Cambridge Journal of Economics 2014, 38, 13391353

doi:10.1093/cje/bet021
Advance Access publication 5 June 2013

Economic history and economic theory:

the staples approach to economic
development

The ideas and institutions within which the current global crisis is being addressed
reflect the power structures of the past and are under pressure to evolve. But mainstream economics tenaciously retains its long-standing power over academe and
policy, while denying a theoretical role for power. Here we consider the contribution
of economic history to theorising. In particular we present a case study in the form
of an economic history approach which emphasises the role of the state in relation
to markets: the staples approach of Harold Innis. We apply this approach to the
modern financial sector.
Key words: Economic history, Staples approach, Financial crisis
JEL classifications: B00, G00, N5, O1

1.Introduction
Issues of power are hard to escape when considering the future of capitalism. Economic
power influences which ways of analysing economic conditions prevail and which
approach to economic policy is taken, further reinforcing prevailing power structures.
Many have argued for example that the current crisis was the result of neoliberal ideology (see, for example, Palma, 2009). This ideology in turn has conditioned the mainstream analysis of the crisis and the policy response in a complex way (Callinicos,
2012). To many it has seemed clear that mainstream analysis not only signally failed (in
predicting and analysing the crisis) but also provided very little theoretical justification
for the interventionist policy measures taken in the early stages of the crisis. For most
mainstream economists, what has been required is only a marginal adaptation within
the prevailing paradigm, with the crisis seen as an aberration from normal times (see
further S.Dow, 2012).
Keynes (1936, chap 24, p 383)expected that ideas would ultimately prevail, rather
than power: I am sure that the power of vested interests is vastly exaggerated compared
Manuscript received 15 February 2012; final version received 14 January 2013.
Address for correspondence: Sheila Dow, Division of Economics, Stirling Management School, University of
Stirling, Stirling FK9 4LA, United Kingdom; email: s.c.dow@stir.ac.uk.
*University of Victoria, Canada (AD) and University of Stirling, United Kingdom (SD). This article draws
on a related presentation to the Critical Realist Workshop, January 2007 and to the HETSA Conference,
Brisbane, July 2007. We are grateful for comments from participants in the session of the 2012 Canadian
Economics Association Conference in Calgary in which it was presented and from three anonymous referees.
The Author 2013. Published by Oxford University Press on behalf of the Cambridge Political Economy Society.
All rights reserved.

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AlexanderDow and SheilaDow*

1340 A. Dow and S.Dow

This contrasts with the official discourse of academic publications (McCloskey, 1983).

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with the gradual encroachment of ideas. . . . Soon or late, it is ideas, not vested interests, which are dangerous for good or evil. But heterodox economists since Keyness
time have had to contend with the socio-economic power of the economics mainstream which has proved remarkably tenacious in dominating the ideas which have
been fed into policy. Furthermore, because issues of power, the distribution of the
surplus and social justice are not readily recognised by mainstream theoretical analysis
as economic issues requiring economic analysis, it has proved difficult to engage across
the orthodoxheterodox divide. But reality shows some signs of breaking through into
the unofficial discourse of mainstream economics.1 Discussion of different forms of
economic organisation is now part of the public debate. There is a chance that the
socio-economic power which underpins mainstream economics may be challenged.
There is a substantial literature which explores the relation between power, ideology and ideas (referring, for example, to Bourdieu, 1998). The purpose of this article
is to consider issues of power in economics, in the economy and in ideas in terms
of a specific methodological view of the role of economic history and the history of
ideasthat theory be grounded in real experience and its application may differ from
context to context. We pin this broad discussion down by presenting a specific theoretical approach which emerged from a real context and offer a preliminary sketch of how
this approach might illuminate the different context of the modern financial sector.
The case study we consider is itself intended as a contribution, given its limited
exposure outside Canada. We explore the particularly Canadian staples approach to
economic development which was largely developed at the University of Toronto independent of the mainstream approach dominant elsewhere, a development perspective
that has also been applied to analysing the Australian experience. This approach supports theory about the institutional arrangements and power relations which follow
from the particular characteristics of any staple product and the particular configuration of the natural resource rents it yields. Economic historian Harold Innis, closely
associated with this approach, was also a pioneer in communications theory, encouraging us to infer consequences of this configuration forideas.
Although the staples approach has been applied predominantly to natural resource
staples and the rents generated by their extraction, we employ analogy to consider an
application to the different context of the financial crisis. While identifying elements of
positive analogy, we highlight the element of negative analogy associated with the locus
of power in the financial sector itself (contrasting with the export dependency of the
natural resource sector). We explore the possibility that the characteristics of the financial sector and the scale and configuration of rents have cemented power relations that
influenced institutional arrangements and policy (such as the process of de-regulation
from the 1970s) and the embedding in public discourse of theoretical ideas that were
believed to support the sector. Breaking the stranglehold of these ideas poses a great
challenge. But the staples approach allows an analysis with a focus which is potentially
very illuminating.
The crisis has encouraged increased attention on economic history, primarily with a
focus on previous crises, but also in more general calls for an economic history input
to modern economics. There has been little discussion about how economic history
should be approached. We therefore begin with a methodological discussion of the

