REVIEW OF JAMES STANFORD, PAPER BOOM: WHY REAL PROSPERITY REQUIRES A NEW APPROACH TO CANADA'S ECONOMY (JAMES LORIMER, 1999).

Kenneth Westhues

Catholic New Times, 17 October 1999; on the web by permission, August 2003

There are two ways to study the economy. One is to look at people's food, clothes, housing, and whatever other earthly goods they use from day to day. Cataloguing all this stuff, finding out where it comes from, tracing the trade relations by which people obtain it—this is slow, tedious, complicated work. It is called substantive economics.

The other way to study the economy is to disregard the actual goods and focus on the common medium for exchanging them, namely money. You assume that money is the measure of anything worth having, and that the more of it people have, the better. You let the simplicity of these assumptions outweigh their doubtfulness. Endlessly fascinating mathematical analyses become possible. This is called formal economics. It is what almost all economists actually do for a living.

Jim Stanford, who works as an economist for the Canadian Auto Workers, is true to form. Despite occasional passing references to substantive concerns like environmental pollution, depletion, and waste, or deskilling and disempowerment of workers, Stanford follows the standard practice of studying how money comes and goes, and of accepting money-maximization as the goal.
Yet even granting this purely monetary take on Canadian economic life, all is not well. The important contribution of this book is documentation that the current economic boom, despite low inflation, is mainly myth.

The distinction at the base of Stanford's lucid argument is between two aspects of the money economy, the financial or paper aspect and the real aspect. The sad truth, demonstrated here in dozens of ways, is that much of the money being made these days bears no relation to actual goods.

Lay aside all doubts about whether your dream-house is what you need. Assume it is. Don't worry about whether it will really make you happy. Assume it will. Here's the rub: your dream-house is probably farther out of reach than it was before the current economic boom began. By Stanford's calculations (p.187), it took 22 percent fewer hours of work to pay off the mortgage on a $150,000 house in 1972 than in 1998.

The problem, as Stanford sees it, is that the financial sector of the economy (stock markets, banks, money managers) has come unglued from the real sector. The former is supposed to facilitate production and trade in the latter. Instead, it has drifted off into a highly profitable world of its own.

The "book value" of Canada's largest corporations (their actual worth, more or less, in terms of tangible assets minus debt) grew at a rate of less than one percent a year through the 1990s, controlling for inflation. The "market value" of these same corporations (their worth on the stock market) grew at a rate nine times as fast.

Finance and insurance industries accounted for just 4 percent of all paid employees in 1997, but for 25 percent of business operating profits and 58 percent of total business assets. The contrast to 1960 is startling: 40 years ago, these industries owned just over a third of business assets.

Stanford likens finance to the oil in a car, its purpose being to lubricate the system so that the real work gets done: burning gas to get somewhere. We have reached the point, he says, where we have to add a litre of oil every time we fill up with gas. Something is obviously wrong.

For anybody interested in how the best left-wing economists ply their trade, this readable, engaging book will flesh out the vague impression of economic malaise most Canadians gain from their own bank statements. An Angus Reid poll conducted this summer found that among Canadians earning less than $30,000 per year, 36 percent say they are worse off than a few years ago, and just 19 percent say they are better off. Among Canadians earning more than $60,000 per year, 46 percent say they are better off than a few years ago, and just 20 percent say they are worse off.

Clearly, Canadians rich enough to take advantage of the paper boom (to invest in stocks and mutual funds, to make RRSP, RPP, and RESP contributions, and to avail themselves of capital gains exemptions and dividend tax credits) are getting richer. Little of their wealth is trickling down. Not only the poor, but the entire less affluent half of the citizenry, is being left behind.

Stanford's proposed solution runs toward governmental intervention, investment, and regulation. Its political prospects are dim. The future more likely belongs to the stockbrokers—or just maybe, to Canadians who have learned that money is not the be-all and end-all anyway.