New Light on the Prehistory of the Austrian School

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essay was originally published in The
Foundations of Modern Austrian Economics
, edited by Edwin
Dolan (Kansas City: Sheed and Ward, 1976), pp. 52–74.]

The most notable
development in the historiography of the Austrian school in the
post-World War II era has been the drastic reevaluation of what
might be called its prehistory and, as a corollary, a fundamental
reconsideration of the history of economic thought itself. This
reevaluation may be summarized by briefly outlining the orthodox
pre-war paradigm of the development of economic thought before the
advent of the Austrian school.

The Scholastic
philosophers were brusquely dismissed as medieval thinkers who totally
failed to understand the market, and who believed on religious grounds
that the just price was one that covered either the cost of production
or the quantity of labor embodied in a product. After briefly outlining
the bullionist and anti-bullionist discussion among the English
mercantilists and lightly touching on a few French and Italian economists
of the eighteenth century, the historian of economic thought pointed
with a flourish to Adam Smith and David Ricardo as the founders
of economic science. After some backing and filling in the mid-nineteenth
century, marginalism, including the Austrian school, arrived in
another great burst in the 1870s. Apart from the occasional mention
of one or two English precursors of the Austrians, such as Samuel
Bailey in the early nineteenth century, this completed the basic

Typical was
the encyclopedic text of Lewis Haney: the Scholastics were described
as medieval, dismissed as hostile to trade, and declared believers
in the labor and cost-of-production theories of the just price.[1] It
is no wonder that in his famous phrase, R.H. Tawney could call Karl
Marx "the last of the Schoolmen."[2]


The remarkably
contrasting new view of the history of economic thought burst upon
the scene in 1954 in the monumental, though unfinished, work of
Joseph Schumpeter.[3] Far
from mystical dunderheads who should be skipped over to get to the
mercantilists, the Scholastic philosophers were seen as remarkable
and prescient economists, developing a system very close to the
Austrian and subjective-utility approach. This was particularly
true of the previously neglected Spanish and Italian Scholastics
of the sixteenth and seventeenth centuries. Virtually the only missing
ingredient in their value theory was the marginal concept. From
them filiations proceeded to the later French and Italian economists.

In the Schumpeterian
view, the English mercantilists were half-baked, polemical pamphleteers
rather than essential milestones on the road to Adam Smith and the
founding of economic science. In fact, the new view saw Smith and
Ricardo, not as founding the sciences of economics, but as shunting
economics onto a tragically wrong track, which it took the Austrians
and other marginalists to make right. Until then, only the neglected
anti-Ricardian writers kept the tradition alive. As we shall see,
other historians, such as Emil Kauder, further demonstrated the
Aristotelian (and hence Scholastic) roots of the Austrians amidst
the diverse variants of the marginalist school. The picture is almost
the reverse of the earlier orthodoxy.

It is not the
purpose of this paper to dwell on Schumpeter’s deservedly well-known
work, but rather to assess the contributions of writers who carried
the Schumpeterian vision still further and who remain neglected
by most economists, possibly from a failure to match Schumpeter
in constructing a general treatise. The best development of the
new history must be sought in fugitive articles and brief pamphlets
and monographs.

on the School of Salamanca

The other relatively
neglected contributions began contemporaneously with Schumpeter.
One of the most important, and probably the most neglected, was
The School of Salamanca by Marjorie Grice-Hutchinson, who
suffered in the economics profession from being a professor of Spanish
literature. Moreover, the book bore the burden of a misleadingly
narrow subtitle: Readings in Spanish Monetary Theory.[4]
In fact, the book was a brilliant discovery of the pre-Austrian
subjective-value-and-utility views of the late sixteenth-century
Spanish Scholastics. But first Grice-Hutchinson showed that the
works of even earlier Scholastics as far back as Aristotle contained
a subjective-value analysis based on consumer wants alongside the
competing objective conception of the just price based on labor
and costs. In the early Middle Ages, Saint Augustine (354–430)
developed the concept of the subjective-value scale of each individual.
By the High Middle Ages, the Scholastic philosophers had largely
abandoned the cost-of-production theory to adopt the view that the
market’s reflection of consumer demand really sets the just price.
This was particularly true of Jean Buridan (1300–1358), Henry
of Ghent (1217–1293), and Richard of Middleton (1249–1306).
As Grice-Hutchinson observed:

writers viewed the poor man as consumer rather than producer.
A cost-of-production theory would have given merchants an excuse
for overcharging on the pretext of covering their expenses, and
it was thought fairer to rely on the impersonal forces of the
market which reflected the judgment of the whole community, or,
to use the medieval phrase, the "common estimation."
At any rate, it would seem that the phenomena of exchange came
increasingly to be explained in psychological terms.[5]

Even Henry
of Langenstein (1325–1383), who of all the Scholastics was
the most hostile to the free market and advocated government fixing
of the just price on the basis of status and cost, developed the
subjective factor of utility as well as scarcity in his analysis
of price. But it was the sixteenth-century Spanish Scholastics who
developed the purely subjective and pro-free-market theory of value.
Thus, Luis Saravía de la Calle (c. 1544) denied any role
to cost in the determination of price; instead the market price,
which is the just price, is determined by the forces of supply and
demand, which in turn are the result of the common estimation of
consumers on the market. Saravía wrote that, "excluding
all deceit and malice, the just price of a thing is the price which
it commonly fetches at the time and place of the deal." He
went on to point out that the price of a thing will change in accordance
with its abundance or scarcity. He proceeded to attack the cost-of-production
theory of just price:

