The Lost Massey Lectures (40 page)

Internationalism can be carried too far, as Keynes pointed out. International trade can become economic warfare as nations attempt to export their unemployment by subsidizing the exports of goods and services on unwilling friends and neighbours. “But if nations can learn to provide themselves with full employment by their domestic policy . . . there need be no important economic forces calculated to set the interest of one country against that of its neighbours. There would still be room for the international division of labour and for international lending in appropriate conditions.” The international community is something added after a national order has been achieved and a society organizes its activities to bring all its citizens a satisfactory standard of living. A nation is entitled to defend itself and its citizens against the power drives of those nations that are willing to risk class warfare at home in order to finance the exports and investments that will secure balance-of-payment surpluses and commercial supremacy. The instability of such competition and economic conflict would effectively block all hopes of achieving a higher unity standing above but rooted in the sovereignty of individual nations. International
rules of conduct arise from a proper respect for the particular genius and character of one's neighbours and are defeated by the unrestrained pursuit of one's own interests.

The idea of the world economy is based on the assumption that there exists a one, true, efficient allocation of all the world's human and material resources. This purely mechanistic vision of efficiency, unproved and undemonstrable, cannot accept the intervention of the nation-state with its own ideas of how output and distribution should be pursued. More fundamentally, globalism cannot tolerate politics, the system by which people express their preferences and determine their priorities as a community.

Economic globalism will create a heartland and a heartland creates peripheries, the vulnerable outposts which no level of regional development assistance can reverse. The centre and the heart of the unification zone become strong and affluent as the outlying regions and countries decline in importance and in the capacity to control their own directions. The drain of material resources and skills accelerates, the flow to the core broadens and deepens.

The trouble with the superbloc thesis and the dream world of global efficiency is that it is neither a political nor an economic concept. It is planning, regimentation, bureaucracy. It eliminates initiative, incentive, and the famed freedom of opportunity for new men. One is reminded of Mussolini's grandiose vision of “the complete organic and totalitarian regulation of production with a view to the expansion of the wealth and political power of the Italian people.” Williamsburg goes further. It envisions the convergence of policy, planning, and production not for Italy alone but for Italy and the six other leading industrial nations in the proposed Western bloc.

When power is accumulated at the centre, nations are not through, as Professor Kindelberger suggests—they become merely
economic units. They are through as political units. The societies become pure economies, the quantitative and mechanical domains of technical coefficients, the inputs and outputs, a world which becomes a great pool of goods and services where the services of labour are separated from the will or needs of the labourer, the services of land and resources from national goals, and the services of capital from the motivations, ambitions, and desires of the proprietor.

Once political power is accumulated in a heartland, is it reasonable to expect that power will then be redistributed back again? Each nation has its own particular set of resources to deal with problems of inflation, unemployment, and poverty. Each nation must maintain its freedom and power to deal directly with them. It cannot be satisfied to wait the day when those who have the power have achieved their objectives nor can it expect that an affluent core will ever willingly decentralize.

Stagnation and inflation, unemployment and poverty are problems that must be faced at the level of the nation-state. The political power to combine and direct its resources, to define the priorities, must remain with the state.

There is a great and immediate urgency for growth and development everywhere. For this to be distributed fairly among all regions of the world, each nation-state must be able to do this job itself. Aid, capital, and technical assistance can be provided by others in supporting but not controlling roles.

Few can believe in a single, global, best allocation of inert and passive factors of production to achieve a purely material growth. Even fewer can expect that a nation can be self-sufficient in so complex and interrelated a world.

Canadians will agree to alliances and arrangements that will add to the strength and security of the Western world, but they will at the same time insist on maintaining the political power and
economic freedom to manage their own affairs. Canada must not become a periphery in a superbloc, a supplier of resources to a global centre. Centralization, whatever the advantages—and I see none—drains nations, checks their development, and thwarts their efforts to build the balanced economy that alone can provide sufficient scope and opportunity to our people.

Canada, by insisting on the distinction between the adaptations that are necessary to the security of the West and the pressures that serve simply to centralize power, will be a better ally by remaining an independent nation-state.

During her 1983 visit to Canada, Prime Minister Thatcher of Great Britain sharply reminded Canadians that they were members of
NATO
and had agreed at the summit meetings at Williamsburg in May of that year to support
NATO
policy and particularly the deployment of the Cruise and Pershing II missiles in Europe. It followed that we had no choice but to agree to the testing of the Cruise on Canadian territory; the visiting prime minister implied that that was little enough.

In fact, we agreed to a great deal more than the complete integration of Canadian defence policy with that of the United States, including the latter's stance in the negotiations on arms control with the Soviet Union. We also agreed to make our trade relations with the East compatible with the security interests of the West as defined at Williamsburg. The definitions of compatible economic relations remain to be spelled out.

In the economic field we agreed to align our policies with those
of the United States to promote an integration of economic performance in the two economies, as well as with the other leading industrial powers. This alignment included the acceptance of the American lead in restraining the growth of money and credit and in maintaining appropriate interest rates. We further agreed to reduce budget deficits by curtailing government expenditures in areas other than defence, since this would not be compatible with our
NATO
obligations and, since fluctuating exchange rates might provide a convenient escape hatch from the above onerous restrictions on Canada's freedom to operate independently, that door also was closed by the inclusion in the declaration of a commitment to move toward greater stability in the exchange markets.

