The National Policy, Neoclassical Economics, and the Political Economy of Tariffs

The National Policy, Neoclassical Economics, and the Political Economy Of Tariffs IAN PARKER A new country presents certain definite problems which appear to be more or less insoluble from the standpoint of the application of economic theory as worked out in the older highly industrialized countries. Economic history consequently becomes more important as a tool by which the economic theory of the old countries can be amended. - Harold Innis, 1929 Where capitalism followed the more rigid channels of surviving commercialism or where it arrived later in a highly centralized state, it was a part of governmental machinery. In Germany, Italy, and Japan and in the British Dominions the state became capital equipment. - Harold Innis, 1938 The voice of the economist is heard throughout the land....A new religion has emerged. The acute religious controversies of the past have given way to economics. One would like to believe that the continuous and rapid growth was important to the extension of knowledge ....While we have established the new priesthood to which every venture must in some way pay tribute, our religion is sufficiently young to permit of disputation, and I may be permitted to point to some trends which may not be in every way conceded. - Harold Innis, 1941 Journal ofCanadian Studies Vol. 14, No. 3(Automne1979 Fall) The centenary of the inauguration of the ''National Policy'' is an opportune occasion for a theoretical and historical consideration of the political economy of tariffs in a Canadian context, in several respects. The National Policy in fact involved a range of policies, related to consolidation and extension of territorial control, development of communication, articulation of state fiscal and financial structures, disposition of land, encouragement of immigration, and settlement, but of these policies it has been argued that the protective tariff was ''the element which was to become most closely identified with the term 'National Policy,' " and that its replacement of a primarily revenue-oriented by a primarily protectionist policy of high tariffs ''has continued with few basic changes until very recently.'' i Canadian tariff policy since 1879 has been variously viewed as a significant element in the development (indeed, in the continued existence) of Canada as a nation; as a crucial factor in the expansion of foreign ownership and control of basic Canadian resources and industries; as a means of exploitation of class by class and of region by region; and, by adherents of conventional neoclassical economic theory (with its strong methodological and ideological bias toward a belief in the efficacy of ''free markets, free trade, and the bracing effect of the winds of competition''), as a source of inefficiency, lowered standards of living , and retardation of Canadian economic ·development . A review of some aspects of the political economy of tariffs is hence an appropriate way of marking the centenary of the National Policy. The occasion is also appropriate, however, in another respect. In recent years, there has been increased discussion of the advantages for Canada of shifting to a policy of free (or at least freer) trade, either generally or within a continental freetrade area or a "common market" supposedly analogous to that of the European Economic Community. Since this discussion h~s included material, authorized for publication by the Economic Council of Canada, which strongly advocates a shift toward freer trade, not on the basis of intensive empirical or statistical research but rather by appeal to arguments which can be found in 95 virtually any standard undergraduate textbook in neoclassical trade theory, there are strong reasons for examining the assumptions on which that theory rests and their applicability to the Canadian situation, in relation to a contemporary policy issue of considerable importance. The purpose of the present paper is to conduct a critical evaluation of the neoclassical theory of tariffs and of its limitations when directly applied to Canadian historical experience, and to suggest some ways in which Canadian economic history can contribute to the development of a more adequate theory of the political economy of tariffs. In the paper, considerable reference has been made to the interpretation of Canadian economic history elaborated by Harold Innis, not because Innis was necessarily correct in all of his specific historical judgments, but because his...