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The True Founders of Economics: The School of Salamanca

Students of free enterprise usually trace the origins of pro-market thinking to Scottish professor Adam Smith (1723–90). This tendency to see Smith as the fountainhead of economics is reinforced among Americans because his famed book An Inquiry into the Nature and the Causes of the Wealth of Nation was published the year of American independence from Britain.

There is much that this view of intellectual history overlooks. The real founders of economic science actually wrote hundreds of years before Smith. They were not economists as such, but moral theologians, trained in the tradition of St. Thomas Aquinas, and they came to be known collectively as the Late Scholastics. These men, most of whom taught in Spain, were at least as pro-free market as the Scottish tradition came to be much later. Plus, their theoretical foundation was even more solid: they anticipated the theories of value and price of the “marginalists” of late-nineteenth-century Austria.1

If Italian city-states began the Renaissance of the fifteenth century, Spain and Portugal explored the new world in the sixteenth, and emerged as centers of commerce and enterprise. Intellectually, Spanish universities spawned a revival of the great Scholastic project: drawing on ancient and Christian traditions to investigate and expand all the sciences, including economics, on the firm ground of logic and natural law.

Because natural law and reason are universal ideas, the Scholastic project was to search for universal laws that govern the way the world works. And though economics was not considered a separate discipline, these scholars were led to economic reasoning as a way of explaining the world around them. They searched for regularities in the social order and brought Catholic standards of justice to bear on them.

Francisco de Vitoria

The University of Salamanca was the center of Scholastic learning in sixteenth-century Spain. The first of the moral theologians to research, write, and teach there was Francisco de Vitoria (1485–1546). Under his guidance, the university offered an extraordinary 70 professorial chairs. As with other great mentors in history, most of Vitoria’s published work comes to us in the form of notes taken by his students.

In Vitoria’s work on economics, he argued that the just price is the price that has been arrived at by common agreement among producers and consumers. That is, when a price is set by the interplay of supply and demand, it is a just price. So it is with international trade. Governments should not interfere with the prices and relations established between traders across borders. Vitoria’s lectures on Spanish-Indian trade—originally published in 1542 and again in 1917 by the Carnegie Endowment—argued that government intervention with trade violates the Golden Rule.

Yet Vitoria’s greatest contribution was producing gifted and prolific students. They went on to explore almost all aspects, moral and theoretical, of economic science. For a century, these thinkers formed a mighty force for free enterprise and economic logic. They regarded the price of goods and services as a consequence of the actions of traders. Prices vary depending on the circumstance, depending on the value that individuals place on goods. That value in turn depends on two factors: the goods’ availability and their use. The price of goods and services are a result of the operation of these forces. Prices are not fixed by nature, or determined by the costs of production; prices are a result of the common estimation of men.

Martn de Azpilcueta Navarrus

One student was Martn de Azpilcueta Navarrus (1493–1586), a Dominican monk, the most prominent canon lawyer of his day, and eventually the adviser to three successive popes. Using reasoning, Navarrus was the first economic thinker to state clearly and unequivocally that government price-fixing is a mistake. When goods are plentiful, there is no need for a maximum-set price; when they are not, price control does more harm than good. In a manual on moral theology (1556), Navarrus pointed out that it is not a sin to sell goods at higher than the official price when it is agreed to among all parties.

Navarrus was also the first to fully state that the quantity of money is a main influence in determining its purchasing power. “Other things being equal,” he wrote, “in countries where there is a great scarcity of money, all other saleable goods, and even the hands and labor of men, are given for less money than where it is abundant.”

For a currency to settle at its correct price in terms of other currencies, it is traded at a profit, an activity which was controversial among some theorists on moral grounds. But Navarrus argued that it was not against the natural law to trade currencies. This was not the primary purpose of money, but “it is nonetheless an important secondary use.” He made an analogy with another market good. The purpose of shoes, he said, is to protect our feet, but that doesn’t mean they shouldn’t be traded at a profit. In his view, it would be a terrible mistake to shut down foreign exchange markets, as some people were urging. The result “would be to plunge the realm into poverty.”

Diego de Covarrubias y Leiva

The greatest student of Navarrus’s was Diego de Covarrubias y Leiva (1512–1577), considered the best jurist in Spain since Vitoria. The emperor made him chancellor of Castile, and he eventually became the bishop of Segovia. His book Variarum (1554) was the clearest explanation on the source of economic value to date. “The value of an article,” he said, “does not depend on its essential nature but on the estimation of men, even if that estimation is foolish.” It seems like such a simple point, but it was missed by economists for centuries until the Austrian School rediscovered this “subjective theory of value” and incorporated it into microeconomics.

Like all these Spanish theorists, Covarrubias believed that individual owners of property had inviolable rights to that property. One of many controversies of the time was whether plants that produce medicines ought to belong to the community. Those who said they should pointed out that the medicine is not a result of any human labor or skill. But Covarrubias said everything that grows on a plot of land should belong to the owner of the land. That owner is even entitled to withhold valuable medicines from the market, and it is a violation of the natural law to force him to sell.

