Who is the most influential economist today … the one whose  ideas offer the best guide to the current crisis? If you limit yourself to living economists, then names like Bernanke and Krugman come to mind along with many others, but it is obviously too soon to pick a winner.

If, invoking Keynes, you include dead economists whose ideas live on, then John Maynard Keynes (on the need for monetary stimulus)  and maybe Milton Friedman (on the inflation risks of monetary stimulus) need to be on the list.

I was a little surprised, however, to pick up today’s Wall Street Journal and see a full page article on Arthur Cecil Pigou, “An Economist’s Invisible Hand.” Pigou, who taught at Cambridge with Keynes, was one of my favorite economists when I was teaching Public Finance. Pigou (pronounced Pig-ooo) developed elegant theories of the economics of externalities and generations of my students studied Pigouvian taxes — taxes designed to correct problems of external cost using the market system.

Pigou is relevant today, the WSJ article asserts, because he helps us think about market failures in a systematic way — and markets sure have failed a lot in recent years.  A nice point and one that emphasizes, as I try to do in Globaloney 2.0, that today’s economic problems are market failure problems not just macroeconomic problems.

It’s a mistake to reduce Pigou to his tax policies, but let me do just that for a moment because it connects so well to two current policy debates. What should we do about the global environment? It’s an external cost problem, for sure, where private economic decisions generate potentially severe social costs to the world. Cap and trade is controversially at the forefront of public debate, but a Pigouvian tax (a carbon tax) would be simpler and provide a more market driven mechanism. I wonder if the WSJ was thinking carbon tax when they decided to run the big Pigou piece? Seems unlikely, don’t you think.

Financial regulation is also an external cost problem. Financial firms take big risks and lots of other people pay the price when things go bad. New regulations and safeguards are the talk of the town, but a Pigouvian tax on financial transactions (especially perhaps the riskiest ones) would also be a solution. We would call it a Tobin tax today — using taxes to put “sand in the wheels” of global finance. Probably not something that the WSJ editors would want to endorse.

The carbon tax idea is very appealing in theory although I don’t know how it would work in practice because of collective action problems. The Tobin tax, on the other hand, might be possible in practice, but I worry about the theory side. Pigouvian taxes assume that the markets they deal with are fundamentally stable — stable as an apply in a bowl as Pigou’s teacher Alfred Marshall used to say.

But financial markets are different from other markets — they are not inherently stable — that’s one of the points of my book. Taxing financial transactions and letting the market work may not be enough to safeguard stability and control external cost.