A nation that agrees to all of this cannot be called an independent nation-state. Canada has agreed to all of this. Walter Stewart in
Towers of Gold—Feet of Clay
quotes a Mackenzie King statement of 1935 as saying, “Once a nation parts with the control of its currency and credit, it matters not who makes the nation's laws.” Canada's longest-serving prime minister was arguing against the control of the Bank of Canada, resting at that time in the private sector. Re-elected in the fall of 1935, he set in motion the legislation that would place the central bank and monetary policy firmly in the hands of the federal government, or so Mackenzie King thought.

Mr. King argued that the major function of a central bank is to regulate credit and currency in the best interests of the economic life of the nation. And he also believed that the best interests of the country could only be defined by the government of the day, elected by the people in response to the policies and platforms that had been put forward by that government. It certainly did not occur to him when he vigorously debated the Bank of Canada Bill in 1935, or moved the nationalization of the bank in 1938, that technocrats in the Central Bank would, or could, determine where
lay the best interests of the Canadian people. It was the King position that the problems facing a nation ultimately and always demand political, not technical, solutions, and monetary issues could not in any way be an exception.

A governor of the Central Bank accepts the mandate, the terms of reference, and the policy directions laid down by the government, or he can resign. The goals of the institution define the range and limits of its operations, and these goals are given by elected governments. If the group of seven industrial nations lays down the policy directions that will bring together interest-rate movement, growth of monetary aggregates, produce co-ordinated fiscal measures to reduce government expenditures and budget deficits, and stabilize exchange rates by controlling rate changes, then where is the freedom of elected governments to address the problems peculiar to their community? And yet this is the situation in which Canada finds itself presently. Can Canada, or even the others, be called independent sovereign states?

Confederation gave some three-and-a-half million Canadians political control over four provinces of British North America. While the Fathers of Confederation would have little faith in an ideological choice to develop the Canadian economy by government action, this option was not available, since none of the three levels of government had the money or credit available through domestic sources necessary to achieve reasonable rates of development.

Alexander Galt and George Brown in particular had pushed for Confederation on the grounds of a Canadian market of three-and-a-half million people, but such a market simply did not exist. Nova Scotia and New Brunswick were within the geographical space of New England manufacturers, and tariff protection could not match the disparity in transportation costs facing the fledgling industry of southern Ontario. Montreal, with its intimate links to
metropolitan England and a surrounding province with largely rural, agricultural, and subsistence economies in fact, did not provide that thriving level of demand that would justify investment in large- or even small-scale productive facilities.

The federal government could do little to promote growth of the general economy because it was swept up in the desperate urgency to build the transcontinental links in both the West and East needed to reinforce the political unification. In 1874, for example, we only spent the pitifully small sum of $206,000 in the mining, the forestry, and the fisheries sections of the economy. Megaprojects, then as now, captured the attention of our political leaders.

The provinces were even more feeble instruments of growth than the federal government. In 1874, the seven provinces spent the grand total of $10,000 on promoting mining development and $10,000 on strengthening agricultural production. In addition, the provinces had seen their revenues collapse from a total of $16 million in 1866, the year prior to Confederation, to less than $7 million in 1874, after seven years of settling into the new federal system. Of that $6.7 million, $3.8 million, or 58 per cent of provincial revenues, came in the form of federal subsidies. To underline the utter dependence of the four original provinces in the early years of Confederation, Ontario depended on federal grants for 47 per cent of its current revenue, Quebec for 48 per cent, Nova Scotia for 81 per cent, and New Brunswick for 92 per cent. Thus, provincial intervention to get the economy moving was simply not feasible. Vulnerability and dependence was the lot of the provinces in 1874, and vulnerability and dependence are not conducive to development.

With hindsight, it is still difficult to believe that John A. Macdonald, the Conservative prime minister of Canada, could have adopted any policy other than the so-called American solution,
protectionism and the Tariff of 1879. The challenge facing the Fathers of Confederation was to give economic substance and direction to the political structure of the new nation. By 1867, however, Canada was already fully integrated into the continental economy of the United States, for the free movement of persons, capital, and transfers of resource ownership was a daily experience. The complete mobility of factors is a much greater threat to sovereignty and national freedom than free trade in goods and services. In 1867, there was no significant barrier to the mobility of the factors of production, either resources or Canadian manpower. Thus the Macdonald government had to live with a Canada set in its economic ways, a supplier of raw materials to Great Britain until free trade in 1846, and then the supplier of largely the same resources to the United States under the terms of the Reciprocity Treaty of 1854-1866. When this was not renewed, the Canada of 1867 had cause to believe itself isolated and insecure.

Macdonald's tariff was mistimed, a hundred years too soon, by which I mean that it would be a more appropriate policy in 1983 than it was in 1879, when there were few industries and little domestic capital available for entrepreneurs and risk takers, and few Canadian entrepreneurs who remained in the country. In any event, the richer, more rapidly expanding—one could say exploding—American economy was an attraction for the best and brightest in Canada, and the flow of emigration to the south swelled dramatically in the last two decades of the nineteenth century. Our loss, of course, was the American gain.

On the other hand, protectionism in the United States and Germany had worked because there were large markets and mature industries to protect. In Canada, there were no strong industries except the resource and financial sectors. Protectionism is designed to support the infant firm, but given the size of markets, not even the infants that were to be helped by the tariff
could advance far beyond their local markets. Internal tariffs and transportation costs quickly limited expansion in an east-west direction, and south-north traffic remained heavy to the benefit of federal customs revenues.