Roman and Early Christian Contributions

The major contribution of ancient Rome:

Civil Law: 

The Roman law of property and contract:

Natural law:

The Corporation: 

From the time of the fall of Rome to the end of the eighteenth century—most writers in economics were lawyers or businessmen of some kind.

Early Christian thought gave us another view®

Worldly Possessions: Not good - would not need them in God's kingdom so shouldn't put a lot of value on them.

The “right” use of material gifts was important.

Morality vs. Economics: More interested in the morality of individual behavior - not the how and why of economics.

Medieval Economic Thought

Feudalism was the dominant form of economic organization in the middle ages.

King was the owner of everything—

 “Ownership” meant “right to use”…

Feudal property became the seat of political power in the middle ages.

So the feudal lords exercised government functions in their territories.

Mostly agricultural—small scale.

Serfs: 

The goal was self-sufficiency—

The principal of organization was status, not contract.

Scholastics

Medieval economics was a product of the clergy, particularly a group of writers known as the Scholastics.  (teachers, professors, “schoolmen”).

Aristotle’s Influence: 

—his logic and reasoning—was the highest ranked non-biblical source for the Scholastics.

The most famous names being

                        St. Thomas Aquinas, Albertus Magnus, Duns Scoutus in the 13^th century, Nicolas Oresme in the 14^th century, and in early modern times the Spanish Jesuit Luis Molina. (many of the ideas below can be attributed to St. Thomas Aquinas).

Nature of Things: 

But they also:

             Inquired into “the nature of things”—which basically is not an ethical problem.

Divine law became natural law.

General Interest and Welfare Economics:   Usually what was declared as "just" was whatever serves the general interest - in this sense Scholastic economics became an early form of welfare economics:

On Value

Their contributions: 

Equilibrium: They brought together Aristotle's primitive notion of value with a concept of equilibrium - although a very weak concept.

Two divergent tracks were set:

(1)    

(2)    

Notion that the value in exchange must comply with cost of productions…some argue a precursor to Karl Marx.  However, he did talk about utility as a predominant element.

Argued that there is a “natural” order (value) and an “economic” order (value) —in which things are valued differently.

All goods were assigned to a class—which also determined their value and had nothing to do with costs.

So we cannot say that the Scholastics were necessarily the precursors to the labor theory of value.

In the economic order goods are measured in relation to labor …actually labor and expenses.

Paradox of Value: We will see that this is typical of the Scholastics and actually posed a problem for them -- the so-called and later termed "paradox of value":

For example, when St. Thomas is faced with the fact that a pearl fetched a high price and a mouse no price, although the “class” of the mouse had been created after that of the pearl and appeared to be entitled to a higher rank in the natural scale of valuation—he referred to St. Augustine and replied that the

“principle of salable things was not reckoned in accordance with the rank of nature…but in accordance with the extent to which the things are useful to man.”

If the market price does not cover costs of production, production will eventually cease.

                        Why is this important (to mainstream economics today)?

(1)     suggested that price could be treated as an equilibrium value (price = costs)

(2)     set up an economic variable as the regulator of value (costs) - if costs were not covered than the economic value was not high enough and production would cease.

The Doctrine of the Just Price-

Inner Goodness:  Basically a "just price" was one that corresponded to the (bonitas intrinseca) or inner goodness of the commodities.

Practical formula:  The generally accepted practical formula for determining the just price was that it should compensate for the work done by the artisans and his aides and plus expenditures for raw materials, tools, and the like supplied by other producers.

So again - Costs of production were thus the essential elements of the prices fixed by feudal lords, municipalities, and guilds;

What labor earned or was paid (that costs) was graded according to the social position and skill of the worker and the nature of the work.

So what St. Thomas discussed seemed basically to denounce market forces as antagonistic to justice—since the just price was basically based on cost—not demand.

Again, the labor theory of value and the Paradox of value: 

However, St. Thomas realized that changes in S and D might affect the value of the commodities… therefore the just price was not fixed with mathematical precision—but depended on estimates.

