Freeman

ARTICLE

Canada Damaged by Faulty Theories

OCTOBER 01, 1982 by KENNETH MCDONALD

Mr. McDonald is a Toronto free-lance writer on economic and political affairs.

Traditionally, Canada’s economic performance has trailed that of the United States. Markets and productivity suffer the consequences of a much smaller population spread thinly astride a narrow band that stretches 3,000 miles from Newfoundland to British Columbia.

In recent years, however, Canada’s relative performance has slipped markedly. The Canadian dollar has fallen, inflation is much higher in Canada, and the budgetary deficit, in proportion to population, is much larger than that of the U.S.

Yet Canada’s policy-makers, and the economic establishment that advises them, stick manfully to theories which are plainly at odds with the facts.

For the layman, the contradictions appear the moment he asks himself some questions.

How can rising prices be attributed solely to their historic ingredients—cost of capital, materials and processing, cost of labor and profit—when the effect of taxes, which are rising faster than the rest, is ignored?

How can the provision of government services be continually expanded without a comparable rise in the cost of providing them?

How can that cost rise be paid for except through taxes?

How can wages ever “catch up” with the recipients’ cost of living when no account is taken in those wages of the unseen government services from which the wage earner benefits?

So long as such services are un-priced, and assumed to be either free or supplied at someone else’s cost, what is to stop society’s pressure groups from demanding more of them?

How can the raising of interest rates bring prices down when the higher cost of borrowing pushes up not only prices but also the cost of the unpriced government services that prices include?

When elected representatives are regarded primarily as redistributors of income, how can they fail to support the structure which enables them to redistribute it?

In a democracy, changes in policy, and in establishment thinking that shapes policy, are presumed to come about as a result of arguments that persuade the policy-makers. But what if the establishment and the policy-makers refuse to listen?

Alternatives Ignored

There is ample evidence that answers to the layman’s questions, and alternative policies that are suggested by the answers, have been presented to policy-makers. Explanations that fit the facts are available to the economic establishment in books and discussion papers. Of any sign that the alternative policies or the explanations have been given serious consideration, there is no evidence at all.

Let us call the innovators the new men, though they are not young, to distinguish them from the men of the establishment, many of whom are not old.

Prominent among the new men in Canada are Verne Atrill and William Krehm, who are businessmen and economists, and Arthur Bailey, who is a senior civil servant.

Running through their work is a common theme: nothing is free; everything must be paid for; obligations must be met.

That fundamental truth is obscured every day, but especially at election times, by politicians whose business it is to suggest the contrary. “The state,” as Frederic Bastiat reminded us a century and a half ago, “is that great fiction by which everyone seeks to live at the expense of everyone else.”

The purpose of this article is to bring the new men’s work to the attention of a discriminating audience in the hope that its significance will come to be understood in time.

It is no exaggeration to say that there is not much time left. If the present policies are not changed, Canada’s transformation into a collectivist state, consuming fatal quantities of what Atrill calls our precious economic energies, will have passed the point of no return.

The establishment, though it makes much play with the complexities of the economy it presumes to direct, is deaf to argument as it steers toward the simplest solution of all: the age-old institution of Hilaire Belloc’s Servile State (“Socialism’s essence consists in vesting in trust with the politicians what is now private property”).[1]

Making Socialism Work

Unlike the men of the establishment, the new men recognize that combining man’s creative instincts with his desire for individual freedom, and doing so within a society that still permits him a say in how he is governed, is a very complicated business.

In their books[2] they are concerned not with dismantling government, for there are many things that only government can do, but with making it work better than it does now.

Atrill explains how the solvency of entities is reflected in their debt structure ratios: the ratio between what is owed to, and owed by, the entity. All obligations are met, if only by the creditor. The wholesale transfer of economic energy from individual entities, which must retain solvency as a condition of existence, to governments which are increasingly insolvent, threatens the survival of individual enterprise.

Praising the money market as “man’s noblest creation,” Atrill shows how the private banking system has been subverted by central banks (Bank of England, Bank of Canada, Federal Reserve Board) whose prime function has become the maintenance of inflation so that the governments they serve can meet their obligations.

His Objective Economics demonstrates the relationship between economics and natural law which engaged the 18th-century physiocrats. Its essential difference from the establishment’s subjective economics, which tries to insert decision-making man at the center of economic events, is that it shows how those events occur and proves the demonstration by extracting, over a seven-year period, the appropriate ratios from the balance sheets of the 300 companies in the Composite Index of the Toronto Stock Exchange.

Like Atrill, Krehm exposes the fallacies that dog the economic establishment. Both men show how the tool of mathematics, which the establishment has misused to determine equilibrium points that do not in fact exist, and which are then applied to the construction of equally fictitious econometric models, can be used properly to our advantage.

