19 The choice was a difficult one and may give rise to valid objection particularly against the exclusion of such men as John Major (d. 1549; cf. the comments of Ashley in Economic History I, Part II), Navarrus (Martinus de Azpilcueta, d. 1586), Domingo de Soto (De justicia et jure, 1553), and Gaetanus (Cardinal Cajetan, Tommaso de Vio, 1468–1534) all of whom we shall have to mention, and others. Tomás de Mercado, author of De los tratos de India y tratantes en ellas (1569; enlarged ed. of 1571, the only one known to me, under the title Summa de tratos y contratos), has been included only because of his ‘quantity theory of money’ and cannot be put on the same level with Lessius, Molina, and de Lugo in any other respect. But I am positive that the latter three must be included in any history of economics, though there was a further motive for selecting them: Professor Dempsey’s book (B.W.Dempsey, Interest and Usury, 1943, chs. VI–VIII) contains a full exposition of their economics; this book com- bines to a degree that is quite exceptional, thorough familiarity with scholastic thought and with economic theory, so that the interested reader may be referred to it with confidence. Lessius (Leonard de Leys, 1554–1623), Luis Molina (1535–1600), and de Lugo (Juan de Lugo, 1583–1660) all wrote treatises de justitia et jure. Our chief guide will be Molina. His treatise appeared in instalments in 1593, 1597, and in and after 1600; (ed. used De justitia et jure, 1659). All that need be said about the sociology of the later scholastics is that they developed, in greater detail and with a fuller perception of implications, the ideas that had crystallized in the works of their thirteenth-century predecessors. Their political sociology in particular retained the same method of approach to the phenomena of state and government and also the same ‘radical’ spirit. 20 Their economic sociology, especially their theory of property, continued to treat temporal institutions as utilitarian devices that were to be explained—or ‘justified’—by considerations of social expedience centering in the concept of the Public Good. And this social expedience might, according to historical circumstances, sometimes tell in favor, and sometimes tell against, private property. They no doubt believed that in civilized societies, that is, in societies that were past the early or natural state in which all possessions were common to all (omnia omnibus sunt communia), these considerations told in favor of private property (divisio rerum); but there was neither a theoretical nor a moral principle to prevent them from arriving at the opposite result whenever new facts should suggest it. 21 Some methodological aspects of this will be dealt with in the next section. But another point should be briefly mentioned. The scholastics were not primarily concerned with the problems of the national states and their power politics. This is precisely one of the most important links between them and the ‘liberals’ of the eighteenth and even the nineteenth centuries. But some of the phenomena that accompanied the rise of these states were, nevertheless, bound to attract their critical attention, and among them was fiscal policy. I mention this here, and not in connection with their economics, because they hardly went at all into the specifically economic problems of public finance, such as incidence of taxation, economic effects of government expenditure, and the like: even when they did discuss government borrowing (which, following the lead of St. Thomas, they mostly condemned) or the question of the relative merits of taxes on wealth and taxes on consumption (Molina, Lessius, and de Lugo, among others, touched upon 20 Any doubt about this may be dispersed by a single reference: Juan de Mariana, De rege et regis institutione, 1599. But even scholastics who did not go so far never worshiped at the shrines of either absolute monarchs or omnipotent bureaucracies, see e.g., Molina, Tractatus secundus, disp. 22 and 26. The scholastic doctors, following their own earlier tradition, must therefore be History of economic analysis 92 considered as the most important of the ‘monarchomachs’ of the sixteenth century. On these, see especially J.W.Allen, A History of Political Thought in the Sixteenth Century, 1928. 21 The reader will find a very characteristic quotation from Lessius in Dempsey’s Interest and Usury, p. 132. It does not follow, of course, that Lessius, were he alive today, would embrace political communism. The point is that in good logic he would be free to arrive at the conclusion that private property no longer fulfils the requirements of social expedience and that economic communism does. this question), they produced nothing that qualifies as economic analysis. What they were most interested in was the ‘justice’ of taxation in the widest acceptance of the term—such questions as whether and when taxes might be rightfully imposed, by whom and on whom, for what purposes, and to what extent. And below their normative propositions there was some sociological analysis of the nature of taxation and of the relation between state and citizen. Both these norms and this analysis, along with the rest of their political and economic sociology, went into the work of their laical successors though the later science of public finance grew mainly from other roots. 