Therefore:

…if the price exceeds the quantity of the value of the article, or the article exceeds the price, the equality will be destroyed.  And therefore, to sell a thing dearer or to buy it cheaper than it is worth is, in itself, unjust and illicit….The just price of things, however, is not determined to a precise point but consists of a certain estimate….The price of an article is changed according to difference in location, time, or risk to which one is exposed in carrying it from one place to another or in causing it to be carried.  Neither purchase nor sale according to this principle is unjust (cited in Dempsey, p.481).

Among the unlawful practices which were especially condemned and prosecuted were:

(1)   Forestalling –

(2)   Regrating -

(3)   Engrossing -

So an increase in price was unlawful unless the good had been transformed and its usefulness increased…usually by human labor.

            However—the labor was not compared in terms of different kinds, etc.—because the emphasis was on how the labor had increased the utility of the good and enhanced its (bonitas intrinseca) inner-goodness.

St. Thomas Aquinas from Summa Theologica

            Four Questions:

1. Whether a man may lawfully sell a thing for more than it is worth:

Basically no, although many did lawfully,

But he shouldn’t.

“consequently, to sell dearer or to buy cheaper than a thing is worth is in itself unjust and unlawful.”

This question right here presupposes that we can say something about the “worth” of a good outside of the process of buying or selling…that particular buying or selling. (worth to another).

Is this fraud?  He answers it is sinful to practice fraud for the express purpose of selling a thing for more than its just price – inasmuch as a man deceives his neighbor to his loss.

Is this the same as “for more than it is worth?”

Can speak of buying and selling in two ways:

a.      common advantage to both parties

“but it not out to be more burdensome to one than to the other . . . contract out to be based on the equality of things.”

b.      accidentally turns out to the advantage of one and to the injury of the other.

For example when a man is in great need of something and the other is injured if he is deprived of it.

In this case the just price not only takes into account the thing sold, but also the loss incurred by the seller in parting with it.  So will this justify a higher price?

Thus:  can be sold for more than it is worth in itself—but not more than it is worth to its possessor.

a.         seller deprived:  should be compensated

b.         buyer aided:  seller shouldn’t charge more due to this.  But it is a “matter of honor” for the buyer to pay more.

2. Whether a sale is rendered unlawful by a defect in the thing sold?

Consider three kinds of defects:

a.         Substance of the thing sold.

b.         Quantity – measure

c.         Quality

The seller:  if he doesn’t know about the defect – he is not sinful – but must pay later.

This is also true with the buyer.  If he buys gold, both thinking brass, the buyer should compensate the seller.

3. Whether a seller is bound to declare a defect in a thing sold?

If the defect is obvious, he doesn’t have to point it out – if he makes a proper deduction from the price.

Doesn’t have to tell of a coming change, although he would be more virtuous if he did.

4. Whether in trading it is lawful to sell a thing for more than was paid for it?

This is sinful!

He is saying something different here – but if he does this, if he is selling something for more than he paid for it he must have paid less than it was worth or be selling for more!  This cannot be done without sin.

      Intent is important.

            Not everyone who sells for more than he paid is a trader – but only the one who buys for the express purpose of selling dearer.

            Can sell it dearer:  Because he has “improved” the thing, because the price has changed with time and circumstances, or risk in transporting or having it transported for him.

Usury:

“. . . to receive usury for money lent is, in itself unjust, since it is a sale of what does not exist; whereby inequality obviously results, which is contrary to justice.”

“ . . . the act of lending involves a transfer of ownership.”

Therefore you cannot ask for the price of something plus a price for its use.  They cannot be separated.

Except in the case of say renting a house: 

But with money – which was invented for effecting exchanges – so the use of money is the consumption of it – whereby it is expended in making purchases.

So this is unjust – to receive usury for money . . . because when you lend money, you are, in effect, transferring ownership since you cannot separate its use form its consumption.

He who pays usury does not really do it voluntarily, but under some compulsion – for he needs the money!

He distinguished between Usury vs. Interest:

Usury:  payment for use of money in a transaction that resulted in gain.

Interest:  reimbursement for loss or expense – such as the opportunity cost of not being able to use the capital.

So risk was not a justification for interest since loans were usually backed by a lot of property.

Thus, usury prohibition was not intended to curb the high profits of risk enterprise.

Therefore with regard to money:  the Scholastic (Thomas) analysis neglected (three interest theories) - all of which came later:

a.       risk,

b.      the productivity of money as an economic resource and

c.       the time value of money.