Outline of Presentation

1. Tomas de Mercado and The Schoolmen of Salamanca: The First Business Ethicists (as well as ‘Real’ Economists and Business Theorists) and Their Vital Relevance for Our Economic Future October 22,2011 Stephen O. Morrell, Ph.D. Professor of Economics and Finance Andreas School of Business Barry University Miami Shores, Florida USA 33071 smorrell@mail.barry.edu

2. Outline of Presentation • Summary of Salient Points. • The Setting. • The Places and The Epistemological Approach. • The Schoolmen of Salamanca. • Tomas de Mercado and the Schoolmen on Business Ethics. • Their Original Contributions to Business and Economic Concepts, Principles and Theories. • Summary and Future Directions. • Acknowledgements and References.

3. I. Summary • A number of core, foundational concepts, theories and principles of business practices, economics, and international law originated with a group of Dominican and Jesuit theologians and philosophers known as the “Schoolmen of Salamanca” in 16th century Spain. 2. The over-arching objective of the Schoolmen’s research was to promote the common good via deriving normative rules, based on natural law, for virtuous and moral (ethical) human conduct in the pursuit and practice of commerce, and in relations between business and government.

4. I. Summary • Study and objective research lead to the conclusions that commerce, trade, business and markets emerge from man’s ‘natural inclinations to innovate’ and thereby shouldcontribute to the common good. This objective research formed the basis for derived ethical practices in business – the sufficient condition for commerce to contribute to the common good. 4. 500 years later the wisdom of these intellectual entrepreneurs can help guide a renewed sense of business ethics, business practices, and socially just economic policies and business ethics. • Tomas de Mercado has a rightful claim as one of the first business ethicists.

5. II. The Setting:Spain in the 16th CenturyWhat the Schoolmen Observed “Monarchy, Mercantilism, Monopoly, Medievalism vs. Modernity, Merchant Fairs and New World Money Monarchy: Charles V and Phillip II - Fiscal Debt and Cash Strapped. Mercantilism: Wealth of nation measured in FX, gold and silver reserves. Subsidize exports, restrict imports. Monopoly: Economic rents in return for taxes Medievalism vs. Markets: Licitness of commerce, usury, just price, just wage, just profit versus flourishing commerce, trade and development in Lisbon, Seville, Burgos, Barcelona as well as Flanders, Florence, Milan, Antwerp, and the Indies. Merchant Fairs: Villalon (May-June); Medina del Campo (July-August); Rioseco (September-November) MONEY : Next Slide

6. Gold and Silver from the New World to Spain: 1503 – 1660$30 billion in 2011 USD

7. Money Wages and Prices in Spain, 1501 -1650Cumulative Inflation Rates: 1500-1570 = 400%; 1570 – 1650 =100%; 1500=1650 = 500%

8. Money and Inflation in Spain, 1500 – 1650

9. Spanish Fiscal Revenues 1555- 1600

10. III. The Places and Epistemological Approaches • “The 16th century was the Golden Age of Spain. Spanish Universities were at the height of their glory and [the University of] Salamanca was the queen among them.”

11. III. Epistemological Approach:Scholasticism and Natural Law Scholasticism • Aquinas as starting point. “The participation of intellectual creatures in eternal law.” • Purpose was to “formulate a unified corpus of scientific thought applicable to all areas of life.”

12. III. Epistemological Approach: Natural Law • Natural Law Theory: Normative Natural Law: • Derivation of rules for moral human conduct. That is, what is naturally just and serves the common good. • Scientific/intellectual inquiry in the limit leads to the determination of the reasonableness/truth of human actions. Human actions derived from ‘correct’ inquiry are good and virtuous as they are in accord with reason and truth. Those outside the order of reason are not virtuous and just. • Inquiry, e.g. how businesses operate that discerns the nature of what is (non-normative), the true natural order of things, then forms the basis of ethics – what ought to be. • Human actions can violate natural law, but only with consequences.

