Why would a layman write a book on the Canadian economy and, if he did, why would you read it?
We both have the same reason -- because it's obvious that something has gone wrong.
Forty years ago the only "homeless people" in Canada were a few hoboes who camped on the edge of town. Now, in a country that pretends to be wealthy and that supposedly has an effective "safety net," social agencies estimate that about 20,000 homeless people live in Toronto. Men, women and children camp in vacant buildings and in parks, and beggars and child prostitutes haunt our streets.[1]
A study released in 1997 found that 2.3 million Canadians lived in poverty for the two years of the study. Another 846,000 who lived in poverty during the first year of the study did better in the second year, but 1.2 million who did not qualify in the first year did in the second.[2]
The definition of poverty is arbitrary, but that's a quibble. Whether it's poverty or something else we know that more and more Canadians do not live as well as we think Canadians should live, and that tens of thousands of people in our society are actually hungry.[3] A study in Montreal found that about 60,000 people a day get food from food banks in that one city, and 24,000 a day eat at soup kitchens.[4]
As a nation we're in debt up to our ears, and now the world is telling us that our money is no good. Thirty years ago the Canadian dollar was worth more than the American dollar but now it's worth about two thirds of an American dollar and is expected to lose more.
Some of our governments prate about "eliminating the deficit" but even if they did, the national debt is still there and it's still growing.
And we have massive levels of unemployment. The numbers are buried in a fog of misinformation but they can't be hidden completely. The official unemployment rate for men[5] in December of 2000 was 7.8% but the official numbers count only people who "participate" in the labor market. People who give up and no longer look for work are not part of the "labor market" and therefore they are not unemployed. Students who can't find jobs after they finish school have never been employed, therefore they can never be unemployed. People who run out of unemployment benefits are dropped from the rolls, as though they had somehow become employed. A study by the Canadian Labor Congress found that, on average, only 36% of unemployed Canadians receive benefits.[6]
Let's look at some other numbers and, at this point, we will look only at men. The numbers for women are equally distressing but even now some women stay home to raise their children and they have good reason to be counted out of the wage-earning work force. Some men care for children too but in general the man who stays home is either wealthy, retired or unemployed.
Statistics Canada tells us that in December of 2000 only 66.8% of Canadian men had jobs. That means more than 33% did not have jobs. Some of those are retired but only about 10.8% of Canadian men are over 65 years old. Some are wealthy and retired early but a study by Statistics Canada found that 27% of men who retired early now live in poverty. They call it retirement, but in fact it's just hopelessness.[7]
At least 15% of men who need jobs don't have them, and many of the people who are counted among the "employed" have only part-time jobs. In 1969 about 9.5% of working Canadians worked part time, but by 1996 the percentage had risen to 29.3%.[8].
If 15% -- or even 10% -- of Canadians have no jobs at all and nearly 30% of those who are working have only part-time jobs, what is the real unemployment rate?
In the "great depression" of the 1930's unemployment hit 17.6% in 1932, peaked at 19.3% in 1933 and dropped to 9.1% in 1937.[9] Unemployment of adult men seldom hit the levels we now consider normal and, for all but two years of the depression, there was less overall unemployment than we have now.
Total employment now is higher than it was in the depression but that's partly because real wages are now so low that most members of most families have to work. Back in the 1930's most Canadians owned their own homes, most women did not have to work outside the home and students did not have to work their way through school. In the wonder-world of the modern economy some women and some teen-agers have exciting and well paid jobs, but the vast majority are glad to find low-paid drudgery.
And it will probably get worse. In fact, we are in serious danger of falling into the kind of economic tailspin that I call "Hobson's spiral."
John Hobson was an English scholar who wondered how, in the Victorian age, England could at the same time be the wealthiest country in the world and have some of the most miserable poverty in the world. He realized that if the poor were too poor, the country as a whole could not prosper.
He argued that the economy depends on consumption and that if the poor have no money they can't consume. On the other hand if the rich are too rich they can't consume all they can afford, so the total level of consumption will drop and the economy will slow down.[10]
Hobson offered a theory but he could not prove it because he could not raise minimum wages himself. Henry Ford could and, whether he ever heard of Hobson or not, he used the flip side of the same idea to kick the United States into the greatest industrial boom in history.
