Canada Damaged by Faulty Theories; K. McDonald

KennethMcDonald Canada Damaged by Fau_ty Theories TRADITIONALLY, Canada's economi(~ performance has trailed that of the United States. Markets and produc .. tivity suffer the consequences of a much smaller population spread thinly astride a narrow band that stretches 3,000 miles from New·· foundland to British Columbia. In recent years, however, Cana·· da'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 policymakers, and the economic establishment that ad·· vises them, stick manfully to theo·· ries which are plainly at odds with the facts. Mr. McDonald is a Toronto freelance writer on eco-· nomic and political affairs. For the la~man, the contradic tions appear the moment he asks himself some questions. How can rising prices be attrib uted solely to their historic ingredi ents-cost of capital, materials and processing, cost of labor and profit when the effe¢t of taxes, which are rising faster than the rest, is ig nored?

How can the provision of govern ment service~ be continually ex panded withoujta comparable rise in the cost of pro-yiding them? How can th~t cost rise be paid for except througn 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?

606 THE FREEMAN October 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 sup port 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 policymakers. But what if the establishment and the policymakers refuse to listen? AlternativesIgnored There is ample evidence that an swers to the layman's questions, and alternative policies that are sug gested by the answers, have been presented to policymakers. Expla nations that fit the facts are avail able to the economic establishment in books and discussion papers. Of any sign that the alternative poli cies 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 ofwhom are not old. Prominent among the new men in Canada are Verne Atrill and Wil liam 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; ev erything must be .paid for; obliga tions must be met. That fundamental truth is ob scured every day, but especially at election times, by politicians whose business it is to suggest the con trary. "The state," as Frederic Bas tiat reminded us a century and a half ago, "is that great fiction by which everyone seeks to live at the ex pense of everyone else." The purpose of this article is to bring the new men's work to the at tention 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 col lectivist 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 complex ities of the economy it presumes to direct, is deaf to argument as it steers 1982 CANADA DAMAGED BY FAULTY THEORI~S 607 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 pri vate property").! Making Socialism Work Unlike the men of the establish ment, the new men recognize that combining man's creative instincts with his desire for individual free dom, and doing so within a society that still permits him a say in how he is governed, is a very complicated business.

In their books2 they are concerned not with dismantling government, for there are many things that only government can do, but with mak ing 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 in·· dividual entities, which must retain solvency as a condition of existence, to governments which are increas ingly insolvent, threatens the sur vival 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 qecome the mainte nance of inflat~on so that the gov ernments they $erve can meet their obligations.

His Objectiv~ Economics demon strates the r~Hationship between economics and; natural law which engaged the ~8th-century physi ocrats. Its essential difference from the establishment's subjective eco nomics, which i tries to insert deci sion-making man at the center of economic events, is that it shows how those events o~cur and proves the demonstration Iby extracting, over a seven-year peIiiod, the appropriate ratios from the!balance sheets of the 300 companies1in the Composite In dex of the Toronto Stock Exchange. Like Atrill,! Krehm exposes the fallacies that ~og the economic es tablishment. Both men show how the tool of matheIlnatics, which the es tablishment has misused to deter mine equilibrium points that do not in fact exist, apd which are then ap plied to the c6nstruction of equally fictitious econ(j)metricmodels, can be used properly ~o our advantage. Both have reasoned their way from the establishIhent's obsession with Newtonian ca~culus, and with look ing upon priQe as an invariant, to the realization that the right tool is tensor calcul-qs as used by Einstein in his develop,lmentof relativity the ory.Atrill se~s the "major mathe matical probl,ms posed by Objective Economics and the dimensionless 608 THE FREEMAN October science of observation of which it is a part" as forming the basis for an understanding between East and West. "I believe that neither Marx ian catechism, nor the Leninist po litical eclecticism, nor the Stalinist brutality, nor the Maoist dogmatism will be able to stop some of the com munist world's great intellects from involving themselves in those prob lems."

Krehm takes us through the de velopment of physics and its appli cation 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 tradi tional components of price (supply and demand, materials, capital, wages), the establishment is in the same boat as pre-Einstein physi cists. "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 seek ing 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 catch all 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 offixed 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 under standing of the forces inherent in mass, matter and energy, so must 1982 CANADA DAMAGED BY FAULTY THEORIES 609 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 Rev enue Dependent Public Sector and How It Might Revitalize the Process of Governing." Their theme is the need to con struct a new model of public financ ing that allows citizens some choice. Instead ofthe appropriations method, which accords to a small group the power to decide a broad range of so cial policies and consequently the appropriations which it then forces Parliament to approve, revenue de·· pendency would link many of the government services to cost by pric·· ing 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 over heads of the government depart ments 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 perma. nent 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 defini tion of a free sbciety, "consisting in nothing else b~t the enforcement of free contracts."3 Revenue dependency would re move from m~ny of government's activities theiripresent advantage of monopoly. Required to pay their way in competition with private enter prises, the departments concerned would have to trim their costs ac cordingly; esti~ates would be based on true costs I rather than on as sumptions that merely added incre ments to those!of the year before.

Trust to Comp~tition In the writers' view, substituting competitive for the present monopo listic delivery 9f services would yield dramatic gains in productivity. Real responsibility, would devolve upon departmental imanagers. Instead of decisions being pushed up to the po litical level, many would be dele gated to, and! made by, the people responsible fqr the activities. De partmental m~nagers would be un der the same! compulsion to econo mize as their competitors in the private sector; The introduction of price and choice to government services would stifle the temptation upon politi cians to prom~se more than they can deliver and toiforce upon the citizens "services" that are neither asked for 610 THE FREEMAN 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 jurisdi~ tional disputes between three levels of government, the introduction of revenue dependency at all levels would show which was most effi cient 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 con tribute to a more functional feder alism."

The Methods Are Unsuited The new men have advanced al ternatives to theories that have proved faulty. The layman's hope is that policymakers will examine the alternatives with open minds and have the courage to test them. , -FOOTNOTESIHilaire Belloc, The Servile State (Indianap olis, Ind.: Liberty Classics, 1977). 2Verne Atrill, How All Economies Work and The Freedom Manifesto (Toronto: Dimension less 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 Econ omy, Babel's Tower,and How to Make Money in a Mismanaged Economy (Toronto: Thornwood Publications, 1970, 1975 and 1977). 3Belloc,op. cit. IDEAS ON LIBERTY IN PRACTICE, therefore, a socialist society is one in which the vast major ity of men are controlled by the tiny minority which has power to direct their economic activities. We might put the matter differently by saying that the socialist dream is based on the delusion that men's other free doms will be enhanced if they are deprived of economic liberty. By eliminating economic liberty and replacing it with a planned economy socialists hope to usher in a brave new world.

It hasn't worked out that way in practice because the theory is all wrong. "Economic control is not merely control of a sector of human life which can be separated from the rest," writes F. A. Hayek, "it is control of the means for all our ends." Eliminate economic liberty in a society and you begin to institute a master-slave relationship. EDMUND A. OPITZ, "Socialism-Substance and Label"