22 But while the economic sociology of the scholastic doctors of this period was, in substance, not more than thirteenth-century doctrine worked out more fully, the ‘pure’ economics which they also handed down to those laical successors was, practically in its entirety, their own creation. It is within their systems of moral theology and law that economics gained definite if not separate existence, and it is they who come nearer than does any other group to having been the ‘founders’ of scientific economics. And not only that: it will appear, even, that the bases they laid for a serviceable and well-integrated body of analytic tools and propositions were sounder than was much subsequent work, in the sense that a considerable part of the economics of the later nineteenth century might have been developed from those bases more quickly and with less trouble than it actually cost to develop it, and that some of that subsequent work was therefore in the nature of a time- and labor-consuming detour. In what may be described as the applied economics of the scholastic doctors, the pivotal concept was the same Public Good that also dominated their economic sociology. This Public Good was conceived, in a distinctly utilitarian spirit, with reference to the satisfaction of the economic wants of individuals as discerned by the observer’s reason or ratio recta (see, below, next section)—and is therefore, barring technique, exactly the same thing as the welfare concept of modern Welfare Economics, Professor Pigou’s for instance. The most important link between the latter and scholastic welfare economics is the welfare economics of the Italian economists of the eighteenth century (see below, ch. 3). So far as appraisal of economic policy and business practice is concerned, the scholastics’ idea of what is ‘unjust’ was associated—though never identified—with their idea of what is contrary to public welfare in that sense. To give at least one example: Molina declared that monopoly was in general (regulariter) unjust and harmful to the public welfare (tract. II, disp. 345); though he did not identify the two, their juxtaposition is nevertheless significant. 22 The fact should, however, be recorded, that Nicolaus Cusanus (already mentioned in connection with the heliocentric theory) framed a comprehensive plan for the reform of the finances of the German Empire, based upon a general income tax (actually introduced, for the Empire as distinguished from the component states, in 1920). The scholastic doctors and the philosophers 93 The welfare economics of the scholastic doctors linked up with their ‘pure’ economics through the pivotal concept of the latter, Value, which also was based upon ‘wants and their satisfaction.’ Of course, there was nothing new in this starting point itself. But the Aristotelian distinction between value in use and value in exchange was deepened and developed into a fragmentary but genuine subjective or utility theory of exchange value or price in a manner for which there was no analogue in either Aristotle or St. Thomas, though there was in both what we may describe as a pointer. First, by way of criticizing Duns Scotus and his followers, the late scholastics, particularly Molina, made it quite clear that cost, though a factor in the determination of exchange value (or price), was not its logical source or ‘cause.’ 23 Second, they adumbrated with unmistakable clearness the theory of the utility which they considered as the source or cause of value. Molina and Lugo, for instance, were as careful as C.Menger was to be to point out that this utility was not a property of the goods themselves or identical with any of their inherent qualities, but was the reflex of the uses the individuals under observation proposed to make of these goods and of the importance they attached to these uses. But a century before that, St. Antonine, evidently motivated by the wish to divest the relevant concept of undesirable ‘objective’ meanings, had employed the unclassical but excellent term complacibilitas—the exact equivalent of Professor Irving Fisher’s ‘desiredness,’ which also is used to express the fact that a thing is actually being desired and nothing else. Third, the late scholastics, though they did not explicitly resolve the ‘paradox of value’— that water though useful has normally no exchange value—obviated the difficulty by making their utility concept, from the first, relative to abundance or scarcity; their utility was not utility of goods in the abstract, but utility of the quantities of goods available or producible in the individual’s particular situations. Finally, fourth, they listed all the price-determining factors, 24 though they failed to integrate them into a full-fledged theory of demand and supply. But the elements for such a theory were all there and the technical apparatus of schedules and of marginal concepts that developed during the nineteenth century is really all that had to be added to them. There are two more aspects of this theory of exchange value that deserve to be noticed. On the one hand, the late scholastics identified their just price not, as Aristotle and also Duns Scotus seem to have done, with normal competitive price but with any competitive price (communis estimatio fori or pretium currens). Wherever such a price existed, it was ‘just’ to pay and to accept it, whatever the consequences might be for the 23 This statement, I think, renders fairly the meaning of Molina’s argument in tract. II, disp. 348, if proper attention is paid to the analytic kernel in the word ‘just.’ Still less than a cost theory of value can a labor theory of value be imputed to them, though this has been done. We shall see later that the emotional appeal of the latter has induced some historians to interpret as many authors as possible in this sense. It should be borne in mind, therefore, that mere emphasis on the importance in the economic process of the element of labor or effort or trouble does not amount to sponsorship of the proposition that expenditure of labor explains, or is causal to, value—which is what is meant by labor theory of value in this book. 24 Cf. especially a passage in Lessius, quoted by Dempsey, op. cit. p. 151. History of economic analysis 94 trading parties: if mer-chants, paying and accepting market prices, made gains, this was all right, and if they suffered losses, this was bad luck or else a penalty for incompetence so long as gain or loss resulted from the unhampered working of the market mechanism though not if it resulted, for example, from price fixing by public authority or monopolistic concerns. 25 Molina’s disapproval of price fixing, though qualified, and his approval of gains arising from high competitive prices in times of scarcity are no doubt ethical judgments. But they reveal a perception of the organic functions of commercial gains and of the price fluctuations that are responsible for them, a fact that marks a considerable step in analysis. This should be borne in mind, for we are not as a rule in the habit of looking to the scholastics for the origin of the theories that are associated with nineteenth-century laissez-faire liberalism. On the other hand, the late scholastics analyzed economic activity itself—St. Antonine’s industria—and particularly commercial and speculative activity, from a standpoint that was diametrically opposed to Aristotle’s. The Economic Man of later times put in an appearance in the conception of ‘prudent economic reason’—a Thomistic phrase which acquired an entirely un-Thomistic connotation by de Lugo’s interpretation, which was to the effect that this prudence implies the intention of gaining in every legitimate way. This did not spell moral approval of profit hunting. As far as that goes, it is safe to assume that neither de Lugo’s nor any other scholastic doctor’s feelings differed from Aristotle’s; St. Antonine, for example, was very explicit on this point. But it spelled an improved analysis of business facts that was, of course, partly induced by observation of the phenomena of rising capitalism. This realistic character of the work of the late scholastics should be particularly emphasized. They did not simply speculate. They did all the fact-finding that it was possible for them to do in an age without statistical services. Their generalizations invariably grew out of discussions of factual patterns and were copiously illustrated by practical examples. Lessius described the practice of the Antwerp exchange (bursa). Molina sallied forth from his study to interview businessmen about their methods. Some of his investigations into the economic conditions of his time and country, such as his study of the Spanish wool trade, amount to little monographs. As regards money, it will suffice to record the four following points. First, reasoning on Aristotelian lines, the doctors presented, practically to a man, a strictly metallist theory of money which, in fundamentals, did not differ from that of A.Smith; we find the same genetic or pseudo-historical deduction from the necessity of avoiding the inconveniences of direct barter, the same conception of money as the most saleable commodity, and so on. Second, they were not only theoretical but also practical metallists, disapproving, with varying degrees of severity, of debasement and of any gain that accrued from it to princes. As mentioned before, the outstanding authority on this matter, Oresmius, only formulated the doctors’ common opinion, which in this case 25 See, e.g., Molina, tract. II, disp. 348 and 364. The scholastic doctors and the philosophers 95 was evidently shared by most people. 26 The modern student of monetary theory, who may possibly sympathize with those princes and feel inclined to regard them as worthy predecessors of the governments of his own day, should observe that the doctors went but a very short way into the economic effects of devaluation. They saw the effect on prices and felt that creditors and holders of money were being defrauded but that was about all. Even in these matters their analysis did not go beyond the obvious, and the idea that devaluation—and other methods of increasing the amount of circulating monetary units—might stimulate trade and employment was quite foreign to them; it first occurred to those businessmen who wrote on monetary policy in the seventeenth century (see below, ch. 6). Since this idea was almost entirely lost on the English ‘classics’ of the nineteenth century, we have here another of those curious doctrinal affinities that exist between J.S.Mill and Father Molina. Third, we note for future reference that some of the doctors, among whom Mercado is the most important instance, adumbrated more or less 26 Oresme, op. cit. ch. XV: Quod lucrum quod provenit Principi ex mutatione monetae sit injustum. Cf. Jean Bodin’s precept in the sixth Book of his De re publica (Les six livres de la République): princeps a nummorum corruptela debet abstinere. This adage and similar ones resound from a large chorus of voices that were raised in protest against governmental malpractices during those centuries of almost incessant monetary disorders. But some writers who joined that chorus were not theoretical metallists. To quote an example, François Grimaudet (Des Monnoyes, 1576), though