You are on page 1of 5

Other articles

Blackwell Publishing Ltd

THE ORIGINS OF LIBERTY A N D T H E M A R K E T: T H E WORK OF MARJORIE GRICEHUTCHINSON (19092003)


Norman Barry

Marjorie Grice-Hutchinson, who recently died, was a leading scholar of the Salamanca school of economics. That school anticipated much of the economic thinking which helped underpin the case for liberal markets in the eighteenth and nineteenth centuries.

Introduction We are accustomed to thinking that theorising about freedom and the market began with Adam Smith. The theory of spontaneous order, which explains how individuals through free exchange generate rules and adjust their economic behaviour so as to produce a kind of equilibrium both in law and economics, was said to originate with the Scottish Enlightenment. It developed independently of the kind of rationalism that apparently dogged European thought and which led to the wholesale economic and social planning and destruction of liberty that so disfigured the twentieth century. We also seem to think, following Max Weber, that the religious source of capitalism must be in that dour Protestantism that elevated labour and discounted subjective utility in the explanation of value. But Marjorie Grice-Hutchinson, who died on 12 April 2003 at the age of 93, in Malaga, Spain, had demonstrated beyond all doubt that the origins of theorising about the market and capitalism lay in late sixteenth- and early seventeenth-century Spain, where a modern theory of value, independently of labour, was developed and a theory of money, as sophisticated as any produced by Milton Friedman, was pioneered, by Catholic priests ( Jesuit and Dominican) in the historic university city of Salamanca, Spain. Although mentioned by Joseph Schumpeter in his legendary History of Economic Analysis, who noticed a remarkable similarity between the theories of a Salamanca economist, Luis de Molina, and the great Austrian, Carl Menger, the priests of Salamanca have largely been forgotten in the history of economic thought. Yet there is much to be said for the argument, advanced by Grice-Hutchinson and Murray Rothbard, that the correct intellectual lineage of capitalism runs from Salamanca through to the
Institute of Economic Affairs 2003. Published by Blackwell Publishing, Oxford

French laissez-faire School of Jean Baptiste Say and Frederic Bastiat and up to the Austrians from the 1870s and beyond. The British tradition went from Smith to Ricardo and eventually led, its critics say, to Karl Marx. Although English born, Grice-Hutchinson was taken to Madrid as a small girl by her father and was brought up there. As a young woman she watched the outbreak of the Spanish Civil War in 1936. But she came back to England as a graduate student in Spanish literature at London University in the late 1940s, stumbled across the writings of Salamanca and did a PhD on them under the guidance of Friedrich von Hayek. She was an expert linguist and her knowledge of Latin enabled her to translate medieval documents of the Catholic Church. She published The School of Salamanca: Readings in Spanish Monetary Theory in 1952.1 But perhaps her best work is Early Economic Thought in Spain 11771740.2 This latter work is a wonderful combination of Spanish history and economic theory in which she shows how the modern virtues of capitalist society (subjective utility and monetary theory) and its vices (mercantilism and protectionism) were all presaged in sixteenth- and seventeenth-century Spain. Morality We must note that the men of Salamanca were strict Catholic priests who wrote in the Aristotelian and scholastic tradition (the ancient Greeks had been brought to Spain by the Moors in their occupation of the country) which was primarily concerned with natural law, that is, the rationalistic statement of those moral rules that should govern our lives. It was the achievement of Salamanca to demonstrate that market economics and price theory were quite consistent with morality. It is a great contrast

iea e c o n o m i c
with modern business ethics, which is always holding up capitalism to the standards of a contentious morality and showing that it normally fails its tests whatever its practical success. The priests of Salamanca were able to show, in a way that anticipated Hayek, that there was an economic order without design and that this was quite consistent with religion and ethics, despite appearances to the contrary. But it had to face some obstacles. At the time there was a prohibition against usury, the charging of interest on monetary loans, in canon and civil law. In medieval times Spain was inhabited by Christians, Jews and Muslims (Moors). All three faiths prohibited usury in some form or other. It varied: Jews, for example, were not prohibited from charging interest to Gentiles. But Grice-Hutchinson showed how commercial practice circumvented the ban, which encouraged economic progress, and how the theorising of the School of Salamanca made capitalism consistent with the rigour of even rationalistic moral theory. As Grice-Hutchinson demonstrated, the priests had remarkably flexible minds. The theory of value In the Middle Ages there was a lingering belief that morality decreed that the prices of goods should reflect their costs of production; all should not be left to supply and demand. Labour was the main cost but the official doctrine also took account of risk and related burdens involved in the productive process. In fact, at the time there were two sorts of goods: necessaries, whose prices were fixed by the prince according to the criterion of the just price, and others, which were left to the market. It was the genius of Salamanca to demonstrate conclusively that the market price was the just price, so that there need be no moral evaluation of the results of the exchange system governed by self-interest. And the just price was determined when exchange was uncontaminated by cheating, lying, theft or fraud. In fact, it was even held to be moral if a producer held back from immediate sale those goods whose prices were expected to rise in the future (a traditional target for pre-Salamanca moralists). The just price was fixed by the estimation of the people and it owed nothing to labour or risk. There was a previous thinker, John Duns Scotus, who, like a contemporary Marxist, was insistent that labour was all important but it was Luis de Molina who showed true modernity:
Scotus is completely wrong when stating that the just price is computed from all the expenses incurred by traders, the just labour involved, and the initiative and risks taken. The just price cannot be estimated from the profit or the costs of traders, rather it is from the common estimate at the place of sale, when all circumstances are taken into account, even if traders,

