Economic Thought Through the Ages, Lecture 2 with David Gordon - Mises Academy
Economic Thought, Lecture 2The Late Spanish Scholastics
Why the Spanish Scholastics?• Rothbard has a counter-narrative to the picture ofeconomics that begins with Adam Smith.• Rothbard’s account stresses the subjective natureof value, as opposed to cost of production theories• The Spanish scholastics of the 16thand early 17thcenturies, centered at the University of Salamancain Spain, are extremely important in Rothbard’saccount because they prefigured basic insights ofAustrian economics.
Scholasticism• All of the persons in this chapter arescholastics. Scholastic philosophy usuallyproceeds by commenting on other texts,rather than by “out of the blue” arguments.• Even in a text that isn’t a commentary, therewill be a summary of what previous writershave said.
Cardinal Cajetan• Before he gets to the School of Salamanca,Rothbard discusses the Italian Dominican Thomasde Vio, Cardinal Cajetan (1468-1534)• He became the General of the Dominican Orderand was famous for debates with Martin Luther.• He is most famous in philosophy for his views onanalogical predication. This was in a commentaryon Thomas Aquinas’s Summa Theologica,
Cajetan on Money• Cajetan had a favorable attitude to business.He didn’t think that people had to stay intheir assigned place in society. They couldbe ambitious and try to improve theireconomic position.• Foreign exchange, trading one money foranother kind of money, is all right.
Cajetan on Money Continued• The price of a good is determined by supplyand demand.• Cajetan realized that this applies to moneytoo. Money is a commodity.• The value of money in part depends onwhat people think the demand and supplywill be in the future. Cajetan was a pioneerin the theory of expectations.
Justifying Interest• As commercial society was developing,there was a tendency to be more liberalabout allowing interest.• Scholastics wouldn’t say, “Here’s a newargument showing that there is nothingwrong with interest.” They would try tomodify older views. (There is a parallelwith Jewish approaches here.)
Cajetan on Interest• Cajetan falls into this pattern. He modifies some ofthe older arguments.• One of the standard justifications for interest wascalled lucrum cessans. This meant that someonecould lend at interest if the money that he lentwould otherwise have earned a profit. The lenderwas being paid for the profit he was giving up.Cajetan extended this to all business loans but notto consumer loans.
The Early School of Salamanca• Spain was the greatest European power in the 16thcentury. The University of Salamanca was theworld center for the study of economics.• Francisco de Vitoria (c.1485-1546) was thefounder of the School.• He was an advocate of natural law and denouncedthe conquest and enslavement of the Indians inSpanish America.
A Dissenting View• There is a dissenting view by the legaltheorist Carl Schmitt in The Nomos of theEarth that although Vitoria generallyopposed wars of conquest, he thought theSpanish were making a justified response toattacks on them.
Just Price• The usual view in the Middle Ages was that thejust price was the prevailing market price.• What happens if there isn’t a prevailing marketprice?• Vitoria said that whatever the traders agreed onwas just. This seems like an obvious next step,given the view about the just price, but these areoften difficult to see.• Vitoria limited this principle to luxury goods.
Azpilcueta• One of Vitoria’s students, Martin deAzpilcueta Navarrus (1493-1586) wentfurther than anyone before in his defense ofthe free market.• He opposed all government price fixing. Ifgoods were abundant, price controls don’tdo anything. If goods are scarce, controlscause harm.
More Azpilcueta• Azpilcueta’s most important contributionsto economics are in the theory of money.• Like Cajetan, he realized that money is acommodity. Its value is determined in thesame way as other commodities.
The Quantity Theory• If a good’s supply increases, its price falls,This is the basis of the quantity theory ofmoney. A fall in the price of money isequivalent to a rise in the price ofeverything else. Unlike some later quantitytheorists, he realized the importance ofdemand in determining the value of money.
The Quantity Theory• Azpilcueta used the quantity theory to explain therapid increases in prices in Spain in the 16thcentury. This rise was caused by shipments ofgold and silver into the country.• Jean Bodin probably read Azpilcueta.• He had the notion of time preference. Having agood now is worth more than having it in thefuture. He didn’t take the next step of using timepreference to justify interest.
Medina• Juan de Medina (1490-1546) was the first writerto give risk of non-payment of a loan as a reasonto charge interest.• Putting your money at risk is something that canbe purchased.• Although Median thought this argument didn’tapply to riskless loans, his opponents saw that itwould undermine the prohibition of usury.
Middle Years of the SalamancaSchool• The middle years of the School of Salamancaincluded Covarrubias, Saravia, and Mercado.• This group opposed cost of production theories ofvalue and claimed that the value of goods isdetermined by utility and scarcity.• They also applied this analysis to money. Thevalue of money depends on how scarce it is and onhow much people demand it.
Molina• Luís de Molina (1535-1601) was one of the mostimportant of the last generation of the school ofSalamanca. (He attended Salamanca only briefly)• He strongly favored free will. He taught thedoctrine of scientia media, or “middleknowledge.”. God knows not only the actions wechoose, but what we would freely choose undervarious conditions. God’s takes account of thesethings in deciding which world to create.
Molina Continued• Molina had an important dispute with theDominican Domingo de Bañez.• Rothbard doesn’t cover the dispute in detail,but Bañez claimed that God causes us to dothings freely. In other words, we have freewill, but God brings it about that we act aswe do.
Molina’s Contributions• In economics, Molina continued the Salamancananalysis of money. He was the first to introduceceteris paribus clauses.• He strongly favored freedom of monetaryexchange.• He supported an active conception of rights. If youhave a right, you have a power to do something.E.g., if you have a property right, you have a rightto use the property.
Mariana• Another important Scholastic was Juan deMariana (1536-1624). He opposeddebasement of copper coinage by KingPhilip III.• Debasement increases the supply of money:the same amount of copper now goes intomore coins. Inflation is a hidden tax.
Mariana• Mariana argued that the king has no right toimpose a new tax without consent of thepeople.• He also opposed state-granted monopolies,if they charged a higher price than themarket would have.• Mariana defended tyrannicide.
Lessius• The last important Scholastic we’ll discuss isLeonard Lessius. He was Flemish, but Rothbardconsiders him a Salamancan in spirit. The name“Lessius” means “from Liège”.• Lessius applied the scholastic view of just pricesto wages. Just wages are market wages. The factthat people willing to work at a wage shows thatthe wage isn’t too low.• He also has the notion of psychic income, i.e.,non-monetary compensation,as part of wages.