Those who
measure the just price by the labor, costs, and risk incurred
by the person who deals in the merchandise or produces it, or
by the cost of transport or the expense of traveling …
or by what he has to pay the factors for their industry, risk,
and labor, are greatly in error, and still more so are those who
allow a certain profit of a fifth or a tenth. For the just price
arises from the abundance or scarcity of goods, merchants, and
money … and not from costs, labor, and risk. If we had
to consider labor and risk in order to assess the just price,
no merchant would ever suffer loss, nor would abundance or scarcity
of goods and money enter into the question. Prices are not commonly
fixed on the basis of costs. Why should a bale of linen brought
overland from Brittany at great expense be worth more than one
which is transported cheaply by sea? … Why should a book
written out by hand be worth more than one which is printed, when
the latter is better though it costs less to produce? …
The just price is found not by counting the cost but by the common

Similarly the
Spanish Scholastic Diego de Covarrubias y Leiva (1512–1577),
a distinguished expert on Roman law and a theologian at the University
of Salamanca, wrote that the "value of an article" depends
"on the estimation of men, even if that estimation be foolish."
Wheat is more expensive in the Indies than in Spain "because
men esteem it more highly, though the nature of the wheat is the
same in both places." The just price should be considered not
at all with reference to its original or labor cost but only with
reference to the common market value where the good is sold, a value,
Covarrubias pointed out, that will fall when buyers are few and
goods are abundant and that will rise under opposite conditions.[7]

The Spanish
Scholastic Francisco García (d. 1659) engaged in a
remarkably sophisticated analysis of the determinants of value and
utility. The valuation of goods, Garca pointed out, depends on
several factors. One is the abundance or scarcity of the supply
of the goods, the former causing a lower estimation and the latter
an increase. A second is whether buyers or sellers are few or many.
Another is whether "money is scarce or plentiful," the
former causing a lower estimation of goods and the latter a higher.
Another is whether "vendors are eager to sell their goods."
The influence of the abundance or the scarcity of a good brought
García almost to the brink, but not over it, of a marginal
utility analysis of valuation.

For example,
we have said that bread is more valuable than meat because it
is more necessary for the preservation of human life. But there
may come a time when bread is so abundant and meat so scarce that
bread is cheaper than meat.[8]

Spanish Scholastics on Money

The Spanish
Scholastics also anticipated the Austrian school in applying value
theory to money, thus beginning the integration of money into general
value theory. It is generally believed, for example, that in 1568
Jean Bodin inaugurated what is unfortunately called the application
of supply-and-demand analysis to money. Yet he was anticipated twelve
years earlier by the Salamanca theologian the Dominican Martn de
Azpilcueta Navarro (1493–1576), who was inspired to explain
the inflation brought about by the importation of gold and silver
by the Spaniards from the New World.

Citing previous
Scholastics, Azpilcueta declared that "money is worth more
where it is scarce than where it is abundant." Why? Because
"all merchandise becomes dearer when it is in great demand
and short supply, and that money, in so far as it may be sold, bartered,
or exchanged by some other form of contract, is merchandise and
therefore also becomes dearer when it is in great demand and short
supply." Azpilcueta noted that "we see by experience that
in France, where money is scarcer than in Spain, bread, wine, cloth,
and labor are worth much less. And even in Spain, in times when
money was scarcer, saleable goods and labor were given for very
much less than after the discovery of the Indies, which flooded
the country with gold and silver. The reason for this is that money
is worth more where and when it is scarce than where and when it
is abundant."[9]

the Spanish Scholastics went on to anticipate the classical-Mises—Cassel
purchasing-power parity theory of exchange rates by proceeding logically
to apply the supply-and-demand theory to foreign exchanges, an institution
that was highly developed by the early modern period. The influx
of specie into Spain depreciated the Spanish escudo in foreign exchange,
as well as raised prices within Spain, and the Scholastics had to
deal with this startling phenomenon. It was the eminent Salamanca
theologian the Dominican Domingo de Soto (1495–1560) who in
1553 first fully applied the supply-and-demand analysis to foreign
exchange rates. De Soto noted that "the more plentiful money
is in Medina the more unfavorable are the terms of exchange, and
the higher the price that must be paid by whoever wishes to send
money from Spain to Flanders, since the demand for money is smaller
in Spain than in Flanders. And the scarcer money is in Medina the
less he need pay there, because more people want money in Medina
than are sending it to Flanders."[10] 

What de Soto
was saying is that as the stock of money increases, the utility
of each unit of money to the population declines and vice versa;
in short, only the great stumbling block of failing to specify the
concept of the marginal unit prevented him from arriving at the
doctrine of the diminishing marginal utility of money. Azpilcueta,
in the passage quoted above, applied the de Soto analysis of the
influence of the supply of money on exchange rates, at the same
time that he set forth a theory of supply and demand in determining
the purchasing power of money within a country.

The de Soto-Azpilcueta
analysis was spread to the merchants of Spain by the Dominican friar
Tomás de Mercado (d. 1585), who in 1569 wrote a handbook
of commercial morality in Spanish, in contrast to the Scholastic
theologians, who invariably wrote in Latin. It was followed by Garcia
and endorsed at the end of the sixteenth century by the Salamanca
theologian the Dominican Domingo de Bañez (1527–1604)
and by the great Portuguese Jesuit Luís de Molina (1535–1600).
Writing near the turn of the century, Molina set forth the theory
in an elegant and comprehensive manner:

There is
another way in which money may be worth more in one place than
in another; namely, because it is scarcer there than elsewhere.
Other things being equal, wherever money is most abundant, there
will it be least valuable for the purpose of buying comparing
things other than money.

