Growth and the Canadian Economy 9780773595187

Table of contents :
COVER
TITLE
COPYRIGHT
THE CARLETON LIBRARY
CONTENTS
INTRODUCTION
1: ECONOMIC GROWTH: CONCEPTS AND OBJECTIVES
2: THEORIES OF ECONOMIC GROWTH: AN INTRODUCTION
3: SOME VIEWS ON THE PATTERN OF CANADIAN ECONOMIC DEVELOPMENT
4: LABOUR, CAPITAL AND GROWTH: THE CANADIAN EXPERIENCE
5: EDUCATION AND MANPOWER : SOME SOCIOLOGICAL ASPECTS OF GROWTH
6: THE PROBLEM OF REGIONAL DlSPARITlES
7: INDUSTRIAL ORGANIZATION AND TECHNICAL PROGRESS
8: POLICIES FOR ECONOMIC GROWTH IN CANADA
EPILOGUE
NOTES
THE CONTRIBUTORS
SUGGESTIONS FOR FURTHER READING

Citation preview

I GROWTH .--

--AND THE

CANADIAN ECONOMY; WITH AN INTRODUCTION BY

T. N. BREWIS

The Carletan Library No. 39 McClelland and Stewart Limited

Copyrlght@McClellandandStewart Limited, 1968

The Canadian Publishers McClelland and Stewart Limited 25 Hollinger Road, Toronto 16

PRINTED AND BOUND IN CANADA

BY T. H . BBST PRINTING COMPANY LIMITBD

He II~

G. I

{ qbc ( , 1/

THE CARLETON LIBRARY

A series of Canadian reprints and new collections of source material relating to Canada, issued under the editorial supervision of the Institute of Canadian

Studies of Carleton University, Ottawa.

DIRECTOR OF THE INSTITUTE

Pauline Jewett

GENERAL EDITOR

Robert L. McDougall EDITORIAL BOARD

David M.L.Farr (History) Khayyam Z. Paltiel (Political Science) H. Edward English (Economics) Muni Frumbartz (Sociology) Gordon C. Merrill (Geography) Wilfrid Eggleston (Journalism)

CONTENTS

INTRODUCTION. ix

1:

ECONOMIC GROWTH: CONCEPTS ANI? OBJ ECTIVES,

by T. N. Brewis, 1 2:

THEORIES OF ECONOMIC GROWTH: AN INTRODUCTION,

by T. K. Rymes, 19 3: SOME VIEWS ON THE PATTERN OF CANADIAN ECONOMIC DEVELOPMENT,

by Gilles Paquet, 34 4:

LABOUR, CAPITAL AND GROWTH: THE CANADIAN EXPERIENCE,

by N . H. Litbwick, 65 5:

EDUCATION AND MANPOWER : SOME SOCIOLOGICAL ASPECTS OF GROWTH,

by Bruce A. McFarlane, 76 6:

THE PROBLEM OF REGIONAL DlSPAruTlES,

by T. N. Brewis, 90 7:

INDUSTRL\L ORGANIZATION AND TECHN ICAL PROGRESS,

by H. Edward English, ll2

8:

POLIcrES FOR ECONOMIC GROWTH IN CANADA ,

by Richard E. Caves, 138

EPILOGUE, NOTES,

159

165

THE CONTRIBUTORS,

175

SUGGESTIONS FOR FURTHER READING,

176

So much of our development Appears to be irrelevant To any form of progress that Will take us where we would be at, That I, for one, think we should salt Away some energy and halt To meditate, with movements slow On just where we would like to go . ANON.

From 'Essays 0" Geography and Economic Development,' University 0/ Chicago, 1960

Introduction

In th e fall of 1964 a series of lectures was offered at Carleton Un iversity on a hotly debated issue - the growth of the Ca nadian economy. With two exceptions the lectures were given by members of the Department of Economics of Carleton University. Professor R. E. Caves of Harvard Uni versity examined policies related to growth and Professor B. A . McFarlane of Ca rleton University presented the views of a sociologist. with pa rti cular reference to education and training. Demand for copies exhausted the first issue and a decision was made to republish the series. This book is the outcome. ]n editing the new publication we have taken the opportunity of drawing the reader's attention to some of the subsequent literature on the subject and of add ing an Ep ilogue, but otherwise the lectures remain essentia ll y as they were given. The Epilogue touches brieHy on certain current trends, emphasizes various points raised in the lectures and includes a reference to recent works on capital, labour and technical change. Whatever progress has been made since these lectures were prepared in understanding the determinants of grow th, it is clear that large elements of uncertainty still remain and that most of what was said originally bas lost little with the passage of time. T. N. BREWlS

Carleton University January, 1968

......

1: Economic Growth: Concepts and Objectives T. N . BREW IS

I

It is fashionable nowada ys to talk abo ut "Economic Growth ," and there is reason to suppose that the subj ect will continue to enj oy a certa in vogue before it is superseded by o ther issues. T he fac t that the topic conju res up differen t facets to different people adds to the discussio n, and since the determinants of growth are far from certain , there is roo m for much divergence of opinion on the policies to be pursued to achieve whatever objective we have in mind. The recent establishment of a large departm ent of governm ent concerned primaril y Wilh the task of hasteni ng the growth process suggested an opportune moment in which to ofl;er certain obser vat ions on the issues in volved. One of th e purposes of this opening leclUre is to present you with a Ill ap of the co urse and to point out some of the distinguishing landm a rks. By so doin g, [ am hopeful th at even if at tim es you end ure the disco mfort of feeling lost in the thi ckets of theoret ica l controve rsy, or worse still , methodology, you will not be lost wi th out hope. Few subjects have expe ri enced such remarkab le atten tion in rece nt years as that of eco nomi c growt h, but li ke most vog ues it is not new, a nd if past experi ence is a ny gu ide interest can be expected to be superseded soo ner or later by some other preocc upati on. Not that I wish to alarm those of you who have recent ly been recruited into new departments of government concerned specifica ll y with growth: contra ry to what Marx fo resaw, it seems there will always be wo rk fo r civil se rvants. Such wo rk , howeve r, may be less related than it is at prese nt to anxio lls and what may be mi sg ui ded attempts to raise a still higher head of steam. According to a Twentieth Century Fund survey, The USA and l IS Economic Future ,l the gross nationa l produ ct in that country will approach a trillion ~do ll a rs by 1975 if prese nt tre nds co ntinue, providing thereb y an average famil y income of $9,525 in doll ars o f 1960 va lue. By that time the average work week is ex pected to be down to 37 hours. Should th is projecti o n prove

2 - GROWT H AN D T H E CANAD IAN ECONO M Y

app rox imale ly right, it is at least open to question wbet ber tbe des ire to accelerate the rate of grow th wi ll continue to be a prime preoccupatio n of economists, at least in North America. 1 do not wish to be dogma tic on th is point, however. In the preface to the recently revised edition of Henry Vi ll ard's Economic Developm ent,'.! Vi lJ ard makes the openi ng observation that whether real income per pe rson increases at 1.5 or 3 per cent a year wi ll determine whether an undergradua te now taking a co urse in econom ics is likely to retire with an income of $13,000 a yea r or $23,000. He adds: "Jt seems to me, therefore, th at the fac tors responsible for di ffe rences in rates of economic development deserve fa r more attention tha n they typically receive." For an undergraduate hard pressed to make ends meet, th is is pretty heady stuff, and if it comes to a choice between $13,000 and $23,000, well, wby not $23,000? Concern with growth has been intermittent. The subject altracted considera ble attention by econom ists during much of the nineteenth century_ T hen, for half a century until the depression of the 1930's, interest waned . The depressio n, leading as it did to fears of secular stag nat io n, revived the iss ue and since the Second World 'War there has been a spate of disc uss ion influenced, at least so far as Canada is co ncerned, by preva iling sho rt-rull trends a nd the p hase of the busi ness cycle. Joan Robi nso n in her litt le book, Economic Philosophy ,3 explains the change in a tti tude since the Second World War as bein g the ou tcome of two considerations. The first of these was an academic one. Once Keynes's short-period theory had been establ ished in wh ich investment plays the key role, it was obviously necessary to discuss the consequences of the accumulation of capital that investment brings about. Keynesian analysis invites the next step. But mo re urgent tha n this a nd introducing the second cO llsideration were the pressi ng problems of the underdeveloped cou ntr ies where vast and increasing numbers of peop le were seeki ng Ihe road out of abjec t poverty. The objeclive of growth is an alluri ng o ne but it is also a complex one and it may be worth pa usi ng at the o utset to co nside r just what it is we have in mind when we disc uss it in the Canad ian contex t. T here are various ways in wh ich growth ca n be conceived and measured , and the differences are significa nl. If we are concern ed with measuring welfare, we are presumab ly interested in per capita or fam ily income, adjusted perhaps fo r hours worked. If productivity is our concern , then output

ECO NOMI C GROWTH : CON C EPTS A N D OBJECTIVES - 3

per man year of the labour force wou ld be more appropriate. If, however, over-all output is our cbief concern, as it has recently been in tbe United States, tben Gross National Product ( G.N.P.) or Net National Product (N.N.P.) would be a more relevant indicator. Wid e variations in tbe apparent grow th rate can result from concentrating on one concept rather tban on ~ln o ther, by selecting one tec hnique of measurement rather tban another, or one base year rather than another. It may be worth emphasizing that in concerning ourselves with growth, we are concerned with long-run or secular trends and not with short-run fluctuations. This mi ght seem so obvious as to be scarcely worth ment ion. In practice the two are often confused. The trend and various long- and short-run cyclical movements are not easily di stingui shed, but the fa ilure to separate them even conceptually has led to confusion and to misconceptions as to the rate of growth, misconceptions which are compounded by what are often quite misleading international compari sons. At the risk of appearing facetious, not so long ago government officials were hastening to Paris to learn the secret of rapid growth in France; prior to tbis it was Germany. Then someone mentioned Italy, and off officials flocked to Rome. Weekends were spent first in one capital of Europe; tben in another enqu iring how it was that G. N. P. was rising faster there than elsewhere. Si nce at any moment of time one country is certain to be doing better than another, such visits can be expected to continue indefinitely. Japan, which has been developing wit h quite phenomenal speed, has had a rate of increase in real national product per bead of the employed labour force of 2.9 per cent since 1880. Between 1950-59 the rate was 6. 1 per cent, and between '54-'59, 7.6 per cent, a figure double that of its nearest competitor, Italy, with a ra te of 3. 8 per cent. If it is growth we are after, Tokyo is worth a visit. The course of development tends in fact to be very irregular. Let me illustrate by referring to Canadian data, a matter on whi ch Professor Paquet will have more to say. Between 1872-1913 , G. N.P. seemingly increased in Canada by 4 per cent (compou nd annual percentage change) ; between 19 13- 1959, the rate was 3. 1 per cent; between the 4t h quarter of 1948 and the 2nd quarter of 1953 , it was 6 per cent; and between th e 2nd quarter of 1957 a nd the 1st quarter of 1960, it was 2.4 per cent. The latter figures clearly contain a large element of cyclical swing. ]0 the short-run, we are measur ing

