Just Price

= The transaction value reached voluntarily by an informed buyer and an informed seller after a series of implicit or explicit offers and counteroffers, with neither under any compulsion to buy or sell. [1]

Description

From the Wikipedia:

"The just price is a theory of ethics in economics that attempts to set standards of fairness in transactions. With intellectual roots in ancient Greek philosophy, it was advanced by Thomas Aquinas based on an argument against usury, which in his time referred to the making of any rate of interest on loans. It gave rise to the contractual principle of laesio enormis."

(https://en.wikipedia.org/wiki/Just_price)

History

Just Price, Christianity, and Property

Author ?

"The coexistence of private property with Christian teachings was never comfortable. In the 5th Century, the early Church fathers (the "Patricians", e.g. St. Augustine) had struck down "communistic" Christian movements and the Church itself went on to accumulate enormous amounts of property. In the 12th Century, St. Francis of Assisi began a movement (the "Franciscans"), which insisted on vows of poverty, "brotherhood" and deplored the accumulative tendencies of the Church. Against the Franciscans were arrayed St. Thomas and the Dominicans, who dug out of Aristotle and the Bible the necessary arguments to put down their challenge. The Thomists took a practical stance: they argued that private property was a "conventional" human arrangement with no moral implications, and furthermore, it had the nice side-effect of stimulating economic activity and thus general welfare. The Thomists cautioned that this did not mean they blankly endorsed all private enterprise: the "love of lucre", they noted, was a serious sin. They stressed the fact that man only has "stewardship" of God's property and should make property available for communal use. They also claimed that theft in times of need was justifiable.

Another question that arose was that of entrepreneurship. Should a merchant be allowed to profit from differentials in prices? The Scholastics replied with a qualified yes, provided the merchant is not motivated by pure gain and profit be only just enough to cover his labor expenses (sacrifices) of the merchant. They went on to argue that the trader, far from being a parasite, is performing a valuable service and increasing general welfare by meeting different needs. But why are needs different? Perhaps, as the Salamanca School argued, God wanted men across the world to engage in exchange and therefore get to know each other, so as to increase their sense of "brotherhood" -- a universalistic perspective that contrasts starkly to the "warfare" notion of trade later employed by the Mercantilists.

The issue of "justice in exchange" was a more complicated issue. In his Ethics, Aristotle had discussed this as an application of commutative justice. The just exchange ratio of goods (i.e. their just price) should be in proportion to their "intrinsic worth" to men. It is notable that Roman law was much more flexible: it considered a price "just" simply if it was agreed to by the contracting parties -- the notion of intrinsic usefulness or worth was not a consideration.

The Thomists attempted to reconcile Aristotle's notion with the Bible. They originally interpreted this as the "intrinsic worth" of goods (bonitas intrinseca) in terms of the order of appearance of things in the book of Genesis. This led to some problems -- to take one popular example, rats are of higher Biblical order than wheat, but are they really worth more? As such, the Scholastics (esp. Jean Buridan) broached the alternative idea that the intrinsic value of a good is more loosely connected to "human needs" and thus related to their "usefulness" to man. However, this seemed to undermine the idea that goods have "intrinsic worth". "Usefulness" is not quite a characteristic of a good itself but rather lies in the relationship between goods and people. Aristotle had argued that people's needs were different and thus the degree of usefulness varied and many of the Scholastics adopted this. This might justify why goods should be allowed to exchange at different prices in different places and times. Also, it might explain why wheat should be worth less than flour, even though one is derived from the other.

Even if we hang the intrinsic value of a good on its "usefulness", how does one estimate what the price should be. What is the "just price" (justum pretium) of a good? Following the Golden Rule ("Do unto others as you would have them do unto you"), the Scholastics decided that a person should not charge more for a good than what he would be willing to pay for it himself. This not only to make ethical sense but also seemed like a good way to estimate the "usefulness" of a good. If a bearskin is so useful to you that you would be willing to pay two deerskins for it, then if you own a bearskin you must sell it for two deerskins.

Duns Scotus, the Franciscan theologian and Thomas's great rival, was disturbed by the unwillingness of the Thomists to commit themselves to a precise idea of "intrinsic worth" and "just price". He came down on the side that argued that the just price of an object was its cost of production, i.e. the labor and expenses of the provider of the good. However, Scotus realized that this might imply waste: it is not unlikely for expenses to be exaggerated beyond what is necessary to produce the good, thus the "just price" might be artificially inflated. Scotus struggled with these questions and went on to make some quite modern reflections about the necessity of competition to determine just price, and thus the immorality of monopoly.

A more disturbing question was posed by another Scotist, Gabriel Biel. If the rule of justice in exchange is followed so that only goods of equal worthiness are exchanged, then, in modern language, Golden Rule-guided exchange is not utility-enhancing for either party. But, suggested Biel, what if there were advantages to both parties in exchange? What is the just price then? This was not clarified by the Thomists, but it is evident that Biel's argument would undermine the concept of just price entirely.

