Thursday, May 13, 2010

Book Review: The Sum of Satisfactions: Canada in the Age of National Accounting by Duncan McDowall

Making Sense Out Of Numbers
The Story of Canada’s National Accounts

McDowall, Duncan. The Sum of the Satisfactions: Canada in the Age of National Accounting. Montreal: McGill-Queen's University Press, 2008.

                 We live in a world of limitless information. On command, Google can retrieve virtually any piece of information in less than a second. Every month, economists spew out new numbers such as unemployment, inflation, and national production. It is hard to believe that merely one hundred years ago Canadians were leading the worldwide charge towards sophisticated fiscal calculations. The Sum of the Satisfactions: Canada in the Age of National Accounting tells the story of the Canadian academics charged with the task of creating Canada’s first national accounts. The tale and its characters are brought to life by the vivid storytelling of Canadian historian Duncan McDowall. McDowall is a professor of history at the University of Carleton with interests in business and political history particularly the Canadian banking system. However, McDowall is also concerned with Canada’s role in the developing world and the nation of Bermuda’s modern tourism (Department of History 2009)[i]. McDowall has been named “Most Popular Professor” by Maclean’s Magazine four times including a three-year streak from 2002-2004. The Sum of the Satisfactions is McDowall’s lecture to the public. He proves why he’s among the best professors in Canada with an informative read but don’t expect him to win any Pulitzer prizes.
Early in the book, McDowall flexes his historian’s muscles and reminds the reader that national accounts were hardly a new idea. Medieval monarchs in Europe sought to calculate their national wealth and trade leading to the works of William Petty and François Quesnay. Leading up to the 20th century, fiscal calculations in Canada were still very naive but important nonetheless such as Robert Gourlay’s agricultural survey of Upper Canada and the early censuses. The latter were carried out by the Dominion Bureau of Statistics (DBS) which was the forerunner to Statistics Canada. Coinciding with the 1915 census, Robert Hamilton Coats, the Dominion statistician, made early estimates of Canada’s national wealth to be over $16.3 billion. The year 1918 would mark a turning point as the next couple of years would see the inclusion of product classification, a base year, gross and net production, and foreign trade into the national accounts (31). Despite all these advances, the data still failed to adequately capture what was actually happening in the economy.
The Great Depression would be the catalyst for demonstrating the need for better national accounts. Harry Stevens, then the minister of commerce and trade stated that the self-correcting model of the economy had failed (37). The depression had exposed glaring inequalities between the provinces (38). In response, Prime Minister R.B. Bennett created the Economic Council of Canada in 1935 because as Coats believed, the key to the economic system lay in intelligent intervention. Later that year, William Lyon Mackenzie King would regain the Prime Minister’s office and establish the Royal Commission on Dominion-Provincial Relations also known as the Rowell-Sirois Commission (39). Four economists were commissioned to study national income and government’s contribution to generating income. As McDowall puts it, the four economists asked to “completely reconceptualise how Canadian policymakers understood the economy” (46). Despite only twenty years of data from DBS, the Rowell-Sirois Commission produced the province-to-province breakdown of salaries paid and investment income. The final report, released in 1940, recommended the establishment of a permanent staff to collect national data.
Canada followed a strong worldwide Keynesian trend during World War Two as the need for government intervention increased. Committees such as the Wartime Prices and Trade Board and Economic Advisory Committee were created (57-58). The Rowell-Sirois Commission called for provincial tax income to be redistributed based on socio-economic conditions. Social welfare was gaining supporters with the implementation of unemployment insurance in 1941. All of these programs required proper numbers before they could be advanced (76).
In England, economist Colin Clark made tremendous progress when he realized that everything that is produced by an economy must be equivalently consumed (63-64). By 1944, British economists Richard Stone and James Meade, based on Clark’s breakthrough, had published a national income and expenditure model for calculating national income (66-67). Meanwhile, American Milton Gilbert was developing similar income and expenditure models (67). In 1944, Stone, Gilbert and George Luxton would represent Britain, U.S. and Canada respectively in a meeting to set up standardized national accounting principles (85).