4 - GROWTH AND THE CANAD I AN ECONOMY

fluctu ations rather than growth. Since the labour force was increasi ng rapidly during much of that period, a.N.p. per head of employment was much Jess than the foregoing figu res suggest, and there have been occasions in Canada, as during the period between the 2nd quarter of 1957 and the 1st quarter of 1960, when growth ill a.N.p. per head of population has been negative. By changing the base year and the time period covered, by looking at a.N.p., or a.N.p. per capita, or G.N.P . per head of the labour force, we are likely to a rri ve at qujte different impressions of growth rates. Thus between 1946-63 real output per capita increased by about one third, real output per worker by about one half, output per man hour by abo ut three quarters and total real output abou t twice. Some of you will be fam ili ar with the furor that occurred in the United States not so long ago when the Joi nt Economic Committee placed special emphasis on the low rate of growth in Ibe United Slates from 1953-59 . 11 so bappened tbat this period coincided with the years of the Eisenhower administration . By the time the smoke had died down, a table had been prepared showing the rate of growth for any year-la-year period from 1910 to 1959, and the argument over growth rates came to be known as the "numbers racket." Apart from the irregulari ti es arising out of the business cycle there is also the question of longer swings in output involving a duration of betwee n ten and twenty years. For so me time the busi ness cycle has occupied the ce ntre of the stage of disc ussions on economic stabili ty and continues to do so, but latterly tbere has been a revival of interest in the notion of these longer swings in activity associated wilh the work of Kuznets. Dr. Daly of the Economic Council a nd Professor Buckley of the University of Saskatchewan have been examining the phenomena in the Canadian context. A stu dy of various time series suggests a long-run pattern of quick and slow expansion, though the actual turnin g points are even more difficul t to identi fy than those of tbe business cycle. Indeed, it is difficult to establish meaningful dates for turning points since total output may be slowing down even though in vestmen t is rising quite rapidly. In the long swing, in fact, investment and output are often out of phase. None the less, if we accept Professor Buckley's data, there is evidence of severe depressions in the 1860's, 70's and 90's; there is evidence of another depression begi nning just before the First World War, and th ere were those of the ea rl y 20's and the 1930's.4 As wi th the business cycle, the timing of these major swings

ECONOMIC GROWTH: CONCEPTS AND OBJECTIVES - 5

is very similar to that in the United States, a result to be expected in view of the heavy dependence of the Canadian economy on economic conditions in that country. The amplitude of the longer swings tends to be greater in Canada, a phenomenon due perhaps to the volatility of world demand for industrial raw materials. A high level of demand for the raw materi als which figure prominently in Canadian exports tends to be associated wi th high levels of capital inflow and domestic investment. The phase of the long swing has an im po rtant bearing on the amplitudes of the business cycle. A stro ng undercurrent of long-term expansion leads to strong upturns in the business cycle and to weak down turns. The converse is equally true. Longer-term weakness results in marked and protracted downturns in the business cycle and weak and short-lived upturns. Attempts have been made to explain recent Canad ian developments in these terms - with what success I am not sure. Some people are easier to convince th an others. To the extent, however, that we accept the concept of shortand longer-run cycles and swings in economic activity, the more careful we must be in deciding whether we are talking about such cycles and swings, or whether we are talking about longerrun secular trends. Those of you who remember Schumpeter's discussion will recall his three-cycle schema; how Kitchin cycles are superi mposed on Juglar's and Juglar's on Kondrat ieff's.s , Kondratieff, hi mself a Professor of the Business Research Instilute of Moscow in the 1920's, did not survive his theory for long. When he suggested that fifty-year downswings in economic activity in the capitalist countries were followed by fifty-year upswings, he was sent to Siberia, and the Soviet Ru ssian Encyclopaedia dismissed his work in a simple sentence: "His theory is wrong an d reaction ary." The risk of co nfusing the cycle and the trend is only one of our difficulties. There is the added and troublesome problem of index numbers. Basically, there are two ways of compiling an index of economic growth. We can measure the increase in national output in terms of the prices of a single base year; or we can compare ou tpu t in the base yea r with current national income, both in terms of current prices. To illustrate the significance of such a choice, we arrive at a much debated rate of growth of the Soviet economy between 1928-1937 of 5.5 per cent using one approach; or 11.9 per cent using the othe r. There are ot her considerations which complicate the problem of measurement. Are we to make any allowance for a decline in the length of the working week? Is leisure to be rega rded as a

6 - GROWTH AND THE CANADIAN ECONOMY

form of income? if the same output is produced with less labour input, is tbis an indication of grow th ? To consider another point, a great many services increasingly supplied by government are really costs of prod uction rather than fina] products, e.g., statistical services, agricultural counselling, education, ind ustria] promOlion, and so on. The classifying of these services as final products introduces an upward bias into the measurement of growth. Do we need to adjust for this? The faster the department of industry grows, the faster our growth rate will appear to be, not because industry is necessarily growing any faster, but because the department is. My purpose in mentioning these items is not to undermine your faith in the statisti cian faced with the complex task of trying to identify growth and quantify growth ratcs, but rather to underlin e the need to be on th e lookout for the inevitable pitfalls in the figures, pitfalJs wh ich the statistician who compi les the data will almost certainly recognize, but whic h the user may not. One final word of warning. The longer one looks back in time in an effort to achieve perspective, the more uncertain the figures become. Statistica l data become inc reasingly unreliable as the time horizon recedes, and all sorts of complications emerge due, for example, to the changing composition of market output. To search, moreover, for a prolonged period over Ihe past half century, which in some sense ca n be regarded as norm al, is to follow a will-O'-the-wisp. Two world wars and their aftermaths, together with the great depression, make much of the twe ntieth century abnormal. Turning from the concept of economic growth to the theories which attempt to explain it, this is to be the subject of the seco nd lecture, but let me make some preliminary observations. The dete rminants of growth are no less elusive than the concept itself, and there is some doubt as to how far they are to be found with in the fi eld of economic analys is. You will be hearing about some of the post-Keynesian contributions from Professor Rymes and my comments are, therefore, confined to some of Keynes's predecessors. Adam Smith, Ricardo, Malthus, Mill and Marx aU contributed 10 theories of economi c growth, and all emphasized to a grea ter or less extent the importance of capital acc umulation as its mainspring. Since savings were seen as a prerequisite to capital for mation, savings occ upied a pro minent place in their th eories. Believi ng that savi ngs would be translated into capital stock, Smith, Ricardo and Mill regarded thrift as a great virtue, a 'virtue to wh ich the popular writers of th e day paid homage,

ECO NOMI C GRO WTH : CONCEPT S A N D OBJECT I VES - 7

a homage paid even today by we ll-mea ning central bankers. Maltbus was a maveri ck in tbis regard , worried by the possibility that attempts to reduce consum ption mi ght also reduce the incentive to invest and thus inhi bit rather than sustain growth, a consideration very mu ch to the fore in Keynesian ana lysis. Savings in short could be too littl e or too much . In th e long run, certain fears were expressed, even by Adam Smith and Ri ca rdo. Smith wondered whether th e stock of capital might not become so large relative to the demand for goods th at the rate of profit might fall, discouraging thereby fur th er capital accum ul ation, a view to whi ch Marx subscribed. Ricardo and Mill for their part worried about dimin ishing returns in agricu ltu re and the li ke lihood that rents wo uld rise at the expense of profi ts. There was a general undercurren t of fear that the rate of profit wo uld tend to fall and capital accumulation come to an end. Marshall, Joa n Robinson observes, was suspicious of cut and dried formulae and approached " the high theme of economic progress" with diffidence and cautio n, but generally went along with the idea that the rate of return on capital might tend to fall. As for Keynes, he took a different tack. He could see no intrinsic reasons for scarcity of capital and thus no reason to reward the capitalist fo r its scarcity. " If I am ri ght," he says, " in supposing it to be com parat ively easy to make capital goods so abundant that the marginal efficie ncy of ca pital is zero, th is may be the most sensi ble way of grad ua ll y getting rid of many of the objectionable fea tures of capitalism." Not only w ill we have the euth anasia of th e renti er, but also the ca pitalist who exploits the scarcity value of capi tal. When it comes to decisions to invest, he suggested lighthea rtedly that these might depend less on the hedonistic calculations of entrepreneurs than on the spontaneous opti mism of hu ma n nalure. As fo r the entrepreneu r and the role he played, this was the core of Schum peter's classic wo rk on "The Theo ry of Eco nomic Development" which fi rst appeared just p rior to the F irst World War. ' Since innovatio ns and new products develop irregularl y over ti me, the growth path is itself irregul ar. Intermi ttent and farreachi ng changes, such as th ose involved in the development of the automobile and the aircraft industry, power and electronics, give rise to the ebb and flow of eco nomi c activity. Growth a nd instabili ty are thus inter-rel ated. Investment arising Ollt of innovation is the basis of Schumpeter's explanati on of cyclical instabil ity. The adoption of an important innovation by one firm

