This paper deals with long-run changes in the structure of Canadian external trade. By structure is meant the magnitude, content, direction, and “terms” of trade. The paper is focused mainly on commodity trade rather than on all international transactions, and on long-run or secular changes rather than on the business cycle or other short-run concerns. The period of study is the “half-century” 1896–1950, and it permits some observation on recent controversies in the theory of international economic adjustment, such as the discussion of Graham's Theory of International Values.

Successful political movements are frequently accompanied by, and well served by, theoretical defences of their positions which later reflection shows to be inadequate for purposes other than popular political polemics. The history of the reform movement in England in the early decades of the nineteenth century provides an excellent example. The defence of political democracy offered by Jeremy Bentham, James Mill, and their followers gave the Radicals of the 1820's and 1830's their main intellectual arguments for the Great Reform Act. A close examination of this theory suggests, however, that it is inadequate in its view both of the nature of a democratic society and of the process of policy formation therein. It is, moreover, also apparent that Bentham's theory of democracy is sharply inconsistent with the main body of Benthamite doctrines.

The basic problem in Bentham's political theory is a product of the manner in which he resolved a contradiction that exists between his ethical and his psychological theory. Utilitarian ethics rests on the principle that the rightness or wrongness of an act is decided by its effect on the happiness of the greatest number. Bentham's psychological theory, however, is egoistic and hedonistic. He offered no hope that a man will act other than in pursuit of his own interests, and little hope that these interests will naturally be associated with the interests of others.

If this psychology is valid, individuals will choose, voluntarily, the ethically proper act only when, by chance, it coincides with that act which they perceive will maximize their own personal pleasure. Bentham realized this. As a consequence, he argued that if individuals are to be brought into harmony and if the greatest happiness is to be achieved, then legal sanctions and incentives must be introduced to influence individual hedonistic calculations in favour of acts that do not diminish the happiness of others more than they increase the happiness of the doer.

Marshall and, later, Pigou were the first to question the competitive allocation of resources, arguing that “increasing-cost” industries produce beyond the optimal point and that the outputs of “decreasing-cost” industries fall short of the optimum. They proposed, on this basis, a system of taxes on the former group of industries, subsidies on the latter group. The criticism of Young, Robertson, and Knight almost completely destroyed the argument. At present, only when “external economies” (and “diseconomies”) play a part in determining the competitive supply function is it admitted that interference with the competitive allocation of resources may be justified.

Our purpose is to present diagrammatically the case for interference with the competitive allocation of resources when external economies of production are present. With the aid of three significant cross-classifications of economies we are able to arrive at several conclusions with policy implications of some importance. In particular, we seek to show that only under very special conditions will the incentive provided by subsidies restore the optimal allocation of resources. Section I is concerned with the definition of terms. Sections II to V provide the diagrammatic analysis, section VI states the policy implications of our results. Section VII briefly summarizes our earlier conclusions.

Throughout the discussion abstraction is made from any special disadvantages of government intervention. No consideration is given to the danger of bureaucratic corruption nor to the possibility that sectional interests will be advanced at the expense of the “general welfare.” Further, all problems of incentive attendant upon government intervention are neglected. Finally, the cost of collecting the revenue from which any net subsidies are to be paid is ignored.

Discussion of the issue of the welfare effects of direct, as compared with indirect, taxes have been greatly clarified by the recent contributions of Mr. Little and Professor Friedman. Both of them show that the usual method of using indifference curves to prove the superiority of income tax over sales tax makes “no overt reference to marginal costs. Yet it is well known that nothing can be proved without some such reference.” They employ an alternative mode of analysis which is designed to take account of conditions of cost of production.

Before the appearance of their articles, Professor Boulding showed the comparative welfare effects of proportional, progressive, and regressive income taxes by the use of indifference curves. His conclusion is that, even if the same amount of revenue is exacted, an individual is better off under a proportional than under a progressive income tax and still better off under a regressive one. Friedman questions the validity of Boulding's result because he thinks Boulding is one of those who base their arguments on a fallacious proof, although Friedman does not set out his criticism in detail. Since Boulding's results, if valid, are of great significance and since the weak point of his analysis cannot be derived directly from Friedman's contributions, it is the purpose of this paper to show the limitations of Boulding's conclusion, which, if known, would deprive it of much of its generality and usefulness.

In a discussion of recent developments it is well to keep in mind that the new grows out of and is founded on the old; that, in statistics as in other fields, our achievements of the present evolve from the endeavours of the past. Similarly our future gains will represent a further stage growing out of our present and past accomplishments.

In Canada we have had a well-developed statistical system for many years. The decennial population and distribution censuses, annual industrial censuses, foreign trade and balance of payments statistics, price and agricultural statistics, to mention only some of the more prominent examples, had been securely established as “going concerns” prior to the Second World War. From this substantial base, the war and events in the post-war years hastened the process of extension into new statistical fields and the qualitative improvement of our whole statistical system.

While our present achievements stem from past accomplishments, one can discern a substantially different attitude toward statistics now than in pre-war years, by public and private bodies alike. There appears to be a much more widespread awareness of the importance of quantitative data in the solution of problems of various sorts than formerly. This is a natural concomitant of an advancing industrial society. The rapid expansion of the Canadian economy, the vigorous emphasis on social welfare, the increasing complexity of our social structure, and the broader role in economic and social affairs that governments have been forced to assume, all find expression in pressing and persistent demands for more statistics of the highest quality by business, governments, and the public at large. In addition, the work of the United Nations Statistical Commission, the Statistical Office of the Economic and Social Council, and other international bodies have created new demands for statistical information.

The essence of federalism is the division of sovereignty between two levels of government. In any system of government, there are sovereign and delegated authorities. In a unitary government all sovereign powers are concentrated in the central government, although decentralization for the purpose of administrative efficiency may result in the delegation of certain powers from the central and supreme government to the regional and local subordinate authorities. In a federal state, on the other hand, regional governments, as well as the central authority, are invested with sovereign powers. In no actual case, however, do both levels of government enjoy sovereignty in all domains, since complete concurrence of jurisdictions would lead to incessant conflicts of coordinate authorities. For this reason, federal constitutions indicate, in a more or less precise way, the special fields of absolute competence of the central and the regional authorities. Partial concurrence of jurisdictions may not be excluded, in which case the problem of bringing about agreements between the sovereign powers arises.

Administrative efficiency in a federal state requires both centralization and decentralization of executive functions, in much the same way as in a unitary state. If subordinate functions are delegated to the regional governments, these governments become subordinate to the central authority in these fields. On the other hand, administrative efficiency may require the centralized administration of certain matters in the realm of provincial supremacy, for example, the collection of provincial taxes. In this case, the central government would act as an agent of the provincial governments, and be subordinate to them. The two types of powers–sovereign and delegated–must be clearly distinguished in order to prevent unnecessary conflicts of authority.