Pigou's theory of business cycle as an inquiry into unemployment: on the relative effects of the gold standard and the wage rigidity in the twenties

In this paper I examine A. C. Pigou's views on the unemployment policies, based on the premise that, as he himself acknowledged, his theory of business fluctuations was one integral part of his whole thought about unemployment. In his Industrial Fluctuations (1927), Pigou gave the most extensive treatment to the monetary policy among the measures against business fluctuations. There he advocated more prompt and smooth action by the Bank of England in order to effectively stabilize the movement of general prices and the economy as a whole. In order for its action not to be affected by external monetary shocks, he suggested the withdrawal from the gold standard should the public opinion and international diplomatic relations allow it. Pigou, meanwhile, placed much less importance on wage adjustment as a palliative against business cycle. The recent studies direct attention to the fact that Pigou pointed out that after World War I money wages were made rigid by such factors as contemporary institutional changes in labor markets. This picture, however, lacks a more important element of his thought: the monetary cause due to the gold standard on the prewar parity. Putting his indirect remarks on this influence together, I argue that Pigou was well aware of the monetary situation and seemed to place greater importance on the monetary influence than the wage rigidity.