Economics 304, Capitalism in Canada

Updated Jan 25, 2013

INSTRUCTOR: Robin Neill, PhD. (Econ. Duke)
Department of Economics, University of Prince
Edward Island and Carleton University

E-mail: rneill@upei.ca
Course web page http://people.upei.ca/rneill
Text: on line course notes

Please take note.

The text [course notes] is constantly, if marginally, under construction

TIME: Monday, Wednesday, Friday, 12:30pm to 1:20pm.
PLACE: Main Building, 113
OFFICE HOURS: 224 Main, 9:45am - 10:30am daily and
by appointment at other times.

To access the course News Forum: in the following order
..........click on "NEWS FORUM" below.
..........On the left hand column: click on "Economics 304"
..........That should do it.

NEWS FORUM

Barring student requests to deal with special topics, or emerging
current issues, the topics in this course will be those indicated
below.

Introduction to Economics 304: Canadian Economic Problems

Economics 304 took on its present form in 2008 when the Great Recession was getting well underway.
Formerly it had reflected the information environment of the Great Moderation during the last two
decades of the twentieth century and into the first decade of twenty first century. Fluctuations
in GDP dropped suddenly in the 1980s and stayed low. The advent of a new all-purpose technology,
computerization of production and information flows, generated rapid expansion in most goods and
services sectors of the economy. Expansion was aided, or perhaps putatively explained by,
deregulation of markets and downsizing of governments. The stagflation of the 1970s and 1980s had
been defeated. Productivity in manufacturing, and, especially, in information based services
increased. "Just-in-time" delivery eliminated inventory cycles. Computerized information began its
reformation of economic activity and institutions. Finally, the importation of consumer goods from
Asia and other newly developing regions kept prices down. The rate of inflation was manageable.

This late twentieth century burst of expansion took place on a global scale. Transnational factories and unregulated transnational markets, epitomized by computerized, instantaneous, “24/7" transactions in financial assets, led the way in globalization of substantial elements of economic activity.

It was a time of Neoconservative euphoria. That the so-called communist system of the Soviet Block had clearly failed was signaled in 1988 by dismemberment of the Soviet Union itself and by the fall of the Berlin wall. Democracy and the capitalist market system seemed to be spreading over the world. Indeed, the “end of history” was announced insofar as particular correlated economic and political systems had achieved the ultimately desirable specific form of their genus. There would be no more evolution in that respect.

In that information environment, Economics 304 adopted Patrick Luciani's Neoconservative text, Economic Myths, and dwelt on micro economic government failures and how they could be avoided by moving control of economic activity to the private sector. In 2008, however, with the onset of the Great Recession, the information environment featured a new set of reference points.

Neoconservative euphoria began to subside in the first decade of the twenty first century. A “Dot Com” bubble collapsed at the beginning of the decade. The rise of dubiously democratic and definitely non-democratic states in the Middle East and Asia, was signalled by the beginning of a war on terror following “9/11". Clearly, economic globalization was not going to be followed by political globalization over any stretch of the planning time horizon. But the coup de grace was delivered to Neoconservative adulation of unregulated markets with the collapse of price bubbles in housing and financial asset markets, and the advent of the Great Recession.

Some of the characteristics of the Great Moderation remained in place. The recession instantaneously spread from the United States to the rest of the world. Globalization was still a fact. Further, massive government bailouts of investment and commercial banks, mortgage brokers and bankrupt automobile manufacturers, together with Keynesian counter cyclical "stimulus", generated an unsustainable government budget deficit. The “crisis of the welfare state” [In part associated with an alleged "ageing population sunami"], in the face of which Neoconservative governments had slowed the growth of the public sector in the 1990s, loomed even more menacing in the 2000s. Indeed, by 2011 (with the recession still in place, renewed oil price shocks, agricultural failures, and massive increases in the money supply) inflation and inflationary expectations reappeared as a possibility. Two roots of Neoconservative policy still faced governments: a looming need to shrink the money supply and an immediate need to effect budget consolidation. Both conflicted with a Keynesian thrust of spending to overcome the Great Recession.

