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Why Study Economic History?

• We want to find out what life was like before our
• Knowing about the past informs us about the
present and gives us clues about the future.
• Knowing why things happened like they did is
• Since the real world is too complex to be
understood through a simple description of
events, we resort to using theory.
• Economic theory explains the working of a
simplified, abstract representation of the real
world, and the conclusions drawn from this
analysis are then applied to the real world (very
• Theory can help us understand history and
history can help to validate or suggest the need to
modify or correct theory. 
• Economic history is essentially the study of economic
growth and development.
• Economic growth = an increase in the overall
productive capacity of an economy.
• Economic development =  a change in the structure of
production and the corresponding composition of
• There’s no single, unified theory of long-term economic
• Instead, a number of different approaches have been
and are in use today.   
Classical Theory

• Developed by followers of Adam Smith in the early
19th century in Britain.
• Ricardo, Malthus, Mill.
• Expanding output required larger and larger
quantities of a variable input – labour – to a fixed
input – land.
• Diminishing marginal product meant total output
would increase at a decreasing rate.
• Average product (output per worker) would fall.
• In the long run, average product would fall until it
reached a subsistence level – just enough output
to keep the work force from declining due to
• This is how economics came to be known as the
dismal science.
Marxian Analysis

• Karl Marx, Das Kapital
• Under his labor theory of value, the direct value of a
commodity stems solely from the socially necessary
labour time invested in it.
• Capitalists do not pay workers the full value of the
commodities they produce –they exploit the workers.
• The gap between the value a worker produces and his
or her wages are a form of unpaid labour, known as
surplus value.
• Workers become alienated from the commodities
they produce – the immiseration of the
proletariat. As a class, they are at conflict with
the capitalists.
• They revolt against the capitalists and take over –
dictatorship of the proletariat.
• A new communist economic order results – the
end of capitalism.

• Influenced post-WWII economic thinking.
• Emphasized the importance of real rates of capital
formation (investment), saving and the
capital/output ratio.
• Capital accumulation led to increased output.
• Higher levels of aggregate demand needed to
validate the increase in capacity.
• Investment and maintaining full employment are
the keys to economic growth.
Neoclassical Theory

• Output could increase from increases in labour
and capital and improvements in both through
technological advances.
• Technological change would offset diminishing
returns, making possible increases in average
incomes over time.
• One of the weaknesses of this approach is its
failure to explain the sources of such
technological change. 
The Staples Approach/Theory

• First conceived by W A Mackintosh
in 1923.
• Brought to the fore by Harold Innis
(pictured here) in 1930.
• This is a truly Canadian approach
to understanding our economic and political
• A staple is a commodity that is “extracted” and
exported in unprocessed form in large quantities.
• Essentially, staples are natural resources and wheat.
• Because they are primarily exported, prices depend on
external (foreign) demand and staple exporters are
subject to the whims of overseas markets.
• Canada’s staples: fish, fur, forests, farming (wheat) and
fuel (what I call the Five Fs of Canadian economic
• The characteristic of the staple determines the
extent of development.
• For example, in the US, the cotton staple led to
settlement, regional population growth and
development around and beyond the staple.
• The fur trade did not require settlement (trading
posts here and there) so there was no population
growth and no large-scale economic development.
• Staple production can lead to linkages:
• Backward linkages: building infrastructure to help with
the extraction of the staple (roads, canals, rail lines
• Forward linkages: processing the staple out of its raw
form before export (saw and flour mills to process
lumber and grain etc.)
• Final demand linkages: local demand for finished goods
(furniture made locally from local lumber)
• An overconcentration in staple extraction can lead to
backward linkages but not necessarily to any great
forward or final demand linkages.
• This can retard any diversification out of the staple.
• You can also become myopic about particular staples –
if world tastes change, you can get stuck in a “staples
trap,” stuck producing the wrong staple, if you can’t
adapt to changing demand.
• Innis argued that Canada developed as it did because
of its staple commodities that were exported to Europe.
• This trading link cemented Canada's cultural links to
• The search for and exploitation of these staples led to
the creation of institutions that defined the political
culture of the nation and its regions.
• Different staples led to the emergence of regional
economies (and societies) within Canada.
• For instance, the staple commodity in Atlantic Canada
was cod. This industry was very decentralized, but also
very co-operative.
• In western Canada the central staple was wheat. Wheat
farming was a very independent venture, which led to a
history of distrust of government and corporations in
that part of the country.
• To Innis, it was the fur trade that created the
geographical boundaries of Canada.
• The early links between the Canadian interior and
eastern ports led to Canadian unity.
• However, the importance of fur as a staple product also
resulted in the northern half of the continent
remaining dependent on Britain for trade and thus
essentially British for so much of its history.
• Staples theorists believe that Canada’s
dependence on staples has left us in a dependent
position – as a periphery (or hinterland) to a core
(or metropolis) where our staples are exported.
• They believe that Canada has always been a
colony: first of France, then of Britain, then of the
• We export natural resources in raw form.
• They are processed in the core.
• We import the finished consumer goods.
• Instead, we should have processed them ourselves
to gain the value added which has accrued to the
foreign processor.