Economic Ideas: The Institutions and Economics of the Middle Ages, Part 2

Published October 19, 2016

The Catholic Church was the one institution in the Middle Ages that was outside of the Feudal Order of both the rural Manors and the town Guilds. The Church, at various times, may have formed alliances, made political compromises, and sanctioned conduct and laws that were contrary to the spirit and the letter of the Church’s doctrine.

But these were argued to be “expediencies” of the short-run to preserve the independence and moral authority of God’s institution on Earth so that it might serve the long-run purpose for its existence – the salvation of souls before the final Day of Judgment.

Earthly Purposes of the Church

There was also the fact that the Catholic Church and its leaders often had their own “Earthly” ambitions for wealth, power, and political control, including declaring and participating in wars of conquest with the Church’s own armies under the command of the Pope.

Rudolf Rocker, in his book, Nationalism and Culture (1947), explained, for example, the use of Church power during the Papal reign of Innocent III (1198-1216):

“Innocent forced the whole temporal power of Europe under his will. He not only interfered in all dynastic affairs, he even arranged the marriages of the temporal rulers and compelled them to obtain a divorce in case the union did not suit him . . .

Innocent thought of himself as pope and Caesar in one person and saw in the temporal rulers only vassals of his power, tributary to him . . . By the establishment of oral confession and the organization of mendicant monks, Innocent created for himself a power of tremendous scope. Furthermore, he made free use of his strongest weapon, the ban of the church, which with unyielding resolution he imposed upon whole countries in order to make the temporal rulers submissive to him.

In a land hit by the ban all churches remained closed. No bells called the faithful to prayer. There were neither baptisms nor weddings, no confessions were received, no dying were given extreme unction and no dead buried in sanctified ground. One can imagine the terrible effects of such a status on the spirit of men at a time when faith was regarded as supreme.

Just as Innocent tolerated no equal power, he likewise permitted no doctrine which departed in the least from the usage of the church, even through entire imbued with the spirit of true Christianity . . . The dominant ambitious spirit of this fearful man balked at no means to guard the unlimited authority of the church.

The unbending tyranny of this theological authoritarianism that all were expected to obey and for which they were to altruistically sacrifice even enveloped Innocent III himself. Rocker quotes Innocent as having once said: “I have no leisure to pursue other worldly things; I can scarcely find time to breathe. Truly, so completely must I live for others that I have become a stranger to myself.”

The Church’s Cosmopolitan Presence and Influence

The Church’s position made it unique in another way. The Church’s domain was neither a single country nor region. Its offices and representatives were located in every part of the European continent in which Christianity had triumphed.

The Church’s representatives all shared a common value system – Christian church doctrine. They all spoke through the common language of Latin for the sharing of religious, philosophical and administrative discourse. The Church’s outlook, in other words, was international, or “cosmopolitan.”

Joseph A. Schumpeter, in his History of Economic Analysis (1954), highlighted some of the consequences of this cosmopolitan quality to the Church:

All those monks and friars spoke the same unclassical Latin; they heard the same Mass wherever they went; they were formed by an education that was the same in all countries; they professed the same system of fundamental beliefs; and they all acknowledged the supreme authority of the Pope, which was essentially international: their country was Christendom, and their state was the Church.

National divisions did not mean to them [the Church’s representatives] what they came to mean in the sixteenth century [with the rise of the modern nation-state]; nothing in the whole range of Dante’s political ideas is so striking as is the complete absence of the nationalist angle.

The result was the emergence of an essentially international civilization and an international republic of scholars that was no phrase but a living reality. St. Thomas was an Italian and John Duns Soctus was a Scotsman, but both taught in Paris and Cologne without encountering any of the difficulties that they would have encountered in the age of airplanes.

The significance of the Church’s authority in temporal affairs can be appreciated in terms of the famous edict of 1041, the Truce of God. The wars between the nobilities and the kings and princes had become so fierce and disruptive of social and economic life that the Church declared Thursday through Sunday as days of devotion and prayer, during which the fighting of battles and the shedding of blood were declared to be “sins” against the Church.