he insists that the nominal value of a coin should not surpass the value of the material except for the ‘fraiz de façon et quelque petit proffit,’ yet states explicitly that the ‘essence of money’ is in that nominal value et non en la matière. On the whole, I think, valor impositus should be translated by nominal value, valor intrinsecus by value of material, and valor extrinsecus by purchasing power (which is, however, also called potestas). Quantitas also means nominal value, and not quantity. Devaluation is denoted by mutatio, corruptela, or augmentum. The last term corresponds to the English usage of the sixteenth and seventeenth centuries (and even later times) when ‘raising’ money meant debasement or devaluation. In that large chorus of protesting voices, I cannot hear any note worth recording. But I shall mention names of a few authors—not all of them scholastics—who seem to have gained considerable contemporary reputation: C.A.Thesaurus’ Tractatus novus et utilis de augmento ac variatione monetarum (1607), and M.Freher’s De re monetaria (1605), do display some traces of the distinction between devaluation and depreciation, and may on this account be assigned a special place. Also ran (among many others, doctors and laics): René Budel, Joannes Aquila, Martinus Garratius, Franciscus Curtius, Ioannes Regnandus, Joachimus Mynsinger, Didacus [Diego] Covarruvias (the famous jurist), Henricus Hormannus, Franciscus de Aretio, Joannes Caephalus. There is some difference, partly explained by the fact that they had different situations in mind, in their solutions of the problem of the repayment of debts contracted in a currency that was subsequently debased. This is the problem that really interested the public and is responsible for the unending stream of publications of this kind. But the answers are practical shifts and of no interest for us. One author should be added, however, because his argument on usury secured him one of those places in the history of economics that remain occupied indefinitely for no other reason than that nobody bothers to revise the occupant’s claims. Charles Dumoulin (Carolus Molinaeus, 1500– 1566) was a French lawyer of reputation whose Tractatus commerciorum et usurarum redituumque pecunia costitutorum monetarum (I have used the 1st ed., 1546) was a great success and enjoyed international reputation. There is nothing in it, however, that could be described as a new contribution to economic analysis. History of economic analysis 96 clearly what came to be called the quantity theory of money, at least in the sense in which Bodin can be said to have held it. And, fourth, they dealt with a number of problems in coinage, 27 foreign exchange, international gold and silver movements, bimetallism, and credit in a manner that would merit more attention and that compares favorably in some points with much later performance. Contrary to an opinion that has some adherents, the scholastic doctors did not work out any theory of the physical aspect of production (‘real capital’), though they did eventually—since St. Antonine—block out a theory of the role in production and commerce of monetary capital. Nor did they possess any integrated theory of distribution, that is to say, they failed to apply their embryonic demand-supply apparatus to the process of income formation as a whole. Moreover, the rent of land and the wages of labor had not as yet become analytic problems to them. In the case of rent, this was perhaps due to the facts that, with farmers who tilled their own soil, the element of rent does not readily display its distinctive character, and that rents paid to landlords were in the times of the doctors so mixed with dues of a different nature that the economic rent, which was moreover traditionally fixed, did not show up very distinctly even in this case. In the case of wages, too, they did not ask the theoretical question; presumably they felt that nobody needs to be told what it is wages are paid for. They proffered indeed moral considerations and recommendations as to policy. However, even St. Antonine’s recommendations, noteworthy because of the broad social sympathies that inspired them, do not rest on any analytic foundations of the kind we are interested in. The same applies to the considerable literature that developed in the sixteenth century on relief of the poor, unemployment, mendicancy, and the like, to which the doctors contributed copiously. 28 Much more important were their contributions to the theories of the two types of income that they did feel to be analytic problems, business profits and interest. The risk-effort theory of business profit is undoubtedly due to them. In particular, it may be mentioned that de Lugo—following a suggestion of St. Thomas—described business profits as ‘a kind of wage’ for a social service. No less certain is it that they launched the theory of interest. So far, our sketch of scholastic economics has been drawn without much attention to its methodological philosophy, which will be discussed in the next section, and also without much attention to the logical processes involved in unwrapping the analytic element in the reasoning of the doctors from the normative considerations in which it was embedded. In order to exhibit these processes and to show precisely how it was that they came to ask the question which they were the first to ask—namely, the question why interest is actually paid—we shall, in the case of interest, be more careful in doing the unwrapping. 