God is a Capitalist

by Roger McKinney

  Lessius undermined traditional dogma on usury even further by adding the principle of the lack of money (carentia pecuniae), which essentially defined interest as the price of money and introduced what economists centuries later would call the time value of money. Money became a good like any other commodity which could be bought and sold in the market for a just price determined in the same way as the price for other goods. “In sum, it is very typical of Lessius’ analytical genius first to discern the underlying economic mechanisms of a particular business practice and, subsequently, to integrate this insight into his normative judgment,” in Decock’s view.

  Lessius contributed to the growing esteem for commerce among the Dutch. Though he fails to mention him, McCloskey credits the rise of the bourgeois virtues that promoted commerce in the West to the Dutch Republic. McCloskey argues persuasively that the upward sloping blade of the hockey stick in the graph of the per capita G.D.P. time series could never have happened without a reversal of the traditional contempt for commerce that dominated Europe.

  Lessius promoted that change by insisting that the work of the merchant, the art of buying and selling goods unchanged, increased the prosperity of the community and improved the relations of people around the world. Therefore, merchants should benefit from their efforts. He could do so because the just price was never fixed but established a range of prices in different places at different times. The merchant bought goods at the low end of the just price range where they were abundant and sold them where they were scarce and more highly valued at the higher end of the just price. Lessius understood that making money in that way required a network of people who could inform the merchant of changes in prices at distant locations. Such a network required experience, intelligence, insight, prudence and industry, so forbidding a merchant to benefit from his work amounted to punishing people for using their best qualities.

  Lessius even dealt with the modern argument for government intervention into markets known as asymmetric information. The principle states that the seller of any good, such as a used car, has vastly more information about the product than the buyer and that places the buyer at a disadvantage. In the fevered imaginations of mainstream economists that means the market has failed and justifies government intervention to regulate a merchant’s activities. The argument is not new; people made the same demand in the middle ages. But Lessius would have nothing to do with it. Clearly, fraud was immoral and should be illegal, but the merchant should not have to give away for nothing his years of experience and knowledge. Ignorance on the part of the buyer did not justify breaking a contract according to Decock:

  What is more, Lessius would explicitly state that everyone can deceive themselves through imprudent behavior: The professional buyer should blame the ignorance on himself because he has not been virtuous enough to inform himself about the market in which he is taking part. Regularly repeating that, among professionals, the marketplace is not a realm of charity and donation but of commutative justice and inner economic logic, Lessius was not prepared to take on a paternalistic attitude in his moral judgments.

  Lessius illustrated the licit nature of asymmetric information (though not fraud) with the story of a merchant who traveled to Rhodes where an acute shortage of grain had led to high prices. The merchant knows that other sellers follow him, but the people of Rhodes do not. Should the merchant inform the people and risk the price of his grain falling? Lessius answered no, according to Decock.

  Thus, even though the common estimation is based on error and ignorance, the just price ensuing from it still prevails. Though we cannot go into details here, Lessius’ solution and further elaboration of this case reveals at least three distinctive features of his economic thought: (1) a consistent application of the general just price doctrine to all kinds of cases, (2) a restrictive interpretation of the vices of the will violating contractual consensualism, and (3) a concept of business as governed by rules of its own that should be recognized by an ethicist who boasts himself on stimulating virtuous and free-market behavior.

  Scholastics such as Lessius never intended to invent a new system for organizing the economy. They influenced businessmen, not politicians. The nobility and monarchs ignored the scholastics. However, businessmen ruled the Dutch Republic during much of its history, the economically better years anyway, and they implemented the ideas of scholastics such as Lessius. While the scholastics never put it this way, it is not difficult to connect the Church’s teaching on private property with the scholastic notion of the just price to realize that free markets are necessary for property rights to exist. After all, ownership means the right to use one’s property as one sees fit, especially to dispose of it. But that right cannot be exercised except in free markets. Free markets instantiate the airy notion of property.

  The first modern capitalist nation

  The businessman leaders of the Dutch Republic repealed the privileges of the nobility and made all citizens equal before the law. They established relatively honest courts, private property rights and freer markets. They held commercial activity in high esteem and promoted individualism. As a result, they created a new system of economic management without knowing it, intending it or giving it a name, but which Adam Smith would call the natural system of liberty. Followers of Marx would attempt to ridicule it as capitalism.

  In his masterpiece, The Wealth of Nations Adam Smith held up the Dutch Republic as the nation that had most completely implemented the principles of natural freedom, “a country that had acquired that full compliment of riches which the nature of its soils and climate and its situation with respect to other countries allowed it to acquire,” according to Jan De Vries in The First Modern Economy, Success, failure, and perseverance of the Dutch economy, 1500-1815. In other words, Smith catalogued what the Dutch had accomplished.