Just as an
abundance of goods causes prices to fall (the quantity of money
and number of merchants being equal), so does an abundance of
money cause them to rise (the quantity of goods and number of
merchants being equal). The reason is that the money itself becomes
less valuable for the purpose of buying and comparing goods. Thus
we see that in Spain the purchasing-power of money is far lower,
on account of its abundance, than it was eighty years ago. A thing
that could be bought for two ducats at that time is nowadays worth
5, 6, or even more. Wages have risen in the same proportion, and
so have dowries, the price of estates, the income from benefices,
and other things.

We likewise
see that money is far less valuable in the New World (especially
in Peru, where it is most plentiful), than it is in Spain. But
in places where it is scarcer than in Spain, there will it be
more valuable. Nor will the value of money be the same in all
other places, but will vary: and this will be because of variations
in its quantity, other things being equal … Even in Spain
itself, the value of money varies: it is usually lowest of all
in Seville, where the ships come in from the New World and where
for that reason money is most abundant.

the demand for money is greatest, whether for buying or carrying
goods, … or for any other reason, there its value will
be highest. It is these things, too, which cause the value of
money to vary in course of time in one and the same place.[11]

Roover’s Revision

The outstanding
revisionist work on the economic thought of the medieval and later
Scholastics is that of Raymond de Roover. Basing his work in part
on the Grice-Hutchinson volume, de Roover published his first comprehensive
discussion in 1955.[12] For
the medieval period, de Roover particularly pointed to the early
fourteenth-century French Ockhamite Scholastic Jean Buridan and
to the famous early fifteenth-century Italian preacher San Bernardino
of Siena (1380–1444). Buridan insisted that value is measured
by the human wants of the community of individuals and that the
market price is the just price. Furthermore, he was perhaps the
first to make clear in a pre-Austrian manner that voluntary exchange
demonstrates subjective preference, since he stated that the "person
who exchanges a horse for money would not have done so, if he had
not preferred money to a horse."[13] He
added that workers hire themselves out because they value the wages
they receive higher than the labor they have to expend.[14]

De Roover then
discussed the sixteenth-century Spanish Scholastics, centered at
the University of Salamanca, the queen of the Spanish universities
of the period. From Salamanca the influence of this school of Scholastics
spread to Portugal, Italy, and the Low Countries. In addition to
summarizing Grice-Hutchinson’s contribution and adding to her bibliography,
de Roover noted that both de Soto and Molina denounced as "fallacious"
the notion of the late thirteenth-century Scholastic John Duns Scotus
(1308) that the just price is the cost of production plus a reasonable
profit; instead that price is the common estimation, the interaction
of supply and demand, on the market. Molina further introduced the
concept of competition by stating that competition among buyers
will drive prices up, while a scarcity of purchasers will pull them

In a later
article, de Roover elaborated on his researches into the Scholastic
theory of the just price. He found that the orthodox view of the
just price as a station-in-life, cost-of-production price was based
almost solely on the views of fourteenth-century Viennese Scholastic
Henry of Langenstein. But Langenstein, de Roover pointed out, was
a follower of the minority views of William of Ockham and outside
the dominant Thomist tradition; Langenstein was rarely cited by
later Scholastic writers. While some of their passages are open
to a conflicting interpretation, de Roover demonstrated that Albertus
Magnus (1193–1280) and his great pupil Thomas Aquinas (1226–1274)
held the just price to be the market price. In fact, Aquinas considered
the case of a merchant who brings wheat to a country where there
is a great scarcity; the merchant happens to know that more wheat
is on the way. May he sell his wheat at the existing price, or must
he announce to everyone the imminent arrival of new supplies and
suffer a fall in price? Aquinas unequivocally answered that he may
justly sell the wheat at the current market price, even though he
added as an afterthought that it would be more virtuous of him to
inform the buyers. Furthermore, de Roover pointed to the summary
of Aquinas’s position by his most distinguished commentator, the
late fifteenth-century Scholastic Thomas de Vio, Cardinal Cajetan
(1468–1534). Cajetan concluded that for Aquinas the just price
is "the one, which at a given time, can be gotten from the
buyers, assuming common knowledge and in the absence of all fraud
and coercion."[16]

The cost-of-production
theory of just price held by the Scotists was trenchantly attacked
by the later Scholastics. San Bernardino of Siena, de Roover pointed
out, declared that the market price is fair regardless of whether
the producer gains or loses, or whether it is above or below cost.
The great early sixteenth-century jurist Francisco de Vitoria (c.
1480–1546), founder of the school of Salamanca, as well as
his followers, insisted that the just price is set by supply and
demand regardless of labor costs or expenses; inefficient producers
or inept speculators must bear the consequences of their incompetence
and poor forecasting. Furthermore, de Roover made clear that the
general Scholastic emphasis on the justice of "common estimation"
(communis aestimatio) is identical to "market valuation"
(aestimatio fori), since the Scholastics used these two Latin
expressions interchangeably.[17]

De Roover noted,
however, that this acceptance of market price did not mean that
the Scholastics adopted a laissez-faire position. On the
contrary, they were often willing to accept governmental price fixing
instead of market action. A few prominent Scholastics, however,
led by Azpilcueta and including Molina, opposed all price fixing;
as Azpilcueta put it, price controls are unnecessary in times of
plenty and ineffective or positively harmful in times of dearth.[18]

