Author: Vincent Geloso

In the course of my thesis and other research, I’ve been forced to think about why Canada and the United States took such different economic routes before the early 20th century. And the more and more I think about it, the more and more I think the argument cannot avoid the importance of public goods.

In 1763, when Quebec was conquered by the British, the population was concentrated along the St-Lawrence seaway. In this area, the population density stood at 8.91 inhabitants per square mile.[1] This was well below the average figure for the New England colonies and even the more remote colonies of the American south. But land was as available in Quebec as it was in the American colony, so why do wee such important differences for density figures?

In an economy where land is cheap and labour is dear (i.e. few workers, lots of acres), population density would be a function of the production of “public goods”. By public goods, I mean grist mills, roads and other institutions needed to connect producers of final goods with consumers. In the United States (more precisely, in New England), the land ownership system was free and settlements would have been based on whether or not someone provided these goods. A landlord would have to attract farmers in his settlement area by producing public goods (grist mills, roads etc). If the public goods provided were of poor quality or too expensive, the peasants would have moved away to another settlement.

In Canada, the game was different. The French implanted a system of seignorial tenure which the British kept intact up to 1791 and kept partially in place up to 1854. The seigneurs controlled access to the land in the colony and to the industries settled on his land. However, they had to produce a minimum of public goods by law (they had obligations towards the censitaires – the renter). The censitaire could not go to other seigneurs to turn his wheat into flour, he could not sell his land either unless he paid a 12.5% tax of the sale value to the seigneur. In such a situation, seigneurs had no competition from other seigneurs since peasants could hardly move away.  It meant that by controlling supply, a seigneur could enact a redistribution of income towards himself without necessarily producing public goods and services to match the size of the transfer. More importantly, it incentivized a thinner distribution of the population over the territory of the colony.

I say this because in such a situation, politically connected actors in quest of rent-seeking (read: obtain privileges) were incited to lobby for a seignorial title. Landlords obtained monopolies over land areas given by the crown and this resulted in dispersing population rather than concentrating it. But this meant that economies of scale could not be exploited, that regional markets were isolated (this prevented specialization and further economies of scale) and that landlors had no incentives to improve the price/quality ratio of the public goods they were producing. As soon as they did produce a grist mill (which was a condition of obtaining a seigneurie), they did not have to care about much.

Spreading the population more thinly meant a poorer quality of public goods, which hindered economic growth on top of the effect of isolating regional markets. This made it harder for the colony to develop economically  and probably created a path dependency which affected the rest of Canada and set the colonies on a different path of economic change and performance than the United States.

Dans le débat sur la charte, j’ai entendu plusieurs niaiseries. Cependant, il y a un commentaire qui mérite que j’y dédie un peu de mon attention: celui du statut charitable des organisations religieuses. Afin d’être cohérent dans son ensemble, plusieurs individus ont proposé que la charte soit élargie pour enchâsser plus clairement la laïcité au Québec. Une des propositions est celle d’abolir le statut charitable des organisations religieuses. En gros: l’Église paierait des taxes.

J’admet que je trouve cette proposition problématique et nocive. Il y a deux raisons pour ceci.

Premièrement, je ne crois pas que l’État est nécessairement le meilleur véhicule de sociabilité et de communauté de l’être humain. En fait, plusieurs études démontrent que plus l’État est actif dans dans la vie sociale, plus il a tendance à créer un effet d’éviction sur l’engagement communautaire (cette étude est particulièrement intéressante tout comme celle-ci et celle-ci). La relation n’est cependant pas une relation de 1-pour-1 : un dollar de plus à l’État ne diminue pas la charité privée d’un dollar. À des faibles niveaux d’intervention (ou à des niveaux efficaces d’intervention), l’effet de la taille de l’État sur l’engagement communautaire, la charité et toutes les formes de capital social, est minime. Cependant, lorsqu’un certain point est passé, l’effet est exponentiel et plus destructif. Considérant que le Québec possède un des gouvernement les plus imposants au Canada, l’élimination du statut charitable des organisations religieuses détruirait une importante portion du capital social et de l’engagement social que l’on voit au Québec.  Au final, cette proposition serait plus nocive pour la communauté que les bénéfices de la cohérence de la charte.