8 - G ROWTH AND THE CAN ADIAN ECONOM Y

will lead to its adoption by others as well as create possibilities for associated development. The result is change on a broad front and a likelihood of excessive capital formation which will set the stage for the subsequent downturn. The theory of economic fluctuations is thus closely interwoven with the growth process. The depression· of the 1930's gave a powerful im petus to the study of the whole question of growth and stability, and the "stagnation thesis" en tered the literature. In December, 1938, A lvin Hansen gave his presidential address to the American Economic Association and spoke of passing over a divide which separates the great era of growth and expansion of the nine teenth centu ry a nd movi ng swiftly into "no one knows what," but observed that the prodigious growth of population in the nineteenth ce ntury appeared to be something unique in h~s tory and that we were in the midst of a drasti c decline in the rate of population growth - as indeed at that time we were. Far, however, from the dec line co ntinui ng, as many anticipated, tbe exact reverse occurred; indeed the sharp increase in post-war population growth bas become one of the most striking phenomena of our age. Variation in population size is a key variable in many attempts to explain the growth process. T he causal connections between economic growth, capital [orm ation and population changes have long been recognized. Though it may sometimes inhibit a rise in per capita output a rap idly increasing population can be a powerful spur to capital fo rm ation under ce rtain circumstances. The marked decline in population growth in the J 930's was regarded as one of the most important facto rs contributing to the extent of the depress ion. When to this was added the lack of sign ificant innova tions leading to la rge new industries and the absence of new territories to di scove r, the phenomenon of a declining growth rate seemed understandable enough. Understandable, however, is not the same th ing as proven, and somewhat disconcert ingly, K uznets baving exa mined the record s of 19 countries, discovered no clea r-cut association between rates of population growth and ou tput per head of total population. G We will be ill advised to jump to co nclusions. To refer to Deborah Paige's co mments on the iss ue in the National Institute Economic Review of Jul y, J96 1, there is a sli gh t and tentative suggestion that a slowing down in economic growth is accompanied by a slowing down in the rise in population and vice versa. But it does not follow that it is the change in

ECONOM I C G RO W.T H: CONCEPT S AND O BJEC TI VES - 9

population growth which influences economic growth. It could just as easil y be the other way round, o r the association might be fortuito us. The rapid growth of the Canadian economy in the 1940's and early 1950's in both population and inco me encouraged a more optimistic fra me of mind, but the crucial issue of the relationship between growth and stability remained a dilemma. Growth theory a nd th e theory of econo mic flu ctu ati ons are intimately related. It is imposs ible to pursue one without becoming involved in the ot her. Presumably, there is a cri tical rate of growth that will lead to stabilit y. The contributio ns of neo-Keynesians and neo-c lass icalists, H arrod, Robinson, Solow and Meade, throw light on th is question. It is to th eir di scuss io n that Professor Rymes will be directing your attenti on, but before looking further at the map. yo u may like to reflect o n the observation of Ma urice Dobb that "It is a mordant comment on the mechanism of th e capitalist eco nom y that growth rates are lowest where excess capacity is most in evidence." The historical background to Ca nadian economic growth is the subj ect of Professor Paquet's lecture, but h is contribution is more than just historical in the co nventiona l sense. Rather it is a partic ular approach to social and eco nomic development in the light of Ca nadi an data over the last three centuries. He attempts to take the discussion beyond th e enum erati on of Rostow-type stages and the Kuznets-type swing. With a full recogn ition of the risks involved, he then proceeds in tb e final secti on of his lecture to do some forecasting in the ligbt of his own model and the preceding discussion. Turni ng to recent times, there has been a shift of emphasis from the con tribution which capital equ ipment makes to growth, to the co ntribution of labour itself, and increasingly one hears of investment in human capital. The characteristics of the population and the social structure have long been recognized as sig nificant consideratio ns, but concern wi th the less developed areas of th e wo rld has und erlined tbe need to look more carefu lly at sociological co nsiderations generally. Increase in ph ysical capital stock has not proved th e effective ca talyst to growth which at one time many ex pected. We need to look further. Professor Lithwick wi ll be discuss ing labour, capital and growth, a subject wh ich he bas explored in greater detail in hi s forthcoming book, Economic Growlh in Conatia. His analysis of the Canadian sce ne has been patterned on E. F. Deni son's study in 1962 of the sources of eco nomi c growth in th e U.S. and he attempts to allocate the growth of output to the various

10 - GROWTH AN D THE CANAD IAN ECONOMY

sources that can be isolated. Denison, as you may know, attempted 10 measure and assign weights to the growing educational background of the labour force, its changing age and sex co mposiLion, the effect of declining hours of work per week on labour efficiency, and so o n. P rofessor Lithwick wi ll provide empiri ca l material to clothe the th eori es. On the relat ion betwee n education a nd growth, some of you may have noted the opening paragraphs of the 1963 report of the National Economic Development Council in the United Kingdom, Conditiolls Favourable to Faster Growlh. "Economic growth," the writers observe, "is dependent upon a high and advancing level of ed ucation because of the improvements that education bri ngs in hum an skill s and the greater spread of knowledge .... From the viewpoint of economic growth, Govern men t expenditu re on ed uca ti on may be co nsidered as an investment, somewhat analogous to expenditure on ph ysical assets, which will yield a return in terms of increased efficie ncy and economic growth. The Organisation for Economic Co-operation and Development has recently emphasized that expend iture on education should take a very high place in a co untry's programme of investment." That tbe academician is in the vanguard of eco nom ic progress is no surprise to him. and the fostering of a belief in the relat ion between education and growth is likely to be in his pecuniary interest. I suspect, however, th at the re lation betwee n ed uca ti on and growth is much more complex than some of us have been led to believe. For o ne thing, muc h will depe nd on the form th at the ed uca tion takes, as well as the sort of aspirati ons to which it gives rise. While the numbers who proceed to an ad va nced education can be expected to continue to grow, there are times when 1 find myself wondering how much furthe r we can go in the length of academ ic instruction. There was a ti me, not so long ago, whe n a high school education was the excep tion rather than th e rul e. We take it fo r gran ted no'w th at our children may be in the ea rly twenties befo re th ey complete their undergraduate courses, and post-graduate students in thei r late twenties with wives and fam ilies a re no longer uncommon. In the fut ure can we expect th em to be in th eir thirt ies? Professor McFarlane looks at the educational and sociological aspects of growth from the Canad ia n standpoint and particularly some of the functi ons of technicians in industry. The economics of educa tion, it may be noted, is a subject on wh ich extraordinarily little work has been done, considering the enormous and increasing sum s of money which are spent upon it. It is not, of co urse, suggested th at the value of education ca n

ECONOMIC GROWTH: CONCEPTS AND OD J ECTIVES - 11

be measured only by its contribution to economic growth, but in so far as it is being advocated with that specific objective in mind, we need far more information to guide us than we have at the moment. One of the problems, as you will realize, is to clarify wha t we mean by education and to quantify the rate of return. Education and training can take a great variety of forms, some of which can be expected to contrib ute more to growth than others. Education is one of the insti tutional factors which will be considered. Professor English will be considering other factors, particularl y the significance of industrial structure. The growth of the Canadian economy depends heavil y on deve lopments in the export sector, and Canada's international competitive position. The strength of that position is influenced in large measure by industrial structure. As Professor English observes elsewhere, with the tripling of the Canadian domesti c market since the 1920's, there is a range of products in each of the main sectors of manufacturing which could be econo mically produced in Canada if th e structure of industry were appropriate. Only for some of the more specialized products is the Canad ian marke t sti ll inadequate to sup po rt internat ionall y competitive prod uction. It is often ass um ed that the private ecooomy reacts se nsitively to consumer preferences as expressed in the market place. In fact, much industry is only partially competitive and this affects th e degree and kind of response which private enterprise makes 10 changes in consumer preferences or technology. Some writers have claimed that the few large firms whi ch predominate in many industries make decisions affec ting investment and growth whi ch benefit the consumer more than tbose dec isions which would emerge from a highl y compelitive organization, so often assumed in economic theory. This claim will be examined anel the particular characteristics of Canadian industr ial organizatio n will be discussed in this context. There will be some conce ntration on the importance of commercial policy and foreign ownership in the efficiency of Canadian industrial organization and deci sions affec ti ng econom ic growth. One of the characteristics of the rate of growth is not only its irregula rity over time but the fact that it is most unl ikely to affect all areas with in a countTY to the same extent. Some areas can be expected to share in the growth much less tban others. The consequences are likely to become manifest in income dispari ties across the country as well as in levels of empl oyment. Like the structure of industry, this matter wi ll be the subject of

12 - GROWTH AND TH E CANAD I AN ECONOMY

a separate lecture. The issues involved have only recently been the subject of widespread study in Canada and the underlying principles des igned to gu ide policy are still in the process of fo rmulation. D epend ing on the fo rm they take, measures designed to hasten the development of less prospero us reg io ns could lead to an accelerati o n o r deceleration in th e rate of growth of the coun try as a whole. The prime objective of assistance may indeed be less the attemp t to stimul ate growth than to encourage a morc equitable sharing of its gains, or to infl uence the distribution of population . Members of Parliament can hardly be expected to look kindly on the depopulation of their ridings, and the encouragement of migration to the No rth may appea r attractive to th ose who have no intention of participating in such a movemen t themselves, those, in short who are conte nt with just a vision .