In a comment
on de Roover’s paper, David Herlihy noted that, in the northern
Italian city-states of the twelfth and thirteenth centuries, the
birthplace of modern commercial capitalism, the market price was
generally considered just because it was "true" and "real,"
if it was "established or utilized without deceit or fraud."
As Herlihy summed it up, the just price of an object is its "true
value as determined by one of two ways: for objects that were unique,
by honest negotiation between seller and purchaser; for staple commodities
by the consensus of the marketplace established in the absence of
fraud or conspiracy."[19]

John W. Baldwin’s
definitive account of the theories of just price during the High
Middle Ages of the twelfth and thirteenth centuries amply confirmed
de Roover’s revisionist insight. Baldwin pointed out that there
were three important and influential groups of medieval writers:
the theologians (whom we have been examining), the Roman lawyers,
and the canon lawyers. For their part, the Romanists, joined by
the canonists, held staunchly to the principle of Roman private
law that the just price is whatever is arrived at by free bargaining
between buyers and sellers.[20] Baldwin
demonstrated that even the theologians of the High Middle Ages before
Aquinas accepted the current market price as the just price.[21]

Several years
later, de Roover turned to the views of the Scholastics on the broader
issue of trade and exchange.[22] He
conceded the partial validity of the older view that the medieval
Church frowned on trade as endangering personal salvation; or rather
that, while trade can be honest, it presents great temptation
for sin. However, he pointed out that, as trade commerce grew after
the tenth century, the church began to adapt to the idea of the
merits of trade and exchange. Thus, while it is true that the twelfth-century
Scholastic Peter the Lombard (c. 1100–1160) denounced trade
and soldiering as sinful occupations per se, a far more benevolent
view of trade was set forth during the thirteenth century by Albertus
Magnus and his student Thomas Aquinas, as well as by Saint Bonaventure
(1221–1274) and Pope Innocent V (1225–1276). While trade
presents occasions for sin, it is not sinful per se; on the
contrary, exchange and the division of labor are beneficent in satisfying
the wants of the citizens. Moreover, the early fourteenth-century
Scholastic Richard of Middleton developed the idea that both the
buyer and the seller gain by exchange, since each demonstrates that
he prefers what he receives in exchange to what he gives up. Middleton
also applied this idea to international trade, pointing out that
both countries benefit by exchanging their surplus products. Since
the merchants and citizens of each country benefit, neither party
is exploiting the other.

At the same
time, Aquinas and other theologians denounced "covetousness"
and love of profit, mercantile gain being only justifiable when
directed toward the "good of others"; furthermore, Aquinas
attacked "avarice" as attempting to improve one’s "station
in life." But, as de Roover pointed out, the great early sixteenth-century
Italian Thomas Cardinal Cajetan corrected this view by demonstrating
that, if this were true, every person would have to be frozen in
his current occupation and income. On the contrary, asserted Cajetan,
people with unusual ability should be able to rise in the world.
In contrast to Aquinas, Cajetan was quite familiar with the commerce
and upward social mobility in the Italian cities. Furthermore, even
Aquinas explicitly rejected the idea that prices should be determined
by one’s station in life, pointing out that the selling price of
any good tends to be the same whether the entrepreneur is poor or

De Roover hailed
the early fifteenth-century Scholastic San Bernardino of Siena as
being the only theologian who dealt in detail with the economic
function of the entrepreneur. San Bernardino wrote of the uncommon
qualities and abilities of the successful entrepreneur, including
effort, diligence, knowledge of the market, and calculation of risks,
with profit on invested capital justifiable as compensation for
the risk and effort of the entrepreneur. The acceptance of profit
was immortalized in a motto in a thirteenth-century account book:
"In the name of God and of profit."[23]

De Roover’s
final work in this area was a booklet on San Bernardino and his
contemporary Sant’Antonino (1389–1459) of Florence.[24] In
San Bernardino’s views of trade and the entrepreneur, the occupation
of trade may lead to sin, but so may all other occupations, including
that of bishops. As for the sins of traders, they consist of such
illicit activity as fraud, misrepresentation of products, the sale
of adulterated products, and the use of false weights and measures,
as well as keeping creditors waiting for their money after a debt
is due. As to trade, there are several kinds of useful merchants,
according to San Bernardino: importer-exporters, warehousemen, retailers,
and manufacturers.

San Bernardino
described the rare qualities and virtues that go into the making
of successful businessmen. One is efficiency (industria),
which includes knowledge of qualities, prices, and costs and ability
to assess risks and estimate profit opportunities, which, he declared,
"indeed very few are capable of doing." Entrepreneurial
ability therefore includes the willingness to assume risks (pericula).
Businessmen must be responsible and attentive to detail, and trouble
and toil are also necessary. The rational and orderly conduct of
business, also necessary to success, is another virtue lauded by
San Bernardino, as are business integrity and the prompt settlement
of accounts.

Turning again
to the Scholastic view of value and price, de Roover pointed out
that, as early as Aquinas, prices were treated as determined, not
by their philosophic rank in nature, but by the degree of the usefulness
or utility of the respective products to man and to human wants.
As de Roover wrote of Aquinas, "These passages are clear and
unambiguous; value depends upon utility, usefulness, or human wants.
There is nowhere any mention of labor as the creator or the measure
of value."[25] 

A century before
the Spanish Scholastics and a century and a half before the sophisticated
formulation of Francisco Garcia, San Bernardino had demonstrated
that price is determined by scarcity (raritas), usefulness
(virtuositas), and pleasurability or desirability (compacibilitas).
Greater abundance of a good will cause a drop in its value and greater
scarcity a rise. To have value, furthermore, a good must have usefulness,
or what we may call "objective utility"; but within that
framework, the value is determined by the complicibilitas,
or "subjective utility," that it has to individual consumers.

