God is a Capitalist

by Roger McKinney

  Except for the teaching on usury and profit, the Church doctors espoused essentially capitalist economic doctrines, so the reader may wonder why capitalism did not emerge in Catholic nations. The answer lies in the fact that the scholarship remained an ivory tower industry for the most part and rarely shaped the way kings and princes governed. As we have already seen, state-sanctioned monopolies, guilds, price gouging, warfare and all that the Scholastic fathers abhorred were common features of the medieval economic landscape. Sometimes scholarship became the law of the land, but the state rarely enforced those laws. For example, Church doctrine, and the resulting legislation outlawing monopolies erected no barrier against the powerful international cartels of Antwerp or the guilds. Public opinion against the cartels inspired limited assaults against them until the Dutch Republic crushed them so effectively that they did not revive until the twentieth century in Kirshner’s view found in Business, Banking, and Economic Thought.

  Until the Dutch Republic, governments at all levels suppressed innovation that might ignite economic growth. McCloskey has listed a few instances of such behavior in his Bourgeois Dignity:

  Joel Mokyr gives plentiful examples of such shooting-oneself-in-the-foot: In 1299 a law prevented bankers in Florence from adopting Arabic numerals. In the late fifteenth century the scribes of Paris delayed the adoption of the printing press (there) for twenty years. In 1397 the vested interest in Cologne outlawed the making of pins in presses rather than by hand. In 1561 the city council of Nuremburg passed an ordinance imprisoning anyone who would make and sell a new lathe that had been invented by a local man. In 1579 the city council of Danzig secretly ordered the inventor of the ribbon loom to be drowned. And on and on into modern times – since the springs of such anti-innovative activities are prudent, self-interest, not some foolishness unique to primitive times. In the late 1770s the Strasbourg council prohibited a local cotton mill from actually selling its stuffs in town because the merchants who specialized in importing cloth would be disturbed: “It would upset all order in trade if the manufacturer were to become a merchant at the same time.” In 1865 the Wiggin’s Ferry Company of St. Louis stopped the first attempt to build the Eads Bridge over the Mississippi. The white members of the City Council of Chicago, with the support of the intellectual left this time, stopped WalMart from opening grocery stores in the food deserts of the South Side.

  Many of the merchants and all of the scholars in The Netherlands, such as Hugo Grotius, drank from the fountain of knowledge of the University of Salamanca, Spain, and the Dutch could boast of having one of Europe’s top schools at Leiden. So the intellectual pool from which the founders of the Dutch Republic drew consisted of more than a millennium of scholarship on matters of money and commerce. Historians refer to these scholars, beginning with Thomas Aquinas and ending with Adam Smith, as the Scholastic school. Where modern economists attempt to explain how economies work, Scholastics viewed economics as a sub-discipline of ethics. They concerned themselves with how wealth was distributed and whether or not individuals made contracts and conducted transactions in a just manner. In the process, they distilled high quality economic theory, which when forgotten took the West another two centuries to recover.

  Capitalism is far more than sophisticated commerce as most journalists, historians and anthropologists assume. As mentioned in chapter 1, informal and formal institutions had to be created in order to give birth to capitalism – individualism, the suppression of envy, respect for commerce (the bourgeois values), security of private property, free markets, limited government, the rule of law and equality before the law. All of these institutions overlap. Siedentop might argue that all of them are just subsets of individualism, for respect for property rights gives individuals freedom from the demands of family and tribe for equal distributions of wealth. And property cannot exist without free markets because property requires that the owner be free to use and dispose of it as the owner sees fit.

  It took Western Europe over fifteen centuries to craft these institutions and we will see in the next chapter that the ingredients come together first in the Dutch Republic.

  Chapter 5 – The Dutch Republic

  The Low Lands of Northwestern Europe had escaped the worst aspects of feudalism due to its late colonization and distance from Rome. By 1500, the Church owned about 10 percent of the land in Holland; nobility owned about 5 percent and town-dwellers roughly a third. Peasants possessed 45 percent of the total available land, were free from feudal control and owned their land with few restrictions on how they could dispose of it according to Jonathan Israel in The Dutch Republic, Its Rise, Greatness, and Fall 1477-1806. Unless noted, all of the quotes in this chapter come from his book.

  The Church and nobility owned the best land. Peasant land was often so poor that the owners had to supplement their income with odd jobs. The most striking feature of the Low Lands “was a sustained intensity, versatility, and higher crop yields than were to be found elsewhere in Europe. This was the only part of Europe which had, thus far, experienced a true ‘agricultural revolution’ and it was one which was already largely complete in Flanders and South Brabant by 1500.”

  The nobility was much stronger in the south than in the north so the lack of a strong feudal legacy offered many benefits to northern residents. In the first place, it meant the absence of a society in which each member held a legally fixed position assigned by birth, so that social mobility was possible and found greater acceptance. Also, it diminished the influence of communal institutions and collective behavior while promoting individualism.

