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The first full day in Salamanca


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Doug French introduced the conference, in a room in the St. Esteban Convent in Salamanca, Spain, that just overwhelms you with its history and meaning. Our coffee was served in a hall said to be the place where Columbus actually waited to meet with Queen Isabella to find out the fate of his proposed exploration of the new world.

Our talks today were in the Chapter room where Francisco Vitoria taught and the professors of the 15th and 16th century gave papers for each other before their public presentations at the university. One might say that this was the room for the "Mises Circle" of the late middle ages. It is filled with paintings and insignias of Spanish scholarly history. Buildings like this immortalize these scholars.

People are here from 21 countries, among which Romania, Czech Republic, Brazil, England, Guatemala, France, Dominican Republic, Switzerland, and these are just the people I have met. It is a true united nations but of course we are here to celebrate a time before the nation state, before passports and nationalism and before planning and world wars. There was free movement of goods and people, something we almost can't imagine today given the police-state tracking of everyone and everything moving from state to state. It was a time of rising prosperity and this reality posed many social puzzles that the theologians of the time sought to solve.

The first talk was by Fr. Angel Roncero, who has taught in Spain and Latin America, and he spoke directly to the burning issue on many people's minds: what does this old history of Christianity have to do with the advocacy of free markets? We tend to ignore this question today because it deals with both religion and politics, a potent mix. But it is a fact that economic science began within the milieu of Catholicism in the 15th and 16th century.

Fr. Roncero describe the Gospels as a book of liberation, one completely at odds with the modern planning project in favor of freedom of the individual. He set the setting by discussing the world of the late scholastics, and the pressing issues that were created by the explosion of technology in the 15th century.

The advance of monetary exchange, the discovery of the new world, the accumulation of capital, and the rise of a new merchant and middle class all combined to create an atmosphere of discovery. What they discovered was the science of economics: supply and demand, the source of economic value, and the practical and moral urgency of freedom. Liberalism in economics followed from the rise of liberalism generally in art and science.

The rise of prosperity also gave the state access to new wealth, which posed the pressing problem of whether and to what extent the state can tax and inflate and live off the growing private sector. What the theologians said was that a state that attempted to loot and grab this new source of wealth was an illegitimate state and its leaders illegitimate leaders.

It was special pleasure for me to hear Fr. Roncero list the major thinkers of the time by priestly order: Dominicans, Jesuits, Franciscans, and Benedictines. The accent was beautiful. Fr. Roncero contrasted their work with the writings of Luther and Calvin, which he said denied the freedom of the will with the idea of the enslaved will or the predestined will. I'm not entirely sure that he understood how controversial his comments were on this topic, even in this audience.

He further focused on the ways that the current banking establishment was encouraged by the central banks of the U.S. and Western Europe to ignore the work on banking by the late scholastics. The scholastics counseled prudence in lending above all else, and believed that the depositors were the ones who should be paying for deposit privileges. Today we have this upside down. Depositors believe they should be making money merely by availing themselves to deposit services while the bankers lend without prudence, due to interest rate manipulations.

Peter G. Klein followed next with a detailed presentation that was absolutely up to the minute. He spoke on the Austrian connection with the new Nobel laureate in economics Oliver Williamson. He said that Williamson, his own professor from graduate school, is not a Salamancan or an Austrian but there are interesting implications of his work for the Austrians.

He began by presenting the Rothbardian view that stands against the Whig theory of history which posits unrelenting progress in intellectual history. In contrast, Rothbard believed that there was lost knowledge in the history of thought, and that gross systematic error is a pervasive feature of the history of ideas. The great tragedy was the loss of the Salamancans, which were not rediscovered in the English-speaking world until the 1950s.

The theory of the firm is an example of this. Important contributions were made by scholastics in the understanding the role of entrepreneur. Following up on this were Cantillon, Menger, Knight, Mises, and Coase.

Then in the 1950s, there was a huge step backward in the theory. Firms were reduced to a series of mathematical functions, black boxes that turned inputs into outputs. Price and quality are the only variables, and there was little focus on how they are structured, organized, financed, or governed. This has important policy implications, so that any deviation from perfect competition were inefficient.