I[

This introduces, then, th e second part of this lecture - the question of the objectives un de rlying growth policy. Considering the freq uency with whi ch growth is cited as a policy objecti ve, it is ex traordinary that so li ttle has been sa id in Canada about the natu re and impli cations of such a policy. Knorr a nd Baumol in th e opening chapter of their book Wh at Price Economic Growth?' refer to the demands for faster economic growth which have been voiced in many a nd various quarters, and looking at the problem from th e standpoint of the U.S. they see the explanation in the political struggle with the U.S.s.R. High rates of economic growth , they observe, may enable the communist bloc to implement thei r hostile intentions. Drawing on observations by President Kennedy in 1960, fears are expressed that: "If we lack a first-rate grow ing economy, we cannot ma intain a first-rate defense." Un less new poli cies in science and in mi litary and economic strength are pursued, the Soviet Union wiJI be ahead by 1970 in all three categories. President Kennedy then asked rhetorica ll y, "H ow many co untries will fo llow a leader who is not able to maintain his lead?" The problem of national securit y looms large in America.n discuss io n. Thus Knorr and Baumol assert: "Vie are not interested in making a fe tish of economic growth. We definitely wou ld fee l no ca use for alarm ove r the America n growth performance during the J 950's if the U.S. lived in a peaceful world. But we do not live in such a world. \Ve are incl ined to take ser iously

ECONOMIC GROWTH: CONCEPTS AND OBJECTIVES - 13

Mr. Khruschev's threat that the Communists will bury us." In a significant footnote they then add th at while faster economic growth may be desired for Don·security purposes and recognize this as a legitimate desire, they regard it as very question able whether such an objective is worth the social costs which wou ld be involved in a substantial growth programme. Canada has been Jess concerned with showing her flag around the world than in designing one, and it may be that the problem of national influence and security weighs less heavily with her. One must be careful, however, not to be too dogmatic about this. Professor Buckley of Saskatchewan is one who does not think that a sustained rise in income per capita is an appropriate index for a country like Canada. Canadian economic historians, he says, have traditionally emphasized population growth and taken populat ion growth as an index of the growth in total economic activity. The decisions of Confederation to build an a.ll·Canadian national transportation system and to industrialize by a protective tariff - the national policy - were deliberate decisions to sacrifice income per capita and reflected a desire to altain and maintain a national political identity. One implication of the American emphasis on economic strength is the selection by Knorr and Baumol of a measure of total output growth rather than output per capita as a growth criterion. Their growth programme is seen primarily as an instrument of military and diplomatic policy. Economic welfare is sqbordinate to power. In a study of growth in the British economy, published by Political and Economic Planning in 1960, the assumption is made at the outset that economic growth is desirable and the point is made without apology that Britain should look forward to a continuous and fairly rapid advance in material standa rds of life. Professor Wilson, in his recent book Planning and Growth,S observes that the needs of defence have had little or no effect on the opinions of British economists, "who usually seem to regard expenditure for such a purpose as a tiresome extravagance that any sane government should try to cut." In so far as specific justification may be sought for a growth policy, the emphas is in Britain appears to be more on welfare and the need to maintain l'xports, though references to the fu lfilment of international obligations are not uncommon. There are virtually no un· employed resources on which to draw. But there is a curious paradox about the growth objective. Professor Wilson puts it

14 - GROWTH AND THE CANAD[AN ECONOMY

very neatly. "Growth" and "affiuence" are now emotive words; the one good and the other bad. "If growth is reall y held to be so urgent even in the richer countries of the West wh ile at the same time affluence is felt to be so unrewarding when ach ieved, then we seem to be committed as never before to what can be described as the rational pursuit of an irrational end." So far as the Canadian scene specifically is concerned, the emphasis on growth seems to derive much of its strength from preoccupation with unemployment. Concern with unemp loyment is understandable enough in Canada considering the high levels that have prevailed in recent years. The point is made that a higher growth rate would absorb the unemployed as well as provide jobs for a rapidly growing Jabour force. Failing an adequate growth rate, not only will incomes be lower than they otherwise wou ld be but unemp loyment wi ll be higher. The suggestion sometimes follows that the growth rate should be tackled directly. Others are disposed to argue that it is the reduction in unemployment which should be the prime concern. Eliminate the unemployment, their argument runs, and growth will largely look after itself. With adequate demand, we will not have to worry about growth directly. There wi ll be automatic pressure to expand output, and the more fully capital equipment is being utilized, the greater will be the incentive to increase it. It is when demand is slack and there is unused capacity that growth is inhibited. Angus Maddison stresses the stability angle in his Economic Growth in the West,9 in which he compares experience in Europe and North America. In his view, a major reason for the post-war acceleration of economic growth in Europe was the action of governments in sustaining high and steady levels of demand and investment, smoothing out recessionary and inftalionary tendencies. He goes on to say that by keeping resources fu ll y employed and addi ng to stability the uncertainties of economic life were reduced, and this had the effect, Dot fully foresee n at the time, of raising the growth trend itself. Some countries, however, among them Canada and the United States, failed to maintain adequate demand, and he adds significantly : "This failure has been a major reason for the relatively slow growth, and it must be attributed largely to the weakness of policy." This relationship between growth and stability was also stressed, some of you may remember, by Galbraith in his evidence to the Royal Commission on Canada's Economic ProspecLS. Perhaps I could remind you of what he said: uFor assured

ECONOM IC GROW TH : CONCEPT S A N D O BJ ECT IVES _ IS

econom ic growth, the fi rst requ irement, obviously, is a strong and effective policy to deal with the danger of depression. We have long bee n awa re of the importance of such a policy fo r our economic well-being a nd as an antido te to suffering and social tension. But it is also central for economic advance." D ifferences of opinion arise as to whether or not such a policy wiU be eno ugh to achi eve the growth rate desired, but there seems to be li ttle doubt that the mai ntenance of high levels of dema nd a nd employment is a key variable. There is no incentive to increase the suppl y of capital eq uipment when there is unused capacity. If at such a tim e prices are rising, aLtempts to curb the increase by dampening down demand will slow down economic activity still further and by red ucing outpu t may contribute to an increase rather than a reducti o n in unit costs. It is in periods of full employment, it seems, that prod uctivity grows fastest, tho ugh th is is not necessari ly what one would expect. One might assume that inefficiencies would increase as maximum output is attained. A tende ncy in this direction may indeed be operative, but it seems to be offset by the reduction in overhead costs wh ich accompany an increase in production. T here is the further consideration th at with high leve ls of empl oyment wor kers move more readily out of low prod uctivity industries into higher. Fo r reasons which I shall be menti oning shortl y, it is tempting to suggest that the government should conce ntrate on maintaining demand in the short r un and let growth look after itself. But fea r th at the gove rnment - and I include in the government the monetary authorities - may not be too successful in maintai ni ng sho rt-run stability at a high level of employ ment rai ses doubts. There has been a lot of discussion lately, not only in Ca nada but elsewhere as well, regarding the di ffic ulties of iron ing o ut the business cycle. Because of the inevitable Jags involved in infl uencing the level of economic act ivit y by moneta ry and fiscal policy, it is being urged tha t governm en ts should set their sights on the long run and pay less attention to the short. The implication is that the task of adjusting to the longerrun swings will be eas ier than the task of adjusting to the business cycle. The main tenance of economic stab ility introduces policy considerat ions which are to be th e subject of the final iectUIe, and I shall therefore confi ne my attention to a brief reference to certa in implications of growth as a general policy objec ti ve. T here are. four points whi ch I should like to touch on specifically.

16 - GROWTH AND THE CANAD I AN ECONOMY

a) There is the question with wh ich we began of what we mean by growth: What specifically are we trying to achieve? b) What priority do we want to give to growth? At what stage does the game cease to be worth the candle? c) Related to th e foregoing, what sort of sacrifices do we have to make to get growth? What degree and form of government intervention, for example, is acceptable? d) How are we to go about it? Do we know how to go about it? How we go about it may very well become an important issue in itself. Professor Caves in the final lecture of the series will be directing your attention to some of the pol icy aspects, especially those related to the open nature of the Canadian economy. But let me turn to the first of these issues : What do we mean by growth ? We have al ready referred to tbis in considering the problem of meas urement. It is a matter on which I think we need to be much clea rer than we are. If by accelerating growth we mean a sec ular rise in a.N.p. above that which would be a ttained by market forces when unemployment is at a minimum, this is one thing. If by accelerating growth we merely mean red ucing levels of involuntary unemployment, this is quite another. Or, if we are concerned with raising per capita disposable incomes or productivity, this is something else agai n. What, in short, are we trying to achi eve? To put the point at its simplest, there seems to be little doubt that we could raise a.N.p., if not the secular rate of growth, by encouraging longe r working hours a nd by increasing labour force participation. One of the reasons for higher output per capita in the United States is that a greater percentage of American women work. Is this the sort of thing we have in mind fo r Canada, or do we regard increases in hours worked and the encouragement of greater female labour force participatjon as inappropriate objectives? It is noteworthy th,a t in the revolutiona ry White Paper on Employment and I ncome of 1945 which set the stage for postwar Canadian policy, the growth objec ti ve was ignored. T he emphas is was overwhelmingly on f ull em ployment. No r, so far as I am aware, was there any mention of growth as a monetary objective of the Bank of Canada until a decade or so later. In submissions to the Porter Commission, there have been suggestions tbat growth should be incl uded specifically in the P reamble to the Bank of Canada Act. The whole subject has now become

ECONOM I C GROWTH : CO N CE PTS AND OB J ECTIVES - 17

so fashio nable that not o nl y do speech writers for the vari ous Ministers seaso n their speeches with references to its desirability, but it is beco ming difficult to get publishers of popular works on economics to consider titles wh ich do not incl ude or at least imply some concern with the issue. If it were the case that all the various concepts of growth were consistent with eac h other, th ere would be less of a problem, but the concepts may, in fact, co nflict with each other. If we are looking fo r illustrat io ns, ex perience in both the U.S.S.R. and Chin a poi nt to the tensions which can arise when welfa re is sacrificed to a ri se in total output. I doubt very much th at the present govern ment in Canada recog nizes any mandate to curtail curre nt consumption once fu ll employment is achieved, the be tter to accelerate the growth of industr ial capital formation . As for the matter of foreign ownership, if it sho uld corne to a choice between rap id growth associated with heavy American investmen t in Canada and a slower rate of growth with less Am eri can investment, I am not sure just which way th e Canad ian public would vote. At the moment ma ny of us are in the da rk as to what the gove rnment has in mind by growth , or what priority it attaches to whatever interpretatio n it favo urs. Wh eth er or not the Economic Council will attempt to estabJish target ratcs of growth remai ns to be seen. Such targets, if they are to be mea nin gful , could call for the construction of detailed quantitati ve models. T he impact of a particul ar growth rate will involve estim ates of input and output fo r a wide range of industries, the implications for investment , consumpt ion, imports, exports a nd labo ur fo rce. Without th is sort of q uant itati ve info rmation it will be im possible to establish potenti al growth rates which co uld serve as a guideline to policy. As for policy imp lications, depending on the form it takes, a progra mme to accelerate economic growth co ul d lead to a substantial extension of governm ent in fl uence over the economy. It may appear desirab le, fo r exampl e, to influence not only the magnitude of investme nt , but also its directio n. Ma rket forces ma y be considered to furnish an inadequate guide to decisions on capital format ion. As mentio ned earlier, the vo lume and nat ure of capital forma tio n arc among the important determin an ts of the growth rale, and it may appear advisable to modify both. We have beco me accustomed to th e idea th at th e govern ment should attempt to reduce sho rt-run fluctuations in eco nomic acti vity by curbi ng investme nt or consumption where th at appears

18 - GROWTH AND THE CANAD I AN ECONOMY

app ropriate. It may be th at the business world wi ll adjust to the idea of having its longer-ru n programmes modified by public policies. The acceptability or ot herwise of such an objective will presumably depend at least in part on the particular instruments which the government proposes to employ. Thus selective credit controls, designed to infl uence the short-run situation, have never been very popular in Canada, and qualitative measures designed to influence the nature and magnitude of longer-run investment plans could well meet with opposition also. Perhaps I should explain at this poi nt that I am confining my remarks to the role of tbe federal government. The pursuit of a national growth policy may become immeasurably more difficult if it becomes necessary to reconcile the objective and programmes of ten provincial governments. I am well aware th at some of the provincial governments are in no mood at the moment to leave the initiative to Ottawa. The implications of this could be that the federal government will find itself playing a residua l rather than a key ro le. Objectives in themselves will, of course, avai l nothing unless the govern ment knows in fac t how to stimulate growth. But as I have indicated already, theoretical discussion on the subject furnishes no clear guidelines for policy. As my colJeagues win ind icate, the maHer is a complex one - the significant variables are inter-meshed and difficu lt to quantify. It is one thing to list the variables such as popUlation, technological change, education, market structure, social and psychological attributes of the populati on, capital for mation and so on, and qui te another to combine them into a model of stable economic growth. If the Econom ic Council can help to clarify some of these inter-relationships, it will earn not only the plaudits of Canadians, but those of the whole western world. The following lectures will, I hope, bring to the forefro nt the sort of issues which need to be resolved and throw some light on the state of OUf present knowledge.