Through large parts of Europe, as a consequence, war diminished or ceased for a period of time. The cost of maintaining, paying, and feed and housing sizable armies of mercenaries who could fight only on three days a week – Monday, Tuesday, and Wednesday – was often too great a financial burden for the lords and noblemen, and princes in whose service those professional soldiers were employed.

However, while this partly succeeded in reducing or stopping fighting among many of the Medieval Knights and their soldiers, the “sinfulness” of such violence was only when it was Christian against Christian; the prohibition did not restrict violence against non-Christians.  Thus, aggression and violent acts against non-Christians – Jews, heretics, and Muslims – were still considered “moral” acts since they were against the “enemies” of the Church and the Christian faith.

What Separated the Church from the Ancient World

The Catholic Church also had a set of fundamental beliefs and principles that set it apart from the Greek and Roman views that had preceded it, and which were to have importance in the future in terms of their economic impact.

First, Christianity proclaimed that all men are the creatures of God, and equal in His eyes. Any inequalities recognized as existing between men should be seen as only the “natural” inequalities that one finds between brothers;

Second, the Church condemned slavery. For one man to hold another in bondage was to make some men gods over others, and was counter to Christian doctrine, for there is only one Lord and Master over all men, and He resides in Heaven. That the Church notoriously acquiesced or actively condoned slavery as various times did not change the fact that the underlying principle against slavery worked as an acid over time eating away as the expedient rationales or justifications used in its defense.

Third, the Church declared that work and labor had dignity, and was not the mark of an inferior or a slave. With the expulsion of Adam and Eve from the Garden of Eden, work was declared to be man’s “curse” for having disobeyed God’s laws; but honest labor was also an avenue for man’s salvation for the glory of God;

Fourth, Charity and alms giving were among the cardinal virtues. But charity and alms giving were proscribed among the “good works” that men could do in God’s name in the context of two limitations: Only the truly and deserving needy should be recipients of such gifts, and the giving should be in proportion to the giver’s ability to perform good works.

However, the positive aspects of these influences should not cloud the eventual tensions between Church doctrine and what emerged as the Age of Reason in the seventeenth and eighteenth centuries. This was concisely summed up by French social philosopher, Louis Rougier, in The Genius of the West (1971):

The whole hierarchy of values of the Greco-Roman world was turned upside down. Faith was more important than knowledge . . . For the Fathers of the Church, for the doctors of the Middle Ages, and the great preachers . . . the passion for knowledge – libido sciendi – which Plato and Aristotle had regarded as the supreme accomplishments of human life, was considered as damning as the other passions . . .

Throughout the Middle Ages and into modern times, this attitude, this ama necscire (love of ignorance) would persist. Even Pascal, after his conversion, would reproach Descarte and Copernicus for delving too deeply into sciences that even were they true, would not be ‘worth one hour of pain’.

If Christianity had limited itself to discouraging scientific research as useless diversion (to use the language of Pascal) it would have been bad enough; but it went much further than that. It undertook to stop such research as a threat to faith. Once the canon of Holy Scripture and the ecclesiastical hierarchy had been established, the hierarchy demanded that it alone be the interpreter of religious meaning.

Thomas Aquinas on Property and Private Property

Much of the same misguidedness, as we shall see, also applied to Church doctrine and confused understanding concerning the notion of a “just price” and the banning of interest on a loan.

Like the Greeks and the Romans, economic problems and questions were considered of secondary importance by the Medieval thinkers, especially in the writings of the Christian Church theologians and philosophers. Man’s pursuit of material ends was to be considered in the wider context of his moral conduct leading to his eternal life, which was considered of far greater significance than any “success” in a narrower “earthly” sense.

The questions asked by Church thinkers about economic activities, therefore, concerned “justice.” That is, had a man acted “justly” towards his Christian “bothers” as Church doctrine proscribed? But what was “just conduct” in men’s “economic” affairs?

The leading Catholic philosopher of the Middle Ages is usually considered to be St. Thomas Aquinas. He is credited with having attempted to reconcile and make compatible the “pagan” philosophy of Aristotle and the Christian doctrines of the Catholic Church. His goal was to integrate “natural reasoning” with religious theology. And in his writings on economic themes, Aquinas followed Aristotle’s views on most issues.

