Central planning by business is still central planning

The much-touted summit of the Coalition for a Better Future, a cabal of more than 100 think-tanks, business and industry associations, and non-profits, met this week in Ottawa to chart an economic path for Canada, focused on achieving greater equality and prosperity. While done with the best of intentions, top-down central planning of the economy by business and related organizations is no better than central planning by government.

The signals leading up to this week’s summit from various participants indicated a proclivity for the development of a master plan for the economy that will guide investment, labour and entrepreneurial decisions from the top down. Lisa Raitt, former deputy leader of the Conservative Party of Canada and co-chair of the coalition, for instance, called for “ensuring” that we’re distributing growth and prosperity “equally.”

It’s fairly clear that the “we” in Raitt’s recommendation is government.

Moreover, former deputy governor of the Bank of Canada and adviser to the coalition, Carolyn Wilkins, recently coauthored a report calling for massive government intervention including broad climate measures well beyond anything linked to the Paris Accord, imposing Environmental, Social and Governance (ESG) measures on business, adhering to global compacts on business and personal taxes, and massive government investments (i.e. spending).

If as expected, the coalition pursues such an approach to the economy, it will be a missed opportunity. There’s more than 100 years of data and experience showing that economies work best when they rely on the individual decisions of workers, entrepreneurs, investors, businessowners and families to make decisions about where to invest their labour, savings and entrepreneurial energies. This is the antithesis of what’s expected from the summit.

The government, does however, play a vital role in establishing the conditions and environment for decisions to be made by individual people, whether acting as consumers or producers. Policies such as well-defined property rights, independent courts, competitive tax rates, outcome-focused regulations based on empirical cost-benefit analyses, and open trading markets both domestically and internationally are vital for a functioning economy, and there’s clearly a role for government.

But this isn’t what’s expected. Perhaps the best example highlighting the different approaches relates to carbon regulation. Placing a price on carbon (as Canada has done) and its assuming it’s well-designed (which Canada has failed to do) creates the conditions for businessowners, investors, entrepreneurs and consumers to figure out what makes most sense for them. It’s worth noting that Canada plans to impose a punitive tax on carbon to discourage emissions—specifically, at $170 per tonne by 2030—which will significantly exceed the Biden administration’s estimates of the social costs that greenhouse gas emissions impose on society, which range from roughly $20 to $90 (USD) per tonne. In other words, the pricing of the carbon tax exceeds the social cost, which is a deterrent.

In a bottom-up market environment where a carbon tax has been imposed, some firms may decide it’s most economical to invest in new technologies and/or transition to alternative sources of energy to avoid or minimize the carbon tax. Others might decide that paying the tax is the most economical. But it’s the bottom-up decisions of individual economic actors that determines the outcome.

Contrary to much of the political rhetoric from carbon tax advocates, this is not what’s happened. Yes, a carbon tax of $170 per tonne will be imposed, but that’s on top of existing regulations. And governments have imposed new additional regulations that short circuit the decisions of individuals. For example, the federal government has, among many measures, created a Clean Power Fund to finance investments in renewables, provided funding for the transition from coal, and promoted zero-emission vehicles. In other words, these top-down regulations and direct interventions either impose decisions on individuals or actually entail governments making the decision themselves.

Put simply, the government’s approach does not rely on workers, entrepreneurs, businessowners and families to make decisions but rather politicians and bureaucrats.

Substituting business leaders, industry associations and non-profits for politicians and bureaucrats will not improve the outcomes. Indeed, Adam Smith, the founder of economics, warned about such coalitions in his landmark and still relevant The Wealth of Nations in 1776: “people of the same trade, seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices.” Simply put, business leaders and other participants in the summit, just like politicians and bureaucrats, lack the incentives and information needed to plan an economy.

While the participants in the summit likely have the best intentions and genuinely desire to see Canada’s economy and prosperity improved, their approach is faulty and ignores economic history and experience. The economy and Canadians would be well-served for the participants to step back and genuinely attempt to understand how markets actually work to deliver prosperity, which is from the bottom up, not the top down.