ECON 2K03

INTRODUCTION TO THE STUDY OF

CANADIAN ECONOMIC HISTORY
Why Study Economic History?

We want to find out what life was like before our

time.
Knowing about the past informs us about the
present and gives us clues about the future.
Knowing why things happened like they did is
important.
 Since the real world is too complex to be
understood through a simple description of
events, we resort to using theory.
Economic theory explains the working of a
simplified, abstract representation of the real
world, and the conclusions drawn from this
analysis are then applied to the real world (very
carefully!).
Theory can help us understand history and
history can help to validate or suggest the need to
modify or correct theory.
 Economic history is essentially the study of economic
growth and development.
Economic growth = an increase in the overall
productive capacity of an economy.
Economic development = a change in the structure of
production and the corresponding composition of
output.
Theres no single, unified theory of long-term economic
change.
Instead, a number of different approaches have been
and are in use today.
Classical Theory

Developed by followers of Adam Smith in the early

19th century in Britain.
Ricardo, Malthus, Mill.
Expanding output required larger and larger
quantities of a variable input labour to a fixed
input land.
Diminishing marginal product meant total output
would increase at a decreasing rate.
 Average product (output per worker) would fall.
In the long run, average product would fall until it
reached a subsistence level just enough output
to keep the work force from declining due to
starvation.
This is how economics came to be known as the
dismal science.
Marxian Analysis

Karl Marx, Das Kapital

Under his labor theory of value, the direct value of a
commodity stems solely from the socially necessary
labour time invested in it.
Capitalists do not pay workers the full value of the
commodities they produce they exploit the workers.
The gap between the value a worker produces and his
or her wages are a form of unpaid labour, known as
surplus value.
 Workers become alienated from the commodities
they produce the immiseration of the
proletariat. As a class, they are at conflict with
the capitalists.
They revolt against the capitalists and take over
dictatorship of the proletariat.
A new communist economic order results the
end of capitalism.
Keynes

Influenced post-WWII economic thinking.

Emphasized the importance of real rates of capital
formation (investment), saving and the
capital/output ratio.
Capital accumulation led to increased output.
Higher levels of aggregate demand needed to
validate the increase in capacity.
Investment and maintaining full employment are
the keys to economic growth.
Neoclassical Theory

Output could increase from increases in labour

and capital and improvements in both through
technological advances.
Technological change would offset diminishing
returns, making possible increases in average
incomes over time.
One of the weaknesses of this approach is its
failure to explain the sources of such
technological change.
The Staples Approach/Theory

First conceived by W A Mackintosh

in 1923.
Brought to the fore by Harold Innis
(pictured here) in 1930.
This is a truly Canadian approach
to understanding our economic and political
development.
 A staple is a commodity that is extracted and
exported in unprocessed form in large quantities.
Essentially, staples are natural resources and wheat.
Because they are primarily exported, prices depend on
external (foreign) demand and staple exporters are
subject to the whims of overseas markets.
Canadas staples: fish, fur, forests, farming (wheat) and
fuel (what I call the Five Fs of Canadian economic
development).
 The characteristic of the staple determines the
extent of development.
For example, in the US, the cotton staple led to
settlement, regional population growth and
development around and beyond the staple.
The fur trade did not require settlement (trading
posts here and there) so there was no population
growth and no large-scale economic development.
 Staple production can lead to linkages:
Backward linkages: building infrastructure to help with
the extraction of the staple (roads, canals, rail lines
etc.)
Forward linkages: processing the staple out of its raw
form before export (saw and flour mills to process
lumber and grain etc.)
Final demand linkages: local demand for finished goods
(furniture made locally from local lumber)
 An overconcentration in staple extraction can lead to
backward linkages but not necessarily to any great
forward or final demand linkages.
This can retard any diversification out of the staple.
You can also become myopic about particular staples
if world tastes change, you can get stuck in a staples
trap, stuck producing the wrong staple, if you cant
adapt to changing demand.
 Innis argued that Canada developed as it did because
of its staple commodities that were exported to Europe.
This trading link cemented Canada's cultural links to
Europe.
The search for and exploitation of these staples led to
the creation of institutions that defined the political
culture of the nation and its regions.
 Different staples led to the emergence of regional
economies (and societies) within Canada.
For instance, the staple commodity in Atlantic Canada
was cod. This industry was very decentralized, but also
very co-operative.
In western Canada the central staple was wheat. Wheat
farming was a very independent venture, which led to a
history of distrust of government and corporations in
that part of the country.
 To Innis, it was the fur trade that created the
geographical boundaries of Canada.
The early links between the Canadian interior and
eastern ports led to Canadian unity.
However, the importance of fur as a staple product also
resulted in the northern half of the continent
remaining dependent on Britain for trade and thus
essentially British for so much of its history.
 Staples theorists believe that Canadas
dependence on staples has left us in a dependent
position as a periphery (or hinterland) to a core
(or metropolis) where our staples are exported.
They believe that Canada has always been a
colony: first of France, then of Britain, then of the
US.
 We export natural resources in raw form.
They are processed in the core.
We import the finished consumer goods.
Instead, we should have processed them ourselves
to gain the value added which has accrued to the
foreign processor.