The Staple Theory @ 50: Abe Rotstein

Here is the first contribution to our special series of commentaries marking the 50th Anniversary of the publication of “A Staple Theory of Economic Growth,” by Mel Watkins, in the Canadian Journal of Economics and Political Science.   The author, Abe Rotstein, was a colleague with Mel at the University of Toronto, and a founder of the Committee for an Independent Canada.

The Staple Theory Redux: On the Origin of Species

by Abraham Rotstein, Professor Emeritus of Economics, University of Toronto

All theories retain the genes of their parents, and likewise the Staple Theory. The time was the early 1960s, the heyday of economic history at the University of Toronto. Harold Innis had died a decade earlier , but his legacy was alive and well. He had artfully overridden disciplinary boundaries in his books to focus on Canada as a society: the way it was conceived and nurtured. He showed how natural resources (staples) had played a central role throughout.

Innis had been impatient with the history written by his predecessors. Histories of early Canada regaled the country as a bastion of the British Empire, a bulwark against the ambitions of the French and of the Americans. Historically, Britannia ruled Canadian minds as much as it ruled the waves.

The historical literature on the fur trade at the time floated on an aura of purple prose — fur traders at sunrise paddling along the great rivers, singing in three-part harmony. It was the world of Cornelius Krieghoff … but flying the Union Jack.

Economists in turn saw all this through still narrower lenses – namely, through the binoculars of “supply and demand”. Staples with distinctly different physical characteristics and very different histories, say fur and timber, all became “commodities”, homogenized under the denominator “price.” Rivers, mountains and prairies were screened as differential transport costs. Generally speaking, economic analysis pictured Canada as comprised of various shades of staples grey.

For Innis, who had personally canoed the old fur trade routes, had served as a deck hand on the steamers of the Yukon, had worked on the fishing boats of the Maritimes, this approach yielded a bloodless one-dimensional Canada. It hardly reflected the country that he knew first hand.

Innis did have a deep appreciation of the industrial achievements of modern capitalism (which he abbreviated as “the price system”) but he sensed that neo-classical economics fell badly short in its portrayal of the country.

When he was in graduate school in Chicago, Innis had been influenced by the work of Thorstein Veblen. Innis claimed later that Veblen had waged “a constructive warfare of emancipation against the tendency toward standardized static economics,” and against “the inclusiveness of price economics”.

Innis searched for an alternative focus:

Perhaps the most serious obstacle to effective work in Canadian economics and economic history is the lack of a philosophy of economic history applicable to new countries…Much of the work has been defective through the attempt to fit the phenomena of new countries to the economic theory of old countries.

For Innis the geographer, the classical supply-demand-price approach of the “old countries” had produced a “whiteout” of the Canada that he knew first hand. How could he retrieve those formative features of its economy that had been sidelined, and portray the economy in its full dimensions? Innis used a ‘wide-angled lens’ for his research, and this shaped his subsequent work on the fur trade and the cod fisheries.

Such was the origin of the staples thesis, an approach that highlighted the substantive features of the economy: its ecology and geography, its technology, and its institutions. It was only after the fact that this approach emerged more formally as a “theory,” and this is where Mel Watkins enters the picture.

Mel Watkins had been a student of Harold Innis during Innis’ latter days at the U of T. Subsequently Mel joined the Political Economy Department. That Department lived, at least for a while, in the afterglow of Innis’ presence. The Department head, Tom Easterbrook, was a close associate of Innis and became a mentor to the young Watkins.

Mel Watkins knew he had a tradition to live up to. His previous stint as a graduate student at MIT did him surprisingly little damage, as was shown later by the independent line he took on the control of foreign investment in Canada. But the main issues of the day had shifted from the time that Innis wrote. The new agenda of the 1960s had been established south of the border and was adopted everywhere else. Speaking for the U.S. State Department and indeed on behalf of the United Nations, Walt Rostow (also an economic historian) declared a “Decade of Development” ahead. All underdeveloped countries should take a leaf out of the experience of the developed countries, he argued, and embark on the path of self-sustaining industrial growth.

In the end, despite massive amounts of foreign aid, all this amounted to little more than a declaration of innocent myopia. Nevertheless, how to successfully launch a country onto this path to industrial growth was the challenge of the day.

Soon the difficulties loomed up: how could the less developed countries, so heavily dependent on the export of natural resources, proceed to launch new secondary industries? Countries were mired in their respective staples, with seemingly little chance of shifting into industrial development. Were these countries fated to drag their heels until they could extricate themselves from this staples dependence? How to escape from this debilitating role and move into the realm of high value-added manufacturing?

