This is explained, Naylor suggested, by the country’s colonial past and, in particular, the economy’s dependence on the staple trades. During the colonial period Canadian business people, Naylor argued, became accustomed to doing business in fields that required little commitment of their capital to long-term projects. They consequently preferred keeping their capital liquid, making short-term and comparatively safe investments in wages and raw materials, or extending short-term credit to producers and distributors rather than undertaking investments in manufacturing plants or other industrial enterprises in which returns were distant and less certain. Thus, they remained primarily "merchants" rather than becoming "industrial capitalists" of the kind who emerged in the US.
Even when Britain abandoned its North American colonies in the 1840’s, Naylor contended, the dominant merchant class in Canada found a way to maintain its traditional role: the merchants of Canada would use their political influence to create a new mercantile state of their own. The new nation founded in 1867 was designed to protect the interests of the commercial class which would now concern itself with running the banks, the railways, and other characteristically commercial activities. As for the manufacturing sector, it would be turned over to American companies. Domestic Canadian entrepreneurs trying to start up industrial enterprises were hobbled by the Canadian tariff which raised the prices of manufactured goods in Canada to levels certain to attract US competitors. The Canadian commercial elite would survive by becoming the handmaidens of US industrial capitalists operating in Canada.
This approach has much in common with a more general analysis ("dependency theory") devised by a number of Latin American economists in the post-Word War II period. They sought to explain the underdevelopment of their part of the world in a way that did not rely on the traditional view that the causes of underdevelopment were inherent in the economies concerned. [See, for example, C. Furtado, Development and Underdevelopment, Berkeley, University of California Press, 1964; R. Prebisch, Change and Development : Latin America’s Great Task, New York, Praeger, 1971; A.G. Frank, Dependent Accumulation and Underdevelopment, London, Macmillan, 1978.] Instead, they argued, underdevelopment is a process which is imposed by external forces.
An important feature of dependency theory is the notion that the dominant social class of the developed area and the dominant social class of the dependent area become linked. Thus, Wallace Clement, the Canadian sociologist, has sought to show that Canada’s corporate elite are the co-opted "compradors" of economic interests based in other countries. (The elite group in the dependent area develops an interest in perpetuating the dependency.) As applied to Canadian history these ideas have provoked much controversy and the validity, especially of Naylor’s work, has been challenged by more orthodox Canadian economic historians. Particularly damaging has been their demonstration that the division between "merchants" and "industrial capitalists" in the Canadian context is far from clear. Many Canadian business leaders in the 19th century appear to have been both. It is also not clear that "merchants" were responsible for the tariff policies adopted soon after Confederation or that Canadian experience was much different from that of a number of other countries which industrialized in the late 19th century. But for all its weaknesses and undoubted exaggeration, the Naylor thesis provides a useful incentive to focus upon certain key features of Canadian economic development in the 19th century. Not least it reminds us that the staples tradition can illuminate negative as well as positive consequences for an economy developing on the periphery of a much larger metropolitan system.
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