Williamson encourages us to open the black box and look inside. He adopts the definition of the firm as a set of resources that are owned and hence managed by one or more entrepreneurs. They constantly face decisions about how much to integrate to produce the more profitable outputs.

An important contribution is his notion of asset specificity which breaks away from treating capital as an aggregate that can be shaped into anything. Williamson saw that capital constitutes a multifarious collection of assets that are specialized to particular uses. Klein says that his approach embeds the notion of heterogeneous capital. This ends up having profound implications for antitrust. Many forms of management are not harmful to society but rather reflect the discovery of new ways of managing assets.

Klein says that his contributions are of great use to Austrians. Williamson, whose work constitutes a recapturing of lost knowledge, had a slogan that he used in class: "Be disciplined, be interdisciplinary, and have an active mind."

Jorg Guido Hulsmann was the next speaker and he addressed the topic of Adam Smith's economics. He presented the Rothbardian critique of Smith, and gave a paper to provide a contrasting perspective, rescuing the good part of Smith.

He began with a discussion of Nicholas Oresme, a thinker highlighted in Hulsmann's own book The Ethics of Money Production. The scholastics built on this theory. In some ways important ways, Smith added to the Scholastic perspective on the self-regulating functioning of the market. Smith added to this an important theory of economic growth. He further noted that both Menger and Mises used Smith's work in their own theorizing. Menger used Smith's Wealth of Nations as a textbook, which he would not have done had he believe Smith to be unacceptable. Mises too had a high regard for Smith. Mises in fact endorsed classical economics in important respects, particularly as regards growth theory.

Austrians should not neglect Smith and his ideas, said Hulsmann. His main contributions are to refute mercantilism, the theory that aggregate spending was the main motor of economic growth. In order to promote economic growth, one had to increase the amount of money spent. Protectionist policies were just one aspect of this.

Smith argued that the level of spending is irrelevant for economic growth, as is the money supply. The main causes of growth are the division of labor and the accumulation of capital. One person can promote economic growth by living a frugal life. Mercantilism contributes nothing to this process and instead only diverts the most-valued uses of capital to less valued uses. Entrepreneurs must be free to use capital as they see fit, taking the risks and reaping the rewards or suffering the losses.

It is true that Smith was not original, but there is merit in bringing together disparate ideas into a systematic treatise. And this is his main contribution to history. He did regress in some areas, such as price theory, but this should not take away from his contributions in other areas. In the same way, Eugen von Boehm-Bawerk made huge contributions forward and also set back theory when he deviated from his own contributions. It is rarely the case that a thinker is perfect.

Finally, Hulsmann heralded Smith for the sheer timeliness of his contribution today. If we understood his economics, we would know that we cannot promote growth through increasing expenditure and by promoting stabilization policies. Smith would say that we need saving, capital accumulation, and the division of labor in order to recover economically. Stabilization policy is not a zero-sum game but a negative-sum game because it diverts resources.

Now, this does not mean that we should rely on Smith exclusively. The Austrians improved Smith in price theory, in the role of time, and the precise function of money and capital. His economics can be dramatically improved using Austrian theory about how investment projects relate to one another, adding the notion of the passage of time to Smithian theory. As regards money, Smith went too far in claiming that money had nothing to do with economic growth at all. He believed money to be nothing but a veil that didn't affect the real economy. Menger and Mises saw the error here. Increases in money can cause malinvestments and price distortions.

In conclusion, Hulsmann praised Smith for his work, and his relevance for our time. The road from Salamanca to Vienna and Auburn travels through Glasgow.

Doug French followed with a presentation of his own personal history as a banker in Las Vegas at Security Pacific. The bank he served was believed to be permanent fixtures of the economic landscape. The managers believed themselves immune from the errors that afflicted the S&Ls of the 1980s. Little did the managers know that the bank was collapsing from within from bad loans. The bank was rescued at the height of the bubble before last.