  A high rate of urbanization also characterized the Netherlands of the early sixteenth century. By 1550, the north had twelve cities with more than ten thousand inhabitants, the largest of which was Amsterdam. The northern states, which later comprised the Dutch Republic, had about twice the ratio of urban to rural inhabitants as the rest of Europe. In Holland, half the people lived in towns. Frequent flooding had forced many rural dwellers to move to the coastal towns and take up fishing for a living, which explains part of the high rate of urbanization. But Amsterdam before the revolt was much smaller than the southern cities of Antwerp, Brussels and Ghent, which would remain a part of Spain. The southern provinces were the richest, most densely populated and most urban in Europe outside of northern Italy. Amsterdam, in contrast, had no important merchants and trade was largely confined to shipping bulk grain, herring and timber to the Baltic States.

  A casting of the European economy including the Dutch Republic as the curtain descended on the middle ages would reveal a complex figure. Politically, the era of city states had ended, except for Italy, but economically towns and cities continued to act as sovereigns and protect local merchants, guilds and manufacturers from competition with outsiders while controlling the agricultural production in their vicinity. The rule of law and protection of property, though preached by the Church, could not be found. Kings murdered Protestants with impunity and the encouragement of the Church, but the Church failed to persuade kings to enforce its doctrines on financial matters, with the exception of usury. The nobility remained above the law, and preferred to increase its wealth through extortion, bribery, private wars, state-granted monopolies and outright theft through perversion of the justice system.

  Society enforced equality of incomes within classes while tolerating gross inequalities between classes. Peasants suffered the most, living lives that differed little from slavery and starving to death in famines that appeared like clockwork. Merchants and manufacturers remained the outcasts of society who purchased respectability by building cathedrals and buying titles of nobility rather than investing in new or expanding enterprises for production. The Dutch Republic would shatter the Old Regime.

  The republic

  The Dutch Republic began life as a monarchy under the brilliant leadership of Prince William of Orange. After an assassin’s bullet cut him down, the leadership tried to retain a monarchy by offering the head of the nation first to He
nry III of France then Queen Elizabeth of England, but both declined the honor partly out of fear of the wrath of Spain. Admirers of a republican form of government under Johan van Oldenbarnevelt took advantage of the vacuum in the ranks of the nobility to establish the new nation as a republic.

  However, the Republic did not allow voting for the leadership as happens in modern republics. The political leadership, the regents, in the many states that made up the nation as well as the national government consisted of wealthy brewers, cloth, herring and dairy dealers, Baltic traders, and soap-boilers, in other words, wealthy merchants. New regents were chosen by the existing membership when older ones died, retired, or lost too much wealth. The regents required members to be wealthy enough to be able to devote large blocks of time to government issues because they did not receive a salary from the state.

  The choice of a republican government was a revolutionary idea in an age when the dominant political philosophy across Europe endorsed the divine right of kings. As mentioned, circumstances forced the decision to some degree since no monarch accepted the offer to rule. And, as will be shown, the nation flip-flopped from a republican government to a monarchy several times during its two centuries of existence, finally adopting a monarchy after the defeat of Napoleon. Why were so many in the nation determined to keep a republican form of government in an age of absolutism? The answer is important to our search for the roots of modern capitalism because economic historians have achieved a consensus on the idea that economic development, especially the explosive kind registered by the Dutch, required freedom and the rule of law of the sort that only a republic can provide.

  Before the middle of the seventeenth century, political theory going back to classical Greece identified three good forms of government - monarchy, aristocracy and a republic. They classified tyranny, oligarchy and democracies as degenerate forms. The consensus held that each of the three good forms of government were appropriate at different times and under varying circumstances. That consensus broke up in the late seventeenth century when republican government became the only legitimate form in the minds of Western European political philosophers. The Dutch Republic led the way.

  The tolerance of the Dutch attracted Jews from Portugal in the 1590s and they created a thriving community. The printing press made copies of the Hebrew Bible, the Talmud and the writings of many Jewish scholars, such as Maimonides and Josephus, widely available and inexpensive. The Republic became the “most vital center of Christian Hebraic scholarship in early-modern Europe,” according to Eric Nelson in The Hebrew Republic: Jewish Sources and the Transformation of European Political Thought. Hugo Grotius learned Hebrew at the University of Leiden and around 1604 wrote De republic emendanda which promoted the Hebrew republic in the Torah as the most clear manifestation of God’s will concerning government. At the same time, the Dutch began to see their nation as the new Israel. These strands were woven together to produce in the late sixteenth and seventeenth centuries a “truly remarkable burgeoning of Hebrew scholarship across Europe,” as Nelson wrote.

  The shift in political thought began with the Reformation. Reformers had announced sola scriptura as their standard, but realized quickly that although they knew the New Testament well, they were ignorant of the Hebrew Bible or what Christians called the Old Testament. So they turned to the Jewish community for instruction in Hebrew and as guides to interpreting the books according to Nelson.