Lus de Molina

Another great economist in the Vitoria-line of thinkers was Lus de Molina (1535–1601), among the first of the Jesuits to think about theoretical economic topics. Though devoted to the Salamancan School and its achievement, Molina taught in Portugal at the University of Coimbra. He was the author of a five-volume treatise De Justitia et Jure (1593 and following). His contributions to law, economics, and sociology were enormous, and his treatise went through several editions.

Among all the pro-free market thinkers of his generation, Molina was most consistent in his view of economic value. Like the other Late Scholastics, he agreed that goods are not valued “according to their nobility or perfection” but according “to their ability to serve human utility.” But he provided this compelling example. Rats, according to their nature, are more “noble” (higher up the hierarchy of Creation) than wheat. But rats “are not esteemed or appreciated by men” because “they are of no utility whatsoever.”

The use-value of a particular good is not fixed between people or with the passage of time. It changes according to individual valuations and availability. This theory also explains peculiar aspects of luxury goods. For example, why would a pearl, “which can only be used to decorate,” be more expensive than grain, wine, meat, or horses? It appears that all these things are more useful than a pearl, and they are certainly more “noble.” As Molina explained, valuation is done by individuals, and “we can conclude that the just price for a pearl depends on the fact that some men wanted to grant it value as an object of decoration.”

A similar paradox that befuddled the classical economists was the diamond-water paradox. Why should water, which is more useful, be lower in price than diamonds? Following Scholastic logic, it is due to individual valuations and their interplay with scarcity. The failure to understand this point led Adam Smith, among others, off in the wrong direction.

But Molina understood the crucial importance of free-floating prices and their relationship to enterprise. Partly this was due to his extensive travels and interviews with merchants of all sorts. “When a good is sold in a certain region or place at a certain price,” he observed, so long as it is “without fraud or monopoly or any foul play,” then “that price should be held as a rule and measure to judge the just price of said good in that region or place.” If the government tries to set a price that is higher or lower, then, it would be unjust. Molina was also the first to show why it is that retail prices are higher than wholesale prices: consumers buy in smaller quantities and are willing to pay more for incremental units.

The most sophisticated writings of Molina concerned money and credit. Like Navarrus before him, he understood the relationship of money to prices, and knew that inflation resulted from a higher money supply. “Just as the abundance of goods causes prices to fall,” he wrote—specifying that this assumes the quantity of money and number of merchants remain the same—so too does an “abundance of money” cause prices to rise—specifying that quantity of goods and number of merchants remain the same. He even went further to point out how wages, income, and even dowries eventually rise in the same proportion to which the money supply increases.

He used this framework to push out the accepted bounds of charging interest, or “usury,” a major sticking point for most economists of this period. He argued that it should be permissible to charge interest on any loan involving an investment of capital, even when the return doesn’t materialize.

Molina’s defense of private property rested on the belief that property is secured in the commandment, “thou shalt not steal.” But he went beyond his contemporaries by making strong practical arguments as well. When property is held in common, he said, it won’t be taken care of and people will fight to consume it. Far from promoting the public good, when property is not divided, the strong people in the group will take advantage of the weak by monopolizing and consuming all resources.

Like Aristotle, Molina also thought that common ownership of property would guarantee the end of liberality and charity. But he went further to argue that “alms should be given from private goods and not from the common ones.”

In most writings on ethics and sin today, different standards apply to government than to individuals. But not in the writings of Molina. He argued that the king can, as king, commit a variety of mortal sins. For example, if the king grants a monopoly privilege to some, he violates the consumers’ right to buy from the cheapest seller. Molina concluded that those who benefit are required by moral law to offset the damages they cause.

Vitoria, Navarrus, Covarrubias, and Molina were four of the most important among more than a dozen extraordinary thinkers who had solved difficult economic problems long before the classical period. Trained in the Thomist tradition, they used logic to understand the world around them, and looked for institutions that would promote prosperity and the common good. It is hardly surprising, then, that many of the Late Scholastics were passionate defenders of the free market.

The members of the School of Salamanca would not have been fooled by the fallacies that dominate modern economic theory and policy today. If only our modern understanding could once again arrive at that high road paved for us more than 400 years ago.

[Originally published as “Free Market Economists: 400 Years Ago” in The Freeman, September, 1995]
  • 1The scholar who rediscovered the Late Scholastics was Raymond de Roover (1904-1972). For years, they had been ridiculed and sloughed off, and even called pre-socialists in their thought. Karl Marx was the “last of the Schoolmen,” wrote R. H. Tawney. But de Roover demonstrated that almost all the conventional wisdom was wrong (Business, Banking, and Economic Thought, edited by Julius Kirchner ).

    Joseph Schumpeter gave the Late Scholastics a huge boost with his posthumously published 1954 book, History of Economic Analysis (New York: Oxford University Press). “It is they,” he wrote, “who come nearer than does any other group to having been the `founders’ of scientific economics.” About the same time there appeared a book of readings put together by Marjorie Grice-Hutchinson (The School of Salamanca ). A full-scale interpretive work appeared later (Early Economic Thought in Spain, 1177-1740 ).
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