  For thousands of years before the founding of the Dutch Republic, Europeans had cycled between famine and stingy growth. The sixteenth and seventeenth centuries escorted onstage the first episode of explosive economic growth in the history of mankind, but the drama took place in just one country, the Netherlands. Angus Maddison’s estimates of the per capita G.D.P. in The Netherlands in his The World Economy stand out: it doubled in the sixteenth and seventeenth centuries while the rest of Europe wallowed in stagnation. Maddison wrote, “They created a modern state, which protected property rights of merchants and entrepreneurs, promoted secular education and practiced religious tolerance.”

  In another book, Dynamic Forces in Capitalist Development, Maddison wrote, “In the past four centuries there have been only three lead countries [defined as the country which operates nearest to the technical frontier, with the highest average labor productivity]. The Netherlands was the top performer until the Napoleonic Wars, when the U.K. took over. The British lead lasted till around 1890, and the USA has been the lead country since then.”

  Two other prominent economists, Douglass North and Robert Thomas wrote in The Rise of the Western World, “In point of fact the Netherlands was the first country to achieve sustained economic growth as we have defined it…” Innovations in finance and trade had evolved for centuries, but institutions had changed little. The Dutch manufactured new institutions as quickly as they did wooden shoes.

  It was in the Netherlands, and Amsterdam specifically, that these diverse innovations and institutions were put together to create the predecessor of the efficient modern set of markets that make possible the growth of exchange and commerce. An open immigration policy attracted businessmen; efficient methods of financing long-distance trade were developed, as were capital markets and discounting methods in financial houses that lowered the costs of underwriting this trade. The development of techniques for spreading risk and transforming uncertainty into actuarial, ascertainable risks, the creation of large-scale markets that allowed for lowering the costs of information, and the development of negotiable government indebtedness all were a part of this story.

  North quoted a famous
Dutch historian in his Rise of the Western World as writing, “Where else was there a civilization that reached its greatest peak so soon after state and nation came into being?” The Netherlands won its independence from Spain in 1640 after eighty years of bloody war. But long before the shooting stopped, the infant state dominated the larger nations of France, Spain and England. For the next two centuries, it would rule much of the continent economically, intellectually, militarily and artistically, but never politically. Its dominance would frustrate England and France so much that the two behemoths would attack again and again in vain attempts to break its hegemony, succeeding only when they resorted to blocking Dutch imports and declaring open warfare on Dutch shipping.

  Readers will naturally wonder about the role of the cities of Northern Italy, especially Venice, in birthing free markets. Some historians trace the DNA of capitalism to those cities long before the founding of the Dutch Republic and their reasons are good enough that it would be easy to agree and adopt the Dutch Republic as a more advanced state of capitalism. The Republic owed an enormous debt to the tremendous work of those city states in advancing Scholastic thought about business and elevating the status of commerce, as Rodney Stark illustrates in his book, The Victory of Reason: How Christianity Led to Freedom, Capitalism, and Western Success. It was a close call, but I chose the Dutch Republic over the Italian cities for a couple of reasons related to the definition of capitalism outlined in the first chapter.

  First, Venice and the other states earned most of their income from international trade and they used their navies to establish monopolies on that trade. Except for the East India Company, which contributed a small part of the Dutch economy as Peiter de la Court argued in the previous chapter, the Dutch used its navy to protect shipping from pirates but not to force others to do business with it. Second, the nobility of cities like Venice kept commerce limited to citizens and primarily the nobility. Entry into the trades was strictly limited, especially by guilds.

  Third, manufacturing did not follow the capitalist kind, but the medieval pattern. Capitalistic production is capital intensive mass production for the masses, as stated earlier. The only mass production that took place in Venice was the manufacturing of ships for the navy and commerce, but the state owned that facility. It was not a private company. As for the rest of the manufacturing, it was still carried out by artisans who hand crafted unique items under the guild system for consumption by the wealthy, local and foreign, but not for the masses because they could not afford the products. Most people made what they needed at home.

  Finally, Christian individualism had not yet matured in the cities of Northern Italy as it had by the time of the Protestant Reformation. Chapter 2 discussed the differences between the true individualism of capitalism and the false monster that atheists and deists fabricated in the French Enlightenment. The individualism of Christianity and capitalism broke the bonds of envy that had kept civilizations in starvation poverty for millennia.

  Pre-tribulation

  By the end of the sixteenth century, the tiny nation that would become the Dutch Republic would tutor the rest of Europe in economic development and in the military tactics to defeat the mighty hordes of the Ottoman Empire. “Both the suddenness and the intensity of the Republic’s economic prosperity provoke amazement and compel us to search for factors that might help to account for such an achievement,” wrote historian Jan de Vries. In response, many economic historians point to the growth of cities. But as we saw earlier, towns and cities erected high barriers to economic growth in the Middle Ages. Besides, great cities had existed since Rome, and other European countries had cities greater than those of the Netherlands, while Instanbul, Alexandria, Damascus and many other cities of the Ottoman Empire made those of Europe appear as backwater villages.