Economic history and economictheory 1341

use of history to contextualise the approach taken later to analysis of the crisis and
beyond. This is followed by an account of the staples approach, as originally devised,
and subsequent applications of it to other circumstances. Drawing on the work of
Innis on communications theory, we explore further the role of power over ideas in
the staples approach. In the final section we attempt to apply this reasoning to a brief
consideration of the role of theory in the run-up to the crisis and the theoretical and
policy response.
2. In defense of history

2
See Dow and Dow (2005) and Shin (2005) for discussions of these differences within development
economics.

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Given what many have identified as the new characteristics of the global economic
environment and the challenges it poses, it may seem inappropriate to start by looking
back to history. Yet unless we take a purely deductivist approach, history is our base
material for forming a view about the future, in terms of both the history of ideas and
economic history. Like most concepts, history takes on a different meaning within
different approaches to economics.
While the crisis has encouraged new attention to history of thought and economic
history, mainstream economics has normally neglected both, in research and in the
curriculum. As far as history of economic thought is concerned, mainstream economists generally believe in progress in economic thought, such that the views of earlier thinkers are by definition mistaken if they are not already absorbed in modern
thought. Meanwhile, as far as economic history is concerned, mainstream empirical
economists tend to see history as a homogeneous data pool with which to test modern
theories. This is supported by a universalist approach to theory, whereby the aim is to
identify relations that have application across time (and space), a position stated in
most extreme form by Debreu (1991).
There are interdependencies between history of thought and economic history that
we explore later, but our focus here is on economic history. The realist heterodox
emphasis on building theory based on experience and with a view to application seems
to make defending the role of economic history quite straightforward. Because of the
open nature of economic processes, the source of evidence across time is not homogeneous; institutions and behaviour evolve in non-deterministic ways, and in different
ways in different societies and at different times. The historical context matters. Even
so, there is scope for different understandings of what history offers, which fall within
a range between the pole positions of historical specificity and historical universality.2
The post-modern view emphasises specificity to the extent of denying any scope for
generalisations, while the universalist view sees the purpose of economic theory to be
the identification of natural laws that can be applied to all contexts.
The traditional approach within history itself is close to the extreme specificity end
of the spectrum. According to Marwick, a leading exponent of this approach: The
search for universal meaning or universal explanations is . . . a futile one. History is
about finding things out, and solving problems, rather than about spinning narratives
or telling stories (as quoted in Tosh, 2000, p 300). How theory develops is a different
matter. Historical facts, as it were, stand on their own merits.

1342 A. Dow and S.Dow

3
The leading members of the English Historical School were Cliffe Lesley, John Kells Ingram (both
Irish), Arnold Toynbee, L.L. Price, William Ashley, W.A. S.Hewins and William Cunningham. It is worth
noting, since we later consider a case study drawn from Canadian economic thought, that Ashley was
appointed as the first professor of political economy in 1888 at the University of Toronto, where he stayed
for four years, before moving to Harvard (see Drummond, 1983; Moore, 2003). In Scotland J.S. Nicholson,
the second appointment as professor of economics at the University of Edinburgh, and William Smart, the
first professor of economics at the University of Glasgow, were both sympathetic to the historical approach
to economics (Nicholson, 1893; Smart, 1910). In this they were typical of the Scottish tradition in political
economy (Dow etal., 1997; Dow and Dow, 2006).
4
Indeed, being a historian was one of the characteristics of the ideal economist which Keynes (1924,
p 173)noted in his essay on Marshall.
5
The Handbook of Economic Methodology (Davis etal., 1998), for example, includes an entry for economic history as a separate field, hysteresis as a limited incorporation of historical time in economic modelling and time itself, but not an entry on history as such.