The Salamanca School resolved the problem by arguing that the estimation of usefulness varies from person to person. Consequently, the just price of a good is nothing other than the natural, exchange-established price. There is no need to go beyond that. In a competitive market, they noted, buyers will not be able to pay less for a good than its usefulness to them and sellers will not be able sell that good for more than what it is useful to them. In this manner, the Salamanca School was also able to resolve the paradox of value: diamonds, which are intrinsically useless, normally exchange at a much greater price than water, which has great usefulness. The Salamanca scholars concluded that as men are the best judges of what is "useful" to them, then diamonds must be useful in some mysterious way.

The charging of usury, or interest on money lent, came quickly under scrutiny. There is no clear basis for a ban on usury in Christian scriptures. The most famous injunction on interest emerges ambiguously as: "Upon a stranger thou mayest lend upon usury, but unto thy brother thou shalt not lend upon usury." (Deuteronomy, 23: 20). To early Church fathers, like St. Jerome, the Christian notion that "all men are brothers" necessarily implied that usury must be banned outright. Another patrician, St. Ambrose, decided that lending with interest to enemies in the course of a just war was permissible.

However, others noted that the Hebrew term for "usury" in the cited Biblical passage is closer to "bite", so perhaps it only seeks to prohibit excessive interest or interest levied upon the poor, but not ban it altogether. Other Biblical passages (e.g. Exodus 22:25) seemed consistent with this qualification. But that just throws up more questions: what is "excessive" and who is deemed "poor"?

Without clearer scriptural guidance, the proponents of the ban were driven by the "hunch" that lending at fixed interest was a rather "unholy" activity altogether -- a sentiment shared by many common people. The burden of proof, they argued, was on the defenders of interest. Could they prove that it was at least "socially" useful to permit the charging of interest? This was far from clear in feudal economies, where most lending was for consumption and not production. Social costs were more clearly discernable: the absurd mathematics of compound interest increased social inequality, reduced free men into indentured servitude and burdened civil authorities with enforcement while the only advantage it seemed to bring was to encourage consumption (a morally suspicious activity anyway). Thus, interest-bearing debt was not only unnatural, but also a morally repugnant and socially detrimental institution.

Although clerics had been prohibited from lending at interest at least since the 4th Century, the ban was not extended to laymen until much later. In 1139, the Second Lateran Council denied all sacraments to unrepentant usurers and, in an 1142 decree, condemned any payment greater than the capital that was lent. Jews and Moors (being "strangers" in Christian lands) were initially exempt from the ban, but the Fourth Lateran Council (1215) issued an admonition prohibiting non-Christians from charging "excessive" usury (thus implicitly condoning modest usury). In 1311, Pope Clement V at the Council of Vienna prohibited usury outright and condemned as "heretical" any secular legislation that tolerated it.

When Christian theologians, particularly St. Thomas Aquinas, finally came across Aristotle's work in the 13th century, they found ample support for the complete ban. The Thomists argued that as money was not in Genesis, then it had no "intrinsic worth". They appealed to Aristotle's idea (in his Ethics, not his Politics), that money is merely a human social convention which yields no utility itself, thus its value is "imposed" by humans. Loosely speaking, as money has no intrinsic worth, then a lender of money loses nothing of worth when lending it out. Thus, by the Golden Rule, he should not ask for compensation for doing so. Other forms of "earning without labor" (e.g. rent on land) were acceptable to the Thomists because there was indeed "intrinsic worth" in the object lent and thus it is "costly" to part with it.

The Thomists allowed two loopholes in their argument: interest is admissible if the lender of money bears risk (dammum emergens) or if, by lending, he is foregoing an alternative, profitable opportunity (lucrum cessans). The former loophole was intended to distinguish between owners of debt with fixed interest earnings and investors in profit-sharing partnerships (Commenda). But as with any loan, there is always at least default risk, then, technically speaking, usury is always admissible. The second loophole was intended to allow the charging of interest in inflationary periods (when the creditor makes a clear loss), but the scope for ritual abuse is even more glaring -- one can always argue that there is an "alternative" profitable use of capital.

Of course, there were always ways around this. Delayment fees, mohatra contracts ("repurchase agreement"), the contractum trinius, etc. -- widely used throughout both the Christian and Muslim worlds -- effectively replicated interest-bearing contracts. The banning of usury complicated, but did not end, debt finance. The ban was eventually repealed, after the revision of the doctrine by the School of Salamanca and the gradual lifting of laws in Protestant countries in the mid-1600s.

The ban on usury brought up an interesting dilemma identified by Nicole de Oresme: the debasement of national currencies by their respective governments (a practice that accelerated notoriously in 14th Century France). Oresme accepted that governments are entitled to some amount of seignorage on account of their minting services, but it must not be forgotten that money is effectively a loan from people to government. Consequently, debasement, by lowering the value of money, is a way of extracting negative interest, and thus is a form of usury -- indeed, worse than usury since it was done without consent. Oresme followed Jean Buridan in endowing money with "intrinsic worth" by moving away from the Aristotlean "social convention" perspective to a "metallic" perspective."

(https://web.archive.org/web/20110524011919/http://www.newschool.edu/nssr/het/schools/ancients.htm)