Again, only
the marginal element is lacking for a full-scale pre-Austrian theory
of value. Coming to the brink of the later Austrian solution to
the classical economists’ "paradox of value," San Bernardino
noted that a glass of water to a man dying of thirst would be so
valuable as to be almost priceless, but fortunately water, though
absolutely necessary to human life, is ordinarily so abundant that
it commands either a low price or even no price at all.

Schumpeter’s ascription of the founding of subjective utility to
Sant’Antonino and observing that he had derived it from San Bernardino,
de Roover showed further that recent scholarship demonstrates that
Bernardino derived his own analysis almost word for word from a
late thirteenth-century Provençal Scholastic, Pierre de Jean
Olivi (1248–1298) Apparently, Bernardino did not give credit
to Olivi because the latter, coming from another branch of the Franciscan
order, was at that time suspected of heresy.[26]

Turning to
the concept of the "just price," de Roover made it clear
that San Bernardino, following Olivi, held the price of a good or
service to be "the estimation made in common by all the citizens
of the community" This he held explicitly to be the valuation
of the market, since he defined the just price as "the one
which happens to prevail at a given time according to the estimation
of the market, that is, what the commodities for sale are then commonly
worth in a certain place."[27]

Wages were
treated by the two Italian friars in the same manner as the prices
of goods. For San Bernardino, "The same rules which apply to
the prices of goods also apply to the price of services with the
consequence that the just wage will also be determined by the forces
operating in the market or, in other words, by the demand for labor
and the available supply." An architect is paid more than a
ditchdigger, asserted Bernardino, because "the former’s job
requires more intelligence, greater ability, and longer training
and that, consequently, fewer qualify…. Wage differentials
are thus to be explained by scarcity because skilled workers are
less numerous than unskilled and high positions require even a very
unusual combination of skills and abilities."[28] And
Sant’Antonino concluded that the wage of a laborer is a price which,
like any other, is properly determined by the common estimation
of the market in the absence of fraud.

the Scholastics

During and
after the sixteenth century, the Roman Catholic church and Scholastic
philosophy came under increasingly virulent attack, first from Protestants
and then from rationalists, but the result was not so much to eliminate
any influence of Scholastic philosophy and economics as to mask
that influence, since their proclaimed enemies would often fail
to cite their writings. Thus, the great early seventeenth-century
Dutch Protestant jurist Hugo Grotius (1583–1645) adopted much
of Scholastic doctrine, including the emphasis on want and utility
as the major determinants of value, and the importance of the common
estimation of the market in determining price.

Grotius, in
fact, explicitly cited the Spanish Scholastics Azpilcueta Navarro
and Covarrubias. Even more explicitly following the Spanish Scholastics
of the sixteenth century were the Jesuit theologians of the following
century, including the highly influential Flemish Jesuit Leonardus
Lessius (1554–1623), a friend of Luís de Molina, and
the even more influential Spanish Jesuit Cardinal Juan de Lugo (1583–1660),
whose treatise was originally published in 1642 and was reprinted
many times in the next three centuries. Also explicitly following
the Scholastics and the Salamanca school in the seventeenth century
was the Genoese philosopher and jurist Sigismundo Scaccia (c. 1618),
whose treatise was widely reprinted, as well as Antonio de Escobar
(c. 1652), author of a moral manual.

To return to
what would be the dominant Protestant trend for later economic thought,
Grotius’s legal and economic doctrines were followed closely in
the later seventeenth century by the Swedish Lutheran jurist Samuel
Pufendorf (1632–1694). While Pufendorf followed Grotius on
utility and scarcity and the common estimation of the market in
determining value and price, and while he certainly consulted the
writings of the Spanish Scholastics, it is the rationalist Pufendorf
who dropped all citations to these hated Scholastic influences upon
his teacher. Hence, when Grotian doctrine was brought to Scotland
by the early eighteenth-century professor of moral philosophy at
Glasgow Gershom Carmichael (1672–1729), who translated Pufendorf
into English, knowledge of Scholastic influences was lost. Hence,
with Carmichael’s great student and successor Francis Hutcheson,
utility began to be weakened by labor and cost-of-production theories
of value, until finally by the time Hutcheson’s student Adam Smith
(1723–1790) wrote the Wealth of Nations, pre-Austrian
Scholastic influence had unfortunately dropped out altogether. Hence
the view of Schumpeter, de Roover, and others that Smith and later
Ricardo shunted economics onto a wrong track, which the later marginalists
(including the Austrians) had to correct.

doctrine had a more lasting influence on economists on the Continent,
particularly in Catholic countries. Thus, the brilliant mid-eighteenth-century
Italian the abbé Ferdinando Galiani (1728–1787) is often
credited by historians with inventing full-blown the concept of
utility and scarcity as the determinants of price. No one wished
to stress Scholastic writings in that rationalistic age, but strong
Scholastic influence is detectable in Galiani’s work, whose section
on value even contains an explicit citation to the Salamanca Scholastic
Diego Covarrubias y Leiva. Galiani’s uncle Celestino, who brought
up the youthful economist, had been professor of moral theology
before becoming an archbishop and was therefore undoubtedly familiar
with the Scholastic literature on the subject, which filled the
Italian libraries of the eighteenth century. Galiani’s contemporary,
Italian economist Antonio Genovesi (1712–1769), was also directly
influenced by Scholastic thought; he had served as professor of
ethics and moral philosophy at the University of Naples.