Aquinas accepted Aristotle’s defense of private property in society as desirable because it creates incentives for work and industry. He also emphasized that private property, by distinguishing between “mine” and “yours,” reduces the basis of conflict that common ownership of property is likely to produce. Plus, property and prosperity tends to generate an attitude of generosity and charity.

But for Aquinas, the private owner of property is only God’s trustee on earth of that which really belongs to God, with the responsibility to administer it for the “common good.” This is reflected in Aquinas’s view of theft. Theft is permissible, he argued, in the case of extreme material necessity, for both natural and divine law ordained that man assist his bothers to live. He who had abundance could not condemn at man who, to live, took a fraction of that abundance for his survival and that of his family.

Aquinas and the Meaning of a “Just Price”

Aquinas’s main concern was with “justice” in understanding and judging man’s transitory sojourn on Earth. Aquinas followed Aristotle in arguing that “justice” in exchange required a transfer of equal values. Justice is to give to each what “justly” belongs to them. This led Aquinas to ask, what is a “just price”?

Goods should trade on the basis of their intrinsic values. But what is this “intrinsic” quality in a commodity that determines it’s “real” value? Aquinas presumed that it was “obvious” that things had an inherent or intrinsic – and, therefore, “true” – value, independent of what any particular person may think or believe.

One interpretation was that goods should trade in terms of their costs, as estimated or measured by the quantity of labor that went into their manufacture. Things of equal costs should trade at equal prices. If their costs differed, so should their value in exchange. But this raised another problem: Was it “just” that a pearl carried a high exchange value in the market, while one of God’s own living creatures – a mouse, say – had no exchange value at all?

Aquinas gave incomplete answers about the value of such things. He quoted St. Augustine that, “The principle of salable things was not reckoned in accordance with nature . . . But in accordance with the extent to which things are useful to men.” Thus, the concept of the “utility” or usefulness of goods to men was introduced into the theory of value.

As some later Christian theologians were to a argue, such use-value was not an inherent magnitude or quantity but a personal, or “subjective,” assignment or imputation to an object of the value or significance of the end or goal the object or commodity could serve or advance. What is seen here is a “hint” of the “subjective value” or “marginal utility” theory of economic value that transformed economic theory beginning in the 1870s.

These Christian philosophers and all other thinkers for centuries failed to solve this “paradox of value” because none of them discovered the concept of “the margin,” which would have explained why goods have different values in exchange. Goods are not valued in terms of “classes” of goods – water vs. diamonds. Rather, goods are valued in increments. While water may be “essential” to human life, a sufficiently abundant supply of water may make one more additional unit of water have a near zero value to someone, while the value of one more unit of the scarce supply of diamonds may be much higher.

However, over time the “just price” came to mean the “customary price” reflecting the general market consensus of a commodity’s worth.  It was argued that only God knows the “real” or “intrinsic” value all things. But no man has God’s perspective and understanding. Thus, the “just price” was the judgment of both users (demanders) and producers (suppliers), considered what the good to be worth. The market price incorporated the “usefulness” of the good to the buyers and the “costs” of producing it for the suppliers.

At first, the notion of a “just price” was taken as a defense of the price and wage structure enforced by the trade and professional guilds in the Medieval towns and cities. But slowly the limited competitive elements provided by the “free fairs” and other such growing influences undermined the system of regulated prices. Eventually the case was made that the only “just price” was one set by market competition, and then the justification for the guild-imposed price and wage controls slowly began to lose all legitimacy.

Aquinas and the “Injustice” of Earning Interest

There was one area where the idea of the “justness” of a market-based price was not accepted among these Christian thinkers like Aquinas: the taking of interest on a loan. The Church’s position became Aristotle’s position. Said Aquinas:

To take usury [interest] for a loan of money is in itself unjust; for it is to sell what does not exist, which is an inequality, and, therefore, an injustice. To understand this it must be known that there are some things whose use consists in the consuming of it, as when we consume wine . . .

In articles of this kind [consumables], therefore, the use of the thing must not be reckoned separately from the thing itself; he who has given the use is thereby giving the thing. And accordingly in lending a thing of this kind, all the rights of ownership are handed over.