27 The eminence of Copernicus in other fields suggests special notice of his Monetae cudendae ratio (1526). 28 De Soto’s Deliberacion en la causa de los pobres (1545), and Juan de Medina’s De la orden que…se ha puesta en la limosna…(1545), are examples of those scholastic contributions. The subject will be briefly mentioned again (see below, ch. 5). The scholastic doctors and the philosophers 97 The motive of scholastic analysis was manifestly not pure scientific curiosity but the desire to understand what they were called upon to judge from a moral standpoint. 29 When the modern economist speaks of ‘value judgments,’ he refers to moral or cultural appraisal of institutions. As we have seen, the scholastic doctors also passed value judgments of this kind. Primarily, however, and so far as their practical task was concerned, it was not the merits or demerits of institutions that mattered to them, but the merits or demerits of individual behavior within the frame of given institutions and conditions. More than anything else, they were directors of individual consciences or, rather, teachers of directors of individual consciences. They wrote for many purposes but principally for the instruction of confessors. In the first instance, therefore, they had to expound moral precepts that were immutable on principle. Secondly, they had to teach the application of these precepts to individual cases arising in an almost infinite variety of circumstances. 30 But this was not enough. In order to secure something approaching uniformity of practice among the numerous confessors, it was necessary to work out concrete decisions for the more important types of cases that occur in practice. Moreover, one of the considerations that are most helpful in deciding whether, from the standpoint of a given individual, a given act is a sin, and if so, how serious a sin it is, is whether or not it is common practice in the individual’s environment. For both these reasons it was necessary for the doctors to investigate typical forms of economic behavior and also the actual practices prevailing in the environments under their observation—a task that was often so simple as not to call for special effort, but Was exceedingly difficult when it came to the complex phenomenon of interest. Thus the normative motive, so often the enemy of patient analytic work, in this instance both set the task and supplied the method for the scholastic analysts. Once set, the task was strictly scientific and logically independent of the moral theology whose purposes were to be served. And the method was also strictly scientific; in particular, it was eminently realistic, since it involved nothing beyond observation of facts and their interpretation: it was a method of working out general principles from ‘cases’ somewhat akin to the method of English jurisprudence. Moral theology came in only after the analytic work was done in each case, to subsume the result under one of its rules. 29 For our purpose, the history of legislation on interest, whether proceeding from temporal or spiritual authority, is not of any great importance. Moreover, the reader will find in the Encyclopaedia of the Social Sciences or in Palgrave’s Dictionary all he may wish to have in the way of general orientation. Nevertheless, a few facts about the policy of the Catholic Church may be welcome at this point. In the times of the Roman Empire the Catholic Church dealt very cautiously with interest, Aristotle and St. Luke notwithstanding. The Council of Nicaea (325) did not go beyond a prohibition addressed to the clergy, though more general disapproval was expressed. The decisive step, which also included the declaration that secular legislation to the contrary was invalid (St. Thomas had not thought so), was not taken until 1311. Prohibition was then reaffirmed many times and is still in force. But its practical importance decreased along with the decrease in importance of the cases that came under it, as will be explained in the text. Some notice of this was eventually taken in the encyclical Vix pervenit, 1745. In 1838 a circular instructed confessors not to disturb penitents who accept interest at current rates. 30 The theory of this was given, e.g., by St. Thomas (Summa II, 1, quaest. VII). The chief reference, so far as moral theology is concerned, for what follows in the text is to St. Alphonso de’Liguori (1696–1787; Theologia moralis, see Works, English ed., 1887–95.) History of economic analysis 98 It is not surprising, however, that to unsympathetic critics of scholastic work, scholastic research into interest appeared in the light not only of ‘casuistry’ in a derogatory sense of the term but even of a series of attempts to cover the retreat of the Catholic Church from an untenable position by logical tricks or subterfuges, and to justify ex post each fait accompli. The reader may judge for himself. But it is as well to point out a fact that will seem to support that opinion. On the one hand, moral precept, however immutable, will yield different results if applied to different circumstances; and capitalist evolution did create circumstances in which the cases that came under the prohibition of usury rapidly decreased in importance. On the other hand, such an evolution will be inevitably paralleled by subterfuges of interested parties, who will try to avail themselves of all the possibilities offered by a system of rules and exceptions that grew increasingly complex; perhaps the most famous of these subterfuges was the abuse of the element of mora presently to be mentioned in the text, but there