From Galiani
the central role of utility, scarcity, and the common estimation
of the market spread to France, to the late eighteenth-century French
abbé Etienne Bonnot de Condillac (1714–1780), as well
as to that other great abbé Robert Jacques Turgot (1721–1781).
Knowing only Galiani as his predecessor, Turgot echoed the Salamanca
school in holding the prices of goods and the value of money, as
the result of the "common estimation" of the market, to
be built up out of the subjective valuations of individuals in that
market. Franois Quesnay (1694–1774) and the eighteenth-century
French physiocrats — often considered to be the founders of
economic science — were also heavily influenced by the Scholastics,
both in their natural law theory and their emphasis on consumption
and subjective value. Scholastic doctrine even appears in the fiercely
anti-Catholic Encyclopédie, including the doctrine
of natural law, as well as the analysis of price as determined by
the current common estimation of the market. Even during the nineteenth
century, strong traces of Condillac and Turgot appear in Jean-Baptist
Say (1767–1832), who upheld a utility model for the future.[29]

At about the
same time as Schumpeter, Grice-Hutchinson, and de Roover published
their researches, Emil Kauder set forth a similar revisionist viewpoint.
Kauder traced the connection between the Scholastics and Galiani,
first to the mid-sixteenth-century Italian politician Gian Francesco
Lottini (1512–1572).[30] He
showed that Lottini first worked out a rudimentary concept of time
preference: that people estimate present wants higher than future.
The next link was the late sixteenth-century Italian merchant Bernardo
Davanzati (1529–1606), who applied subjective-value theory
to money in 1588. Indeed, Schumpeter was soon to point out that
Davanzati also solved the "paradox of value," that water
is very useful but not valuable on the market because it is highly
abundant. Whether or not Davanzati was influenced by San Bernardino
is not known.[31] He
was followed almost a century later by the Italian mathematics professor
Geminiano Montanan (1633–1687). Galiani was then definitely
influenced by Davanzati.

Kauder then
developed in an original way the great contributions of Galiani.
For not only did Galiani comprehensively set forth the familiar
theory of utility and scarcity as determinants of price —
which lacked only the marginal principle to arrive at the Austrian
theory — but he also went on to apply the utility theory to
the value of labor and other factors of production. For the value
of labor is, in turn, determined by the utility and scarcity of
the particular kind of labor being considered. The highly skilled
are paid much more than the common laborer, since nature produced
only a small number of able men. But not only that; for Galiani
it is not labor costs that determine value, but value — and
consumer choice — that determines labor cost.

Galiani touched on a pre-Böhm-Bawerk, time-preference theory
of interest, with interest being the difference between present
and future money.[32] Turgot
then anticipated the Austrians in applying Galiani’s utility theory
to a detailed analysis of isolated exchange. Turgot, furthermore,
as Schumpeter pointed out, developed a time analysis of production
and worked out a pre-Austrian general analysis of the law of eventually
diminishing returns that was not to be matched until the end of
the nineteenth century. Quite justly Schumpeter wrote that "it
is not too much to say that analytic economics took a century to
get where it could have got in twenty years after the publication
of Turgot’s treatise had its content been properly understood and
absorbed by an alert profession."[33] Instead,
as Kauder pointed out, it was left to Condillac to offer a last-ditch
and neglected defense of Galiani’s utility theory against the rising
tide of British cost theory. In Condillac’s trenchant phrase, "A
thing does not have value because it costs, as people suppose; instead
it costs because it has a value."[34]

In a fascinating
companion article, Kauder speculated on the persistence of utility-and-subjective-value
theory on the Continent, as compared to the rise and dominance of
a quantity-of-labor-and-cost-of-production theory in Great Britain.[35] He
was particularly intrigued by the fact that the pre-nineteenth-century
French and Italian subjectivists were all Catholics (and, of course,
he might have added the medieval and sixteenth-century Scholastics
as well), while the British economists were all Protestants, or,
more precisely, Calvinists. Kauder speculated that it was their
Calvinist training that led John Locke and particularly Adam Smith
to reject the Continental tradition (Smith knew Turgot and read
Grotius) and to emphasize a labor theory of value. The Calvinists
believed that work or labor was divine; could not this imprint have
led Smith and the others to adopt a labor theory of economic value?

Kauder pointed out that until the middle of the eighteenth century
the French and Italian universities were dominated by Aristotelian
philosophy, particularly as transmitted by the Jesuits and other
religious orders. Kauder added that, in contrast to Calvinism, Aristotelian-Thomist
philosophy did not glorify work or labor per se as divine;
work may be necessary, but "moderate pleasure-seeking and happiness"
— in short, utility — "form the center of economic
actions." Kauder concluded that "if pleasure in a moderate
form is the purpose of economics, then following the Aristotelian
concept of the final cause, all principles of economics including
valuation must be derived from it."[36]

Kauder admitted
that his is a conjecture that cannot be proved and also that it
does not particularly hold for the nineteenth century. However,
he did offer an intriguing explanation for Alfred Marshall’s failure
to adopt the full marginal utility theory and, instead, his shunting
aside of the theory in favor of a recrudescence of Ricardo’s objective
cost-of-production theory. That explanation lies in Marshall’s undoubtedly
strong Evangelical and Calvinist background.[37]

Finally, Emil
Kauder convincingly demonstrated the direct influence of Aristotelian
philosophy on the founders of the Austrian school and contrasted
the result with the other marginalist schools of the late nineteenth
century. First, in contrast to Jevons and Walras, who believed that
economic laws are hypotheses dealing with social quantities, Carl
Menger and his followers held that economics investigates, not the
quantities of phenomena, but the underlying essences of such real
entities as value, profit, and the other economic categories. The
belief in underlying essences inherent in superficial appearances
is Aristotelian, and Kauder pointed out that Menger studied and
cited Aristotle extensively in his methodological work. He also
noted the similarities discovered by Oskar Kraus between the Austrian
and the Aristotelian theories of imputation.