2: Theories of Economic Growth: An Introduction' T. K. RYMES

I.

S IM PLE STATIC THEORY

In th is lectu re, 1 shall assess a few of what I consider to be important theo retical abstractio ns of growi ng advanced eco nomies. Tested theory of economic growth is not ye t at a stage where a new set of grow th policy instrum ents may be proposed. J am conv inced, howeve r, th at deeper theoreti cal insight into the problems of growing econo mi es is necessary if growth policy is 10 be anyth ing morc than at wo rst a collectio n of plat itudes expressed in terms of pe rcentages and at best a backhanded way of pro mo ting full empl oyment. I sha ll begi n my lecture with a brief review of some P051Keynesia n theoret ical developments which are cast essentiall y in terms of compa rative statics - i.e., which compa re eq uilibriu m positions of eco nomic systems after disturbance by o nce-over or irreg ul ar occurre nces. The th eories of grow th to wh ich I sha ll direc t my mai n attention are comparisons of economic systems subject to steady rates of change, or changes in the rales of change, in a few critical econom ic variab les. In the theo retica l disc uss io n following pu bli cation of Key nes's General Theory, one of the importa nt questi ons debated was whether o r not a n advanced mar ket economy could be co unted upon to return autom aticall y to full employ ment. T he Keynesia n model,:': as cla rified by Hicks,:! enta iled the simultaneous determin atio n of th e levels o f natio nal in vestm en t. savings, lthe rate (or rates ) of interest and real Nat ional In come with the level of I ncome so determi ned not necessari ly bei ng accompa nied by full employmen t. It has bee n co unter-a rgued th at if such a si tu ation were accompani ed by fl ex ible prices and money wage rates then eve ntu all y a full employment level of rea l I ncome wou ld be determined. Such an arg ument refor mulates the pre-Keynesian class ical position that market economies are aut omatica ll y self-regulati ng and implies that Key nesian unemployment is a phenomenon of tempora ry instabili ty subject to eventual correctio n rat her tha n a phenomeno n of chro nic undere mployment eq ui lib ri um."

20 - GROWTH AND THE CANADIAN ECONOMY

The reformulated neo-cl assical argument asserts that. given flexib le nominal prices and wage rates and an initial less than full empl oyme nt level of I ncome. falling prices and wage rates will lead to a reduction in the transactions demand for money. reduction in the level of th e rate(s) of interest, inc reased net investment and higher levels of Income and employment. In the event that either (a) the non-transactions demand for money is perfectly interest-rate elastic at the going levels of interest rates or (b) the demand for real net investme nt is perfectly intereslrate inelas tic, falling prices and wages, which will continue if the labour market remains in excess supply, will lead. th rough the so-called real balance effect, to shifts in expenditure func ti ons of the private secto r to the point where fu ll employment is attained. That is, if private consumptio n is posi ti ve ly related to private real wealth, then the ri sing goods va lue of the net claims of the private sector on the public sector will, providing the public sector's expenditures are not relatively adve rsely affected by the rising goods value of its liabilities, eventually reduce private savings to the point where a fu ll employment level of Income is generated. 1I This argument wou ld appear to have as its major theoretical weakness a lack of precision as to when adverse expectat ions as 10 future prices and wage rates within the context of currently falling prices and wage rates will cease to generate movements in private expenditure functions which would prevent a return to fu ll employment equ ilibrium. 6 Moreover, if the argument re lates to an isolated laissez-fai re economy in which the private sector's rea l wealth consists solely of commodities, the poss ibi lity of a less th a n full-emplo yment equilibrium with fall ing nominal wage rates and prices exislS.1 This theoret ical debate never had much weight upon the formulation of policy si nce (a) prices and money wage rates in imperfectl y competitive market economies may not have the requi site fle xibilit y, (b) the actual time requ ired for the excess suppl y in the labo ur market to be dissipated wou ld en tail unbearable and unnecessary economic and social costs and (c) it appeared th at monetary and fiscal expansion were quicker and more powerful corrective devices. Recent theoretical and empirical research raises questions about the efficiency with which monetary and fiscal instruments of control may be reli ed upon to ameliorate short-run fluctuations in the level of economic activity. It also indicates th at the cost of a vigorous fullemployment policy may be a sustained rise in prices - the effects of which, to my mind, are insufficiently known for us to be cavalier about. 8

THEORIES OF ECONOM I C GROWTH - 21

The nco-classical argument can be extended to an open economy ope rati ng under a regime of fixed exchange rates. If unemployment prevails and domestic prices and money wage rates fall relative to their interna tional counterparls, th en there may result improvement in the balance of trade and higher levels of real Income and employment at home. The efficacy of such a proced ure hinges partially On the ex ten t of foreign exchange reserves. If the original unemployment situation were also characterized by a balance of payments deficit, and the ensuing improvement in the balance of trade still left a deficit, monetary contraction would be required to overcome the deficit by inducing capital inflows and li miting the expansion in Income and employment at home. If other countries were also experiencing unemployment, they could permit monetary expansion to offset the re lat ive rise in their wage rates and prices. If, however, the firs t country's action led to a balance of payments surpl us, the possibility emerges that other countries, rather than countenance monetary contraction, would also permit a decline in their wage rates and prices and the employment-generating impact in the first country of movements in world relati ve wage rates and prices would be offset. It ca n be argued that, under a regime of fixed exchange rates, re liance on fl exible money wage rates and prices is not mandatory since an appropri ate mix of fiscal and monetary policies can be envisaged to promote domestic and external equilibrium both at home and abroad.o Also, when consideration is paid to the fact that government tax revenues are sensitive to changes in the level of money incomes, downward movements in money wage rates and prices, by reducing public saving, may lower the level of nati onal saving and generate expansions in the level of economic activity. Thus, when cognizance is taken of the effects of flexib le wage rates and prices on an open economy and the budgetary position of tbe government sector, the case for flexible wage rates and prices in promoting an automatic return to full employment levels of activity is somewhat strengthened but, given the possibility of adverse and slow results and "retaliation" by other countries, only moderately so. The case for disc retion ary use of monetary and fiscal controls, wi th all their weaknesses, remains - to aU intents and purposes - unimpaired. II.

S IMPLE GROWTH AND STABILITY THEORY

In the Keynesian comparative static analysis, tbe level of net investme nt, a dynamic concept within an essentiall y static

22 - GROWTH AND T HE CANADIAN ECONOMY

framework, was largely a function of expected gross returns to capital, th e price of new capital goods and current rates of interest. In th e dynamics of Sir Roy Harrod,lo the rate of net investment (Le., I/ Y) is a fu nction of (a) the character of technological progress and the changing pattern of final demand, (b) the expected and ruling equilibrium rates of net return to capital and (c) the rate of increase in real Income. In his theory, given that over-all technological progress and changes in the composition of final demand are neither capital-saving nor capital-using and the expected oct rate of return to new investment neithe r exceeds nor falls short of what entrepreneurs have become accustomed to expect, then the level of net investment which entrepreneurs will at any time attempt to carry out will be a function of the current increase in output. The essence of the H arrodian approach can be seen by a simple abstrac tion. Suppose that there exists a one-commodity economy wherein the commodity is produced by means of labour and stocks of th e commodity. One of Harrod's main postulates is that the prime determinant of planned increases in the stock of commodities as input is increases in the flow of commodities as output. If entrepreneurs do not expect variations in the rate of return to additions to their stocks of commodities and if, in the large, technological progress does not change the addit ions to the stock of commodities that technical conditions dicta te must accompany given increases in flow of output, then such addit ions to the stock of commodit ies as entrepreneurs plan to make (i.e., 1) wi ll be related to the additional output of commodities (i.e., b. Y) by what he called the "required capital coefficient" (i.e., C r ). That is, (I) 1 = C,lJ. Y

and I

y=

C,lJ. Y

Y

(2)

with C r being a function of expected net rates of return to commodities as inputs and the character of technological advance. It is sufficient here to note that Harrod's postulate asserts that, given constancy in the required additional capital per additional unit of output, tbe share of planned investment in Income at any point in time is a function of the rate of growth in Income transpiring at that point in time. His second postulate is that the prime determinant of the level of planned savings is the'level of ] ncome. Assume for the moment that a constant fraction of Income is saved.l l That is,

THEOR I ES OF ECONOM I C GROWTH - 23

s= or

sy

(3)

s y=S

(4)

rn the Keynesian ana lysis, the level of Income at which planned investment and savings were equated tcnded to be an equilibrium or unchanging level of I ncome. In Harrod's analysis, different proportionate rates of growth of Income involve different rates of net investment. Suppose that there exists one proportionate rate of growth at which the implied rate of net investment is precisely equal to the planned rale of saving. That is, I S or

(5)

Y Y

C,c;y _ y

s

(6)

or

c;y

y=

s C,

(7)

