An economic theory of economic analysis: the case of the School of Salamanca

Abstract

The School of Salamanca often is identified as the first economic tradition in the history of the “dismal science”. Its members anticipated principles later developed by the likes of Adam Smith and Carl Menger. This paper provides an economic theory of the production of economic analysis by the Doctors of Salamanca, beginning from the observation that producers of economic analysis respond to incentives the same way producers of meat, beer, or bread do. Historically, the demand for economic analysis arises from two sources: governments and interest groups. I argue that the changes in international trade associated with the emergence of new transatlantic markets in the sixteenth century led to an increase in the demand for economic analysis by Spanish merchants and that the contribution of the School of Salamanca was grounded in the predictable supply response to those fresh incentives.

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Notes

  1. 1.

    “The principles of all sciences are taught in Salamanca.” Little did they know that they also taught the principles of sciences yet to be discovered—economics.

  2. 2.

    See Tollison (1986) for an excellent overview of the role played by economic incentives in the discovery of key economic ideas and the creative process more broadly.

  3. 3.

    See Backhaus and Wagner (1987) on the role of the cameralists in producing economic arguments during the middle of the sixteenth to the nineteenth centuries for princes who demanded them largely because the costs of mobility increasingly had fallen (making it difficult to tax their subjects as heavily as before).

  4. 4.

    “The great difference between scholastic and contemporary economics is one of scope and methodology: the Doctors approached economics from a legal point of view” (de Roover 1995, p. 185). Throughout the paper, I will refer to the Spanish Scholastics using the broad, traditional term “Doctors” because their training and scholarship encompassed both theological and juridical (Roman and canon) disciplines.

  5. 5.

    In his words: “[W]e are well received in the measure that we preach what the society wishes to hear. Perhaps all preachers achieve popularity by this route” (Stigler 1981, p. 159).

  6. 6.

    “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” (Schumpeter 1954, p. 97).

  7. 7.

    In cases where the political authorities did intervene, some Doctors leveraged their economic analysis to make economic arguments for providing recompense to the injured parties. As Leonardus Lessius (1554–1623) taught:

    Take the following example. Without reason, a magistrate excludes some sellers from the market. The price of your goods rocket. The magistrate is obliged to indemnify the citizens for the damage they suffered as a result of this price increase because, contrary to the duties of his office, he caused the prices to climb so high. You, on the other hand, are not obliged to make compensation; under these circumstances your goods were simply worth the price for which you sold them (Lessius [1605] 2007, p. 25).

  8. 8.

    Phillip II exercised monarchical self-control by defaulting on his loans only in 1557, 1560, 1575, and 1596. Solutions to royal financial pressures were found by increasing taxes on the merchants and capturing a larger share of ecclesial tithes and property.

  9. 9.

    Charles V sought to reprimand him (although Vitoria later would be asked back as an advisor): “[T]he emperor did react in 1539 with a letter to the principal of the Convent of San Esteban, where both Vitoria and Soto were residing, to prevent their teaching and to destroy their manuscripts” (Koskenniemi 2011, p. 10).

  10. 10.

    “Monetary theorists are born in all ages and they were not lacking in sixteenth-century Spain, which was indeed the happiest of playgrounds for theologians whose tastes lay in what would now be called economics” (Grice-Hutchinson 1952, p. 18); “a preoccupation with the ethics of pricing … is precisely one of the strongest motives a man can possibly have for analyzing actual market mechanisms" (Schumpeter 1954, p. 57); “[b]ecause of their preoccupation with ethics, the Doctors were also more interested in what ought to be than in what actually was” (de Roover 1955, p. 185).

  11. 11.

    de Roover (1955, p. 180) highlights how their teachings were advantageously consistent: “One of the most striking characteristics of scholastic economics was universalism: regardless of origin and nationality, the Doctors are in fundamental agreement on method and principles”.

  12. 12.

    The Doctors at Paris refused to recognize exchange (that is, currency exchange across time and distance) as legitimate. Interestingly, Vitoria was studying in Paris at the time and authored many of the responses. His students would later go on to argue for the legitimacy of these very exchanges (e.g., Tomás de Mercado).

  13. 13.

    That conclusion is consistent with DeLong and Shleifer’s (1993) analysis of the negative impact that an absolutist prince, whom they explicitly typify as Philip II (1527–1598) of Spain, has on economic growth.