a f fa i r s s e p t e m b e r 2 0 0 3

43

through bad luck or inexperience, make no profit or incur losses.3

Furthermore, no attempt was made to distinguish between luxuries and necessities. As Saravia de la Calle said:
In order to determine the just price we need only consider three things: abundance or scarcity of goods, merchants and money of things that people want to barter or exchange for money.4

It is not the nature of the good that is important it could be anything that gives us utility. As Domingo de Soto said: want is the basis of price5 (emphasis added). Even our most foolish of purchases were perfectly moral if the transactions met the conditions of fair trade. One of the moral factors that entered into the just price was monopoly and that might be an occasion which validated state regulation. But even here the emphasis was not on market failure but on the actions of individuals that might distort competition. The School of Salamanca was particularly hostile to guilds, which were the products of deliberate human actions that prevented competition in the labour market. They were appropriate for moral censure. And, as Grice-Hutchinson shrewdly noted, producers were often supporters of the cost of production theory of value because it gave them a bogus rationale for raising prices above market-clearing levels.6 One failure of the Salamanca theory of value was that, despite its emphasis on subjective utility, its members never grasped the concept of the margin. And, like the British Classical School, they were puzzled by the paradox of value water has great use value but little or no value in exchange while a piece of jewellery has the reverse features. Of course, they used supply and demand to explain the price differences but could not express it in marginalist terms. But they still remained subjective utility theorists, unlike Smith and his successors who were led on a wild goose chase to find an objective measure of value independent of individual choice in the market. The School also had a theory of the tendency of the market to move towards equilibrium but they did not use flamboyant metaphors like the invisible hand to explain it. Subjective utility did all the work. Money and banking There were two things that especially concerned the School of Salamanca. The particular economic problems of Spain brought about by the influx of gold and silver from its colonisation of the New World and the theoretical explanation and moral justification of credit creation and banking. The former involves a pure economic problem which had few ethical implications.

Institute of Economic Affairs 2003. Published by Blackwell Publishing, Oxford

44

t h e o r i g i n s o f l i b e rt y a n d t h e m a r k e t: t h e wo r k o f m a r j o r i e g r i c e - h u tc h i n s o n ( 1 9 0 9 2 0 0 3 )

Because of the discovery of precious metals in the Americas, Spain suffered the illusion of great wealth. What they had, in fact, was a great inflation which eventually led to the ruin of the economy and the countrys long-term decline in the seventeenth century. It was exacerbated by inept government action. The phenomenon was a bit like the discovery of oil in some countries these days: it has impoverished them. Grice-Hutchinsons analysis of the problem is illustrated by some beautifully written, well-informed economic history and some quite sophisticated monetary theory.7 Prices doubled in the first half of the sixteenth century and doubled again in the second. As GriceHutchinson wryly comments, this was actually less than in the modern era (Early Economic Thought in Spain was published at the height of inflation in the 1970s) but it was unprecedented at the time. It was Martin de Azpilcueta (14931586)8 who discovered the quantity theory of money, and the basic idea was taken up by other Salamanca writers. He noticed how prices varied according to the amount of money in circulation and that this had given Spain the illusion it was wealthy. The overall effect was simply to produce a decline in the productivity of the real Spanish economy. Quite simply, the Spanish stopped working and foreigners began to settle in the country and produce wanted goods and services. There was, however, another reason for the decline in the Spanish economy which had nothing to do with money. It was the fall in agricultural productivity brought about by the expulsion of the Moors, finally realised in 1609. They had been particularly proficient in that activity. The Jews had earlier been expelled (in 1492) and this had adversely affected trade. There was a diminution in the size and quality of the business class in the country. Furthermore, as soon as capital flowed into the country it flowed out again to venues where it could be better used. As one Salamanca observer graphically put it: Why are we so poor? Because we are so rich. Eventually, Salamanca economists realised that ultimately the value of money was determined by supply and demand, so effecting a unity of economic explanation under a general theory of value a synthesis that was not to be achieved again until the marginalist revolution of the 1870s. It has not been universally agreed that the discovery of new sources of gold and silver was entirely responsible for the inflation. It is true that there was no exact correlation between the increase in the supply of precious metals and changes in the price level. At the time it was suggested that the export of Spanish-produced goods to the Americas led to an increase in home prices but Grice-Hutchinson was rightly convinced that this and other factors were less decisive than the increase in the money supply.

