The Staple Theory @ 50: Hugh Grant

As part of our continuing series of special commentaries marking the 50th anniversary of the publication of Mel Watkins’ classic article, “A Staple Theory of Economic Development,” we present the following contribution by Hugh Grant from the Economics Dept. at the University of Winnipeg.  Grant is a former student of Mel’s, and an important chronicler of the history of Canadian economic thought.  Here he argues that the historical roots of the staples theory enunciated by Watkins go back a little further than just Harold Innis.  Learn here about the initial contributions of W.A. Mackintosh.

Who’s Your (Grand) Daddy? Watkins, Innis, and W.A. Mackintosh

By Hugh Grant

Everything I know I learned from Mel Watkins and Abraham Rotstein, so this is a very personal commentary. (It is also a convenient starting point, because if I am wrong about any of what follows, I can simply deflect criticism by blaming Mel and Abe for teaching me incorrectly.) If I view Mel as my intellectual parent, in tracing my intellectual lineage I think I’ve been lied to for years: my grandfather isn’t Harold Innis, but W.A. Mackintosh.

Mackintosh, Innis, and the Staple Thesis

Mackintosh began teaching economics at Queen’s in 1920 and served as its Principal in the 1950s. He engaged energetically in Canadian policy debates, serving on the National Employment Commission (1936-38), the Rowell-Sirois Royal Commission (1937-9), as an advisor to the Minister of Finance during World War II, and later on the Royal Commission on Banking and Finance (1961-4) and as a Director of the Bank of Canada. Indicative of his contribution to wartime policy, it was Mackintosh who, at Bretton Woods Conference, seconded Keynes’ motion that led eventually to the establishment of the International Monetary Fund and the World Bank.

He was also a prolific scholar and arguably the “discoverer” of the staple thesis. Its origin can be traced to Mackintosh’s talk delivered at the National Archives in 1922, a talk that formed the basis to his seminal 1923 paper on “Economic Factors in Canadian History.” Innis was in the audience and was quick to recognize the importance of Mackintosh’s argument; indeed, Innis would seize upon many ramifications that Mackintosh later admitted he himself had not fully appreciated.

By 1934, the two men had completed their major studies of specific Canadian staple industries: Innis on the fur trade and cod fisheries, and Mackintosh on wheat. The enthusiasm each expressed for the other’s work reflects a common desire to understand the broad patterns to Canadian economic history. Mackintosh hailed Innis’s The Fur Trade in Canada (1928) as “the greatest single contribution that has been made to the interpretation of the economic history of this country” and “a great book in economic history.” In his reading, a key aspect of the Fur Trade was Innis’s recognition of the vulnerability of a staple economy: “a perpetual Canadian economic problem of great significance, that of carrying heavy overhead costs and with variable income and with relatively unproductive seasonal periods.”

Innis, in turn, was quick to appreciate Mackintosh’s extension of this theme to the analysis of the prairie wheat economy. In a lengthy review of Mackintosh’s contribution to the Frontiers of Settlement series, Innis states that “It is impossible even in an extended review to convey an appreciation of the significance of the work carried out under the project represented by the volumes under review. The . . . work provides a fundamental basis to the problems of Canada as a whole. Throughout the volumes the problem of the adjustment of burdens between established and fringe areas has been of vital concern and emphasis has been placed on methods by which the burdens may be kept under control and reduced. But in many ways Western Canada is to the industrial center of Canada what the fringe is to the center within the western provinces, and a provincial regional problem becomes a Canadian problem. These volumes constitute a first preliminary attack on the difficulties of provincial-federal relations, and their importance is enhanced by the opportune date of the study and their appearance in the years of the depression. No economist or historian or geographer can continue to write intelligibly about diminishing returns, the frontier theory, and other related concepts without a through appreciation of their implications.”

At the 1935 meetings of the Canadian Political Science Association, Mackintosh presented “Some Aspects of a Pioneer Economy,” in which he made the first attempt to generalize the findings on specific staple industries into a more comprehensive framework for understanding the development of Canada and “new countries” in general. “It is, then, in the history of new countries that the economics of development can best be studied,” he wrote. “I suggest that the fully operating open economic system is best exemplified in new, pioneer countries.”

Four basic features of the pioneer economy are identified. First, countries characterized by plentiful resources need to find a staple product that was both “adapted to the basic geographical facts” and in demand in metropolitan markets. Second, the scarcity of labour and capital necessitated an inflow of labour, use of the “industrial arts of mature economies” (or “mature techniques” to use Innis’ term), and capital borrowing. The latter implied a high rate of investment and indebtedness, and a high propensity to save if the interest payments on debt were to be met. Third, the nature of the production function, or the technological and institutional conditions under which the staple commodity is produced, had broader implications not only for the economy as a whole, but political and social institutions as well. Fourth, the conflict between highly-variable income from staple exports and heavy overhead costs left the economy vulnerable to wide fluctuations in the rate of economic growth. The staples economy thus faced periodic tests of the capacity of export earnings to carry the growing debt charges and to pay for imports.