Two prominent Canadian statisticians around this time were Luxton and Agatha Chapman. McDowall notes their similarities as both were academics from affluent British families. The two likely met as members of McGill’s Student Christian Movement which was rooted in Marxist and socialist ideologies. Afterwards, Luxton and Chapman’s careers would intertwine at Sun Life Financial and then at the DBS. Luxton would go on to become chief of DBS’s Research and Development Staff (83)before succumbing to tuberculosis in 1945 (93).
There were many other rising Canadian statisticians that McDowall spends some time describing. The Research and Development Staff at DBS included young intellectuals like David Slater, Thomas Rymes, Hans Adler, and Simon Goldberg (114). Goldberg would eventually become director of research and development. Two other Canadians, Larry Read and Jenny Podoluk made major advancements by showing Canada’s income distribution by class and province. Canada also began to calculate GNP in constant dollars to negate inflation and Canada’s seasonal economy (116).
By the 1950s, Canada’s national accounts were among the best in the world (119). With constant improvement, Canadian national accounts were seen as on the forefront of the field (128). In 1957, Toronto accountant Walter Gordon managed to predict Canada’s economic prospects up to 1980. Using research from DBS, Gordon’s report predicted a shrinking agricultural sector, increased foreign investment, and the growth of the service industry (124).
Computers were first introduced to the DBS in 1960 for data processing and storage (140-141). Among other things, computers made it possible to use econometrics. Throughout the 50s and 60s, econometrics gained fame as both a broad economic predicator and focused tool of performance measurement (144). However, national accountants were less than enthused about econometrics as their goal lay in dissecting the past, not envisioning the future.
Calculating production proved to be harder than originally thought. The concept of production, gross domestic product per unit of labour, seemed simple but its application was more complex (146). The DBS created two productivity indices: one for farm business and one for individual industries (147). Their calculations showed that from 1949-1962, growth in employment contributed to 45 percent of GNP growth in Canada versus 55% from increased output per worker (147). Critics however doubt the validity of these statistics because many factors were excluded from the calculations.
McDowall then introduces the reader to Wassily Leontief, the founder of input-output analysis. In 1936, Leontief developed a market matrix that segregated economic transactions. This matrix showed the inter-industry relations of an economy and helped statisticians create better benchmarks for GDP. Leontief further posited that inverting the matrix can demonstrate the impact of a decision in one industry on all other industries (150). In Canada, the first input-output table was made by Jack Sawyer in 1956. Input-output tables suited Canada’s regional industry because statisticians could focus on how one region can affect others (154).  Two Canadian academics were responsible for pushing Canada’s input-output reputation to worldwide acclaim: Kar Levitt, a professor at McGill University who studied the maritime region’s economy with input-output tables and Tadek Matuszewski who used input-output tables to show which commodities each industry consumed (158). By the late 1960s, computers and econometrics were helping Canada release more detailed and swift income information.
While Canadians were getting better at calculating GNP, its practical uses were limited. The GNP worked as an economic summary but could not understand issues such as quality of life, environmental deterioration, and resource depletion. In 1972, Prime Minister Pierre Trudeau appointed Sylvia Ostry as the new chief statistician at DBS. Ostry brought a demand for better qualitative measures to the DBS which was centred on the idea of “new welfare economics” (173). National accountant Hans Adler counter-argued that issues of morality and growth were up to policy makers, not statisticians at the DBS. Ultimately, Adler conceded to the demand for including social welfare factors into national accounts. The national income now included social factors such as household work and environmental impacts 175). In order to add these factors, the DBS used social indicators that imposed weights on existing national accounts.
McDowall juxtaposes opposing sides of a debate to give the reader an objective insight. On the issue of including household work in to GDP calculations, McDowall presents the arguments of two prominent economists: Adler and Richard Lipsey. Adler had calculated in 1978 that household work would account for 40% of Canada’s GNP if included with the national accounts. Lipsey questioned this number with the counterargument that calculating household work would require speculative evaluation, thus tarnishing the statistical integrity of GNP. Other attempts to include “social indicators” such as pollution were also met with resistance from traditional economists.