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The English Historical School within economics, however, took a more narrative approach
to history (Koot, 1987).3 Economic History is not so much the study of a special class of
facts, as a study of all the facts of a nations history from a special point of view (Harte,
1971, p xxi). Beyond that narrative of economic history tradition there is a further range
of views as to how much scope there is for generalisation from specific historical instances.
Amongst modern economists, one of the few to address the role of history in economics is Hodgson (2001), who emphasises the contribution of history to theorising.
Nevertheless for him that role crucially refers to the specificity of historical experience,
limiting the scope for generalisation. The principles of economics are not universal;
instead, economic understanding depends on the institutional context, an aspect of
reality that changes through historical time. Separate epochs have different institutions
and different kinds of socio-economic systems. To understand these systems requires a
historical knowledge as to the characteristics of the epoch (A. Dow, 2002). Hodgsons
view is that historyor to be more precise historical awareness on the part of economistsis a central element in economic understanding.
However, others have seen more scope for generalising from specific examples, without
going so far as universal principles. This was evident in the use of economic history by
Marshall and Keynes.4 This use of history had earlier been more explicitly embraced by the
key figures in the Scottish enlightenment, called by Skinner the analytical (or conjectural)
approach to history: The distinctive nature of the theory of history . . . may be found in
its scientific temper and emphasis on economic forces as fundamental to historical and
sociological investigation. The particular feature of this contribution [may be] . . . that of
finding principles which reduce the apparent chaos of history to order and thus enable us
to understand our present condition (Skinner, 1965, p 22, emphasis in original). According
to this approach, detailed historical study is an essential ingredient in the development of
theory and also in its application to new contexts. Thus, while mainstream economists
have interpreted Adam Smiths approach as a search for universal principles, this does not
accord with an analytical history interpretation (S. Dow, 2009). The principles he sought
to identify (as in the division of labour) were provisional principles that emerged from
detailed historical study of different contexts. In line with the Newtonian method, any
application of such principles required that the context of application be taken seriously,
and that the need for principles to be modified in the light of different contexts always
be recognised. Historical specificity explicitly sat alongside the aim of generating a more
general narrative that might be applied to study of other contexts (Dow and Dow, 2005).
While the modern methodology literature has explicitly explored the nature of theorising and the status of facts, it rarely addresses the particular role of history.5 Some

Economic history and economictheory 1343

See Carabelli (1988, section 4.2) for a discussion of both Hume and Keynes on analogy.

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heterodox economists have addressed the specific methodological role of historical

experience for theory development. Keynes (1921) provides the starting point in his
analysis of grounds for belief under uncertainty, where he points out the limits to guidance from extrapolating from the past. But in his distillation of The General Theory,
Keynes (1937) listed, amongst the conventions we employ to cope with uncertainty,
that we assume that the future will be more like the past than we can reasonably expect.
Furthermore, the evidence of history provides a framework for understanding the
present. Like Hume, Keynes emphasised the role of analogy as a mechanism for inductive reasoning and thus for theory development.6 The enumeration of instances, as in
the traditional approach to history, was an inadequate basis for inductive reasoning
without a presumption of uniformity in nature which would yield laws. Rather, logical
reasoning may be applied by taking into account qualitative and quantitative likeness and unlikeness of events (Carabelli, 1988, p 63). Inductive argument acquired
strength from negative analogy, that is, when it applied in spite of variety with respect to
some characteristic. More recently, Lawson (e.g., 2003, chap 4)emphasises the role of
analogy in retroductive logic, as a method for developing arguments about the underlying causal mechanisms which together generate evidence of events: Retroduction
. . . consists in the movement, on the basis of analogy and metaphor amongst other
things, from a conception of some phenomenon of interest to a conception of some
totally different type of thing, mechanism, structure or condition that, at least in part,
is responsible for the given phenomenon (Lawson, 1997, p 24). The more we delve
into economic history, the greater the scope for identifying patterns, through analogy,
from which casual mechanisms may be imputed.
But thinking of history as narrative on the basis of analogies introduces the importance of interpretation of episodes as an inherent part of history; indeed, the selection
of facts is itself the first step to interpretation. According to post-modern historians, not only is the concept of fact problematic, but history inevitably involves
narrative in the sense of a particular construction being put on facts: once an
event of the past is described, it becomes something elseit becomes a narrative
(Brown, 2005, 28). The interdependence between narratives and theory assumes
significance. So economists with historical awareness may have different understandings of the knowledge status of their accounts of historical episodes when considering applying principles based on one experience to another. This understanding is
rarely made explicit, although it poses significant methodological questions for modern economics. Kindleberger (1990), a self-avowed historical economist in his later
writings, was a key contributor to the historical understanding of financial crisis. Yet
he was aware of the challenges: Many economic models are plausible and will fit
particular circumstances: the question is how general they are and how much one
can rely on them to provide understanding and wisdom in particular circumstances
(Kindleberger, 1990, p4).
The role of economic history therefore cannot be divorced from the role of the economic approach through which history is interpreted. The history of economic thought
becomes performative in that particular interpretations of ideas become adopted more
widely and influence the way in which institutions evolve and policies are formed. They
help shape economic history. Where there are multiple interpretations, the one that

