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One for Another: Thomas Aquinas and the Just Price
Aquinas and His Influence The philosopher Thomas Aquinas (1225-1274) was born in the Italian town of Aquino. His family wished him to enter the Church's priestly ranks, in the hopes that he could acquire a high church position. But Aquinas had different ideas. While still a student at the University of Naples, he became a Dominican monk. Aquinas devoted his life to the Dominican order, both as a scholar and teacher. He taught first at the University of Paris, at that time the most important university in Europe. As his reputation grew, he joined the papal court in Rome, where his thinking had a deep impact on official Church views. Aquinas achieved remarkable scholarly fame during his own lifetime, and is now considered one of the most influential thinkers of the Middle Ages. His philosophical system continues to affect the doctrines of Roman Catholicism today.
In his writings, Aquinas combined the classical ideas of Aristotle with Christian laws, thereby laying the groundwork for the religiously based medieval thought known as scholasticism. Like Aristotle, he touched on a wide range of subjects, though with the purpose to provide a system of thought that combined the worldly and divine in a seamless unity. Given the breadth of Aquinas's interests, it is not surprising that his treatment of worldly affairs included economic topics.
Lending and Interest Aquinas echoed an age-old Christian tradition with his condemnation of interest-based money lending, known in his day as usury. To buttress his argument, he cited passages from the Bible, including a statement by Jesus as recorded by the apostle Luke: "Lend freely, hoping nothing in return." In addition, Aquinas extended the view of Aristotle, who believed that the proceeds of usury represent an unfair profit made at the expense of the borrower. In Aquinas's words: "..to receive usury for money lent is, in itself, unjust, since it is a sale of what does not exist.."1
For Aquinas and his contemporaries, the payment of interest brought into question the stability of the monetary system, since it seemed to presume that money necessarily depreciates in value. With an annual interest rate of 10 percent, for example, $100 received today is worth the same as $110 received in one year's time. And accepting such constant depreciation in the value of money, it was thought, would be as harmful as allowing political rulers to decrease the worth of their own currencies in order to make a dishonest short-term gain.2
Today, economists tend to view interest as a payment for an identifiable service. If borrowed funds are invested in a profit-making enterprise, it is possible to turn a given monetary amount today into a larger amount in the future. If, instead, borrowed funds are used for consumption, borrowers are still willing to pay interest. This is because the chance to receive a certain monetary amount today is preferred by most of us to the chance to receive the same amount in the future.
The relevance of these conditions in Aquinas's own day meant that his condemnation of usury was virtually impossible to enforce. From 1300 onwards, a sophisticated banking system arose in medieval Europe, as the economic role of interest-based lending became too crucial to allow for its absence, and the potential profits to lenders were too high to be ignored. In England during the 15th century, for example, the annual return expected by 'sleeping partners' (the polite term for lenders) was in excess of 10 percent.2 But, because of opposition from the Church, such interest payments were usually concealed in legal technicalities. A common way was by combining a loan with an exchange of funds from one country's currency to another, with the interest being hidden as a commission on foreign exchange transactions.
As the Middle Ages ended, Aquinas's argument against usury became one of the casualties of the overthrow of traditional values by capitalism. By the 1500s, regulations against usury were gradually being loosened throughout Europe, and even the Church's own spokesmen were forced to accept interest-based lending as a part of everyday life.
The Just Price While Aquinas's attack on usury had little success, he made another more effective contribution to economic thought. Using the concept of the just price, he attempted to measure the conditions of fair trade. For Aquinas, as for his contemporaries, the importance of this issue stemmed from Christian ethics, as summarized in the biblical command to "Do unto others as you would have them do unto you." Aquinas also wished to extend the incomplete explanation of the ethics of exchange provided by Aristotle.
Aristotle had reflected the typical view of his times that traders break the rules of justice whenever they sell items at prices higher than those they purchased them for. In contrast, Aquinas realized that a trader deserves a return that covers not just his out-of-pocket costs, but also a payment for his own labour and a premium for risk. Aquinas therefore suggested that society should be prepared to tolerate the activity of traders as long as their gains from trade were moderate and their wealth was used for the benefit of the entire community:
...there is no reason why gain [from trading] may not be directed to some necessary or even honourable end; and so trading will be rendered lawful; as when a man uses moderate gains acquired in trade for the support of his household, or even to help the needy..3
As interpreted by later medieval writers who extended Aquinas's economic ideas, the just price came to be seen as the value of an item that allowed producers to maintain their customary position in society. In this form, the notion of just price can be related to producers' long run costs, including a normal profit. But for Aquinas himself, there was no guarantee that the just price could be reached automatically. Without the modern notion of competition at his disposal, he had little faith in the ability of private markets to find an equilibrium where the interests and consumers and producers would be in balance. In his view, price controls and other forms of market regulation were therefore necessary to curb the selfish excesses that would otherwise dominate trade.
Contemporary Relevance Do Aquinas's economic ideas have any modern-day interest? Certainly his argument against usury is now difficult to agree with, given the central role that interest plays in our economy. Indeed, it can be argued that the medieval opposition to usury worsened the very conditions this rule was meant to suppress, because the prohibition of usury had the perverse effect of increasing interest rates, thereby raising the profits from lending and borrowers' costs.
Aquinas's conception of the just price is less easy to dismiss. His realization of the need for payments for business risk represented a significant departure from previous economic perspectives, and his admission of the potentially positive role of profit aided the gradual growth of private market activity in Europe in succeeding centuries. While Aquinas applied his conception of the just price to defend regulation of markets, in the hands of some later scholastic writers his notion was transformed into something not far removed from the modern idea of long-run competitive equilibrium. Not only were market prices seen as reflecting allowable costs for all resource suppliers, there was also a realization of the special harm of monopoly to buyers, due to the ease with which monopolistic sellers could circumvent the just price.
A few thinkers who succeeded Aristotle in the scholastic tradition approached even closer to modern notions of market competition by identifying short-term conditions that could influence the just price. But their scattered insights were never fashioned into a coherent theory in the medieval period. It would take further development of markets, as well as a more positive attitude towards money-making and trade, for the potential benefits of competition to be clear. The link between the economic ideas of Aquinas and modern economic theory is therefore weak at best. Despite this fact, ideas such as the just price still exert an indirect influence on popular views. For example, present-day supporters of government programs such as rent controls or agricultural price supports owe a debt to the arguments of Aquinas. If nothing else, the continuing popularity of such programs shows that the search for a just price, distinct from economists' notions of market equilibrium, is far from ended.
Notes 1. Quoted in A. E. Monroe (ed.) Early Economic Thought (Cambridge Mass: Harvard University Press, 1930), p. 66. 2. The Cambridge Economic History of Europe, M. M. Poston and Edward Miller, eds., 2nd ed. (Cambridge UK: Cambridge University Press, 1987), vol. 2, p. 267. 3. Quoted in Monroe. op. cit., p. 63.
