Economic Thought, Lecture 2

The Late Spanish Scholastics

Why the Spanish Scholastics?

• Rothbard has a counter-narrative to the picture of economics that begins with Adam Smith.

• Rothbard’s account stresses the subjective nature of value, as opposed to cost of production theories

• The Spanish scholastics of the 16th and early 17th centuries, centered at the University of Salamanca in Spain, are extremely important in Rothbard’s account because they prefigured basic insights of Austrian economics.

Scholasticism

• All of the persons in this chapter are scholastics. Scholastic philosophy usually proceeds by commenting on other texts, rather than by “out of the blue” arguments.

• Even in a text that isn’t a commentary, there will be a summary of what previous writers have said.

Cardinal Cajetan

• Before he gets to the School of Salamanca, Rothbard discusses the Italian Dominican Thomas de Vio, Cardinal Cajetan (1468-1534)

• He became the General of the Dominican Order and was famous for debates with Martin Luther.

• He is most famous in philosophy for his views on analogical predication. This was in a commentary on Thomas Aquinas’s Summa Theologica,

Cajetan on Money

• Cajetan had a favorable attitude to business. He didn’t think that people had to stay in their assigned place in society. They could be ambitious and try to improve their economic position.

• Foreign exchange, trading one money for another kind of money, is all right.

Cajetan on Money Continued

• The price of a good is determined by supply and demand.

• Cajetan realized that this applies to money too. Money is a commodity.

• The value of money in part depends on what people think the demand and supply will be in the future. Cajetan was a pioneer in the theory of expectations.

Justifying Interest

• As commercial society was developing, there was a tendency to be more liberal about allowing interest.

• Scholastics wouldn’t say, “Here’s a new argument showing that there is nothing wrong with interest.” They would try to modify older views. (There is a parallel with Jewish approaches here.)

Cajetan on Interest

• Cajetan falls into this pattern. He modifies some of the older arguments.

• One of the standard justifications for interest was called lucrum cessans. This meant that someone could lend at interest if the money that he lent would otherwise have earned a profit. The lender was being paid for the profit he was giving up. Cajetan extended this to all business loans but not to consumer loans.

The Early School of Salamanca

• Spain was the greatest European power in the 16th century. The University of Salamanca was the world center for the study of economics.

• Francisco de Vitoria (c.1485-1546) was the founder of the School.

• He was an advocate of natural law and denounced the conquest and enslavement of the Indians in Spanish America.

A Dissenting View

• There is a dissenting view by the legal theorist Carl Schmitt in The Nomos of the Earth that although Vitoria generally opposed wars of conquest, he thought the Spanish were making a justified response to attacks on them.

Just Price

• The usual view in the Middle Ages was that the just price was the prevailing market price.

• What happens if there isn’t a prevailing market price?

• Vitoria said that whatever the traders agreed on was just. This seems like an obvious next step, given the view about the just price, but these are often difficult to see.

• Vitoria limited this principle to luxury goods.

Azpilcueta

• One of Vitoria’s students, Martin de Azpilcueta Navarrus (1493-1586) went further than anyone before in his defense of the free market.

• He opposed all government price fixing. If goods were abundant, price controls don’t do anything. If goods are scarce, controls cause harm.

More Azpilcueta

• Azpilcueta’s most important contributions to economics are in the theory of money.

• Like Cajetan, he realized that money is a commodity. Its value is determined in the same way as other commodities.

The Quantity Theory

• If a good’s supply increases, its price falls, This is the basis of the quantity theory of money. A fall in the price of money is equivalent to a rise in the price of everything else. Unlike some later quantity theorists, he realized the importance of demand in determining the value of money.

The Quantity Theory

• Azpilcueta used the quantity theory to explain the rapid increases in prices in Spain in the 16th century. This rise was caused by shipments of gold and silver into the country.

• Jean Bodin probably read Azpilcueta.• He had the notion of time preference. Having a

good now is worth more than having it in the future. He didn’t take the next step of using time preference to justify interest.

Medina

• Juan de Medina (1490-1546) was the first writer to give risk of non-payment of a loan as a reason to charge interest.

• Putting your money at risk is something that can be purchased.

• Although Median thought this argument didn’t apply to riskless loans, his opponents saw that it would undermine the prohibition of usury.

Middle Years of the Salamanca School

• The middle years of the School of Salamanca included Covarrubias, Saravia, and Mercado.

• This group opposed cost of production theories of value and claimed that the value of goods is determined by utility and scarcity.

• They also applied this analysis to money. The value of money depends on how scarce it is and on how much people demand it.

Molina

• Luís de Molina (1535-1601) was one of the most important of the last generation of the school of Salamanca. (He attended Salamanca only briefly)

• He strongly favored free will. He taught the doctrine of scientia media, or “middle knowledge.”. God knows not only the actions we choose, but what we would freely choose under various conditions. God’s takes account of these things in deciding which world to create.

Molina Continued

• Molina had an important dispute with the Dominican Domingo de Bañez.

• Rothbard doesn’t cover the dispute in detail, but Bañez claimed that God causes us to do things freely. In other words, we have free will, but God brings it about that we act as we do.

Molina’s Contributions

• In economics, Molina continued the Salamancan analysis of money. He was the first to introduce ceteris paribus clauses.

• He strongly favored freedom of monetary exchange.

• He supported an active conception of rights. If you have a right, you have a power to do something. E.g., if you have a property right, you have a right to use the property.

Mariana

• Another important Scholastic was Juan de Mariana (1536-1624). He opposed debasement of copper coinage by King Philip III.

• Debasement increases the supply of money: the same amount of copper now goes into more coins. Inflation is a hidden tax.

Mariana

• Mariana argued that the king has no right to impose a new tax without consent of the people.

• He also opposed state-granted monopolies, if they charged a higher price than the market would have.

• Mariana defended tyrannicide.

Lessius

• The last important Scholastic we’ll discuss is Leonard Lessius. He was Flemish, but Rothbard considers him a Salamancan in spirit. The name “Lessius” means “from Liège”.

• Lessius applied the scholastic view of just prices to wages. Just wages are market wages. The fact that people willing to work at a wage shows that the wage isn’t too low.

• He also has the notion of psychic income, i.e., non-monetary compensation,as part of wages.