1344 A. Dow and S.Dow

has greatest impact is the one adopted by the most powerful groups in society in their
efforts to promote their own interests.
In the following section we consider a case study of historical input to economic
theory in the form of the staples approach to economic development. This is a particularly apposite case study in that its main originator, Harold Innis, also contributed to
the study of communication of ideas
3. History in the staples approach

7
Innis was of Scottish descent and raised on a farm in Ontario. Wounded in World War I, he undertook
a Ph.D. in Chicago before being hired at the University of Torontos Department of Political Economy.
Despite his injury, Innis began an investigation (in canoe as well as in archives) of the fur trade in Canada.
The beaver was the main pelt of this trade.

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One of Canadas contributions to the history of ideas has been a kind of historical
economics, which has also proved influential within Canada as a nationalist inspiration. Now a neglected artifact within the history of economic thought, as economics
has moved on to non-historical, modeling approaches to understanding, the staples
approach can nevertheless serve to show how economics can be enriched by a historical dimension. It also illustrates the scope for ideas to develop away from the centre of
(imperial)power.
What is the staples approach, and what makes it especially suitable to an investigation of how history informs economic understanding? The staple theory, which arose
from this approach, has arguably been Canadas original contribution to the world of
economic ideas and in Canada was for many years the leading one employed to explain
the countrys economic development (Phillips, 1985). The observations of Harold
Innis of the University of Toronto7 and others in the 1930s led to an understanding
that the nature of natural resourcebased industry differed from that of other industrial sectors, so that a country heavily dependent on the export of natural resources
would tend to develop in ways shaped by the characteristics of the export staplethe
staple being the name given to a natural resourceintensive export good (Neill, 1991,
chap 5). The staples approach suggested that the pattern, pace and nature of development of a natural resource exporting economy, relying on one sort of commodity for
a large part of its exports, would depend essentially on the mode of production of the
staple export.
By mode of production is meant not just the production function of neoclassical economics but also an array of associated variablesthe distribution of income,
the demographic effects of the staple, the institutions growing up around the trade,
the structure of costs (e.g., overhead cost) and so on. This approach to Canadian
economic development was embellished at length by Innis. It should be emphasised
that he was an economist and brought to his study of Canadian development the
particular perspective of a focus on markets. The staples approach he put forward was
market-driven, in the sense that prices for the staple and for the inputs into its production were the dynamic motive force in triggering and sustaining the staple development. However, he was clear that Canadas development took place with massive
government interventionthe railways, the National Policy, the geological survey
and accepted that without it Canada might never have come into existence as a leading world power. After The Wealth of Nations (Smith, 1776), economists had moved

