Photo: Mel Watkins

Here is a very intriguing and creative entry in our continuing series of commentaries marking the 50th Anniversary of the publication of Mel Watkins’ classic article, “A Staple Theory of Economic Growth.” We are delighted to have the participation of Alistair and Sheila Dow, two leading heterodox economists from the U.K. They argue here, in a summary of an argument fully developed in a recent article in the Cambridge Journal of Economics, that the staples mode of analysis can actually be applied to other sectors — not just resource-based industries. They apply the main features of staples analysis (focusing on the mode of production and the interaction between production, exports and policy) to the case of the financial sector and find surprising similarities. Thank you Alistair and Sheila for this fascinating contribution!

The staples approach, and Watkins’ exposition of the staples theory, are a quintessentially Canadian contribution to economic thought. It involves identifying the consequences of reliance on production of a particular staple for export as arising from the physical characteristics of the staple and thus its mode of production (broadly defined). It offers an approach rather than a universal theory in that each staple, such as beaver pelts or base metals, has its own characteristics and mode of production. The key is to focus on the nature of a particular product in order to analyze the cost structure of production, linkages with other sectors, demographic effects, the role of the state in its production, the institutional arrangements which arose around this production and its export, the associated power relations and the consequences for the distribution of rents. Harold Innis, who along with William Mackintosh was the main instigator of the approach, also showed how these power relations (as well as communications technology) determined the prevailing ideas about how the economic role of any staple was understood.

But economics in the second half of the 20th century developed increasingly around formal deductive models designed for universal application. The importance of the specifics of particular staples, as well as the different methods employed for different elements of the analysis, meant that the staples approach could not be generalized in this way. Staples analysis thus continued in Canada outside the mainstream, with some limited application to other economies (notably Australia). But the approach remained essentially of local importance. Yet there is scope for much wider application of the staples approach. In principle it can be used to illuminate analysis of any sector which is important to an economy and its exports. The approach is novel in focusing on the nature of the product and the technical conditions of production, and on the consequent evolution of institutions around this production, the role of the state, the distribution of rents and the character of power relations; these latter influence the prevailing mode of analysis of the product.

In a paper recently published by the Cambridge Journal of Economics (abstract available here), we have attempted to show how the staples approach can be applied in this way to the financial sector and the current crisis. The product of the financial sector is not a staple physical product in the traditional sense of a raw material. Nor is its production necessarily in a dependent position with respect to export markets; the financial sector itself is a locus of power. But, using (negative) analogy, we show that, in spite of the differences, finance has sufficient in common with traditional staples for it to be illuminating to analyze it using the staples approach.

The financial sector, like staple products in Canada, accounts in many economies for a substantial proportion of national economic activity and also for exports. The rest of the economy is dependent on the sector in other ways too. A key product of the financial sector is society’s money (in the form of bank deposits), in which the state plays a key role. In most economies, the state developed a mutually supportive relationship with banks, such that banks were backed up by a lender-of-last-resort facility of the central bank in exchange for accepting portfolio restrictions. This system encouraged widespread confidence in the money asset and this in turn allowed banks to supply credit to finance investment. But then the power exercised by the banks over governments forced a process of deregulation which changed the structure of the financial sector and greatly extended the range of its products. At the same time, the increasing use of information technology in financial ‘production’ facilitated the massive growth of complex structured products. It also changed practices and processes. Banks increasingly made loans by credit-scoring rather than the exercise of judgment and used quantitative models to represent their risk profile (as required by the Basel capital adequacy rules). Trading in financial markets was increasingly automated by means of complex algorithms; the remarkable speed of trading this allowed added to the scope for market instability. Taken together, the way in which ‘production’ in the financial sector evolved, with input from deregulation by the state, sowed the seeds of the crisis which began in 2007. The core products, money and credit to finance real investment, were under threat because of increasing engagement by banks in other products.

For all its apparent competitiveness, the financial sector has generated massive rents, contributing to the increasing maldistribution of wealth. Since the rest of the economy is dependent on the financial sector providing its money and also providing credit, governments could not in general allow large banks to fail, since they might bring the entire system down with them. The prevalence of bailing-out in many economies rather than bailing-in has meant that the state has taken the brunt of rescuing failing banks. Further continuing provision of liquidity to banks at low rates has contributed to the survival of failing banks. But this cheap liquidity has tended to support financial speculation by existing wealth holders rather than credit for financing real capital investment. More generally, low interest rates have meant a massive redistribution away from net-saving households while net-borrowing households have sometimes faced higher rates due to higher perceived default risk.

Finally the power exercised by the financial sector has meant that their rhetoric has dominated analysis. Thus, for example, fiscal austerity has been introduced across a wide array of economies to placate the financial sector. High executive pay has been justified as a reward for high skill levels. Where banks have been nationalized or part-nationalized, as in the U.K., governments have attempted to behave like private sector owners with a view to a successful eventual sell-off of their stockholdings. This rhetoric is based on analyzing banks as generic profit-maximizing competitive firms.

This brief analysis has employed a staples approach by focusing on the nature of the product and its mode of production, on interactions with the state, on institutional evolution, and on the exercise of power over rent distribution and over the way in which the sector is predominantly analyzed. It is a method of drawing together a range of different types of analysis. The detail will differ from one national financial sector to another: the above analysis is indicative rather than universally applicable. But the aim has been to show that the staples approach has much wider application than Canadian and Australian raw material products. This uniquely Canadian approach has much to offer the discipline of economics as a whole.


A. Dow and S. Dow (2013), “Economic History and Economic Theory: The Staples Approach to Economic Development,” Cambridge Journal of Economics, doi: 10.1093/cje/bet021.