Editing Pigou effect (section)

{{short description|Economic phenomenon and term by Arthur Cecil Pigou}}
{{refimprove|date=April 2011}}
{{missing|whether there is a consensus among modern economists that this effect is real|date=August 2019}}
In [[economics]], the '''Pigou effect''' is the stimulation of [[Output (economics)|output]] and [[employment]] caused by increasing consumption due to a rise in real balances of [[wealth]], particularly during [[deflation]]. The term was named after [[Arthur Cecil Pigou]] by [[Don Patinkin]] in 1948.<ref>{{Cite journal|jstor = 591|title = Price Flexibility and Full Employment|last = Patinkin|first = Don|date = September 1948|journal = The American Economic Review|pages = 543–564|volume = 38|issue = 4|author-link = Don Patinkin}}</ref><ref>{{Cite journal|jstor = 1825073|title = An Asset Influence in the Labor Market|last = Hough|first = Louis|date = June 1955|journal = Journal of Political Economy|doi = 10.1086/257665|issue = 3|pages = 202–215|volume = 63|s2cid = 154553746}}</ref><ref>{{Cite journal|url = http://hope.econ.duke.edu/node/134|title = Managing the Loss: How Pigou Arrived at the Pigou Effect|last = Takami|first = Norikazu|date = April 2011|journal = HOPE Center Working Papers|access-date = 2014-07-15|archive-date = 2019-05-14|archive-url = https://web.archive.org/web/20190514200347/https://hope.econ.duke.edu/node/134|url-status = dead}}</ref>

Real wealth was defined by [[Arthur Cecil Pigou]] as the summation of the [[money supply]] and [[government bonds]] divided by the [[consumer price index|price level]]. He argued that [[John Maynard Keynes|Keynes]]' ''[[The General Theory of Employment, Interest and Money|General Theory]]'' was deficient in not specifying a link from "real balances" to current [[Consumption (economics)|consumption]] and that the inclusion of such a "[[wealth effect]]" would make the economy more "self correcting" to drops in [[aggregate demand]] than Keynes predicted. Because the effect derives from changes to the "Real Balance", this critique of [[Keynesianism]] is also called the '''Real Balance effect'''.