In 1913 minimum wages at Ford were $2.07 for women and slightly more for men. Early in 1914, Ford decreed that the minimum wage in his factories would be $5 a day.[11]
That was a bold stroke and, many people thought, a crazy one. One newspaper cartoon of the day showed a charwoman coming to work at a Ford factory in a limousine while Ford, dressed as a janitor, swept the sidewalk.
But Ford was no fool. Like Hobson he realized that the economy depends on consumption, and that if the poor have no money they can not consume. He believed that if his workers had more money some would use it to buy cars. Others would use it to buy houses -- and provide work for house builders who could then afford to buy cars -- and so-on.
And he was right. When Ford raised his minimum wage,he started the American industrial boom that lasted until 1929. The First World War was also a factor in the boom but, whatever Ford's contribution to the national prosperity, there is no question about the effect on his own company. The pundits said Ford would go broke, but instead he became the world's leading auto-maker.
Now we are reversing the "Ford effect" but most of us ignore the signs of poverty that surround us because we don't want to see them. If I can convince myself that economic losers are lazy, or that they failed to keep up with the times, I can pretend that I'm in no danger myself.
But if Canadians don't notice our economic woes, others do. A report by the Organization for Economic Co-operation and Development considers three possible futures for the Canadian economy, and all of them are bleak.
In 1998 our GDP per-capita index was 110% of average of the 29 countries that make up the membership of the OECD. The report says that in 20 years our GDP per-capita will probably be about 85% of the average but it might be as high as 95%, or as low as 75%.
That's not compared with other G7 countries. It's compared with the average of 28 other countries, some of which we think of as poor. GDP per-capita in the United States is now about 140% of the OECD average.[12]
In a "Survey of Canada" The Economist reported that living standards in Canada have declined by 5% over the past decade, while living standards in the United States have risen by 12%.[13] In 1998 the Canadian Labour Congress reported that Canada was the only major industrialized country in which living standards actually fell in the 1990's. Between 1989 and 1996, the Congress says, the average family income of Canadians (adjusted for inflation) fell by 3.9% while average real income per person in the United States grew by 6.2%. Real income in western Europe increased by a range of 6% to 13% over the same period.[14]
And we have no reason to hope for anything better, unless we are willing to make changes. Some bafflegabbers tell us we are suffering from "world market conditions." That does not explain why people in Europe and the United States are doing better every year, while we are doing worse.
Are Europe and the United States in a different world, or are we doing something wrong?
It's obvious that we are doing something wrong, and we are now perilously close to the brink of Hobson's spiral. Once we head down that slippery slope we may never recover. When our dollar crashes -- as the currencies of other mis-managed countries have crashed -- some Canadians will starve because we no longer produce enough food to feed ourselves.
When the Mexican peso crashed Mexicans had to stop buying imports but at least they had their own food. If our dollar crashes we will still have to import food from the United States and Mexico, and it will be very expensive.
With a 65-cent dollar hundreds of thousands of Canadians rely on food banks to feed their children. If our dollar crashes, many will face starvation. We like to think that in an emergency the government would provide food for the hungry, but if our dollar crashes our governments won't be able to help anybody.
THE FAILURE OF SCHOOL LEARNING
There's no question that our economy is badly off-track. I didn't have to study economics in school to see that and, in fact, if I had studied economics in school I might not see it.
If I had studied economics in school I would have learned to look at the numbers, rather than the real world, and published numbers make the Canadian economy look pretty good. Never mind the beggars on the street corners, the homeless people who sleep in the parks or the families that rely on food banks to feed their children. They're just statistical anomalies. On the other side of the ledger we have lots of paper millionaires and some billionaires so, on average, we're doing well.