were many of them. This parallelism cannot fail to impress the superficial observer, particularly if he is not very well versed in either scholastic literature or economic theory. Moreover, we are speaking of scholastic doctrine at its highest. It is of course not denied that the ordinary clerical practitioners, like any bureaucracy, committed a great many mistakes and fostered resort to subterfuges both by unintelligently restrictive interpretation of the rules they were directed to apply and by well-meaning connivance at evasions. Usury, then, was sinful. But what is usury? On the one hand, it does not necessarily involve the exploitation of the needy: this element is morally relevant in other respects but was not a constituent of the scholastic concept of usury. On the other hand, usury is not always present when more than repayment of the sum lent is stipulated: simple exegesis of St. Thomas’ teaching sufficed to justify compensation for the lender’s risk or trouble—particularly evident in the purchase below par of notes—or compensation in cases where the lender was deprived of his money against his will, as in cases of forced loans, or of the debtor’s failure to repay at the stipulated time (more debitoris). Thomistic teaching even suggested Molina’s proposition that, since the lender of any commodity is in any case entitled to receive back its full value at the time of lending, more units might have to be repaid than were given (esto plus in quantitate sit accipiendum), though no application was made of this, so far as I know, to money loans. From all those cases emerged the principle that a charge was to be considered as normal or unobjectionable whenever the lender incurred any loss (damnum emergens). Some doctors argued that the lender in temporarily giving away his money always and inevitably suffers such loss. But most of them refused to accept this view. Nor did the majority admit that the gain the lender foregoes by lending (lucrum cessans) is in itself a justification for making a charge. They did admit, however, that, as we may put it, gain foregone turns into actual loss when the opportunity for such gain is part of a man’s normal environment. This meant two things. First, merchants themselves who hold money for business purposes, evaluating this money with reference to expected gains, were considered justified in charging interest both on outright loans and in cases of deferred payment for commodities. Second, if the opportunity of gain contingent on the possession of money is quite general or, in other words, if there is a money market, then everyone, even if not in business himself, may accept the interest determined by the market mechanism. This proposition had to be handled with care, for it evidently opened the door to all sorts of The scholastic doctors and the philosophers 99 evasions. But it is no more than a special case of the principle that everyone may, in justice, pay and ask the current price for everything, and was not invented ad hoc: if it is not in evidence in the thirteenth century and much in evidence in the sixteenth, this is merely due to the fact that money markets had been uncommon in the former century and became quite common in the latter. 31 Observe that whenever alternative opportunities of gain are normally available to everyone, the argument from gain foregone will coincide with the argument from ‘privation’: foregoing gain is in this case precisely what the privation consists in. Observe further that in all the cases mentioned justification rests on circumstances that, however frequently or even generally they may prevail in a given environment, are logically accidental to the pure loan contract (mutuum), which in itself was never held to justify interest. And observe finally that justification was never, or hardly ever, based upon the advantages that the borrower might reap from the loan; it was exclusively based on the disadvantages that lending brought to the lender. Dropping now the normative garb of scholastic interest analysis and the moral doctrines that motivated their research, we may restate as follows the causal theories their research unearthed, on the understanding that the picture cannot be quite satisfactory because the scholastic doctors did not much more agree on the theory of interest than do we. I. Interest, though construed on the more general model of loans of ‘con- sumptibles,’ is essentially a monetary phenomenon. There was no analytic merit in this. The scholastic doctors simply accepted a surface fact exactly as had Aristotle. They did sometimes relate interest on money to the returns of income-bearing goods, land, mining rights, and the like that may be bought for money. But this point—though used in some interest theories of the seventeenth and eighteenth centuries—was without analytical value because the price of income-bearing goods and therefore the net return from them already presupposes the existence of interest. II. Interest is an element of the price of money. Calling it a price for the use of money does not explain anything and at best restates the problem in an unenlightening way. In itself, it is an empty phrase. Nor is the analogy of interest with interlocal premia or discounts on money more than a restatement of the problem. For these interlocal premia 31 This is no doubt a very imperfect account of a rich doctrinal development. Considerations of space, however, make it impossible to present a more satisfactory one which the interested reader will find in Professor Dempsey’s book. Also see