The real balances effect is also known as the Pigou effect, after its originator, Arthur C. Pigou. (1877-1959). Pigou was born on the Isle of Wight in England, and studied at Cambridge University. He eventually became the chair of political economy at Cambridge University, succeeding Alfred Marshall, who influenced Pigou greatly. Pigou was a welfare economist, meaning that he was concerned with how to maximize social well-being beyond the scope of the individual. He contributed to theories of income distribution, externalities, and price discrimination.

It is worth while to remark, that a product is no sooner created, than it, from that instance, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should vanish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus, the mere circumstance of the creation of one product immediately opens a vent for other products ...(2) The theory did not officially become known as Say's Law until John Maynard Keynes (1883-1946) used the phrase in 1936, when Keynes was attempting to discredit the theory. Given Keynes’ motives, it is reasonable to ask whether Keynes represented accurately the ideas of Say. The most recent word on Say's Law comes from economist William Baumol. Despite what we "know" about Say's Law, Baumol asserts that there are still unresolved issues, regarding both substance and origin. As revealed above, Say's Law was not the creation of one individual, but was born of an intellectual dialogue that began in the late 18th century. Who created Say’s Law? In Baumol’s words, "they probably all did," (with "all" referring to not only J.B. Say, James Mill, and John Maynard Keynes, but also to classical economists such as Adam Smith and David Ricardo). William O. Thweatt, "Early Formulators of Say's Law," Quarterly Review of Economics and Business 19 (Winter 1978): 79-96. J. B. Say, A Treatise on Political Economy (Philadelphia: Claxton, Remsen & Haffelfinger, 1880), p. 134-135. [Originally published in 1803].

Keep in mind that Smith was writing during the time of the industrial revolution in Great Britain. At that time it was common to have wages that barely provided for physical subsistence, and often times fathers (the primary wage laborer), would forgo meals so that children could eat. Higher wages would allow workers, as Smith suggests, to increase bodily strength, and important dimension to productivity in late 18^th century Britain. Modern efficiency wage theory focuses more on worker morale and labor turnover, and less on the physical needs of workers, a central issue in Smith's time.

Robert Owen (1771-1858), owner of the New Lanark spinning mills in Scotland, attempted to put the idea of efficiency wages into practice. Owen, who owned and ran the mills from 1800-1820, also established the model community of New Lanark. Operating during the industrial revolution, a period in which wages were pushed to subsistence, Owen paid his workers significantly more than the prevailing wages of the time, and his mills were both productive and profitable.

Several economists developed formal theories of efficiency wages. These theories are summarized by George Akerlof and Janet Yellen, eds., in their book, Efficiency Wage Models of the Labor Market (Cambridge: Cambridge University Press, 1986).