Pigou effect
The Pigou effect claims a stimulating effect of falling wages and prices. If the general price level falls in a deflationary trend, the financial wealth of the citizens is worth more and the total wealth is higher than desired, so that savings fall. With the higher purchasing power of financial assets, overall economic demand increases. This effect was first described by Arthur Cecil Pigou and is represented by the supporters of a deflationary policy , especially the rentiers and their lobbyists in economic policy.
history
Arthur Cecil Pigou, the arch-rival of John Maynard Keynes in all questions of the business cycle and employment theory, examined since the end of the 1920s and especially in his work The Theory of Unemployment (1933) the elasticity of labor demand and was in favor of wage cuts to increase the Employment entered. Pigou attributed unemployment largely to the rigidity of wages, which would be reinforced by social legislation and unemployment benefits. After Keynes had denied the use of wage cuts in his General Theory of Employment, Interest and Money , Pigou shifted his interest to a model that would link money wages through interest with employment in such a way that falling wages lead to increasing employment would have to. Under the influence of Nicholas Kaldor , Pigou already relied in his work Employment and Equilibrium (1941) on the IS-LM model developed by John Hicks , with which the Keynes theses were shortened to a neoclassical synthesis . In this work and in his article The Classical Stationary State (1943) he developed the thesis, later referred to as the Pigou effect, of deflation's effect on the economy and employment .
Thesis and reason
Pigou expected rising consumer demand from falling prices, because owners of government bonds in particular save less due to their real asset growth.
Keynes had argued against wage cuts because falling money wages lead to falling prices, deflation leads to a collapse in investment and real wages could even rise through lower nominal wages. Pigou, on the other hand, called for wages to fall until unemployment was overcome. The fall in prices would increase the real wealth of government bondholders and increase the purchasing power of the money supply. This leads to a falling propensity to save and rising consumer spending, which stimulates the economy.
criticism
Michal Kalecki, in particular, contradicted this in The Economic Journal (April 1944), arguing that the profit of the renters and creditors corresponds to a loss of the debtors. Overall, there is only real asset growth to the extent of the gold reserves. A severe deflation in wages and prices would catastrophically increase the real burden of debt, resulting in large-scale bankruptcies and loss of confidence. Even if workers were willing to continually cut wages, the government would have to put a wage freeze under pressure from employers.
The Pigou effect is largely based on the net debt of public budgets, which enables the private sector to have a corresponding net financial wealth, especially in government bonds. According to Paul Krugman, the real cash effect from the increase in the value of the banknotes and coins in circulation is negligible.
Comparable concepts
What all comparable concepts have in common is that, like the Pigou effect, they claim that deflation has a stimulating effect on the economy, which in a crisis would lead to economic equilibrium and full employment again.
Real cash effect
When wealth effect (real balance effect) the real cash rises through a falling prices above or lowered by a rising price level below the desired cash balances. In the IS-LM model, lower prices result in a right shift of the LM curve and the intersection with the IS curve. The real cash effect is the basis for the effects named after Pigou, Keynes and Patinkin.
Keynes Effect
The so-called Keynes Effect comes from the Neoclassical Synthesis by John R. Hicks and is in complete contradiction to Keynes' views on the effect of deflation on the economy. It describes an effect on the demand for goods that has an indirect effect on the investment via the securities market. As a result of the excessive cash holdings (transaction and speculative cash registers) with falling prices, the demand for securities increases, so interest rates decrease and investments increase. In the IS-LM model, the IS curve shifts to the right, income and employment increase.
Real treasury or patinkin effect
Don Patinkin's approach is known as the augmented real cash effect or real cash holding effect . The real cash management is adjusted to the desired cash management after a price change due to increasing or decreasing expenses. Falling prices therefore lead to increased demand for consumer goods and securities as well as increased investments due to increased real assets. Don Patinkin considers cash keeping under the benefit concept and a balance is sought between the marginal benefit of cash keeping with the marginal benefit of additional consumption or investments.
Web links
- Keynes Society: Pigou Effect: Attack and Defense
Individual evidence
- ↑ Norikazu Takami: How Pigou Converted to IS-LM (PDF; 194 kB)
- ↑ Keynes: General Theory, 1936, p. 227
- ↑ M. Kalecki: Professor Pigou on "The Classical Stationary State" A Comment ( Page no longer available , search in web archives ) Info: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice. (PDF; 290 kB)
- ↑ P.Krugman: Real balance effects (wonkish)
