Arthur Cecil Pigou on Speculation: A Marshallian Analysis of Institutions and Economic Welfare

This paper examines the theory of speculation in the work of prominent Cambridge School economist Arthur Cecil Pigou (1877-1959). Although his treatment of speculation has been examined insofar as it relates to his theory of the business cycle, Pigou’s microeconomic analysis of speculation has received very little attention from historians of economic thought. This study contributes to the literature by providing an exposition and interpretation of Pigou’s treatment of the subject of speculation with particular reference to organised markets. It sheds light on an aspect of Pigou’s theory of speculation that has been overlooked in the secondary literature— namely, that Pigou’s assessment of the welfare consequences of speculation depends crucially upon the nature of the institutional context within which that activity takes place. Recognising this aspect of Pigou’s analysis of speculation not only provides a more faithful representation of his views on the subject but it also allows us to identify some of the more fruitful insights contained therein. In this connection, it is argued that Pigou’s treatment of the subject of speculation yields considerable insight into how best to interpret Alfred Marshall’s views on the subject—a matter which has constituted an important unresolved question in the secondary literature.