The economic collapse of the 1970s shook paradigms of economists everywhere. Chronic stagflation brought soaring unemployment and high inflation at a time when growth seemed inevitable (187). The DBS was pressured to provide quicker, more responsive data to cope with these problems. Ironically, at a time when they needed accurate data the most, the rushing of statistics meant only shallow revisions were made rather than extensive analysis (189-190). The reputation of Statistics Canada continually took a beating as statistical experts were constantly missing the mark on key economic indicators. Government officials were starting to lose faith in the entire system of national accounts (191-192). McDowall notes that the problems at Statistics Canada stemmed from intense infighting and a diminishing reputation. Statistics Canada was even accused of deliberately trying to influence the 1979 general election (198-199). These mounting problems eventually led to massive changes at the organization. Sir Claude Moser, the president of the British Royal Statistics Society examine the workings of Statistics Canada and reported that the producers of the national accounts needed to be in closer contact with the users of those national accounts in public and private sectors. Furthermore, the organization was lacking financial and administrative resources. In 1980, Martin Wilk was appointed to the chief statistician post with the promise of effective and responsive leadership in the face of changing times.
 The final chapter begins in the year 1993. The System of National Accounts, the first manual of national accounting since 1968, was released as a collaboration between 65 experts from 40 countries to create a universal system (208). Four years later, Canada would revise the System of National Accounts to better suit Canada’s needs. Canada’s ability to adapt to international standards proved that actions taken since the tumultuous 1970s had worked. Wilks raised morale with more of a bottom-line management style and improved accuracy with efficient computer system (215). Statistics Canada had created a statistical council in charge of strategic guidance and to minimize the gap between makers and users of statistics (213). Ivan Fellegi replaced Wilk in 1985 and continued in his predecessor’s goal of renovating old statistical methods. Fellegi became more attentive to the environment and non-market activities. One of Fellegi’s top projects was creating constant dollar input-output tables for provinces. Kishori Lal led the project overcoming obstacles such as cross-provincial trade flows. These input-output tables were extremely useful when measuring the impact that the Goods and Services Tax would have on provinces (222).
The 1990s resurfaced pesky problems of national accounting while introducing newer more complex complications. Debates still raged over whether to include resource depletion and the Keynesian model but newer issues involving how to measure technological advances and tourism were just as important. In the end, Statistics Canada was very conservative in changing their methods due to the difficulty in their calculation (233).
To respond to the growing demands for environmental accountability, Statistics Canada renamed their Income and Expenditure Accounts Division to the National Accounts and Environment Division (241).
McDowall parting words convey the need for better national accounts that can measure one’s quality of life. One example is the Genuine Progress Indicator (GPI) which measured progress after defensive expenditures such as resource depletion.
McDowall's extensive historical research relies on numerous interviews of key participants. This helps put a face on the otherwise anonymous public workers who revolutionized Canada’s world-class system of national accounts. He clearly is very knowledgeable on the historical facts and stories of Canadian national accounting.
The book can be confusing at times jumping back and forth between years. While structure is generally chronological, McDowall veers off course from the main storyline many times. Consequently, the reader is left trying to piece together a timeline. McDowall’s digressions also disrupt any flow for the reader as they are bogged down with irrelevant facts. At times, the book feels long and drawn out as McDowall includes the back stories of too many people. In some cases, knowing the context of these people hardly added to the overall point.
The story of national accounting was far more interesting that I would have ever thought. It was a good read about Canada and also the world throughout the twentieth century. I would recommend this book to anyone with a serious interest in business or history. McDowall uses accessible language for a university level reader in six well written chapters. His writing tends to drag at times which can lose anyone with less than a passing interest in national accounting. The book could have fared better if it were shorter and saved some trees.
The real power of The Sum of the Satisfactions: Canada in the Age of National Accounting is its potential as a teaching utility. This book is an export of Canada’s best professor that should be shared in economics, management, and history classes worldwide. As for the other faculties, The Sum of the Satisfactions may not add up for them.

[i] Department of History. 2009.

No comments:

Post a Comment

Say Something...Anything!