth since 1790" [Fogel 1994, 387-8]. It did not require a social cost ac-
counting system to realize that higher wages improved workers' diets, adding to
their productive efficiency.
Conclusion
Within the framework of their theories of general welfare, Pigou and Clark had
a common concern that under certain conditions in a capitalist system, the quality of
the work force might deteriorate and reduce welfare, a perspective that needs to be
revived. The point of view each expressed with his theory counters arguments being
made in Western capitalism about the need to cut wages and benefits to renew com-
petitiveness. Clark's view that such cuts subsidize business by letting it shift its
costs onto society was stronger than Pigou's appreciation. Clark's use of the social
costs of work was influenced by Pigou, but Clark extended it into areas that Pigou
would have deplored.
Clearly, Clark was an institutionalist and Pigou was not. Veblen praised Mar-
shall's work for aspiring to stress change but felt it only contained "an air of evolu-
tionism . . ." Marshall's notion of cumulative causation was constrained by the
static classifications of marginalism [Veblen 1932, 171-51. Pigou's interest in insti-
tutions was restricted by this same emphasis.
Of more concern to institutionalists, Pigou's influence on Clark epitomized, as
Gruchy [1947, 401] noted, "Clark's respect for the contributions of the neo-classi-
cists and his skillful attempts to revamp their theoretical positions . . ." It was also
an effort to "bring new support to" institutionalism by "seeking to develop a synthe-
sis" between the two schools.
Clark's synthesis added to knowledge of work and welfare but did not enlarge
support for his welfare economics. The issue between Clark and Pigou was where
to draw the line between institutions and calculations based on "the measuring rod
of money." This difference is not easily synthesized. Pigou's inclusion of institu-
tional elements made it easier for Clark than it would be for current institutionalists
to incorporate elements of modern welfare economics into their analysis.
References
Clark, John Maurice. Studies in the Economics of Overhead Costs. Chicago: University of Chicago
Press, 1923.
. Social Control of Business. Chicago: University of Chicago Press, 1926.
' "Recent Developments in Economics." Chapter 5 of Recent Developments in the Social Sci-
ences, edited by Edward Carey Hayes. Philadelphia: J.B. Lippincott Co., 1927.
. Economic Institutions and Human Welfare. New York: Alfred A. Knopf, 1957.
Fogel, Robert W. "Economic Growth, Population Theory, and Physiology: The Bearing of Long-Term
Processes on the Making of Economic Policy." The American Economic Review 84 (June 1994):
369-95.
Gruchy, Allan G. Modern Economic Thought: The American Contribution. New York: Prentice-Hall,
Inc., 1947.
Hickerson, Steven. "John Maurice Clark's View of Social Valuation and Accounting: Potential Applica-
tion of Policy Assessment Techniques." Review of Social Economy 39 (December 1981): 289-306.
Jensen, Hans E. "Are There Institutional Signposts in the Economics of Alfred Marshall?" Journal of
Economic Issues 24 (June 1990): 404-411.
Little, I. M. D. A Critique of Welfare Economics. 2d ed. London: Oxford University Press, 1957.
Marshall, Alfred. Principles of Economics. 3d ed. London: Macmillan & Co., 1895.
Nordhaus, William, and James Tobin. "Is Growth Obsolete." In Economic Growth: FiJtieth Anniversary
Colloquium V. National Bureau of Economic Research, General Series 96. New York: Columbia
University Press, 1972.
Pigou, A. C. The Economnics of Welfare. 1st ed. London: Macmillan & Co., 1920.
. 7The Economics of Welfare. 4th ed. London: Macmillan & Co., 1932.
Seligman, Ben B. Main Currents in Modern Economics. New York: The FreePress of Glencoe, 1962.
Stabile, Donald R. "Accountants and the Price System: The Problem of Social Costs." Journal of Eco-
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Veblen, Thorstein. "The Preconceptions of Economic Science." In 7he Place of Science in Modern Civi-
lization and Other Essays. New York: The Viking Press, 1932.

Pigou's Influence On Clark: Work and Welfare

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Pigou's Influence On Clark: Work and Welfare

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Pigou's Influence on Clark: Work and Welfare

Author(s): Donald R. Stabile

Pigou's Influence on Clark: Work and Welfare

In an earlier article, Hans Jensen documented institutional elements in the work

Pigou's Welfare Economics

The Side Effects of Work

Working Conditions and Welfare

Pigou and Clark

Indications of the influence of Pigou on Clark are easy to ascertain, because

Clark's Social Costs

Whether through ignorance, inertia or sheer necessity, workers will work

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