Economic history and economictheory 1345

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away from a study of what induces economic development to a study of the allocation of resources. For many, one of the virtues of the staples thesis was its rounded
approach in addressing both development and efficient allocation. In the language of
Kuhn (1962), this synthesis of the two traditional paradigms presented a further paradigm, reflecting a particular worldview that underpinned the narrative Innis (1930,
1936, 1940) wove around his study of Canadas economic history in the 1930s and
1940s in a series of books dealing with Canadian fishing, the fur trade and the mining
economy (see further Watson, 2006). Each of these staples had different characteristics (negative analogy), but the staples approach inferred by a process of retroduction
that the underlying mechanisms by which these characteristics influenced the pattern
of economic development were held in common. The essence of the staples approach
is therefore that by concentrating on the characteristics of a particular staple product,
it draws together analyses that would normally be analysed separately: technology, the
development of institutional structures, the scale and distribution of rents, international trade and soon.
The narrative was built around detailed factual accounts of historical episodes. In
Inniss staples approach, considerable attention is directed towards the physical characteristics of the particular product under consideration. One of his most important
works, The Fur Trade in Canada, has as its first chapter a short description of the beaver and its typical locale, commencing with this passage: The history of Canada has
been profoundly influenced by the habits of an animal which very fittingly occupies a
prominent place on her coat of arms. The beaver was of dominant importance in the
beginnings of the Canadian fur trade. It is impossible to understand the characteristic
developments of the trade or of Canadian history without some knowledge of its life
and habits (Innis, 1930, p1).
These physical attributes not only determine the geography of the staples production but also influence significantly the economics of the process. In particular they
help determine the form which a particular mode of staple production will assume and
the distribution of rents that ensue (A. Dow, 1985). Will there be small independent
producers or a labour force subject to industrial discipline? Will there be large overhead costs or a trade based mainly on cash flow? Will private capital find it profitable
to develop and exploit the resource, or will state involvement be needed to set up infrastructure or to provide and train the required labour? Of course, the physical qualities
of the commodity do not alone ensure that the production mode takes the form that
it does, though they are an important determinant. Also important are the prevailing
technology, the industrial structure and the nature of the demand for the exported
staple (McCallum, 1980, pp 11820).
In the case of fur in Canada the large overhead costs of sending organised teams of
labour in canoes for long distances led to a form of commercial capitalism which was
arguably ill-suited in a later era to finance emerging manufacturing (Naylor, 1975).
The fur trade surplus was extracted by two oligopolistic companies and the geographical reach of the trade supported the early opening up of the frontier, a political priority
that shaped the thinking underlying government policy. Government provided further
support for opening up the frontier, through transportation and land grant policies and
the establishment of the Canadian Wheat Board, all of which supported the extraction
of rents by small-holding farm settlers. Although this institutional structure remained
for decades, shaped by early ideas about the frontier, the financial and technological
push to agri-business subsequently concentrated rents in much fewer privatehands.

1346 A. Dow and S.Dow

Innis had indeed argued that institutions, designed in the past, wield influence long
after outward circumstances change.8 Sometimes changing market conditions for staples may force a transformation of these institutional relics, with traumatic effects. This
is the judgement of the mature Innis (1950, p5):
Concentration on the production of staples for export to more highly industrialised areas in
Europe and later in the United States has broad implications for the Canadian economic, political and social structure. Each staple in its turn left its stamp, and the shift to new staples invariably produced periods of crisis in which adjustments in the old structure were painfully made
and a new pattern created in relation to a new staple.

Inniss intellectual project, therefore, did not limit itself to the theory of economic development
more appropriate to the study of hinterland economies than those currently in vogue in the
metropolis. More radically, he was suggesting the need for a global theory of imperialism to be
built around painstaking concrete analysis of the many levels of interaction of the centre/margin
of empires. He was using the staple to focus attention on the cultural interaction of different peoples at the edge of an expanding empire. (Watson, 2006, p 150, emphasis in original)

Nevertheless, provisional generalisations (as in Inniss hoped-for global theory of

imperialism) may emerge that may be translated from one context to another, in the
form of a narrative approach, which may illuminate similar circumstances. Thus for
example the stages approach to economic development, which arose from historical
study of the experience of a variety of contexts, provided a narrative that has a pedigree
reaching from the eighteenth to the twenty-first centuries.
The provisionality of such generalisations is critical; if there is no aspiration to identify natural laws, historical study is crucial to develop theory appropriate to specific
contexts. It is therefore not a foregone conclusion that the staples narrative will illuminate the experience of other countries. Nevertheless, there have been attempts to
apply the staples approach to other contexts, as in Douglass Norths (1961) application to the analysis of regional economic development and inter-regional trade in
North America. Further, Inniss application of the staples approach to natural resource
industries in Canada encouraged application to these industries in Australia (Abbott,

8
Innis was well acquainted with leading institutionalist economists who shared this insight: see Baragar
(1996).
9
Thereafter, it was criticised and largely abandoned by the economics profession in Canada (Neill, 1991,
chap 11). It lives on in Canada in other disciplinary settings (see for example Grays [2010] application to
corporate geography).