Deuxièmement, l’engagement social a tendance à forcer une réduction des dépenses gouvernementales. Dans un article du Quartely Journal of Political Science, Kenneth Scheve et David Stasavage démontrent que la solidarité sociale et l’engagement religieux sont des méthodes alternatives permettant à l’individu de s’adapter aux chocs adverses de la vie. Il en est ainsi parce que les Églises produisent un capital social important en permettant aux gens de faire parti d’un réseau d’information qui permet de rebondir rapidement. C’est pourquoi là ou les organisations religieuses sont fortes, la demande de services étatiques est plus faible.  En rendant la vie plus difficile aux institutions qui produisent du capital social, on risque de créer une augmentation de la demande de services publics. Toujours considérant le niveau élevé de taxation et de dépenses du Québec, il est difficile de souhaiter une telle chose.

Normalement, je serai favorable à une telle mesure (considérant mon intérêt dans l’économique des religions). Cependant, ce préjugé favorable dépend largement de la taille et de l’importance du secteur public dans la vie sociale.

I’ve recently been made to understand that the finance minister of Quebec desires a falling exchange rate for the benefit of the province. His logic is the same as for any currency depreciation: it favours exports. But in all fairness, he should be worried about a falling exchange rate.

The best thing to do when exchange rates are higher is to import production inputs to increase productivity where necessary. The documented surge in the use of imported inputs allowed prices to drop while maintaining competitivity (as a result of higher productivity per unit of labour). A reduction in the exchange rate might have the effect of inciting manufacturers to turn away from productivity-enhacing investments in order to rely solely on a cheaper dollar.

Given that Quebec has a well-documented productivity gap with the rest of Canada and with the United States,this is not something the minister of Finance of Quebec should desire, especially since productivity growth in manufacturing has been slower than elsewhere in Canada.  If we were in Ontario, I would understand why a finance minister would appreciate a lower exchange rate, but Quebec isn’t Ontario.

I was recently on the emergence of shipbuilding in Canada, especially in the years prior to Confederation. I was shocked to discover that when ships were built in Canada and sold in England, there were subject to absolutely no import duties. In short, a profit of 1,000 pounds sterling on a 100 ton ship in 1820 would not have to be dilluted by import duties. Some of my free-market friends might point out that this was a good thing, I would tend to disagree.

I am saying this because I am asking myself the following question: what if distortionnary trade policy made it profitable to invest in shipbuilding and shipowning in Canada even in the absence of such a policy, shipbuilding and shipowning would have been the speciality of another country (say Spain or the United States)? Once investments were made in the shipping industry as a whole (drydocks, shipyards, etc.), costs would have been sunk, making it harder to shift production factors between industries.

Up until the 1850s, Canadian shipbuilders often built ships to carry shipments of timber to England which they would then sold. This allowed them to be protected from fluctuations in freight rates and insurance premiums whilst also allowing them to sell a product which was free of import duties. However, once the Navigation Acts were repealed (these acts regulated shipping between Britain and non-British countries), there was an increase in the share of total shipping volume that was foreign to the British empire and an increase in the share of ships sold in Britain which were the product of countries outside the British empire.

This would tend to indicate that distortionnary trade policy incited individuals in the Canadian colonies to invest massively in the development of shipbuilding and its corrolaries. Once these distortions appeared, fixed investment costs had already sunk in and an important share of locked-in capital investments lost their value. I possess important data on Quebec’s shipbuilding output and the case seems defendable since output per capita declined dramatically after 1849 (the year of repeal). It is to be noted that between 1815 and 1849, the value of output per capita in shipbuilding grew at the rate of 1.4% per annum (t-stat for a time trend is significant and yields high R2).

The 1850s are widely presented as years of poor economic performance in Canada (I am not sure to which extent I buy the argument presented by some, but it does seem like growth was slower than in the United States or Britain). Maybe it could be worthwhile to consider how much the argument of “being set on the wrong track” by distortionnary trade policy plays in the economic growth of the British colonies in the years leading to Confederation.