Towards a rational reconstruction of Pigou’s Theory of Unemployment

The paper examines the core framework of A. C. Pigou’s Theory of Unemployment (TU) with the aim of providing a rational reconstruction of his analysis of the determinants of unemployment in the short period. This is accomplished without any comparison with Keynes’s criticism of TU, as often found in the previous literature. I reconstruct Pigou’s two-sector model, which only accounted for output in the wage good sector but not in the non-wage good sector, as a complete two-sector model to reveal his implicit assumptions about the passive behavior of non-wage earners in the non-wage good sector. I also find classical elements, most notably the wage fund doctrine and the hypothesis on profits, in Pigou’s approach, which partly explains why the model is incomplete when viewed in terms of its neoclassical elements. In the appendix I sketch a mathematical model to make Pigou’s analysis consistent. The paper shows how unemployment is determined and how economic policy to deal with it is conceived in the work of a major exponent of the pre-Keynesian approach.