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The vision that appears is one of the development of society under an economic
regime of dependent capitalism, where dependency results from concentration on
the export of a few relatively unprocessed, staple products. One aspect of this has
been translated into a model of economic growth suited to economies rich in natural
resources but without an advanced industrial base. Authored by Mel Watkins (1963,
1977) this model, in its mature form, combines the staples approach with a distinctly
Marxian perspective. Thus the fresh historical perspective of Innis led to a more analytical presentation of part of his contribution (Altman, 2003)one which dominated
for a time the study of Canadian economic history and which was read and utilised by
development economists in the 1960s.9
Innis was interested in power, and its effect, in a way that growth models do not
encompass. As his biographer comments:

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1965). That the staples approach has had wider application than the historical study
that originally generated it suggests that the narrative does indeed illuminate, where
the circumstances are sufficiently similar.
Wool was the staple in Australia that was broadly comparable to fur in Canada.
Although both were open land economies settled by Europeans to the detriment of an
aboriginal population, Australia was in fact richer than Canada up until the end of the
nineteenth century. As Pomfret (1981, p 137)remarks: Fur was more land intensive
while wool was more European-labour-intensive, especially before the 1850s gold rushes
pushed up Australian wages. In both countries land-intensity was a force for geographic
expansion of staple production and for rapid exploration of the respective continents.
Tom Gunton (2003) concludes that staple regions are believed to be much more
at the mercy of destiny than they actually are. He sees a key determinant for development being the securing of linkages necessary to diversify the economy while also
emphasising the resource rent (which he estimates for coal in British Columbia) generated by the resource. The importance of natural resource rents to Canadian investment, and so growth, was also emphasised by A.Dow (1984, 1990).
The issues of knowledge that we have been addressing are redolent of Adam Smiths
(1795) view of the psychological requirements for theory to connect with real experience and set minds at rest; central to the spread of theory was the role of rhetoric as persuasion (Smith, 1983). The narrative history approach, which successfully
addressed experience of Canadian development, played a central role in the communication of ideas. It is therefore telling that Harold Innis was not only an innovative
economic historian but also influential in the foundation of communication studies
(Watson, 2006). Before turning to consider applying the staples approach to the modern financial sector, we therefore consider Inniss ideas on communication.
The seeds of Inniss communications ideas are to be found in the staples approach
(Parker, 1985). Although his major contribution was his distinction between different
communications technologies (Innis, 1950), we focus on how Innis saw communication as an element in supporting power structures. He believed empires (formal or
informal) and the cultural attitudes they spread are strongly influenced by the means
of communication current at the time. But in particular he saw a role for the more
peripheral parts of empire to create new ideas different from those ruling at the heart
of empire. Universities were critical, according to Innis, in encouraging thisrole.
What is meant by communications? Where once transport links and a mail service
were important there are now newspapers, radio and television, as well as the Internet
and text messaging. Inniss contention was that a dominating medium shapes the possibilities for any place, including the economic possibilities. In particular media may be
either time-oriented or space-oriented. As he put it: The concepts of time and space
reflect the significance of media to civilisation. Media that emphasise time are those
that are durable in character, such as parchment, clay, and stone. Media that emphasise space are apt to be less durable and light in character, such as papyrus and paper.
The latter are suited to wide areas in administration and trade (Innis, 1950, p7).
A dialectical process was evident in the development of societies in the Innis vision.
If media were predominantly time-oriented or space-oriented at any time the countervailing forces in society would correct that bias though cultural adaptations or technological change. As Menahem Blondheim (2003, p 170)remarks: By pointing out the
polarity of time and space, Innis upholds the prospecteven the inevitabilityof the
change of one bias into the other.