The Great Recession was of a different kind. Clearly the under-consumption that was thought to
underlie the Great Depression of the 1930s was not to blame. In the United States, ground zero of
the recession, the saving rate had fallen below zero. Relying on debt, consumers had a marginal
propensity to spend greater than one. The structural unemployment that was thought to underlie the
stagflation of the 1980s was present, but in a global as well as a national context. Global imbalance
in the form of borrowing and consuming in the United States and production and saving in Asia
generated transnational structural unemployment. This new structural imbalance was maintained by
dysfunctional transnational financial markets and failures in the equilibrating mechanisms of
transnational trade. Further, the Great Recession featured an unsustainable debt to GDP ratio. The
"crisis of the welfare state” left little room for debt-financed GDP stabilization over a period of
persistent unemployment. In particular, increase in the average age of populations has been
a major factor in the approach, if not the arrival, of a "fiscal cliff" in the EuroAmerican economy.
The phenomenon has been recorded in the National Transfer Accounts

All of this played and plays a role in the evolving problems of the Canadian economy. Canada is a small, open, regionally differentiated economy. Its economic problems are the problems of a more or less capitalist global system refracted through the prism of a particular set of local conditions. Accordingly, understanding Canadian economic problems begins with an understanding of the problems of contemporary transnational economic organization and activity. The first three in this series of lectures deal with the nature and consequences macroeconomic instability in general, but with special reference to the Canadian case. The middle lectures deal with Canadian examples of market and government failures that carried over from the Great Moderation period. Mostly they treat problems associated with growing national and provincial budgetary entitlements. A lecture on externalities and environmentalism is an exception. The third and second to last lectures deal with the interrelation of unstable global financial markets, global imbalances, commercial and exchange rate policy related to these, and their relation to unsustainable debt-to-GDP ratios. The lectures conclude with comments on the precarious distinctive success of Canada in dealing with the layered problems of the Great Recession. The last lecture deals with a general attack on the theory rationalizing the capitalist market system – an understandable emerging element in the information environment given the market failures exposed by the Great Recession.

In short, neither Keynesian nor Neoconservative policies can meet the current situation. Both systems feature static analysis ill suited to the problems of ongoing technical and institutional change. They specify institutions, but not ongoing change in technology and institutions. It is the latter that is generating relatively high unemployment in the North American , if not the EuroAmerican, economy and is restructuring global economic activity.

The Approach to the Subject in Each Topic

.........The First Fundamental Theorem of "welfare economics" states that any competitive equilibrium or Walrasian equilibrium leads to a Pareto efficient allocation of resources. the Second states the converse, that any efficent allocation can be sustainable by a competitive equilibrium. At the same time the Theory of the Second Best states that when one optimality condition in a model cannot be satisfied, it is possible that the next-best solution involves changing other vairables away from the ones that are usually assumed to be optimal. The optimality conditions assumed in a competitive market are (1) large numbers of producer/sellers, (2) homogeneous goods in all markets, (3) perfect knowledge for agents on both sides of all markets, and (4) perfect mobility in and out of all markets for all agents. Each topic will posit an optimality condition or some optimality conditions that are not satisfied, and will point to the removal of other optimality conditions associated with a next-best condition.

TESTING: Time permitting here will be four in-class tests, worth 40% of the final grade.
..................There will be a final examination worth 60% of the final grade.


Topic 1.1: The Capitalist Market System:Successes and Failures
Topic 1.2: Recessions: the Path to Recovery?
Topic 1.3: The Nature of Support: Employment Insurance
Topic 1.4: Micro Market Failures: Government Monopolies
Topic 1.5: Micro Market Failures: Externalities: Carbon Tax and Cap-and-Trade
Topic 1.6: Micro Market Failures: Asymmetical Knowledge: Healthcare
Topic 1.7: A Very Long Run Market and Government Failure: Equalization
Topic 1.8: The Very Long Run: Unstable Foundations: Post Secondary Eduation
Topic 1.9: Transnational Markets: a Made-in-Canada Price for Gasoline
Topic 1.10: Recessions, Exchange Rates, and Commercial Policy
Topic 1.11: The Great Recession and Budget Consolidation: Canada, 2011ce
Topic 1.12: The Capitalist Market System and Behavioural Economics