Gottfried Haberler, “The Pigou Effect Once More” (1952)

Gottfried Haberler’s “The Pigou Effect Once More” is a short single-author theoretical note, not a policy tract. In three sections plus notes, it intervenes in the post-Keynesian debate over Pigou, Hansen, Metzler, underemployment equilibrium, and secular stagnation. Its central thesis is that the Pigou effect has been wrongly treated as a program of wage-price deflation. Properly read, it is a theorem about the consistency of the Keynesian static model.

The ideal, static conditions under which the Pigou effect has been formulated, assuming away as they do disturbances caused by unfavorable expectations, immobility of labor, bottlenecks, the dead weight of fixed money contracts, are thus of the Keynesians' own choosing.

Haberler’s first move is methodological: keep distinct the model, the cycle, and policy. In the ideal model of competitive flexible wages, full employment is normally restored by the Keynes effect, since falling prices lower the interest rate. The Pigou effect is needed only in extreme cases—an infinitely elastic liquidity preference or interest-insensitive investment. But precisely there it performs its theoretical work, because rising real balances shift expenditure and close the remaining possibility of static competitive underemployment.

It thus effectively removes the narrow remaining basis of what has often been hailed as Keynes's greatest achievement, viz., the demonstration of the possibility of a static, competitive underemployment equilibrium.

The second section answers Hansen’s claim that real recoveries cannot be Pigovian because prices rise with output after the trough. Haberler accepts the observation while denying its relevance. The Pigou effect is not a theory of cyclical upswing; real cycles are shaped by rigid wages, unions, bottlenecks, immobile labor, expectations, and bank credit. Once these are admitted, one has left the pure Keynesian model whose equilibrium claim Pigou was meant to test.

That prices do in fact move with the business cycle (apart from occasional short lags or leads at the turning points) is not open to doubt, and hence actual cyclical upswings cannot be explained in terms of a continuing upward shift of the expenditure function caused by a sustained rise in the real value of cash and government bonds.

Haberler then moves "away from the static model" and becomes explicitly anti-deflationist. Fixed money contracts and adverse expectations make a general fall of wages and prices dangerous; he does not recommend waiting for deflation to cure depression. Yet he also rejects the opposite inference that rigidity is harmless. Relative wage and price flexibility may be needed where excessive costs or prices have suppressed demand, while monetary and fiscal expansion can prevent relative adjustments from turning into cumulative deflation.

For these two reasons it would be foolish to rely entirely on price and wage deflation to cure a depression through the Pigou effect.

The article’s broader conceptual move is to detach the wealth-saving relation from the narrow case of falling prices. If money is increased through tax reductions or transfers financed by the central bank, private expenditure may rise apart from the interest-rate channel; secular growth of real wealth may likewise lift the consumption function. Thus Pigou matters even if the real-balance mechanism is not a major force in ordinary business-cycle turning points.

The importance of the wealth-saving relation goes beyond the case usually designated by the Pigou effect, viz., beyond the effect of an increase in the real value of cash balances and government bonds due to falling prices.

This is why Haberler can agree with Hansen that Pigou is not central to the cycle yet still deny secular stagnation. In Hicks-type models, he argues, flexible wages and prices would allow trend real balances to rise and push the equilibrium path toward full employment. The final pages extend the same discipline to Metzler. Haberler accepts Metzler’s result: if open-market purchases reduce private real wealth, raise saving, and leave investment demand unchanged, the full-employment interest rate can fall. But he treats this as a special distributional case, not a practical policy recommendation or a refutation of classical theory.

Certain monetary policies do, indeed, tend to affect the equilibrium rate of interest.

The essay’s relevance lies in its anti-caricature. Haberler defends the Pigou effect as a logical corrective to static Keynesian underemployment and secular stagnation, while conceding that real depressions require monetary and fiscal policy and cannot safely be left to wage-price deflation. Its enduring point is that model equilibrium, cyclical dynamics, and policy advice must not be collapsed into one another.