1348 A. Dow and S.Dow

Innis also emphasised the importance to civilisations of monopolies of knowledge
and power buttressed by the existing mode of communications. Again Blondheim
explains:
By achieving a monopoly, a certain communications apparatus may become the sole provider of
the physical infrastructure for communications, and thus dominate the nature of knowledge and
its diffusion. Since this monopoly of matter serves the mind, however, it can perpetuate and fixate not only itself, but also the concerns of society, shaping them in its own image and solidifying
the status quo. (Blondheim, 2003, p 170)

4. Application to the financialsector

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At first glance it might seem odd to consider applying the staples approach to
the modern financial sector. The product of the financial sector is not a natural
resource, which is the normal understanding of a staple, and the financial sector
is itself a locus of power, such that dependency on it is experienced by the rest of
the economy. But as already noted, Keynes had emphasised the merits of employing not only positive analogy (emphasising similarities) but also negative analogy
(emphasising differences). Only if the common characteristic persisted in a variety
of contexts could there be some confidence in applying it to new circumstances.
Thus, by considering similarities between staples and finance in spite of their differences, we may apply the staples approach to illuminate our current circumstances.
In what follows we explore the similarities. We will see the contribution of the staples approach as we consider in turn the nature of the products of the financial sector; the (technical and organisational) characteristics of production; the power of
the financial sector in relation to the state, the non-financial sector and the global
economy; the development of institutional structures; and finally the scale and distribution of rents. The purpose is to suggest the benefit of the staples approach as
prompting a focus on all of these factors. The next stage, which is beyond the scope
of this article, would be to develop a theory within that approach; our aim here is
simply to be suggestive.
The differences between the financial sector and natural resource production
provide the negative analogy. Yet there are similarities. A staple product is one that
accounts for a significant proportion of national output. The UK financial sector, for
example, is estimated to have contributed 9% of GDP in 2008 (Burgess, 2011). It is
also important in current account balance terms: the net surplus in the financial and
insurance sectors accounted for half of the United Kingdoms services surplus in 2010;
to give a sense of scale, this surplus was around one-third of the goods trade deficit
that year (Broughton, 2012, p 7). In this sense the financial sector is important for the
UK economy. Further, whilst the UK financial sector has significant market power in
global terms, financial asset prices nevertheless are set in a highly competitive global
market.
The staples approach focuses our attention first on the nature of the product. Rather
than being a physical product for which physical production technology is central, the
product of the financial sector is more complex. The basic product of retail banking,
whose importance lies in the fact that it underpins socio-economic relations, is money.
The major input to money is trust, the product of a history of relations between the
state and the banking system (Chick and Dow, forthcoming). Whether or not there is
confidence in money and the financial system more generally is influenced heavily by

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conventional understandings. These in turn are heavily influenced by the representation of reality by the financial sector itself, which had spread the idea that they could
be trusted to maintain financial stability. Buiter (2008, pp 1046) has dubbed this
powerful influence of the financial sector on the monetary authorities understanding
cognitve regulatory capture.
Confidence in bank-produced money provides the basis for the massive financial
superstructure whose products are a service for which the major input is the knowledge
and skills of the labour force. This production characteristic increases the importance
of clustering for this sector; speed of knowledge transmission is critical for market
operators, even though what used to be physical markets are now predominantly virtual electronic markets. This has been the case in spite of the increasing globalisation of
finance, which has hugely increased the market for any one institution. The location of
financial centres has thus proved remarkably resilient in the face of shifting economic
power (Kindleberger, 1974). Indeed, London has continued to influence the global
economy since the days of the gold standard to the involvement of London banks in
the Southeast Asia crisis, for example. However, even though technological change has
not substantially influenced the locus of power in the financial sector, it has had other
consequences. For example, information technology developments have facilitated
increasing financialisation, exposing (increasingly deregulated) financial institutions to
a wider range of country risks and the ill-understood risks associated with structured
financial products. Furthermore, technological advance has meant that changing market perceptions of these risks have had greater repercussions. For example, an increasing reliance on highly sophisticated algorithms for automated trading (independent of
location) has been an important technologically driven force behind the transmission
of the crisis, changing the character of financial crises. As Lawson (2009) explains,
the characteristics of production have thus been important for the way the sector has
evolved and behaved.
The financial sector has evolved in line with the evolution of state institutions
designed to support it. This support was provided for the banking system in particular to meet societys needs for a means of payment, and in the process to meet credit
needs to finance investment (Chick and Dow, forthcoming). This support enhanced
bank profitability, but at the cost to the banks of submitting to prudential controls
(including holding reserves at zero interest) which ate into profits. But the scale of the
sectors economic contribution had made it increasingly powerful and that power has
been enhanced over centuries by the political decision of successive governments to
serve the sectors interests (Aaranovitch, 1983). The dismantling of regulation was the
outcome of lobbying by the financial sector, supported by academic arguments based
on free market ideology (Chick and Dow, forthcoming). In the 1970s and 1980s, the
banking sector had put pressure on the government (in the United Kingdom and
elsewhere) to relax regulation to allow competition across different types of financial
institution and in different financial markets. The resulting institutional changes within
the financial sector and introduction of new products and practices ultimately led to
the financial crisis.
Meanwhile the scale of the financial sector in the United Kingdom has increased
dramatically as a result of its economic power. Central bank independence contributed to this process by shifting the balance of power away from the state and towards
markets. Therefore interest rates (and thus the exchange rate) might be set at a level to
suit the financial sector to the detriment of the manufacturing sector, an eventuality