For French, this was also a time when he began pursing a masters in economics at the University of Nevada, Las Vegas. He was warned by some against taking a class with Rothbard, but the schedule worked out for him and he found himself studying under the great teacher. The class was EC-742, but the content would change every semester. Many people in the class had already taken it the year before, because Murray never gave the same lecture twice.

From the first class, it was clear to French that this class was very different. He spent an entire semester on the scholastics. Rothbard spoke at length about Jean Buridan's theory of money which was a big improvement on Aristotle and Aquinas. He took money out of the realm of the state's creation and saw that it was a natural outgrowth of exchange. Buridan was the teacher of Nicholas Oresme.

Another person that Rothbard wrote about was San Bernardino of Sienna, who wrote a full and robust defense of the entrepreneur and the merchant. Where he was wrong on interest, Cardinal Cajatan was correct on interest payments. Another person Rothbard heralded was Juan de Marina, who saw interest is a reward for risk. French continued with a presentation of Rothbard's list of theorists of this period.

French talked about Rothbard's own exams, two in each semester. They were all essay questions, focused on the late scholastics in the first term.

During this time, French was leaving one bank and going to another, and his thesis topic was on speculative bubbles, Eventually French moved to a bank that was growing at an astronomical rate during a bubble that compared to the most preposterous in history. He knew precisely what was going on as land prices soared and the bank's portfolio grew increasingly inflated. As always, the good times seemed like they would never end, until suddenly it did end, with catastrophic results.

It is striking that French now works for the Mises Institute, which publishes his thesis written under Rothbard, and now carrying on the great project through his work every day. He adds Rothbard's name to the list of scholastics: men with guts who had the courage to defend science and freedom regardless of the trends of his time.

The final speaker of today was Gabriel Calzada of the Juan de Mariana Institute. He spoke on what Bernanke can learn from Mariana. Four hundred years one week ago guards entered a convent to arrest Juan de Mariana and put him in prison for a year for his writings on inflation. Spain was an empire at the time, under King Philip II. After teaching in Paris and Rome he came back to Spain.

His first book was on the role of the prince, but he wrote the opposite of Machiavelli. He explained the society results from the division of labor and argues that the prince or king is nothing but a delegate. He cannot raise taxes or inflate the money supply. He further said that the only way to enforce this against tyranny was to recognize the right of the people to kill the king. This was not an unusual teaching at the time, but he took it further to argue for the rights of the individual to kill the king. The book was written for Prince Philip III. By the time the book was published, Philip had become the King of Spain, and he had expansionist plans for the government. The result was wars and taxes and inflation. They changed the numbers on the coins, as a means of magic finance.

Mariana spoke out with a book De Monetae Mutatione in 1609. He said that the owners of the money were the people, not the King, and therefore the King possessed no right to alter the value of money. He called inflation an infamous plunderer of the people. He demanded that the inflation must stop, alongside the wars and crazy spending plans.

The monetary advisers to the King did not like what Mariana had to say. It was for this reason that Mariana was arrested and imprisoned. They gave him one last chance to recant his views. But he merely reasserted his own position yet again. The Pope then intervened and said that the imprisonment could continue provided that the King refute what he had written. At this point, the King released him immediately, out the back door. Meanwhile, when released, Mariana was friendless but he had several followers carried on his work. He was the last of the scholastics and the most libertarian of them all.

His successors included Leonardo Lessio in the Netherlands and later people like Condillac and Turgot. They all had books by Mariana, who left a legacy of liberalism. Even John Locke owned a book by Mariana. Then we had Adam Smith was a follower in many respects. Later still we had J.B. Say, Gottlieb Hufeland, Wilhelm Roscher and finally Carl Menger. So there we have the line from the scholastics to our own time: a consistent defense of liberty.

Calzada said that Rothbard's What Has Government Done to Our Money reads much like Juan de Mariana. Most recently we have Ron Paul's own End the Fed, which is reminiscent of Mariana. What should Bernanke learn from Mariana? The only answer to the restoration of liberty and prosperity is to stop the press and start to obey the moral law.

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