At such a rate of grow th of I ncome, the expectations of e ntre~ preneurs that the marginal net ra te of return on ad di tional net investment wi ll be equal to the net rate of rcturn which they have become accustomed to expect on investment will, by and large, be turning out to be neither optimistic nor pessimistic. The increase in net investment will be such as to generate through the mUltiplier, determ ined by the marginal rate of savings, an increase in output which is sufficient to preserve the equilibrium ne l rate of return to capital and so call forth the same proportionate rate of growth of investment and Income. Such a rate of growth of I ncome Harrod called the "warranted rate of growth." The proportionate rate of growth of stocks of producers' goods of all kinds will, in the large, be neither too great, involving unwarranted additions and disappointment with respect to marginal net rates of return, nor too small, involving unwarranted depletions and surprises with respect to marginal net rales of relurn. Thus, the Harrodian warranted rate of growth of Income is th e dynamic analogue of Keynes's equilibrium level of Income. H arrod 's analysis raises two fundamental questions. F irst, the stabili ty of the economic system depends upon whether the actual rate of growth equals the warranted rate. Second, the

24 - GROWTH AND TH E CANAD IA N ECONOMY

achievement by the system of a steady rate of advance equal to its potential rate of advance will depend upon whether the system can be stabilized around its path of potential adva nce. Stable nOll-optimum growth

Assume that a warranted rate of growth exists. Consider now an economy's actual rate of growth which will simply be a social accounting identity. I "" S

(8)

or (9 ) The nel ad ditions to stocks of goods per unit of additional output being accumu lated at any point in time may we ll exceed or faU short of those net additions which en trepreneurs at such a point in time would be prepared to see made at going rates of net return to capita1. If such actual additions exceed warranted additions, it is clear that the economy is not growing at tbe higher rate which wou ld warrant the actual addi tions. The overall rate of expansion in new orders throughout the system would fall and the actual growth rate, given the economy's propensity to save, would fall even lower. Conversely, if the actual rate of addi tions to stocks were short of the warranted rate of additions, profit-seeki ng entrepreneurs would expand the rate at which orders were being adva nced and the actual growth rate would rise. This inherent instability of the Harrod description of an advanci ng economy has been imputed to the assumed constancy - though Harrod did not assume them constant - of the requi red capital coefficient and the marginal ra te of saving. Suppose the actua l growth rate were below the warranted growth rate. The former growth rate would be maintained if entrepreneurs were prepared to accept lower net rates of return to capital so that the higher rates of net accumul ation per unit increase in output were maintained. If, at the same time as entrepreneurs' orders fell and, other things being equal, a fall in th e actual growth ratc would emerge, the marginal savings rate also feU, then the ac tual growth rate need not faU indeed, it might rise above the warranted. If entrepreneurs' expectations about the profitability of future production were strongly based and held firm over minor fluctuatidns in actual growth rates and marginal net rates of return to capital, then again a tendency for actua l growth rates to remain close to

THEORIES OF ECONOM IC GROWTH - 2S

warranted rales might be manifested. As well, some part of net additions to stocks wi ll not be closely linked to current changes in output, and to the extent that such investment offsets tbe disequilibrating excess or deficiency in net savings, tbe tendency for the actual growtb rate to depart centrifugally from tbat whi ch is warranted will be reduced. Or again, the offset might well emanate fro m tbe foreign sector with an excess of intended net national savings over intended nel additions to domestic stocks of producers goods being diss ipated througb an expansion in th e rate of net exports - and vice versa. These possibilities, together with once-over a nd continuous changes in money wage rates and prices, were considered by H arrod and, in general, he felt that their stabilizi ng influence would not be sufficient. Again, the critical qu estion is not whether equilibrium capital-output and savings ratios are points or ranges - clearly they are ranges - but whether the ranges are wide enough to return the fluctuating actual growth rates of modern capitalist economies to stable warranted trends in output with speed and automaticity. Parentheticall y, it should be noted that Harrod quite appropriately conducted his ana lysis in terms of instantaneous rates of change. Trade cycle anal ys is is perhaps more realistically drawn up in terms of Jagged relationships. Now, when savings and net additions to stocks are formu lated as a functio n of, say, levels of income, profit rates, etc., in preceding periods, tbe resultant savings and desired capital-output ratios may interact to provide models of economic systems some of which, with disturbances, are explos ively unstable, subject to oscillations of varying intensi ty and duration, or demonstrate speedy return to warranted expansion paths. 12 Once again, even in tbe case wbere tbe critical relationships do not demonstrate explosive ,instability. the importa nt qu esti on is the length and economic cost of the adjustment time and mechanism.

Full employment optimum gro wth In the Keynesian system, levels of real National Income at which intended net investment was offset by intended net savin gs need not entail that all labour which would see k work 3.t going real wage rates woul d find work or that th e pri ces wo uld not yield to inflatio nary pressure. Similarly. a growing level of real Income which, at all points along the time path of output, equilibrates net investment and savings need not e nt a il full employment or stable prices. In short, the equili-

26 - GROWTH AN D TH E CANADIAN ECONOM Y

brium rate of ad va nce need no t be equal to what may be call ed the potential ra te of adva nce which an eco nomy co uld enjoy. The potenti al rate of growt h of output of a n eco nomic system wi ll be a function of the rate of increase and improvement of the full y and optimally employed labour input; the rate of increase in stocks of goods of all ki nds; the c hangin g degree of imperfecti on in a ll mark ets in th e econo my and th e rate of technolog ical advance both at home and abroad. T he labour input is clearly a most heterogeneo us input and im proveme nts in it can involve both a shi ft in its composition towards marc productive units and th e allocatio n of resources to the imbedd in g in the labo ur force of better skills a nd usable knowledge. Wi th respect to th e latter type of im provement , it has been argued that such "investment in human capital" necessitates treating part of the returns to labour as returns to capital - indeed, the argument can be carried to its ult imate concl usion by asserting that pure labo ur as an econom ic inp ut is an outda ted concept and that Natio nal Inco me is rea ll y just a collection of ne t retu rns to capita1. 11l Such a positio n has, of course, importa nt policy imp lications, but I venture to suggest that from it no great additional theoret ical insight into the growth process is achieved. W hatever it is, the labour inp ut must be full y and optimall y employed. By th at I mean th at, given th e work-leisure preferences of the mem bers of th e labour force, in advancing equil ibrium all those seeking work at any time at goi ng rea l wage rates must o btai n it. It can, I thi nk, be coge ntly argued under certai n assump tions that techn ological progress, when equi libriu m 'let ra tes of return to capital rule throughout the system, wi ll be neither ca pitalusing nor capit al-savin g. Such a defi nit ion of neutralit y implies that, in advanci ng equilibriu m, net stocks of prod uce rs goods, in the large, wi ll be growing at the same propor tionate rate as output. u As an economy moves fo rward thro ugh lime, new ways of doing things, new instituti o ns and new techniqu es of prod ucti on will evol ve. T he flow of new ideas will depend largely on nonecono mic forces a nd well may be, as Ka ldor has argued, a functio n of the " technical dy nam ism" of the populace.lti The rate at which new techniqu es will be incor porated into economic production will be a fun ction of expectatio n as to the f uture net profitabi li ty of employing such techniqu es and the changing degree of im perfection in the system. It ca n be argued that some imperfectio n in the market pl ace is requ ired to persuade profi t-seeki ng ent re pre neurs to take up new techniq ues

THEORIES OF ECONOM I C GROWTH - 21

of production since some future stream of profits - which is not instantly competed away - is necessary to offset the risk premiums impu ted to new ventures in economic activity.16 It is difficult to assess the importance of this argument since it can, in rebuttal, be argued that a high degree of competition will a lso lead to the speedy adoption of new techniques since failure to do so would involve the quick emergence of losses for those entrepreneurs who fa iled to innovate at the sa me rate as their competitors. Moreover, a high degree of imperfection may slow down the rate at which new techniques of production are diffused through both national and international economic systems and may involve levels of output which are lower th an the optimum levels which could be acbieved. l1 Two additional factors would appear to tilt the scales in favo ur of a high degree of competition. Other things being equal, competition amongst financial intermediaries will enhance the marketability of primary securities (mainly bonds and equities) issued by productive entities as they. from time to time, place net calls on the resources of the economic system. The yield that such sec uriti es pay will, in equilibrium, be a function of many fo rces, but if it is lower than would otherwise be the case on account of the presence of competitive financial intermediaries, it may well be that entrepreneurs will carry net accumulation of slocks of producers goods to lower equilibrium net rates of return to capital than they ot herwise would si nce debt-asset ratios will presumably be some function of rates of return on capital assets relat ive to yields on debt en trepreneurs mu st pay out. 1 S Second ly, the impact o n a cou ntry's bala nce of trade of technological change abroad can o nly be app raised when fu ll consideration is paid to the activities in which such change occurs, the rate of growth of real income both at home and abroad, the response of the volume of internationa lly traded and tradeable commodities to changes in real incomes at home and abroad and changing relative international prices and the changing international composition of suppli es of factors of production. 19 However, it may be that differing rates of technological adva nce amongst trading nations involve changes in the activities in which anyone country ma y have comparati ve advantage. The speed with which domest ic resou rces can be reallocated over the activ ities, which will be a function of the degree of co mpetitio n, will help to determine the rate at wh ich a particular country extracts the gains in rea l income to be derived from improvements in efficiency of production and conduct of inter-