Kauder also
pointed out that Menger applied the fundamental Aristotelian distinction
between matter and form to economic theory: economic theory deals
with the underlying form of events, while history and statistics
deal with the concrete matter. The concrete historical cases are
the exemplifications of general regularities, the Aristotelian matter
that contains potentialities, while the economic laws "are
the Aristotelian forms which actualize the potential, that is, they
provide the laws and concepts valid for all times and places."[38]

Second, Menger
held, in contrast to Jevons and Walras, that economic laws as expressed
in mathematical equations are only arbitrary statements; on the
contrary, genuine economic laws are "exact," in Menger’s
terminology meaning fixed laws that describe sequences invariable
to time and place. Thus, Menger and the Austrians build up an "eternal
structure of economics … stripped of all historical peculiarities."

In short, Menger
and, following him, Böhm-Bawerk were Aristotelian social ontologists,
maintaining the absolute and apodictic reality of economic laws.
Kauder perceptively pointed out that in contemporary economics,
"only von Mises, the most faithful student of the three [Marginalist]
pioneers, maintains the ontological character of economics laws.
His theory of human action is a ‘reflection about the essence of
action.’ Economic laws provide ‘ontological facts.’"[39]

Finally, the
Jevons-Walras mathematical method necessarily deals with "functions
of interdependent phenomena," whereas, for Menger and the Austrians,
economic laws are genetic and causal, proceeding from the utility
and the action of the consumer to the market result. As Kauder put

For Marshall,
value and cost, supply and demand are interdependent factors whose
functional connection can be explained in an equation or a geometrical
figure. For Wieser, Menger, and especially for Böhm-Bawerk
the wants of the consumer are the beginning and the end of the
causal nexus. The purpose and the cause of economic action are
identical. There is no difference between causality and teleology,
claims Böhm-Bawerk. He knew the Aristotelian origin of his

Kauder also
pointed out that the characteristically Austrian method of proceeding
with words from a Robinson Crusoe model and then proceeding step
by step to a fully developed economy accords with the Aristotelian
concept of entelechy, in which "the motion from the potentiality
to the actualization determines not only the structure of the system
but also the presentation of the thoughts."[41]

In attempting
to explain the Austrian choice among all the marginalists for philosophical
realism and social ontology, Kauder pointed to the late nineteenth-century
influences on the Austrian intellectual climate of Aristotle, Thomas
Aquinas, and other schools of realistic philosophy. Most influential
was Aristotle, who was studied carefully down to the middle of the
nineteenth century, and who was often taught in the secondary schools
in Austria. And while realism gave way to empiricism in the Austrian
schools by the turn of the twentieth century, "the Viennese
Schotten gymnasium, the intellectual nursery of many famous
Austrians including Wieser, required, even after 1918, the students
to read Aristotle’s metaphysics in the original Greek."[42] In
contrast, of course, the influence of Aristotelian philosophy in
Britain or even France during the nineteenth century was virtually

In recent decades,
the revisionist scholars have clearly altered our knowledge of the
prehistory of the Austrian school of economics. We see emerging
a long and mighty tradition of proto-Austrian Scholastic economics,
founded on Aristotle, continuing through the Middle Ages and the
later Italian and Spanish Scholastics, and then influencing the
French and Italian economists before and up till the day of Adam
Smith. The achievement of Carl Menger and the Austrians was not
so much to found a totally new system on the framework of British
classical political economy as to revive and elaborate upon the
older tradition that had been shunted aside by the classical school.


[1] Lewis
H. Haney, History
of Economic Thought
, 4th ed. (New York: Macmillan, 1949),
pp. 106–8.

R.H. Tawney, Religion
and the Rise of Capitalism
(New York: New American Library,
1954), pp. 38–39.

[3] Joseph
A. Schumpeter, A
History of Economic Analysis
(New York: Oxford University
Press, 1954).

[4] Marjorie
Grice-Hutchinson, The School of Salamanca: Readings in Spanish
Monetary Theory, 1544–1605 (Oxford: Clarendon Press,

[5] Ibid.,
p. 27.

[6] Luis
Sarava de la Calle, Instruccion de mercaderes (1544), in
Grice-Hutchinson, School of Salamanca, pp. 79–82.

[7] Ibid.,
p. 48.

[8] Francisco
García, Tratado utilisimo y muy general de todos los contractos
(1583), in Grice-Hutchinson, School of Salamanca, pp. 104–5.

[9] Martín
de Azpilcueta Navarro, Comentario resolutorio de usuras (1556),
in Grice-Hutchinson, School of Salamanca, pp. 94–95.

[10] Domingo
de Soto, De Justitia et Jure (1553), in Grice-Hutchinson,
School of Salamanca, p. 55.

[11] Luís
de Molina, Disputationes de Contractibus (1601), in Grice-Hutchinson,
School of Salainanca, pp. 113–14; Tomás de Mercado,
Tratos y contratos de mercaderes (1569), ibid., pp. 57–58
and; Domingo de Baez, De Justitia et Jure (1594), ibid.,
pp. 96–103.

[12] Raymond
de Roover, “Scholastic Economics: Survival and Lasting Influence
from the Sixteenth Century to Adam Smith,” Quarterly Journal
of Economics 69 (May 1955): 16 1–90; reprinted in
de Roover, Business,
Banking, and Economic Thought
(Chicago: University of Chicago
Press, 1974), pp. 306–35.