  In spite of their size and development, the cities of Europe and the Ottoman Empire demonstrated their utter impotence in siring sustained economic development. Rather than causing economic growth, the high rate of urbanization in the Netherlands was an effect of development, resulting largely from greater agricultural productivity that freed workers for urban labor. Also, the cities in Europe had very different charters than those in the rest of the world. European cities embraced individualism in which all citizens were equal before the law and had a voice in the government. They were cities of refuge from oppression by the nobility in the countryside. In the rest of the world, cities followed the ancient Greek and Roman model in which they existed for the nobility.

  Other economists point to improvements in agriculture for the source of growth. Few people would argue against agricultural productivity as necessary for growth, but was it sufficient? Improvements in agricultural techniques could provide the source of the capital that the Dutch needed to invest in other productive ventures. But it seems unlikely that it could spawn the changes in values and institutions that gave birth to this small, remarkable nation and created its dominance over countries many times its size for almost 200 years. And as we learned in previous chapters, values and institutions provide the greenhouse environment for development to take place. It is only reasonable, then, to examine the Netherlands in greater detail to try to discover in what way its values and institutions demonstrated its uniqueness from the bulk of Europe as well as the Ottoman Empire at the beginning of the sixteenth century. The chief difference lies in its religious beliefs. As the previous chapter demonstrates, the rise of individualism, freedom, equality and respect for property as well as the institutions to protect and encourage those values form the true foundation of capitalism and those originate in religion.

  The gestation period for individualism from its inception by the Apostle Paul to its birth in the Dutch Republic was over fourteen centuries. “The identity of the individual – of a status which creates a space for the legitimate exercise of personal judgement and will – had broken through the surface of social life by the fifteenth century,” in the words of Siedentop in Inventing the Individual. But it was still an abstraction, rarely instantiated outside of a few cities. It had not taken on flesh and blood so that it could slay envy. The doctor who performed the delivery was Desiderius Erasmus Roterodamus, better known as Erasmus. Erasmian Protestantism would produce a form of individualism so radical that its natural parent, the Catholic Church, would stagger at its image and eventually disinherit and repent over it.

  Born in Rotterdam, Holland in 1466, Erasmus’ parents educated him in monastic schools. He took the vows in 1492, but never seems to have worked as a priest. In 1495 he went to study at the University of Paris where he found life at the university, and scholasticism, distasteful and left. He lived in England for a while and became lifelong friends with the leading thinkers in the days of Henry VIII.

  Erasmus’ first book, Dagger of the Christian Gentleman, published in 1503, sketched the outlines of his image of the normal Christian life. He portrayed formalism, i.e., the veneration of tradition and the concern for what other people think, as being opposed to the true teachings of Christ and as the chief evil of his day. Formalism manifested itself in monasticism, saint-worship, war, and the spirit of class divisions. His remedy for this evil involved searching Scripture to determine what Jesus would do, and then doing it without fear. He would return to this theme and amplify it throughout his life.

  Erasmus published his most famous book, Praise of Folly, in Paris, 1509, but he considered it a trifle that he had tossed out to relieve the boredom of travel. In it, Folly praises, encourages and justifies foolish activities. The book backhands superstition, uncritical “scientific” theories, and the vanity of Church leaders, peasants, poets, rhetoricians, lawyers, and merchants. Throughout his life, Erasmus attacked the sale of indulgences and got away with it when a similar thrust by Luther a decade later would bring down on Luther the full terror of the Church’s wrath. Bishops and popes, he wrote, should imitate the poverty, labor, doctrine, and sacrifice of Christ. Instead, he indicted them for concentrating on financial gain an
d living like princes.

  In 1516 he published the Institutio Principis Christiani, in which he advised the young king Charles of Spain on how to be the proper Christian prince, which he understood to be the servant of the people. Erasmus wrote this during a time in which, generally, kings ruled by divine right and considered the people their property, very much in line with the attitudes of Ottoman Sultans.

  While in England, Erasmus began the systematic examination of New Testament Greek manuscripts that would result in the publication of a new Latin translation by Froben of Basel in 1516. His translation formed the first attempt by a competent scholar to ascertain what the New Testament writers had actually said. Erasmus considered it his greatest contribution to the cause of Christ and it laid the foundation for most Bible study during the Reformation. His translation diverged from the Church’s Vulgate on significant matters, another wounding thrust at the Church’s authority. Immediately after publishing the translation, he wrote paraphrases of the New Testament, an early version of a Living Bible, which were translated into Dutch for consumption by the masses and contributed greatly to the spread of Protestantism. For the preface to his Greek New Testament, the volume A History of Western Society Since 1300 quotes Erasmus as having written,

  Only bring a pious and open heart, imbued above all things with a pure and simple faith...For I utterly dissent from those who are unwilling that the sacred Scriptures should be read by the unlearned translated into their vulgar tongue, as though Christ had taught such subtleties that they can scarcely be understood even by a few theologians. Christ wished his mysteries to be published as openly as possible. I wish that even the weakest woman should read the Gospel—should read the epistles of Paul. And I wish these were translated into all languages, so that they might be read and understood, not only by Scots and Irishmen, but also by Turks and Saracens.… Why do we prefer to study the wisdom of Christ in men’s writings rather than in the writing of Christ himself?