In the countries of Latin America for example, staples were regarded as the albatross that had dragged them down during the time that the industrial giants such as the United States had raced ahead. Raoul Prebisch had launched the dependencia doctrine, the economic underpinning that animated much of the Latin American policy and political discussions of the time. In a nutshell, the doctrine maintained that Latin American countries were fated to backwardness over time because the terms of trade had consistently turned against raw materials in favour of the relatively higher prices commanded by manufactured goods. It followed that Latin American countries had, by any means they could muster, to jettison their dependence on staples in order to acquire the bounties of economic progress. Politically, this seemed to be the route as well to get out from under the thumb of the United States.

Enter Watkins’ staple theory of economic growth, showing how Canada had in fact found a way out of its own staples dependence. Canada had, after all, emerged as a developed country despite its initial reliance on the export of staples. How had this occurred? That was the intriguing question that Watkins resolved in his classic 1963 article.

In Innis-like fashion, the answer came from casting a wider net; it meant pursuing the ramifications of staples production in an industrial age. Staples production had become more complex: it now required industrial equipment. Wheat production required tractors and harvesters; mineral production required elaborate mining machinery. How to take advantage of these opportunities?

There were further possibilities. Instead of simply digging things out of the ground and exporting them in their raw state, economic growth could come from further processing of these raw materials. Softwood lumber could be turned into paper by constructing paper mills. Flour mills could (and should) process the wheat into flour; steel mills should process the iron ore. Who would take up these industrial opportunities?

Here, Watkins argued, lay the key to the transition into industrial growth — the industrial linkages that staples production offered. He called these “backward linkages” for the machinery to produce the staples and “forward linkages” that could provide for further processing. Moreover, additional jobs were thereby provided (including to the immigrant population), and this in turn expanded the consumer goods industries that followed in the wake of these linkages. Canada (with some qualifications ) could be held up as an example of how these linkages could work to foster industrial growth at least for some staple-reliant countries.

But little of this would have actually occurred in a laissez-faire society, where industrial imports from an adjacent economy might have swamped the fledgling domestic industries responding to the demand for the products of these backward and forward linkages. These new industries were sheltered in Canada behind a tariff wall. Local manufacturers did seize the opportunities on their doorstep and created an industrial base for the country. (We will have to bypass here the later debate on “efficiency” and supposedly suboptimal growth through import substitution.) In the post-war period, as Watkins pointed out, Canadian business was often slow on the uptake, and alas foreign owners garnered many of these industrial opportunities.

Other staples-oriented theories followed in a similar vein, although they were not necessarily offshoots of Watkins’ original article. Eric Kierans directed attention to the question of capturing the ‘rents’ connected with natural resources. Charles Kindelberger had earlier addressed the different effects of staple exports on the balance of trade and on the growth of the domestic economy. Albert Hirschman pointed to the fiscal consequences of staple production, and this was followed by the diagnosis of “Dutch disease” (analyzing the effect on the exchange rate and hence on manufactures of major staples exports.)

Environmental consequences as well began to loom large in the discussion of staples. These were often devastating: the clear-cutting of forests, the pollution of the atmosphere, and (more recently) the moonscapes of the bitumen fields.

Today, tracking the broad consequences — economic, financial, political and environmental — that flow from a reliance on staples production still follows the broad Innisian tradition, although in a more critical vein. Further, the challenge of finding a national balance between staples and manufacturing remains a perennial theme of debate.

Innis was right many decades ago to place staples in the forefront of the discussion of Canadian economic history. He thereby provided an antidote to the dominance of the sycophantic and the romantic in Canadian history. Instead, he grounded that history in an analysis of staples that had been ‘hidden in plain sight.’ The ramifications of staples production were spread far and wide, linking not only the economy but shaping the society as well. This is what Innis discovered, and thereby found a way to remove the blinkers of neo-classical economics through his staples thesis.

Watkins’ renewal of this discussion fifty years ago was an antidote of a different sort. He pointed out some active directions for policy makers to pursue in staples production. In this case it was an antidote to the conventional approach to managing staples with “invisible hands.” These hands had in fact become so “invisible” that they were in danger of rendering Canada a paraplegic.

This challenge is still clearly with us today, evidenced both by the reluctance of Canadian business leaders to develop value-added industries here, and the lack of imagination of policy-makers to push them to do better. In this regard, we give Watkins (1963) the last word:

“…economic institutions and political values, an inefficient structure of industry combined with an unwillingness to do anything about it, have in the past prevented Canada from growing at a satisfactory rate in the absence of a strong lead from primary exports, but this need not be true in the indefinite future.”