If therefore a man wanted to sell wine and the use of the wine apart from one another, he would be either selling the same thing twice (meaning that the use is the wine), or it would be selling what did not exist. Wherefore he would be manifestly committing injustice and sinning.

For the same reason, he would commit injustice who lent wine or corn, seeking for himself two rewards, the restitution of an equal amount of the article and also a payment for its use, called usury [interest]. But money, as Aristotle says . . . has been devised for the making of exchange. So the first and chief use of money is its consumption or spending. Wherefore it is of itself wrong to receive (besides the return of the money itself) a price for the use of the money.

The heart of Aquinas’s argument is whether or not the use of a thing can be separated from the object, itself. It is possible to use a house without consuming it up. Likewise, it is possible to use a boat without using it up. There are durable or tangible objects that a person can sell the uses of without at the same time selling the right to the object, itself. The use of the object is separate from the object.

This is the origin of rendita – the original Latin for rent.

But Aquinas argues that there are goods that cannot be separated in this way. Using it also at the same time uses it up. The using (consuming) of bread cannot be separated from the bread. The drinking of wine cannot be separated from the wine. In these cases, selling the use of the object is also selling the object.

To charge someone for the use of a loaf of bread and for the bread, itself, Aquinas reasons, would be charging twice for the same thing  — and, thus, unjust.  Since money is a medium of exchange, and is “used up” in the spending of it on the market for something else, the use of a sum of money cannot be separated from the money, itself. Thus to charge interest on the money borrowed is to demand a double price for its use.

In the year A.D. 325, the Catholic Church declared that members of the clergy were forbidden to take interest on a loan. By the end of the twelfth century, it was forbidden to laity, as well. And in 1311, interest on loans was declared absolutely sinful and illegal.

A few groups were exempt from the taking of interest on loans, the most prominent being Jews. The Church argued that the Jews were already going to hell for not accepting Jesus, so what more harm could they do to themselves by taking interest on loans? This, of course, supplied a useful safety valve when kings, princes or the Church itself needed to borrow funds. And since at this time Jews lacked many if not most of the “rights” or privileges of others in society, they could more easily be threatened with financial or even physical harm if the monarch or Church official decided to not pay back part or even all that had been lent to them.

Market-Based Exceptions to Earning Interest

However, over time arguments were made creating exemptions for Christians under certain conditions. Just as the borrower should not be treated unjustly, neither should the lender. First, if by extending the loan the lender could show that he had suffered or would suffer a loss by not having the lent sum available to use in some other purpose during the period of the loan, he could insist on an interest payment from the borrower. In other words, here was an implicit notion of “opportunity cost,” that is, that the use of a scarce means to achieve one end or goal, necessarily excludes it use for some alternative purpose at the same time.

Second, the lender could demand an amount in excess of the principle if the borrower failed to pay back the borrowed sum at the agreed time, resulting in some lost opportunity for the lender since the money had not been returned when agreed.

Third, if the lender had a legitimate concern that the borrower might not pay back the borrowed sum when it came due, the lender could insist upon a sum over the principle; that is, a “default-risk premium.”

These exceptions to the taking of interest on a loan – regardless of the name giving to the premium over the principle – meant that eventually the banning on “usury” would collapse.

But the theological principle against interest remained: In a situation without default risk, or without inconvenience and without foregone opportunities (such a situation in the “real world,” being logically impossible), then the taking of interest on a loan would still be “unequal” and therefore a “sin.”

Of course, the one essential reason behind the paying of interest is time preference, that is, the existence of differing valuations of the use and consumption of resources and goods in the present versus the future, and that the future is discounted against the present. But this was never considered or taken seriously by these Medieval thinkers, including Aquinas.

If the issue of time as (opportunity) cost was raised in some form, the reply given was that the proponent wished to “sell time,” but time belonged to no one but God.

However, the correct theoretical understanding of the basis and origin of interest on a loan, however, was not fully explained until the late nineteenth century when the Austrian economist, Eugen von Böhm-Bawerk, formulated the time preference theory of the rate of interest in his master works, Capital and Interest (1884) and The Positive Theory of Capital (1889). In the meantime, the ethical condemnation of “usury” remained the prevailing position for hundreds of years.