The concentration on a single staple product had cumulative effects which influenced the capacity to transformation from an immature to mature economy. During period of growth, factor prices tend to adjust as the inflow of relatively scare labour and capital drive down wages and interest rates respectively, and increase the price of land. “Rising prices and falling interest rates are the attendants of pioneer prosperity.” When the inflow of capital eventually declines, there must be sufficient export earnings to fund imported consumer goods and establish the basis for domestic capital accumulation, particularly in secondary industries to help spread out the social overhead costs. Only then can the economy “pass from the pseudo-prosperity of the settlement boom to the genuine prosperity of a fully functioning economy.”

This paper would serve as the starting point for Mackintosh’s definite statement of the staple thesis applied to Canadian history: The Economic Background of Dominion-Provincial Relations written in 1938. When asked to comment on the draft of the manuscript, Innis declined on the grounds that it would be “merely gilding the lily.”

Mackintosh and Keynes

Innis and Mackintosh would increasingly part company over the course of the latter 1930s. For Innis, the basis for knowledge was fragile and the search for bias was an essential step to gaining self-knowledge; as he cited James Ten-Broeke, his professor in Philosophy from his undergraduate days at McMaster, “Why do we attend to the things to which we attend?” Questioning the basis for one’s own convictions was, if not the route to detached objectivity, at least the grounds for obtaining a perspective on the subject. It did not, however, provide a reliable basis upon which to offer expert policy advice. His scathing review of the Rowell-Sirois Royal Commission in 1939—whose Final Report Mackintosh had a large hand in drafting—underscores Innis’ increasing isolation from the majority of his fellow economists.

Mackintosh was no less introspective despite consistently expressing a matter-of-fact approach to intellectual inquiry and the capacity to apply “common sense” to a body of accumulated facts. He subscribed to no simple inductive method; rather, “It is that wealth of knowledge which tempers logic with intuition and enables the competent economist to judge the quality of imprecise facts, to exercise what we may call his economic sense.” He acknowledged that “as an individual of experience he will doubtless have strong prejudices and inherited tastes,” but that scientific detachment was possible. “Men must have a philosophy of some kind no matter how poor or contradictory a thing it is, but it is essential that we keep our philosophy separate from our scientific thinking, or rather that our philosophy should always be ready to retreat before science.”

In Mackintosh’s Presidential Address to the CPSA, the methodological gulf between the two men is quite apparent. In responding to Underhill’s charge that economists were the “garage mechanics of capitalism,” Mackintosh acknowledged that, “In all quarters one gathers the impression that the general public is disappointed in economists, is distrustful of them, is unimpressed with the complexity of the subject, or considers them out-moded and outworn receptacles of a bourgeois ideology, the product of a particular historical epoch.” But he defended the economist’s role as a policy expert as long as one resisted the pressure to “abandon his scientific method and become a propagandist.”

In this respect Mackintosh endorsed Keynes’ view which he described as the trusting of a technical man to do a technical job according to good professional standards. “Just as engineering principles do not lay down the form and structure of a bridge apart from the particular facts of pan, weight, strength of materials, etc., so economics enunciates no policy apart from the particular facts of the problem.” Thus as Innis lamented the growing division within the social scientists, Mackintosh championed the scientific foundation of economics with the proviso that “the economist must remember that he is an expert in but one of the social sciences.” He was equally adamant that “any social science must ultimately be justified by the basis which it affords for policy . . . unless economics and other social sciences are to be justified by policy they become mere chess games, to be classed as recreation, wholesome recreation if you will.”

Accordingly, it was Mackintosh that came to embrace Keynesianism during his work for the Canadian Government during World War II. In authoring the White Paper on Employment and Income in 1945, he articulated a Keynesian vision of the Canadian economy in the post-war period. In doing so, Mackintosh made a seminal contribution in crafting a Keynesian model amenable to a small open economy regulated by a federal state. The White Paper can be interpreted as an effort to restate the staple thesis within a Keynesian aggregate demand framework.

From Mackintosh to Watkins to You

I will leave it to others to discuss specific aspects of Mel’s 1963 paper, but I encourage all to read or reread it as an extension of Mackintosh’s wedding of the staple thesis with a Keynesian model. Moreover, when it comes to addressing immediate policy concerns, Mel’s lifelong engagement and activism actually stand in sharp contrast to Innis’ reticence – and bears a much greater affinity to Mackintosh’s active policy commitments.