  14. 14.

    See also Ekelund and Hébert (2010).

  15. 15.

    To give an example of their influence: Domingo de Soto (1494–1560) represented King Charles V at the Council of Trent and also became the Emperor's confessor; Diego de Covarrubias y Leyva (1512–1577) was the President of the Council of Castile; Martin de Azpilcueta (1493–1586) was called to Rome in 1567, where he advised three successive popes (de Roover 1955). Rothbard ([1995] 2006) explains the School’s influence on contemporary and future thinkers in greater detail.

  16. 16.

    “Benson (1990, p. 60) writes: “The shifting of enforcement cost onto the government is consistent with the increasing political power and political activity of merchants. Indeed, the overall trend in economic regulation of the period was primarily motivated by merchant demands for monopoly rights”. In other words, merchants found it in their interest to outsource the production of commercial rules to the School of Salamanca.

  17. 17.

    Here and henceforth, economic analysis is understood to be the scientific nature of economic inquiry (i.e., economic principles) that is conveyed in theory through the medium of a scholarly economic research paper, while economic arguments involve mobilizing economic analysis for a particular end, something similar to the aims of policy papers (or policy sections of papers).

  18. 18.

    For example, Smith (1904, Book V, Ch. 1, Part III, Art. II) highlighted the principal-agent problem in the payment structure of professors at Glasgow University, where compensation was paid directly by students to professors, versus at Oxford where the university compensated the professors (1904). The result: “In the university of Oxford, the greater part of the publick professors have, for these many years, given up altogether even the pretence of teaching”.

  19. 19.

    One could adopt the same argument to explain why economics generally is not taught until high school. The return to economic arguments grows as individuals expand their choice sets.

  20. 20.

    See Mokyr (2002), especially his discussion of the effects of innovation on the household in the chapter “Knowledge, Health, and the Household.”.

  21. 21.

    Likewise, expanded economic opportunities always come at a cost. Merchants frequently sought excuses to exploit the native peoples, which was the area in which the School imposed the strongest constraints on merchant behavior (see Bartolomé de Las Casas). Ironically, the treatment of native peoples too put the Doctors of the School at odds with the Crown, who followed incentives to cater to merchants in that regard (see the debates and legacy of Spain’s New Laws of 1542).

  22. 22.

    For further information regarding the history of the Consulado, see Smith’s (1940) book The Spanish Guild Merchant. Greif et al. (1994) advance an argument for the efficiency of merchant guilds in governing the relationship between rulers and alien merchants.

  23. 23.

    de Mercado (1569, p. 26) explicitly dedicates his handbook to the Consulado, showing merchants the way to pursue earthly wealth “so as not to lose the eternal wealth in dealing with the temporal one”. He adds a guarantee: “Hence, the Merchants’ Guild of Seville may be assured of this doctrine, and rejoice in having their contracts solved by this famous university … to have a plain solution to the contracts that are most celebrated in these kingdoms and in the Indies” (de Mercado [1569] 2017, p. 26).

  24. 24.

    Essentially a case of re-regulation at a more encompassing level. Thomas and Leeson (2012) provide an analysis of the interplay between productive and unproductive entrepnueruial activity by examining the case of Bavaria’s brewing industry in the fourteenth to sisteenth centuries.

  25. 25.

    “The penalties of confiscation of property and perpetual exile for the importation of unregistered treasure were applicable to the prior and consuls, if convicted of abetting the evasion of registration. Since the guild often interceded on behalf of those prosecuted for possession of unregistered bullion, securing pardons or a mitigation of the penalties, and, finally, had a hand in the abolition of compulsory registration, plainly the Consulado failed to share fully the mercantilist preoccupation of the state to prevent the drain of specie to foreign parts” (Smith 1940, p. 101).

  26. 26.

    It is well-known that the merchants had no qualms about using credit arrangements to charge and receive interest payments as well. Church regulations did not hamper finance in any significant way; rather, it made some financial instruments (such as foreign currency exchange) relatively more attractive given their ability to conceal interest charges (de Roover 1951).

  27. 27.

    In a later book, Grice-Hutchinson (1978, p. 120) does give an economic answer to the question of why Protestant scholars did not engage explicitly with late Scholastic economic thought (while clearly having read and drawn from their analysis): "we must remember that not only was [Pufendorf] a convinced Lutheran himself but that he also depended on the favor of Protestant princes".

