The Distorted Priorities of Mainstream Economics

Writing in the Toronto Star (link lost), economists Arthur Donner and Doug Peters reflect on economics, employment and inequality:

The Distorted Priorities of Mainstream Economics
Arthur Donner and Douglas Peters, May 2006

There has been a monumental shift in mainstream economics over the past forty years.

When we studied economics in the 1960s, economists and public officials who had an economics policy mandate identified a number of important national goals-full employment, rapid economic growth, a viable balance of payments and an equitable distribution of income. These goals were stated in the terms of reference of the Economic Council of Canada and repeated in the Council’s First Annual Review of 1964, “Economic Goals for Canada to 1970.”

In policy terms, full employment is rarely taken seriously and the equitable distribution of income priority seems completely foreign to current mainstream economics. The issue of a viable balance of payments has always been the least understood of economic policy objectives and today seems to be largely ignored, or worse argued that it does not matter, particularly in the United States. We would argue that Canada is worse off because of these changes in priorities.

Interestingly, the importance of an equitable distribution of income was recognized by many giants of economic analysis, both from the left and the right. The late John Kenneth Galbraith, an original thinker in the field of economics and a prolific writer, seemed proud of Canada’s social programs which focused on the issue of income distribution in a far fairer way than in the United Stares.

He also wrote that “The notion that economic insecurity is essential for efficiency and economic advance was a major miscalculation – perhaps the greatest in the history of economic ideas. …In fact, the years of increasing concern for economic security have been ones of unparalleled advances in productivity.” (Source the Globe and Mail May 1, 2006, p. S8)

The great economist, Alfred Marshall, wrote in his “Principles of Economics” in 1890 posed a fundamental question on income distribution “ . . . whether there need to be large numbers of people doomed from their birth to hard work in order to provide for others the requisites for a refined and cultured life; while they themselves are prevented by their poverty and toil from having any share or part in that life.” (p. 3, Eighth Edition, Macmillan & Co. 1962)

Adam Smith, who is widely thought of as the founder of modern economics, was both a philosopher (The Theory of Moral Sentiments) and an economist (Wealth of Nations).

In 1776 Adam Smith described how an economy works and created the concept of the invisible hand that generates economic well being. Nonetheless, in the Wealth of Nations Smith observed that “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.”

This brings us to the present situation in Canada. The overall economy, as reflected in such standard numbers as GDP growth, is performing fairly well. To a far greater extent than in the past, however, the issue of economic justice and income distribution is off the radar screen of our Canadian politicians. While the standard of living of Canadians is rising in aggregate, the system still leaves huge numbers living in poverty.

Statistics Canada does publish figures on the percent of Canadians who fall below a low income cut-off level. And their recent survey shows that the Canada’s recent near boom has shrunk the pool of these people. But this still leaves a huge number of people living in poverty.

Here are some pieces of fragmentary evidence that trouble us:

∑ Inequality and poverty are two separate but linked problems. Is it fair to see a small drop in poverty and an increase in homelessness while the wealthy in our society enjoy a boom in their incomes? All of this in Canada despite an economic boom and repeated federal government promises to cut poverty

∑ There is a huge affordablity problem for housing in Canada. Moreover, despite the eocnomic boom, we see many homeless people on the streets of Canada’s major cities.

∑ Poverty is rising among children and new immigrants, and more middle-class Canadians are finding it difficult to pay for education and housing

∑ Canada’s treatment of Aboriginal Canadians, both on and off reserves and in the North, is disgraceful. The problems brought on by poverty among our 1 million Aboriginal Canadians, truly the first Canadians, are disgraceful. Unfortunately, past federal governments’ policies had hardly made a dent at setting matters right and there seems little hope from the policies of the most recent budget.

∑ The current boom is boosting the top salaries and bonuses of the wealthy CEOs at the expense of the workers at the bottom of the totem pole, particularly the working poor. We are struck by the enormous CEO and other executive salaries that are announced, with the huge escalation in the ratio of the top to bottom incomes. How many times the average worker’s salary should a CEO or other executive receive? 20 times? 100 times? Or the actual number in the US for the top 10 per cent of executives, 350 times?

∑ We are also struck by the way in which the minimum wage was deliberately allowed to fall behind average wages, despite the fact that the minimum wage plays a key social and anti-poverty role for propping up the low wage labour market.

… Canadian policy-makers should be examining their economic policy instruments (taxes, transfers, government expenditures, etc.) not only from the perspective of do they improve the growth of the economy or of a particular industry, but also the way in which the improved growth and benefits are distributed among different groups in our society in a more equitable manner.