Indeed, it was probably the most conclusive test ever of the quantity theory of money. And Azpilcueta made further advances on the quantity theory by linking the value of money with its purchasing power:
other things being equal, in countries where there is a great scarcity of money, all other saleable goods, and even the hands and labour of men, are given for less money than where it is abundant.9

Successive Spanish kings did not help economic matters. They might not have been profligate in personal consumption but they wasted national treasure on wars of national glory. This was especially true of Charles I, who was Emperor Charles V (of the Holy Roman Empire). The Royal Family was constantly in debt and a resort was made to a device that caused further inflation and greater social instability: the coinage was debased. Gold and silver were not used for ordinary trade, it was the copper coin, the velln, which was in circulation and it was repeatedly devalued, beginning with Philip III. This had a very serious effect on normal trade and contributed significantly to long-run Spanish decline. This set in at about 1600 and lasted until at least 1700. It was also the period in which the School of Salamanca lost its influence and Grice-Hutchinson describes brilliantly how alien doctrines gradually took over, notably mercantilism and protectionism.10 As Grice-Hutchinson observed, the response to the Spanish crisis has been repeated throughout history. The idea spread that a nations wealth was measured by the amount of money it possessed, not by the level of trade it achieved: the very theory that Adam Smith made his reputation destroying. Successive rulers desperately took measures to stem the flow of gold and silver out of the country. And, of course, there were demands for protectionism, some of which were met. While all this was going on there were other phenomena that affected economic theory. In the turbulence of the times there was little prospect of enforcing the laws against usury. But the Salamanca economists showed how trade in money could go on without breaching that prohibition. Money lending for interest had been forbidden on the ground that time cannot justify profit. But the School could easily show that money lent increased trade and therefore was not usurious; and the practice of issuing bills of exchange to facilitate international trade eventually became accepted. It was not money lending for no discernible economic purpose, except for profit, but was seen as an essential part of the productive process. More important, successive kings were not anxious to enforce prohibitions against usury, whatever civil and canon law might say, for it would have meant a considerable loss in revenue. At the same time, the School of Salamanca developed

Institute of Economic Affairs 2003. Published by Blackwell Publishing, Oxford

iea e c o n o m i c
the theory of credit creation by banks (a practice that had actually begun in northern Italian cities). This was a further departure from medieval theories of money which still saw its value in terms of a specie: paper money, it was thought, must involve usury. Other themes But there are many more things in Grice-Hutchinsons Early Economic Thought in Spain which reveal that the Spanish economists anticipated many of the features of modern classical liberalism. Two examples are welfare and taxation. By the time of the late seventeenth century Spanish economic conditions had produced a welfare problem: there were hoards of landless labourers roaming the country and towns and there were many people in real distress. The response of the political authorities was to introduce heavily centralised welfare schemes. A major critic of them was Domingo de Soto, who said that they would not help the genuinely poor, would reduce liberty and attenuate the personal responsibility of the citizen.11 That is precisely what people say about state welfare today. With regard to taxation, Spain had experienced a myriad of complex and inefficient tax systems. One Spanish economist recommended a single tax on land rent and justified it on the economic ground that it would have no effect on productivity.12 His rationale could have been written by the great nineteenth-century advocate of a single tax on land rent, the American Henry George. As in so much of her work, Grice-Hutchinson showed how many of our economic problems are recurring. They happened in the past and will surely happen again: inflation is obviously one of these. It is important to note that economists thought and wrote about these problems in the vain hope that political leaders might learn something from their diagnoses and prescriptions. As her work demonstrated, they rarely do. A very distinguished woman

a f fa i r s s e p t e m b e r 2 0 0 3

45

Marjorie Grice-Hutchinson brought three rare skills to the understanding of economic and social affairs: a great linguistic talent (she was fluent in Spanish, French and German in addition to translating texts from the Latin), a great flair for historical understanding and a deep knowledge of the theory of monetary (and general) economics. Her output in English was not prolific (although she also wrote in Spanish) but every one of her published works was carefully reasoned and supported by theoretical and empirical evidence. Although she sought neither the fame nor publicity that some in the classical liberal tradition have achieved she was widely revered for the rigour of her scholarship. She married a landowner and farmer and lived most of her life in Malaga where she was an important figure in the local community. She was honoured both by her adopted country and her own. Although she loved Spain she retained her British nationality to the end and, despite her expertise on Catholic philosophers and economists, her Protestant faith. She was active in the sole Anglican church in Malaga and worked assiduously for the preservation of the famous English Protestant Cemetery there, which was threatened with closure. We shall remember her for her scholarship and her meticulous understanding of historical and economic events.
1. London, Oxford University Press, 1952. 2. London, Allen & Unwin, 1978. 3. Quoted in Josep C. Verges, The Political Economy of the Just Price, Journal des Economistes et des Etudes Humaines, Vol. 10, 2000, p. 262. 4. Early Economic Thought in Spain, p. 99. 5. The School of Salamanca, p. 83. 6. Early Economic Thought in Spain, p. 100. 7. Ibid., chapter 3. 8. Ibid., p. 104. 9. Ibid., p. 105. 10. Ibid., chapter 4. 11. Ibid., p. 132. 12. Ibid., p. 147.

Norman Barry is Professor of Social and Political Theory at the University of Buckingham, UK.

Institute of Economic Affairs 2003. Published by Blackwell Publishing, Oxford

You might also like