  28. 28.

    The earliest Doctors focused their analysis on the legal relationships between groups in the New World: “mere infidelity did not deprive the Indians of their rights—the contrary doctrine was, in fact, a Protestant heresy” (Koskenniemi 2011, p. 8).

  29. 29.

    For a taste of the magnitudes involved:

    Charles confiscated 1,500 ducats from the bishop of Cuenca as well as an additional 7,000 ducats of revenue from the diocese. The bishop of Guadix gave a loan of 300 ducats, the bishop of Almeria another 300 ducats, the bishop of Mallorca 1,500 ducats, the bishop of Badajoz a sum of 1,000 ducats, and the bishop of Osma a forced loan of 2,000 ducats. Charles as well confiscated from Segovia 6,000 ducats, from the bishopric of Burgos 10,000 ducats, the bishopric of Salamanca an additional 8900 ducats, and from the Toledan archdiocese 7,000 ducats. (Espinosa 2006, p. 14)

    Not all prelates opposed those measures—in fact, many received new appointments in return for their financial support (Espinosa 2006, p. 8). It was not to be the first nor the last time that Doctors of the School would take up positions against their fellow clergymen by explicitly warning the Crown against wars, inflation, and general excess.

  30. 30.

    The political thought of the School distinguished itself from contemporaries by attempting to disentangle the state from the church; “One of Suárez’ major works—his 1613 Defensio fidei—was written, building upon Bellarmine’s efforts to refute the claims of James I about the divine right and absolute power of kings” (Alves and Moreira 2013, p. 103).

  31. 31.

    Melé (1999), Rivas (1999), Alves and Moreira (2013) and Moreira and Alves (2013) provide thorough investigations into the business ethics approach taken by the Doctors.

  32. 32.

    Milgrom et al. (1990) show how the larger system of seasonal fairs, private judges, and the Law Merchant reduced the transaction costs of long-distance trade between individual merchants.

  33. 33.

    For more details on this point, see de Roover (1951, p. 501): “It would be a grievous mistake in historical interpretation to assume that the theories of the Doctors did not affect economic policy or influence legislation”.

  34. 34.

    de Roover (1951) also cites numerous examples of medieval wills including restitution for usury and illegitimate gains.

  35. 35.

    Diego de Covarrubias summarizes the theory in 1556: “'The value of an article', he says, 'does not depend on its essential nature but on the estimation of men, even if that estimation be foolish. Thus, in the Indies wheat is dearer than in Spain because men esteem it more highly, though the nature of the wheat is the same in both places” (quoted by Grice-Hutchinson 1952, p. 48).

  36. 36.

    The conclusion that taxes can change behavior violates the norm of “tax neutrality” found in many public finance textbooks.

  37. 37.

    The permanent principles of the Church's social doctrine constitute the very heart of Catholic social teaching. These are the principles of: the dignity of the human person, which has already been dealt with in the preceding chapter, and which is the foundation of all the other principles and content of the Church's social doctrine; the common goodsubsidiarity; and solidarity” (italics in original, Pontifical Council for Justice and Peace 2004).

  38. 38.

    Laures (1928) discusses taxation further in his excellent book, The Political Economy of Juan de Mariana.

  39. 39.

    To give a sense of the magnitude of inflationary finance to which the Crown would resort, Velde and Weber ([1997] 2000, p. 6) report:

    The stampings of 1636, 1641 and 1654 each provided 5m ducats on average. From 1621 to 1626, minting of pure copper coinage earned 2m ducats per year. By way of comparison, total expenditures in 1598 and 1621 (both war years) were 12.3m and 12.7m ducats respectively, of which 6 to 7m ducats for defense. In 1608, a peacetime year, expenditures were 10.8m D of which 4.2m for defense. The sums raised in seigniorage were therefore considerable.

  40. 40.

    Consider an excerpt from Cyprian’s homily in the second century: “The property of the wealthy holds them in chains … which shackle their courage and choke their faith and hamper their judgement and throttle their souls. They think of themselves as owners, whereas it is they rather who are owned: enslaved as they are to their own property, they are not the masters of their money but its slaves.”.

  41. 41.

    Juan de Mariana even accuses his own order of Jesuits for extravagant living: “Certainly, it is natural for people to spend much more when they are supplied in common than when they have to obtain things on their own. The extent of our common expenses is unbelievable” (quoted by Chafuen 2003, p. 35).