A.M. Knoll, Der Zins in der Scholastik (1933). But a much discussed construction, associated with the name of the famous Dr. Eck (1486–1543) and also favored by Navarrus and Major, should be noticed, the triple contract, contractus trinus. It is, of course, licit to enter into a partnership and to draw an income from it. Nothing prevents the partner in a business from insuring his capital against loss; hence he may also do so with his other partners in which case the price of the insurance will amount to a reduction of his share in the profits. Finally, he may legally convert this reduced share in variable profits into a constant annuity that will represent pure interest. This construction is interesting from an analytic point of view because it exhibits the connection between interest and business profits in a very instructive way. As a defense of usury it was, however, rightly condemned. For either we accept the argument that the partner in question has alternative business opportunities of the kind that justify the charging of interest; then the construction is superfluous. Or we do not accept that argument; then the failure of the second contract to reduce that partner’s share to zero (apart from a remuneration of his work) would spell usury. The logical slip involved in Eck’s argument is worthy of the reader’s attention. History of economic analysis 100 and discounts are explained by risks and costs of transfers whereas pure interest, as distinguished from compensation for risks and costs, is an intertemporal premium which the analogy does not help to explain. The uncritical appeal to mere lapse of time per se is valueless—circumstances are easily conceivable in which it would fail to produce a deviation from zero interest. Though negative only, these propositions are of great analytical value. They clear the ground and prove that the scholastic doctors—in this respect much superior to nine-tenths of the interest analysts of the nineteenth century— saw the real logical problem involved. In fact, these propositions define it. This is why they should be credited with having launched the theory of interest. III. Hence deviation of interest from zero is a problem the solution of which can be found only by analysis of the particular circumstances that account for the emergence of a positive rate of interest. Such analysis reveals that the fundamental factor that raises interest above zero is the prevalence of business profit—all the other facts that may produce the same results are not necessarily inherent in the capitalist process. This proposition constitutes the main positive contribution of scholastic interest analysis. Adumbrated before, it was first clearly stated by St. Antonine, who explained that though the circulating coin might be sterile, money capital is not so because command of it is a condition for embarking upon business. 32 Molina and his contemporaries, while rightly insisting that money was ‘in itself’ not productive and no factor of production, yet accepted a similar view: they coined the significant phrase that money was the Merchant’s Tool. Moreover, they quite understood the mechanism by which this premium, if capitalist business be sufficiently active and—relative to the rest of the environment—sufficiently important, will tend to become an all-pervading normal phenomenon. And their ideas on lucrum cessans and damnum emergens complement their analysis as regards the supply side of the money market. Further than this they did not go. Their theory of business profits in particular was not sufficiently developed to allow them to reap the full benefit from the insight that led them to trace interest to profit as its source. Also, being the first in this field, they groped for their generalizations rather than stated them. In this prolonged process of groping they slipped up frequently and used many inadequate and even faulty arguments. But if we are to treat them as we treat other groups of analytic workers, merits prevail greatly over shortcomings, especially if we give them credit, as we ought to, for much of what successors and even opponents learned from their analysis. 32 This, of course, was a frontal attack on Aristotle’s ‘sterility of money.’ It is interesting to note that St. Thomas’ argument proffered a clue for this. After having taught that there was no reason why money should ordinarily carry a premium, he went on to say that there were secondary employments of money in which something might be charged for it. This would be the case, for instance, if somebody lent money for the purpose of enabling the borrower to deposit it as a pledge or guarantee (loco pignoris). St. Thomas certainly did not mean to include business loans in these ‘secondary uses,’ of money. But this was done in Jacobus Ferrarius’ Digressio resolutoria…(1623), where the author went so far as to include all loans made for any legitimate purposes whatsoever. The scholastic doctors and the philosophers 101 . analysis of business facts that was, of course, partly induced by observation of the phenomena of rising capitalism. This realistic character of the work of the late scholastics should be particularly. therefore be History of economic analysis 92 considered as the most important of the ‘monarchomachs’ of the sixteenth century. On these, see especially J.W.Allen, A History of Political Thought. of modern Welfare Economics, Professor Pigou’s for instance. The most important link between the latter and scholastic welfare economics is the welfare economics of the Italian economists of