  Readers began to see in the five books of Moses not just political wisdom, but a political constitution. No longer regarding the Hebrew Bible as the Old Law – a shadowy intimation of the truth, which had been rendered null and void by the New Dispensation – they increasingly came to see it as a set of political laws that God himself had given to the Israelites as their civil sovereign. Moses was now to be understood as a lawgiver, as the founder of a politeia in the Greek sense. The consequences of this reorientation were staggering, for if God himself had designed a commonwealth, then the aims of political science would have to be radically reconceived...It became the central ambition of political science to approximate, as closely as possible, the paradigm of what European authors began to call the respublica Hebraeorum (republic of the Hebrews)...

  Within a short time, monarchies fell from grace and republics ascended to be recognized as the form of government closest to godliness. None were brave enough to suggest abandoning legislatures and executive branches completely, as had Israel under the judges. Many failed to grasp the differences between civil and moral laws and misunderstood the laws providing for debt forgiveness every seven and fifty years, thinking they were an early form of wealth redistribution. That led to calls for the state to redistribute wealth and encouraged early forms of socialism. But as Pieter de la Court explained, the freedom in the Dutch Republic, while it remained a republic, provided the greenhouse atmosphere for commerce to explode.

  Leonardus Lessius

  Huibrecht Leys intended his nephew, Lenaert Leys, born in Brecht near Antwerp in 1554 and whose uncle was his guardian, to become a businessman like him. But Lenaert won a scholarship to the University of Leuven in 1567 at the age of thirteen. The Latinized version of his name became Leonardus Lessius. In 1572 he joined the Jesuit order and launched his academic career. When he returned to the university to teach, he relied on the works of Thomas Aquinas and the Salamancan scholar Martinus de Azpilcueta, or Dr. Navarrus.

  The town of Leuven was in the Spanish Netherlands, the southern part of the region that remained loyal to Spain and did not become part of the Dutch Republic. Nevertheless, Hugo Grotius, the founder of international law and compiler of Dutch law, read Lessius, which serves as an example of the influence of the academics of Salamanca on Dutch academia, including those of the north in the Dutch Republic. Even Protestant scholars, as was Grotius, studied Catholic scholars. The theological split of the Reformation had not yet caused Protestants to abhor all things Catholic or vice versa.

  Unlike today when businessmen ignore academia and ridicule ivory tower speculation, (though often for good reasons) academia in Lessius’ time exerted greater influence on practical affairs. Known as the “oracle of the Netherlands,” Lessius regularly advised businessmen on the ethical aspects of their practices and held weekly debates on controversial issues. “In their universities and colleges across Europe, the future economic, political, and scientific elite was educated, and many a merchant or prince allowed himself a private Jesuit counsellor and confessor. Lessius, in particular, served as an adviser of Albert and Isabel, the Hapsburg archdukes governing the southern Netherlands during the last twenty years of his lifetime,” according to Wim Decock in “On Buying and Selling” in the Journal of Markets & Morality.

  Lessius advised businessmen, as did his mentors at the University of Salamanca, that calculations of the just price must consider the abundance and scarcity of the good, the number of buyers and sellers, the mode of selling, and the money supply, but the particulars of the situation could justify deviations because the just price was actually a range of prices in Decock’s words:

  For example, take the following case. A buyer requests me to sell my good on the spot, whereas in fact I intended to sell it not until ten months later, being pretty sure that by that time its price would have doubled. Am I obliged to sell at the current market price, or would it be allowed for me to demand a surplus, given that I am giving up a realistic profit in the future? Alternatively, is it licit for me to deviate from the current just price by virtue of the particular circumstances constituting my specific case?

  It is licit indeed, according to Lessius and other sixteenth- through seventeenth century moral theologians, to deviate from the just price in circumstances such as these...

  To come back on the merchant who gives up a future profit by selling in advance, his situation can be classified as an instance of the paradigmatic case in which a businessman rightly deviates from the just price by virtue of the extrinsic title cessant gain (lucrum cessans). The gradual but st
eady expansion of these so-called extrinsic titles enabled the scholastics to account for new developments in business practice and escape the merciless rigidity of a general normative framework. Strictly speaking, any deviation from the equality principle, namely, the just price in buying and selling would be illicit, but by virtue of typical circumstances, extrinsic to the contract itself, this deviation may become entirely licit, not to say imperative.

  Loopholes had inflicted many fractures on the doctrine of usury that possessed academics for millennia by the time Lessius came along, but the doctor’s vigorous trumpeting of exceptions caused the walls to crumble. Previous scholars had insisted that any surplus payment above the contract price amounted to illegal and immoral usury. Later scholastics, including Lessius, found sound reasons for such profits, such as damages incurred, cessant gain, and capital risk. Damages included adverse circumstances that might happen during the term of the loan in which the merchant suffered while being deprived of his money. For example, his house might burn and he would be forced to borrow money for rebuilding.

  Cessant gain (lucrum cessans), was an early form of opportunity cost, a concept at the heart of modern micro economics: if the lender could not use his money to invest in profitable opportunities he was entitled to compensation by the borrower. Finally, the debtor might go broke and be unable to pay back the loan. The lender was justified in demanding interest in order to compensate for the risk. “By the time Lessius edited his treatise On Justice and Right, damage incurred and cessant gain were widely accepted titles by the moral theologians. Yet, it is only with him that the title capital risk starts to gain solid ground,” according to Decock.