28 - GROWTH AND TH E CANAD I AN ECONO M Y

national trade. To summarize thi s poi nt, I should be prepared to argue that an increase in the degree of co mpetitiveness in any economy wilJ ra ise the potential rate of growth of output while the shift in the degree of competition is taking place. Mo reover, I should argue tbat the rate of increase in rea l income per head will be similarly enhanced with the elaboration that I speak of real income, not necessa rily real National Income, per head. Even if the rate of growth is not affected, the level of output of consumption goods will be higher. Clearly, the rate of technological advance wh ich emerges in any country will not be steady, but wi ll be biased in terms of factor savings, the composition of output and effects of international trade, and will involve costS.20 Growth will not be stead y and perfect competition will never prevail. The labour force and population do not grow steadily and are subject to continual cbanges in composition and skills. Economic theory suggests that factors of production wi ll be so alloca ted over activities that no one factor will be able to earn more than it is earning in the activity in which it is engaged. A set of equilibrium relative money wage rates and nel rates of return to capital will prevail, and hence relative commodity prices will be determined. The real holdings of paper claims wi ll be so determined throughout the system th at the marg inal net rates of return for each transactor on sucb holdings will, with due allowance for risk, be equalized. Any change (e.g., technological progress) disturbs thi s system and , in theory, a new set of equilibrium wage rates and com modity prices will result. If what is considered to be the eq ui li brium set of relat ive net rates of return to capital is altered, again a new set of equilibrium relative money wage rales, commOd ity prices and net rates of return to capital and paper cla ims ho ldings ca n be envisaged . Al l the disturbances occurring in modern grow ing economies imply, however, that sllch equ ilibr illlll conditions will never hold. Yet to gain insight into th e process of optimum growth. it is necessary to abstract from such disturba nces and complexities. Consider a perfectly co mpetitive economy wherein the labour input is uniform and constant, tec hn ological progress is costless and steady and is neither capital-saving nor using, an equilibrium rising money wage rate and co nstant net rate of return to capital prevail, and stocks of paper claims are so adjusted by omniscient monetary authorities that th e commodity price level is cOQstant. 2l The economy produces but one commodity

THEORIES OF ECONOMIC GROWTH - 29

which may be either a consumers' or producers' good. For such an economy, the rate of growth of poteotial output will be equal to the rate of technological advance - if proper account is taken of the improvements in efficiency with which the system can reproduce the growing stock of produce rs' commodities. An iss ue of some importance is joined here. Under the assumptions outlined, the proportionate rate of growth of potential output of this simple economy will be equal, if the stock of commodities is measured in commodities, to the rate of technological advance divided by the share of labour in net National Income. If the stock of commodities is measured in terms of Joan Robinson's~~ real capital - i.e., the cost of the labour input required to reproduce tbe growing stock of commodities, compounded over the unchanging periods of production at the going equili brium net return to capital - the proportionate rate of growth of potential output will be equal to the rate of technological advance so conceived. Clearly, the Robinsonian rate of technological advance will be greater, in any attempt to measure the rate of technological progress, than the marc customary nco-classical version. Various attempts to measure the rate of technological progress are now available for your consideration. The procedure abounds wilh difficulties, but at the level of abstraction used here, two points can, I think, be usefully made. First, some controversy has developed over an alternate measure of the stock of commodities - one that takes into account the improvement in producers' commodities as technological progrc.IOS is to some extent embodied in them. ~ 8 The conclusion to be drawn from such attempts would appear to be that capital accumulation is a more important con tri butor to growth than it appears to be when technological advance is deemed to be wholly dise mbodied. This issue is related closely to th e problem of the rate at which obsolescent plant is abandoned and replaced and can, I think, more fruitfully be approached from that direction. Whether or nOl we treat capital accumulatio n as embodying so me technological advance or not, there is, given the rate of overall technological advance, so me upper rate to capital accumulation determined by equilibrium net rates of return to capital. Give n expected technological progress and money wage rates and current techniques, the age-structure of the stock of producers' commodities wi ll be determined by the eq ui librium net rates of return to capital. H entreprene urs become accustomed to lower net rates of return, it can be shown that there

30 - GROWTH AND THE CANADIAN EC ONOMY

will be a short-run tendency for the average age of capital goods to decrease, and more up-to-da te techniques will, on average, be embodied in the stock of producers' goods. 24 Second, what variant - the Robinsonian versus the neoclassical - of the concept of the rate of technological advance is more useful? A full comparison of the two variants is not possible here but I would ask you to note tbe following observation. Within the context of tbe simple model outlined above, the rate of Robinsonian-type technological advance is equal to the rate of accumulation of commodity stocks, the rate of grow th of output and the rate of grow th in the real wage rate. The rale of neo-classical technological advance cannot be compared to those rates of grow th without so me adjustment. \Vhat is called the golden rule of accumulation will illustrate this more clearly. 2li Assume that those receiving wage income do not save, while no consumption is made out of the net returns to capital. In such a situation, if all the other optimum conditions of the abstraction hold, it will be observed that the rate of growth in the real wage rate, tbe rate of growth of output, the rate of accumu lation of net commodity stocks and tbe net rate of return to capital will all be tbe same. In addition, at all points along such a growth path, the level of the real wage rate will be a maximum. All the above rales of growth wi ll be equal to the Robinsonian rate of technological advance wi th again the neo-classical variant being diffe rent. The matters being touched upon here are controversial, with such matters as the existence of production fu nctions (aggregate or not) and the possibili ty of separati ng the effects of capital accumulation and technological progress OD output in dispute. 'What is important in the dispute is nOL whether any aggrega te stock of capital is concepLUally meaningful but whether what we mean by the capital input in any disaggregated activi lY sense provides a useful conceptualization enabling us to ge l some idea of the optimum rate of saving of a society and the mechan ism by wh ich income is distributed. I cannot examine these ideas fully here but would a rgue that the Robinsonian concept of real capital can be made operational and, wi th it. a more powerful explanation of the effects of technological advance on prices of outputs and inputs and income distribution obtained. I now want to return to the question of stability. It is readily apparent that the path of potential advance in output is a rather fanciful abstract ion. Clearly few economies move along such paths fo r long historical periods. The path of potential advance

THEORIES OF ECONOM IC GROWTH .:. 31

is really a range of paths which provide a "ceiling" to the rate at wh ich an economic system ca n grow. Moreover, it will be largely accidental if, at any given time, the requisite rate of investment which would obtain along such a path, given the character of technological progress and equilibrium net rates of return to capital, will be matched by the rate of saving. In short, the warranted rate of grow th of output may be greater or smaller than the range of rates of potential advance. In such a situation, the econo mic system wi ll be subject to instability and actua l level of outp ut will fluctuate a round a rising trend with the range of fluctu ations of actual output being contained by the changing potential output ceilings and th e minimum level of investment wh ich is necessary to ensure that the structure of producers' goods, subject as it may be to much complementarity, will be capable of producing any output at al l. Again, let me reiterate that the critical question is not whether variations in capital intensities of production, savings ratios and price-wage rate mechanism will eventuaUy ensure that the actual, warranted and potential growth rates will all come into some rough equality. The two critical questions are how quickly the equil ibrating mechanisms will work and how closely we can approximate an optimum path of potential advance. The first question is essentiall y empi rical. What of the second? Consider again the abstraction of an economy moving along its equilibrium path of potential advance. What is the significance of the golden rule of accumulation? Along the path, equ ili brium rising money wage rates and net rates of return to capital prevail. Suppose for the moment that no savings are made from wages and part of net profits are consumed - i.e., the net rate of return to capital is greater than the rate of net accumulation of stocks of commodities. What happens jf more profits are saved? Ignore the problem of how stability is maiotained and consider equilibrium to equilibrium points such that the additi onal savings are invested. Then, crudely speaking, it is possible to argue that the system will shift toward more capital intensive techniques. Output per unit of standard labour input will rise. The system shifts to a different expansion path, picking its way through "more capital intensive techniques" where the rate of growth of output and the stock of commodities and the real wage rate are the same as they were before - determined as they are in this model by the rate of technological advance - but the level of the real wage rate is higher and the net rate of return to capital is lower than would have otherwise been tbe case if the

32 - GROWTH AND THE CANADIAN ECONOMY

fraction of net returns to capital saved had not changed. Under the assumptions, then, the level of real wages is determined by the propensity to save out of returns to capital. While the golden rule does not necessarily impl y social optimality, it wou ld appear, in the real world, that net rates of return to capital are far in excess of the recorded rates of growth in output. I think we need to reflect upon what this entails if we are to propose any growth policies for an eco nomy wherein private optimality conditions may necessi tate minimum net rates of return to capital in excess of those which might entail socially-optimum "capital-intensity" of techniques. z6 This is not the time to develop these highly abstract and rather tentative ideas further. The definition of neutrality of technological advance, the meaning of real capital, the determination of the equilibrium net rate of return to capital and the implied theory of income distribution all require further theoretical research.

Ill.

CONCLUSION

The unrealism of the analysis suggests that it would be highly improper to outline any policy implications at this stage. Yet it should, I think, be clear th at more theoretical research into tbis subject is badly required if any rational growth policy is to be tormulated. Two points, however, are, I think, clear. Firstly, consider an economy which has been growing at full employment with only minor interruptions in its advance. Consider then a major interruption. Expected rates of return on new investment will fall off, the rate of accumu lation will contract, plant wi ll stand idle and there will be much talk of structural overinvestment. Those factors just worth hiring at high levels of output will be laid off and there will also be talk about the need to retrain the labour force and replace obsolescent plant. I am not competent to· assess fully the merits of such argumen ts. I think the structural argument has some merit. 27 I think it has far more merit reconsider my remarks on imperfections in the sys tem - when a high and steadily growing level of aggregate demand is also pursued through aggregative fiscal and monetary policies crude though they may be. I wou ld ask you, however, to consider the costs of unemployment as we might now evaluate them with some knowledge of growth theory. Not only must output, fo regone due to unem-·

THEOR IES OF ECONOMIC GROWTH - 33

p loyment of the labour force , be estimated, bu t as well some account must be paid to the fact that accumul ation fa iled to proceed at its previous rate aDd we now must work with relatively lower stocks of producers' goods. As well, because with unemployment there will probably be some red uction in the upward press ure on money wage rates, the capital-intensity of the technique that the system picks its way through over tbe period of unemployment may well be less. T he economy may we ll return to full employ ment levels of act ivity a nd be once again operating alo ng a potential output path. 1 would point out Ihat the level of output of consumption commodi ti es would no neth eless probably be less than it would have been if the bout of heavy un employment had not been e ndured. To get back to the previous path of output would involve costs that the system mi ght not wi sh to endure. The present value of the flow of output perma nently thus fo rego ne by initially allowing the economy to fa ll away from its full employment expansion path might well be very substantial. Secondly, the level(s) of the eq uil ibrium net rale(s) of return wi ll, if growing econom ies are subject to grea t instab ili ty , have built into them substantia l premiu ms for risk and uncertainty. Thus, as from time to tim e unstable systems approac h their po tential output paths, the le vels of consumption outp ut so reached will not be optimum because, again crud ely speaking, the capi tal in tensity of techn iques will be lower th an would o thenvise be the case. Thus, stabilit y would seem to be a prereq uisi te for optim um growth. We do know so methi ng about full employment sta biliza tio n policies and every effort should be made to improve such po li cies. In this respect, it is di sco uraging that we continue to do so badly a nd that alternat ive suggestions are heard that ou r criteria for successfu l short-run stabi li zation should poss ibly be relaxed. 28

