An Economist's Invisible Hand. Commentary by John Cassidy, WSJournal, November 28, 2009. "Arthur Cecil Pigou... was, for a long time, the forgotten man of economics. In the years leading up to his death, in 1959, he was a reclusive figure, rarely venturing from his rooms at King's College. His novel ideas on taxing polluters and making health insurance compulsory were met with indifference: Keynesianism was all the rage. Today Mr. Pigou's intellectual legacy is being rediscovered, and, unlike those of John Maynard Keynes and Milton Friedman, it enjoys bipartisan appeal. Leading Republican-leaning economists such as Greg Mankiw and Gary Becker have joined Democrats such as Paul Krugman and Amartya Sen in recommending a Pigovian approach to policy. Much of President Barack Obama's agenda -- financial regulation, cap and trade, health care reform -- is an application of Mr. Pigou's principles. Whether the president knows it or not, he is a Pigovian.
"Mr. Pigou pioneered the study of market failure... While Mr. Pigou believed capitalism works tolerably most of the time, he also demonstrated how, on occasion, it malfunctions. His key insight was that actions in one part of the economy can have unintended consequences in others... Global warming presents perhaps the most dramatic example of what can happen if spillovers are ignored. It was the growing public concern over global warming that resurrected Mr. Pigou from obscurity. In 2006, the British government published an official report on climate change by Sir Nicholas Stern, a well-known English economist, which relied extensively on Mr. Pigou's analytical framework. 'In common with many other environmental problems, human-induced climate change is at its most basic level an externality,' Mr. Stern wrote. And he went on: "It is the greatest and widest-ranging market failure ever seen." In addition to referencing Mr. Pigou's work directly several times, Mr. Stern recommended the imposition of one of his extraordinary restraints: a substantial carbon tax. This proposal remains controversial, but a number of Republican economists have endorsed it. Harvard's Greg Mankiw has founded an informal Pigou Club for economists and pundits that support a carbon tax."
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