  42. 42.

    San Bernardino of Sienna had taught: “If it is legal to lose, it must be legal to win” (quoted by Chafuen 2003, p. 113).

  43. 43.

    Aquinas makes a careful distinction—that just because an act is immoral doesn’t mean that it should be illegal. Both Aquinas and the Doctors conclude that prostitution should be legal to avoid even greater harm, and they “do not sin in taking their salary.… [T]hey can even claim what was promised to them” (quoted by Chafuen 2003, p. 116).

  44. 44.

    Merchants invested their new wealth into the educations of their children, providing a new source of funding for the universities. Records show that one of the wealthiest Sevillian merchants, Juan de la Barrera, established a fund to provide annual scholarships to the University of Salamanca for seven poor boys (Pike 1972, p. 117).

  45. 45.

    Maryks (2010) documents how the (originally) non-discriminatory policies of the Jesuits allowed for a significant number conversos—Jews who were forced to convert to Catholicism by the Alhambra decree in 1492 (and other past laws)—to join the Society. It is hardly a stretch to believe that the financial expertises of the formerly Jewish families had some effect on the well-rounded knowledge from which the Schoolmen approached business.

  46. 46.

    Francisco de Vitoria was a primary correspondent of past and future merchants during his study at the University of Paris. His opinions can be distinguished from the others by the “severity of his doctrine”.

  47. 47.

    They also called for educational reform: “Moncado advocated the use of the vernacular instead of Latin for teaching at universities. He furthermore regretted that the educational system did not analyse social and economic problems. According to him, education had to be relevant to reality and functionally oriented to the socio-economic and cultural development problems of the nation. As long ago as that!” (Baeck 1988, p. 399) .

  48. 48.

    de Roover (1955, p. 170) discusses the interplay between usury laws and merchant evasion, concluding that “in trying to constrain the market, the moralists were fighting a losing battle”.

  49. 49.

    An excellent conclusion of this exercise is given in Tollison (1986, p. 921): “To defend a person’s behavior as being consistent with positive economic theory is to say very little indeed. Moral leadership requires to some degree that preachers practice what they preach”.

  50. 50.

    González (2017) reports: “We know that Mercado’s work had an evident repercussion at the time, to the point that, in a very short span, two other, extended editions were published in Spain (Seville 1571 and Seville 1587) as well as an Italian translation (Brescia 1591)”.

  51. 51.

    Finnis (1980, p. 36), who has certainly read more Aquinas than the present author, writes that for Thomas Aquinas "the way to discover what is morally right (virtue) and wrong (vice) is to ask not what is in accordance with human nature, but what is reasonable”.

  52. 52.

    The mathematical historian Morris Kline (1987) has called attention to the influence of the Scholastics: “The last medieval teachers, the Scholastics in particular, provided not only the rational climate in which mathematics and modern science were born, but they also inspired in Renaissance thinkers the belief that nature was the creation of God, and that the paths of God could be understood. It was this fundamental article of faith what prevailed on and inspired scientists and mathematicians of the Renaissance” (quoted by Gómez Camacho et al. 2017, p. 31).

  53. 53.

    “In the first chapter we said that monies are not of the same value in all places, that the ducado among us is worth eleven reales, in Rome thirteen, the real is worth thirty-four in Seville, and in Gran Canaria, thirty-eight. Now it is a question whether it is licit to change a hundred reales in Seville for a hundred in Gran Canary where they are not worth four hundred maravedíes” (de Mercado [1569] 2017, pp. 135–136).

  54. 54.

    Importantly, I do not intend to claim that the main motivation of the Doctors, merchants, or Spanish Crown, for that matter, was not seeking truth. What I believe my paper demonstrates is that the actions of the Doctors, merchants, and Crown also can be explained by their economic incentives.

  55. 55.

    In the words of Tollison (1986, p. 911), “The economist is a rational, maximizing individual, subject to the predictions of economic science. In this sense there is no way that the economist cannot be influenced by the environment”.

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Correspondence to Clara Jace.

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Jace, C. An economic theory of economic analysis: the case of the School of Salamanca. Public Choice 181, 375–397 (2019). https://doi.org/10.1007/s11127-019-00662-y

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Keywords

  • School of Salamanca
  • Supply and demand of economics
  • History of economic thought