3: Some Views on the Pattern of Canadian Economic Development GILLES PAQUET

Economic development is a new discipline which has DOL yet defined clearl y its ambition and which intends to explore something much broader than economic growth but less inclusive than social change. It has proved fascinating because of the framework it prov ides for applied economics but also terribly complex because of its hybrid character. At the crossroads of economics and history,l economic development has been trying to formu late what Aitken would call "a lype of economic theory th at deals wit h 10ng-rull , d iscontinuous, irreversible change over time." Progress has been very limited, essentially because of the fact that the economists arc still ill at ease within the mulLidimcnsional wor ld analysed by the specialist of economic deve lopment ( the menta l structures, the social str uctures, the poli tical features of reality ca nnot be elimi nated from his frame of reference), while the economic historians have not ye t been seduced by the methodology of models and are trading only with great regret an approach built on their "flair" and their powers of evocati on for a series of analytical cons tructs. ]11 fact, the specialist of economic development is now haunting both meetings of economic associations and conferences of economic historians. I n recent years, old debates have been revived and journals have been stuffed with the jargon of the phi losopher of science: structu ral ism vs history, struct ure vs event, and so on. This mayor may not be a good sign. This is not the place 10 raise basic issues about the epistemological foundations of economic development as an autonomous di scipli ne. Howeve r, it seems esse nt ial to give some rudiments of a methodology of models and to discuss briefly the importance of unifying concepts, of scientific concepts, in the elaboration of the models used by the specialist of economic develop menl. It will enable us to define the limi tat io ns inherent in any attempt to pro pose a view of the pattern of the economic development of Canada, but it will also give us the opportunity 10 examine some of the models proposed in the past to explain

PAlTERN OF CANAD IAN ECONOM IC D EVELO PM ENT - 35

the pattern of Ca nadi an development, and thereby establish the point of departure of our a nal ysis. This will be done in the first section of the paper. In the second section, we wi ll give a description of the unifying concept tha t we will lise as our model, the notion of abstract eco nomic space.:: We will lry to show that thi s is an ex tended vers ion of the MacIntosh-Innis model in a sense, but that the added dimensions have transform ed drastic ally the Innisian world of natural reso urces and tec hnology. In the much longer third sectio n, we will apply the model to the Canadian economy over the last three centu ries. We will attempt to present a number of new perspectives on this old material. Our function , however, will be to integrate what we know abo ut this period into a coherent pallern. From the trends which will be isolated, we wi ll try in a fourth section to define some of the historical co nstrai nts operative on Ca nada today: this sho uld help to defi ne a wo rl d of the possibles for Canadian I!conomic development of the twentieth century. In conclusion, we wi ll attempt to look to the future. If the structural approach has any merit, it must be able to isolate some of the major forces wh ich will shape the world of tomorrow.

I Science has 0 0 ready-made object; one mu st co nstruct it. The scientific universe is therefore a co nstruct, and the first stage in any scientlfic endeavour is to determine the methodolog y of this construction. The essential instrument of a theoretical construction is the scientific concept: to apprehend hi storically, for instance, is to substitute for raw data wh ich are not in themselves apprehensible a set of concepts constructed by the mind. It is obvious that the elaborat ion of these co ncepts is strongly dependent on the implicit or exp li cit ph ilosop hy of the scientist. In fact, the theoretical construct fo rms a wbole with tbis philosophy of ma n, which in its tu rn constitutes, so to speak, its nervous system. a Econo mic development poses, in this connection, certain epistemologic.:'1 1 difficu lties because of the fact that economic theory and eco nomic history proceed in an exactly inverse way. Economic theory goes from a constructed scientific universe to the universe of values, i.e., the values proceed from the model. while eco nom ic history goes from a universe of va lues to a

36 - GROWTH AND THE CANAD I AN ECONOMY

constructed scientific uni verse, i.e., the model proceeds from the values,'1 This interaction of tbe un iverse of values and of the scientific universe in economic developme nt is a constant problem of the social sciences, but it is more acute in this context. The elaboration of adequate scientific concepts for an inquiry into the process of economic development is made especiaJJy difficult: it is in the interaction of these two poles (scientific a nd value universes) that an appropriate conceptual framework for the study of eco nomic development will have to be elaborated. In the elaboration of thi s conceptual framework, the student of economic development is confronted wi th a difficult choice: should he try to construct sets of relationships between economic elements and proceed to fo recast the behaviour or future states of this system from a n examination of the inner dy nam ism of these relations, or should he try to reconstruct the actual process which has generated such relalionships?!S This is the structural approach as opposed to the historical approach. The crucial differences between the two approaches as we can observe them in the literature boil down to th e following: the structura list insists on the di sconti nuous cha racter of the development process and ignores generally the rol e of ma n as a conscious actor, while the historian stresses the continuity of the process and Lbe fundamental ro le of man as the efficient agent and conscience of this process. Neither of these avenues is totally sat isfying for the student of economic development. He knows th at structures are not permanent, that they are stream lined and altered from li me to time. and he is interested in the mechanism which creates a nd destroys the structures. But he is also conscious that a lot of designing (conscious or not) is goi ng on for which man is responsible, a nd he would like to insert bim as a conscious ac tor and designer in his model. Some new concepts must th en be created wh ich will be rich enough to be acceptable to the structura list and the historian. and which will reconci le the synchronism of the one and the diachronism of the other. One such concept would seem to be the notion of structure as a precarious equ iJi briuOl.oThis enables one to visualize the process of developmen t as a process of structuralion an d destructuration triggered by the complex interac ti on of the forces of the milieu (technology, geography, etc.) wi th the forces emerging from social action ( plans, ideologies, etc.). In Marxian parlance. thi s process is the result of the interac ti on between structure and praxis. Bearing in mind that scientific concepts mllst be developed

PATTERN OF CANADIAN ECONOMIC DEVELOPMENT - 37

formally in order to be free of too much implicit semantic content, we have proceeded in two stages in developing the basis of our weak-structuralist approach. We first introduce the idea of property-space as a vast 1B.M. card capturing the many dimensions of an economy likely to be of interest to the specialist in economic development. 7 The property-space will enable one to represent the state of an economy, for instance, as a point in a n-dimensional space. The apparent complexity of an I.B. M. puncbed card provides a fair illustration of such a property-space. In a second stage, we have gone back to an idea of Frao90is Perroux deveJoped at the eod of the 1940's, the concept of abs tract economic space (or structured space) . This provides us with a mechanism of integration of the many dimensions of the property-space. This concept of abstract economic space is defined as a set of relationships between economic elements, and it constitutes a mode of integration of the property-space, a mode of structuration of a set of pertinent va riab les and attributes. Perroux had already suggested a simple typology of abstract economic spaces in his paper: space as a field of forces, space as a plan, space as an homogeneous dimension. We have retained this classificatio n. An extensive exploration of the possibilities of this Perro uxian concept would lead us into the stud y of topology, a branch of mathematics which deserves more attention than the social scientists have given to it. Perroux had already menti oned the connection of the co ncept with topology, and more recently, at the 196 1 meeting of the Regional Science Association at The Hague, K. Dziewonski, a Polish geographer engaged in trying to deve lop a general theory of econom ic regions as one of. the elements of a theory of economic development, has revived this idea of abstract space in economic analysis and has suggested that many phenomena in geography, sociology and economics could " be interpreted satisfactorily and usefully" as properties of abstract spaces. In our look at Canada, we will try to isolate a series of precarious equil ibria described by abstract spaces and we will try to identify the forces at work in the process of change. The dynamism of Ihe system will be provided by the interaction of the field of forces defining the structure of the economy and of the plans or programmes of perso ns or groups of people in the system: interaction of the polarized spaces and of the planspaces. If the concepts used are new, the type of approach to histori cal analysis proposed here is neither differen t nor unique as a mode of acquisition of knowledge about Canadian eco-

38 - GROWTH AND THE CANADIAN ECONOMY

nomic deve lopment. A look at the work done in the last fifty years in an attempt to define the pattern of Canadian deve lopment would reveal that in each case scientific concepts have been more or less consciously introduced, more or less buried under the archivistic accomplishment. Let us mention some at random : 8 1. Staple (Innis) 2. Metropolis (Careless) 3. Uncertainty (Easterbrook) 4. Types of organization (Diamond, Faucher) 5. Stage (Rostow) 6. Long swings (Buckley)

Of these approaches, the first one has limi ted value for the analysis of an advanced economy. The second is part ial and lacks analytical content. Easterbrook's uncertainty concept is interesting but has never really been put to work in any extensive way. The sociological history of Faucher and Diamond puts the emphasis on broader realities and represents perhaps the most fascinating contribution to Canadian historiography of the last decade. However, this approach shares aU the vagueness and mechanistic character of the simplest sociological models on which it is based. Such a work has great merit as an exploration of vast social real ities but does not seem to ho ld any promise of operationality.o The last two approaches mentioned, Rostow's stages and Buckley's use of the Kuznets' swings, must be challenged on different grounds. Both these approaches have produced some quantitative data and have been at the source of much know ledge about Canadian development. But the simple tests of Rostow's stages for Canada have not supported the hypotbesis.lO Moreover, the very way in which the problem is posed ra ises some questions : a stage theory in which the sequence of stages is not necessary boils down to a classification scheme, and, as a classification scheme,'Kuznets has shown the limited utility of Rostow's stages. On the other hand. Buckley's criticisms of the staples approach for tbe post- 1820 period have led hi m to an attempt to use the Kuznets swi ng as a tool of analysis. However, the mass of data compiled sti ll represe nt a body without a soul. This is an exercise in measurement withoul theory. We can at best suspend our judgment on this sort of work, while registering strong disagreement with the philosophy of research underlying it. We hope that the use of the notion of abstract space will enable us to carry the debate beyond the present stage. II will

PATTERN OF CANAD IAN ECONOM IC DEVELOPMEN T - 39

certainly help us to go beyond the mechanics of growth Z '0n" z

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