Both have reasoned their way from the establishment’s obsession with Newtonian calculus, and with looking upon price as an invariant, to the realization that the right tool is tensor calculus as used by Einstein in his development of relativity theory. Atrill sees the “major mathematical problems posed by Objective Economics and the dimensionless science of observation of which it is a part” as forming the basis for an understanding between East and West. “I believe that neither Marxian catechism, nor the Leninist political eclecticism, nor the Stalinist brutality, nor the Maoist dogmatism will be able to stop some of the communist world’s great intellects from involving themselves in those problems.”

Krehm takes us through the development of physics and its application to economics. Showing how the efforts of central banks to “stabilize” prices are “a simple rewrite of Boyle’s Law linking the volume, pressure and temperature of a perfect gas” he shows how, by ignoring new subsys tems that intermesh with traditional components of price (supply and demand, materials, capital, wages), the establishment is in the same boat as pre-Einstein physicists.

“There is, for example, nothing more obvious to common sense than the invariance of time and space. Experiment, however, proved that the speed of light was the invariant; and to reconcile that with the known laws of physics Einstein showed that time and space were not invariant. The case of price is similar . . .

“Economic science should be seeking the real invariants of the new world that is evolving around us. But by setting up price as an absolute invariant, economists have made it impossible to carry on any serious investigation of our problems . . .

“Instead of dealing with the catchall concept of ‘inflation’, we should have examined the very different factors that make for price rise. We should have studied the circuits through which these operate, and how they intermesh. Had we plotted these relationships, we could then have turned to the computer to help us ascertain how much each of them did in fact contribute to the price bulge. Such an effort, however, was ruled out by our faulty theory.”

A Host of Contradictions

Faulty theory has led us into a host of contradictions. For example, civil service pensions are indexed to the cost of living while business profits are tied to the original rather than the replacement cost of fixed capital. Because government services are unpriced, the benefits in wages and salaries are unseen; their recipients try to keep up their take home pay while rejecting the tax increases that should pay for the benefits—taxes which are in everybody’s cost and which, while unpaid, consume the society’s capital.

Both Atrill and Krehm are drawn to physics for guidance out of the blind alleys into which faulty theory has led us. Just as the concept of space was changed by an understanding of the forces inherent in mass, matter and energy, so must the concept of an idealized market be changed to accommodate the non-market subsystems that distort it; new equations are needed.

How Arthur Bailey and Douglas Hull apply these concepts to the government sector is conveyed by their book’s sub-title: “A More Revenue Dependent Public Sector and How It Might Revitalize the Process of Governing.”

Their theme is the need to construct a new model of public financing that allows citizens some choice. Instead of the appropriations method, which accords to a small group the power to decide a broad range of social policies and consequently the appropriations which it then forces Parliament to approve, revenue dependency would link many of the government services to cost by pricing them.

Thus to the extent that enough citizens judged the benefits to be worth the price, and bought them, the services would be self-financing, as would the administrative overheads of the government departments concerned. (This would not preclude citizens who were in a state of dependency from being subsidized individually to secure the provision of common services.)

Political leaders and their permanent advisers would be relieved of the hopeless task of trying to plan the unplannable; government would be concerned with defining the limits and structures within which the citizens could go freely about their business. This meets Belloc’s definition of a free society, “consisting in nothing else but the enforcement of free contracts.”[3]

Revenue dependency would remove from many of government’s activities their present advantage of monopoly. Required to pay their way in competition with private enterprises, the departments concerned would have to trim their costs accordingly; estimates would be based on true costs rather than on assumptions that merely added increments to those of the year before.

Trust to Competition

In the writers’ view, substituting competitive for the present monopolistic delivery of services would yield dramatic gains in productivity. Real responsibility would devolve upon departmental managers. Instead of decisions being pushed up to the political level, many would be delegated to, and made by, the people responsible for the activities. Departmental managers would be under the same compulsion to economize as their competitors in the private sector.

The introduction of price and choice to government services would stifle the temptation upon politicians to promise more than they can deliver and to force upon the citizens “services” that are neither asked for nor needed: the test would not be one vote every four or five years, but millions of votes every day.

In a federal system, where much time and effort is wasted in jurisdictional disputes between three levels of government, the introduction of revenue dependency at all levels would show which was most efficient in the delivery of interlocking or competing services; many of the present redundancies would be eliminated. In the writers’ words: “Under revenue dependency the most appropriate scale of operations would be settled more by public choice than by constitutional negotiations. Thus increased public choice could contribute to a more functional federalism.”

The new men have advanced alternatives to theories that have proved faulty. The layman’s hope is that policy-makers will examine the alternatives with open minds and have the courage to test them. []


1.   Hilaire Belloc, The Servile State (Indianapolis, Ind.: Liberty Classics, 1977).

2.   Verne Atrill, How All Economies Work and The Freedom Manifesto (Toronto: Dimensionless Science Publications, 1979 and 1981). A. R. Bailey/D. G. Hull, The Way Out (Montreal: The Institute for Research on Public Policy, 1980). William Krehm, Price in a Mixed Economy, Babel’s Tower, and How to Make Money in a Mismanaged Economy (Toronto: Thornwood Publications, 1970, 1975 and 1977).

3.   Belloc, op. cit.

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October 1982

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