What the Greatest Catholic Philosopher Had to Say about Private Property

Much of the same misguidedness that turned Church members' attention towards matters too earthly also applied to Church doctrine and the confused understanding concerning the notion of a “just price” and the banning of interest on a loan.

Much of the same misguidedness that turned Church members' attention towards matters too earthly, as we shall see, also applied to Church doctrine and the confused understanding concerning the notion of a “just price” and the banning of interest on a loan.

Like the Greeks and the Romans, Medieval thinkers considered economic problems and questions to be of secondary importance, especially by 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 to be of far greater significance than any “success” in a narrower “earthly” sense.

The questions asked by Church thinkers about economic activities concerned "justice."The questions asked by Church thinkers about economic activities, therefore, concerned “justice.” That is, had a man acted “justly” towards his Christian “brothers” 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 a 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 its “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?

The "just price" was the judgement of what both users and producers thought a good was worth.Aquinas gave incomplete answers about the value of such things. He quoted St. Augustine, saying, “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. 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 failed to solve this “paradox of value” for centuries 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 of all things. But no man has God’s perspective and understanding. Thus, the “just price” was the judgment of what both users (demanders) and producers (suppliers) thought a good was 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. Aristotle's position became the Church'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. 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 would, thus, be 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. 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 for 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 its use for some alternative purpose at the same time.

The one essential reason behind the paying of interest is time preference, but this was never considered by Medieval thinkers.Second, the lender could demand an amount in excess of the principal 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 principal; that is, a “default-risk premium.”

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

But the theological principal 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 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.

More by Richard M. Ebeling

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