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lent force in recent decades by the introduction of inflation targeting. The characteristics of the financial sector are such that inflation is more of a threat than it is to the
manufacturing sector.
The scale and distribution of rents, as in the staples approach, have been central
to the narrative of the crisis. Indeed, Palmas (2009) analysis of the crisis in terms
of increasing rents resulting from a new technology of power would fit well into a
staples approach. The nature of the financial sector and the power it has wielded
have provided scope for the acquisition of rents on a massive scale; these rents are
based on valuations that are endogenous to the sector itself. But the crisis has provoked a public outcry over bonuses for senior bank executives. Governments had
ceded power to the financial sector such that the onset of crisis created the too
big to fail problem, requiring taxpayer support. The lender of last resort facility,
designed within an earlier co-operative approach to banking has clashed with the
new deregulated approach, yielding moral hazard rents for banks. The public outcry is further enhanced by the fiscal austerity measures taken to meet the financial
sectors requirements of governments whose bonds they will purchase. The scope
for a shifting political landscape opens up possibilities for ideas to prevail, and for
institutional change, which are not tied to vested interests. As Innis had argued, a
changing market environment for a staple product can force a change of ideas and
institutional arrangements.
The ideas behind the evolution of the functioning of the financial sector and the
states involvement in it have been heavily influenced by an approach to economic theory which serves the sectors interests (Niebyl, 1946; see further Dow and Dow, 2002).
The idea of a monetary theory of inflation dates from the early days of banking, before
the massive growth of the financial sector, yet continues to be widely held not only
among mainstream economists but also by the general public. Because the products
of the financial sector are so closely related to market valuations and a more diffuse
state of confidence, market sentiment is a powerful force such that ideas embedded in
it wield a type of power that is absent in other types of products.
The idea that unconstrained competition in financial markets enhances social welfare is entrenched in an approach to economics that makes little reference to the actual
operation of financial markets as being endemically unstable. It was telling in the early
days of the crisis that there was so little awareness of the history of financial crisis. But
that has changed. The evidence of the crisis has posed a challenge to the view that
financial stability should be left in the hands of the financial sector itself, as far as the
public is concerned, although it is perpetuated within mainstream economics. But
even then, the fiscal austerity measures being championed by the financial sector are
widely accepted by the public as a necessity. As Innis had argued, power over communications more generally has been concentrated, facilitating the propagation of a
particular narrative account of the crisis and its policy solutions and shaping the future
of the global economy.
From this brief account we can see that the staples approach focusses our analysis on
key elements of the underlying forces from which the crisis emerged and the reactions
to it: the nature of the product of the financial sector and its production technology,
the development of institutional structures as a result of power relations, the scale and
distribution of rents and the propagation of ideas that serve the interests of the financial sector. More generally it provides a potentially fruitful framework for analysing the
role of the financial sector with respect to growth and development.

Economic history and economictheory 1351

5.Conclusion

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