Pigou began lecturing on economics in 1901 and started giving the course on advanced economics to second year students on which was based the education of many Cambridge economists over the next thirty years. In his early days he lectured on a variety of subjects outside economics. He became a Fellow of King's College on his second attempt in March 1902, and was appointed Girdler's Lecturer in the summer of 1904. He devoted himself to exploring the various departments of economic doctrine, and as a result published the works on which his worldwide reputation rests. He specifically studied under
Alfred Marshall and focused on normative economics. He became intrigued by
welfare economics, which examines the overall benefit to society that comes from all the decisions made: those that individuals make about buying, selling and working, and those that firms make about production and employment. His first work was more philosophical than his later work, as he expanded the essay which had won him the Adam Smith Prize in 1903 into
Principles and Methods of Industrial Peace. In 1908 Pigou was elected
Professor of Political Economy at the
University of Cambridge in succession to Alfred Marshall. He held the post until 1943. In 1909 he wrote an essay in favour of
Land Value Taxation, likely to be interpreted as support for
Lloyd George's
People's Budget.
Marshall's views on the land value tax were the inspiration for his view on taxing negative externalities. Pigou's most enduring contribution was
The Economics of Welfare, 1920, in which he introduced the concept of
externality and the idea that externality problems could be corrected by the imposition of a
Pigovian tax (also spelled "Pigouvian tax"). In
The Economics of Welfare (initially called
Wealth and Welfare), Pigou developed Marshall’s concept of externality, which is a cost imposed or benefit conferred on others that is not accounted for by the person who creates these costs or benefits. Pigou argued that negative externalities (costs imposed) should be offset by a tax, while positive externalities should be offset by a subsidy. Pigou's contemporary,
Frank H. Knight, described the work as "monumental" and "economics at its best." In the early 1960s Pigou's analysis was criticised by
Ronald Coase, who argued that taxes and subsidies are not necessary if the partners in the transaction can bargain over the transaction. The externality concept remains central to modern welfare economics and particularly to
environmental economics. The
Pigou Club, named in his honour, is an association of modern economists who support the idea of a
carbon tax to address the problem of
climate change. A neglected aspect of Pigou's work is his analysis of a range of labour-market phenomena studied by subsequent economists, including
collective bargaining,
wage rigidity,
internal labour markets, segmented labour market, and
human capital. Pigou’s contributions to solving unemployment serve as a basic foundation for understanding the phenomena of labor market externalities. His
Theory of Unemployment, first published in 1933, describe many of the factors that contribute to unemployment, such as sticky wages, and an unwillingness to work at the market price. Both of these are factors that were given by Alfred Marshall and reinforced by Pigou. Up until the post-World War One era,
frictional unemployment was understood as part of a functional market. However, Pigou also notes that there is another type of unemployment that emerges not because people are unwilling to work at market wages but because employers have lower demand for labor. With the lack of employment that resulted from the devastation of four years of war, England suffered from an economic depression long before the Great Depression, due in part to the fact that employers were hesitant to continue to hire women and veterans. This new factor of unemployment, Pigou writes, could be solved with subsidies provided by the government to industries suffering the most, such as manufacturing. However, the separation between frictional and voluntary unemployment is the first foray into understanding the way unemployment impacts the labor market until the publishing of Keynes
General Theory. One of his early acts was to provide private financial support for
John Maynard Keynes to work on probability theory. Pigou and Keynes had great mutual affection and regard for each other, and their intellectual differences never put their personal friendship seriously in jeopardy. Pigou was generally critical of Keynesian macroeconomics and developed the idea of the
Pigou effect on real money balances to argue that the economy would be more self-stabilizing than Keynes proposed. In a couple of lectures delivered in 1949 he made a more favourable, though still critical evaluation of Keynes' work: "I should say... that in setting out and developing his fundamental conception, Keynes made a very important, original and valuable addition to the armoury of economic analysis". He later said that he had come with the passage of time to feel that he had failed earlier to appreciate some of the important things that Keynes was trying to say. ==Personal life==