[13] Ibid.,
p. 309.

[14] Raymond
de Roover, “Joseph A. Schumpeter and Scholastic Economics,” Kyklos
10(1957): 128. De Roover traced the concept of mutual benefit as
exhibited in exchange back to Aquinas, who wrote that “buying and
selling seem to have been instituted for the mutual advantage of
both parties, since one needs something that belongs to the other,
and conversely” (ibid., p. 128).

[15] De
Roover, Business, Banking, and Economic Thought, pp. 312–14.
Elsewhere de Roover noted that the Scotists were a small minority
among medieval and later Scholastics, whereas the Scholastics discussed
here were in the mainstream of Thomist tradition.

[16] Raymond
de Roover, “The Concept of the Just Price: Theory and Economic Policy,”
Journal of Economic History 18 (December 1958): 422–23.

[17] Ibid.,
p. 424.

[18] Ibid.,
p. 426.

[19] David
Herlihy, “The Concept of the Just Price: Discussion,” Journal
of Economic History 18 (December 1958): 437.

[20] John
W. Baldwin, “The Medieval Theories of the Just Price,” Transactions
of the American Philosophical Society (Philadelphia: July 1959);
see also the review of Baldwin by A.R. Bridbury, Economic History
Review 12 (April 1960): 512–14.

[21] In
particular, the theologians at the great center at the University
of Paris in the early thirteenth century: Alexander of Hales and
Aquinas’s teacher, Albertus Magnus (ibid., p. 71). Baldwin further
pointed out that theological treatment of such practical questions
as the just price in the Middle Ages only began with the development
of university centers at the end of the twelfth century (ibid.,
p. 9).

[22] Raymond
de Roover, “The Scholastic Attitude toward Trade and Entrepreneurship,”
Explorations in Entrepreneurial History 2 (1963): 76–87;
reprinted in de Roover, Business, Banking, and Economic Thought,
pp. 336–45.

[23] De
Roover, here and in his other writings, pointed to the great deficiency
in Scholastic analysis of the market: the belief that any interest
on a pure loan (a mutuum) constituted the sin of usury. The
reason is that while the Scholastics understood the economic functions
of risk and opportunity cost, they never arrived at the concept
of time preference. On the Scholastics and usury, see the magisterial
work of John T. Noonan, Jr., The Scholastic Analysis of Usury
(Cambridge, Mass.: Harvard University Press, 1957); see also Raymond
de Roover, “The Scholastics, Usury, and Foreign Exchange,” Business
History Review 41 (1967): 257–71.

[24] Raymond
de Roover, San
Bernardino of Siena and Sant’Antonino of Florence: The Two Great
Economic Thinkers of the Middle Ages
(Boston: Kress Library
of Business and Economics, 1967).

[25] Ibid.,
p. 17.

[26] On
the originality of Olivi see ibid, p 19.

[27] Ibid.,
p. 20.

[28] Ibid.,
pp. 23–24.

[29] On
the later influence of the Scholastics, see Schumpeter, History
of Economic Analysis, pp. 94–106; Grice-Hutchinson, School
of Salamanca, pp. 59–78; de Roover, Business, Banking,
and Economic Thought, pp. 330–35; and de Roover, “Joseph
A. Schumpeter and Scholastic Economics,” pp. 128–29.

[30] Emil
Kauder, “Genesis of the Marginal Utility Theory: From Aristotle
to the End of the Eighteenth Century,” Economic Journal 63
(September 1953): 638–50.

[31] Schumpeter,
History of Economic Analysis, p. 300.

[32] Kauder,
“Genesis of the Marginal Utility Theory,” p. 645.

[33] Schumpeter,
History of Economic Analysis, p. 249, see also ibid., pp.
259–61, 332–33.

[34] Emil
Kauder, “Genesis of the Marginal Utility Theory,” p. 647. Kauder
and Schumpeter also noted the early eighteenth-century French mathematician
Daniel Bernoulli (1738), who outside the stream of economic thought
developed a mathematical version of the diminishing marginal utility
of money (ibid., pp. 647–50; Schumpeter, History of Economic
Analysis pp. 302–5).

[35] Emil
Kauder “The Retarded Acceptance of the Marginal Utility Theory,”
Quarterly Journal of Economics 67 (November 1953) 564–75.

[36] Ibid.,
p. 569.

[37] Ibid.,
pp. 570–71. These two articles are essentially reprinted
in Emil Kauder, A
History of Marginal Utility Theory
(Princeton, NJ: Princeton
University Press, 1965), pp. 3–29.

[38] Emil
Kauder, “Intellectual and Political Roots of the Older Austrian
School," Zeitschrift für Nationalökonomie
17 (December 1957): 411–25.

[39] Ibid.,
p. 417.

[40] Ibid.,
p. 418.

[41] Ibid.

[42] Ibid.,
p. 420; see also Kauder, History of Marginal Utility Theory,
pp. 90–100. On Menger as Aristotelian, also see Terence W.
Hutchinson, “Some Themes from Investigations into Method,”
in Carl
Menger and the Austrian School of Economics
, J.R. Hicks
and Wilhelm Weber, eds. (Oxford: Clarendon Press, 1973), pp. 17–20.

N. Rothbard
(1926–1995) was the author of Man,
Economy, and State
, Conceived
in Liberty
, What
Has Government Done to Our Money
, For
a New Liberty
, The
Case Against the Fed
, and many
other books and articles
. He was
also the editor – with Lew Rockwell – of The
Rothbard-Rockwell Report

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