At least you might think so if you are a trained economist. We all know that school teaches us a lot of good things but we also know that, in some cases, schooling can perpetuate error. For much of the history of formal education the ultimate authority on the physical world was the Greek philosopher Aristotle who taught, among other things, that the sun orbits around the Earth. For more than a thousand years men who were just as intelligent and well educated as modern economists believed that the stars were supported by "crystal spheres" which surround the Earth!
How could they have been so stupid? The answer is that they weren't stupid at all, just educated. Their schooling gave them a way to look at the world, and the world they saw made sense from that point of view. Because they saw the world only from that point of view they never questioned it.
Like the scholars who believed Aristotle, modern economists have been schooled to look at the world in a specific way, and to assume that the world they have been trained to see is "real." Like professionals in any field they have to accept the tenets of their faith because their status rests on the presumption that what they believe is true. If they question what they have learned, they must also question their position in the world.
But they don't question. In the foreword to the third edition of The New Industrial State John Kenneth Galbraith refers to ---
"a sizable group of economists who unhesitatingly associate whatever they have been told to believe in their youth with absolute scholarship. Anything alien to such installed belief is deficient."[15]
Later in the same book Galbraith says --
"specialization within the subject matter of economics keeps scholars from any need to reflect on the truth or the larger role of the subject. The good scholar is the man who sticks tightly to his last, declines any concern with the truth or error of the system of which his work is part. And such concern, since it offers the difficult task of offering more satisfactory alternatives, can usually be attacked as deficient in methodology or proof."
When they finish school professionals may consider their education complete. In his General Theory of Employment, Interest and Money English economist John Maynard Keynes wrote ---
"There are not many who are influenced by new ideas or theories after they are twenty five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest."[16]
Keynes himself may have suspected that economics was off track. In his preface to the General Theory he wrote:
" -- if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and generality in the premises."[17]
Exactly. The fault is in the one place that professional economists will never look. As Keynes suggests, they may try to refine the superstructure of their discipline but they will not question the premises.
In fact Keynes was one of the economists who led us astray because it was he who suggested that governments could tinker with taxes and interest rates and public spending to "manage" the economy. Canada adopted the idea in 1945, with the publication of a white paper on employment and income which declared: "The government will be prepared, in periods when unemployment threatens, to incur deficits and increases in the national debt resulting from its employment and income policy, whether that policy in the circumstances is best applied through increased expenditures or reduced taxation."[18]
There is some logic to Keynes' idea, but not much. If I park my car for long enough the battery will run down, and I might have to get a push to start it. Once I get the push, the car will run.
But if I'm cruising at highway speed and the engine dies, it will take more than a push to start it again. Something is wrong, and until that something is fixed, the car will not run.
In economic terms, if we had no economy at all we might get one started with a Keynesian push. We have an economy and from about 1945 to 1965 it worked very well -- like a car running at highway speed.
But then it began to miss and for the past ten years or so it has been rolling to a stop. A Keynesian push might make it roll a bit farther but it's obvious that something is wrong, and that the economy won't work well until we fix it.
"Keynesian economics" assumed that economists knew enough about the economy to guide it but that was a fatal conceit, because the foundation of economics was never intended as a framework for management. It began as an attempt to predict the tax revenues a king could expect to collect and it is only since Keynes that governments have tried to manage economies.
But formal economics does not provide enough information to manage an economy, and the unemployment and poverty in Canada prove that. While a few prosper the country as a whole is going broke, so obviously that even governments see the need to save money. The Ontario government has closed schools and hospitals that it can no longer afford to operate, our post office is now a commercial operation that no longer delivers mail to the door in many areas and -- even though we know that uncollected garbage is a health hazard -- cities across Canada have reduced the frequency of garbage collection. In a desperate attempt to raise money our federal and provincial governments began running lotteries more than 15 years ago, and now license gambling casinos.
Some economists, bureaucrats and other bafflegabbers tell us our economic woes are a "temporary adjustment to world market conditions." That's hogwash. The changes we see are steps in our change of status, from one of the leaders of the first world to one of the mass of the third.
We're going down the tube, but why? What happened to the country that was supposed to lead the world into the 21st century?
Some pundits say that our unemployment is caused by "new technology." The theory is that people have no work because factories are automated and machines make most of our goods.
