Free-market ‘rationalism’ turned Canada from champ to chump

Posted on February 26, 2012 in Policy Context

Source: — Authors: – business
February 26, 2012.   By Jim Stanford, Postmedia News

In the initial postwar decades, Canada’s economy experienced a historic leap forward, qualitatively and quantitatively. Strong business investment, rapid industrialization, and massive spending on public infrastructure propelled growth and productivity. We went from being poor cousins to our American neighbours to virtual equals: productivity in the business sector rose from 70 per cent of U.S. levels in 1946, to 90 per cent four decades later. And as Canada built a stronger social safety net and more equal income distribution, the quality of life for most Canadians surpassed U.S. levels.

In the 1980s, Canadian policymakers became concerned with how to maintain that momentum. The famous Macdonald Commission, influenced heavily by market-oriented economic analysis, made two core recommendations in this regard. Canada’s social-welfare programs should be rationalized to reinforce labour market discipline. And we should pursue comprehensive free trade with the U.S., to expose our firms to the full force of competition and eliminate our remaining 10-percent productivity disadvantage. The proposals were fiercely debated, but in the end implemented. The Macdonald Commission’s 1985 report heralded a new era of economic rationalism; it might be less “compassionate” than previous policy frameworks, but would surely deliver the productivity goods via the invisible hand of a freed market.

But no sooner had the Macdonald Commission helped spur a historic turn in Canadian policy than Canada’s relative productivity began to fade. The more social programs were curtailed, the more we faced global competition, the more sectors were deregulated, and the deeper taxes were cut, the worse Canada’s productivity performance became. Today we’re back where we started: poor cousins again, with businesssector productivity equal to only 70 per cent of U.S. levels, and sinking.

In terms of innovation, our performance has been even worse: lagging far behind the U.S. and most of the industrialized world. As we focus on extracting and exporting evermore unprocessed minerals, our capacity to develop innovative products, services, and processes for the world has withered away. The current tribulations of Research In Motion (like Nortel before it) reflect much larger problems: The failure to develop a successful national innovation system, the failure to nurture Canadianbased global champions, the failure to penetrate global markets with anything other than what happens to be buried beneath our feet.

Market-oriented economists struggle to identify remaining residual “barriers” or “frictions” that must explain the failure of their whole policy approach to unleash promised efficiency. But what if the starting assumption of the “rationalist” model – namely, that the unconstrained operation of private markets is the most efficient, innovative way to organize economic activity – is not justified? What if, in fact, markets work more productively and creatively when they are guided, supported and constrained, rather than simply being unleashed? What if the best approach is to challenge and direct business to more productive and innovative outcomes, rather than coddling and privileging it?

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