Not so. If that were the case we would not need to import manufactured goods from low-wage countries.
Some factories are automated and machines make some goods but we use and consume so much more than our ancestors that there should still be lots of work to go around.
Modern car factories have lots of robots, for example, but today's cars are so much more complex than the cars of earlier years that there are still more man-hours of work in a modern car than in an old-fashioned one. Besides, we have more cars than our parents did and we replace them more often.
The robot that landed on Mars did not replace a human worker. Many of the jobs robots do are new, and they should not create unemployment in a modern culture.
So where is the problem? We have a lot of problems but one of the most important is that our politicians, our civil servants and especially our economists try to manage the country with in a so-called "science" that is based on a series of fallacies. Any one of them could lead us astray, and together they make a real mess of everything.
THE FALLACIES
The first problem is that economists and politicians don't understand what wealth is. I deal with this in the section on The Numbers Game.
Because economists and politicians don't understand the nature of wealth many of them believe that the number we call the Gross Domestic Product bears some relationship to our economic welfare.
That's not so. The GDP gives the government a base from which to predict tax revenue but it bears no significant relationship to the welfare of the nation. As we will see, many events that increase the GDP actually harm the economy and the people of Canada.
Our trust in the GDP is rooted in the belief that money itself has value. As we will see, money can represent value but it has none of its own. The real value of a dollar varies, depending on what it represents, and some dollars are more valuable than others. Some people will find this idea strange, but it is fully explained in the section on Midas' Mistake.
We believe that our laws protect us from predators who may take our possessions, but that's not so. The law protects us from the crimes it describes as theft and robbery but not from others that are their practical and moral equivalents. In fact the law itself may be a predator, and it is often a tool of predators.
Some of our problems stem from the colonial beginnings we never outgrew. We will consider the difference between national and colonial economies, and see that many of our economic problems begin with our failure to develop an independent economy. We will consider the difference between an independent and a colonial economy, and see why we can not afford to remain an economic colony.
Canadian confederation was planned for Britain's benefit. Now it serves our federal government and some big corporations but most Canadians would be better off without it. We will see why we must re-organize Canada into a different type of union that will give local governments more responsibility, and limit the power of the central government.
Educators tell us we need more education but that's not quite true. Part of our problem is that we have too much of the wrong kind of education and not enough practical training.
Some business writers suggest that the women's movement has been a positive economic force. It has been a major contributor to the Numbers Game, but it has been a negative benefit to the economy.
The so-called "global economy" is a form of global colonialism that impoverishes the first world, that keeps the third world poor, and that could destroy us all.
As far as possible I make no moral judgments on any of these topics. When I say that this or that condition produces this or that effect, I make a statement of fact.
I think that's important because many of the statements I make will disturb some people. The moral implications of these statements disturb me too -- that's why I'm writing the book -- but I write about causes and effects, not about morals.
And I write in plain language because I believe the credo of Ernest Rutherford, the English scientist who discovered and was the first to split the atomic nucleus and who won the Nobel prize for chemistry in 1908.
"If you can't explain what you are doing to the woman who cleans your laboratory," he told his students, "the chances are that you don't understand it yourselves."[19]
If Rutherford was right I have to assume that some established and famous economists do not understand economics. I'm sure that some people who read this will decide that I don't know much, but that's life. All I ask is that you keep an open mind, and that you think about my arguments rather than compare them with established dogma.
And take heart -- it's not all doom and gloom. The doom and gloom are there because we have to recognize the problems before we can fix them, but we can fix them.
Some people don't want to fix our problems because they're doing just fine now. They tell us that others could do well too, but that's not so. In the economy we have now a few people can do well at the expense of the many, but while they do well the rest of us suffer. We need a system in which all of us -- or at least most of us -- can do well.
There is a way. It can happen and we can make it happen, but first we have to understand how the system works. That's what this book is about.
I'm going to deal with the fallacies I see in our social and economic systems one at a time but please remember, as you read about each one, that there are many fallacies and that they reinforce each other so the effects are compounded.
Forward to The Numbers Game
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