13. IV. The Schoolmen of Salamanca Who Were They? • Dominican and JesuitTheologians, Philosophers, “Moral Philosophers”centered but not exclusive to the University of Salamanca. Prominent from approximately 1524 – 1600. • While centered at Universities they traveled widely, observed astutely and keenly, participated openly in issues of commerce, government, law and church affairs. • Inquiring into the nature (reason & truth) of business and economics to derive principles for moral and ethical human action that promote the common good.

14. IV. The “Schoolmen:” A Partial Listing Francisco de Vitoria, O.P. (1493 -1546) Founder of School of Salamanca. De Justitia. Doctrina Sobre los Indios. Freedom of Exchange, Just Price, Just Wage, Just Profit. Domingo de Soto, O.P. (1495 – 1560) De Iustitia. Purchasing Power Parity Theory of Foreign Exchange Rates. Just Prices, Just Taxes and Just Economic Policies. Martin de Azpilcuetta , O.P. (1493 – 1586) “Doctor Navarrus” Comentario Resolutorio de Usuras Comentario Resolutorio de Cambios Quantity Theory of Money. Validity of Merchants and Business

15. IV. The Schoolmen, Continued Domingo de Banez, O.P. (1528 – 1604) De Iustitia et Iure Decisiones. Expectations theory of prices. Just Economic Policies Luis de Molina, S.J. (1535 – 1600) De Iustitia et Jure Concordia Just Prices, Sanctity of Individual Freedom Juan de Mariana, S.J. (1536 – 1624) De Monetae Muttione Inflation and Currency Debasement

16. IV. The Schoolmen, Continued Tomas de Mercado, O.P. (c.1530 – 1575/1585) Tratos y Contratos de Mercaderes Suma de Tratados y Contratos. Ethical Business Practices, Foreign Exchange Rates. “My intention is not to write laws to sentence the judges, but rules that keep the Christians in the issuing and holding these contracts, which are so continuous and common among all people.”

17. V. The Schoolmen and de Mercado on Business Ethics Normative Principles Derived from Objective Research. • Commerce/business is necessary for the common good. • Ethical Business Practices: Just Prices and Wages. • Ethical Business Practices: Just Profits. • Ethical Business Practices in Relation to the State/Monarchy. • Usury restrictions.

18. Ethical Business Practices:A Summary Do: Engage in mutually beneficially trade, voluntary exchange, charge just prices, pay just wages, earn just profits, pay just taxes, obey just laws, abide by terms of contracts. Do Not: Seek monopoly, engage in fraud, coercions, misrepresentations, deceptions, charge unjust prices, pay unjust wages, earn unjust profits, pay unjust taxes, obey unjust laws, abdicate contracts, and charge interest on certain transactions.

19. On the Importance and Necessity of Business, Commerce and Just Exchange “ Mankind progresses from imperfection to perfection. For this reason, in the beginning, barter was sufficient… But afterward, with the development of a more educated, civilized and distinguished life the need to create new forms of trade arose. Among them, commerce is the most respectable, despite the fact that human avarice can pervert anything.” (de Soto) “ …commerce is necessary for the republic. Not all the provinces have the goods they need in abundance. On the contrary… some have in abundance the fruits and labors which are scarce in others.” (de Soto) “any exchange is for the mutual benefit of both parties with the result that they are better-off than previously.” (de Molina) Private Property Rights and voluntary exchange are necessary cornerstones of effective business. “We know that the fields are not going to be efficiently tilled in common ownership and that there will not be peace in the republic, so it is convenient to undertake the division of goods.” (de Banez)

20. Just Prices and Wages. “To summarize, the just price of goods depends principally on the common estimation of men of each region. When a good is sold at a certain price (without fraud or monopoly or any foul play), that price should be held as the just price as long as the circumstances which might cause the price to change remain stable.” (de Vitoria) “After considering the service that an individual undertakes and the large or small number of people who, at the same time, are found in similar service, if the wage set for him is at least the lowest wage set in that region the wage is considered just.” (de Soto) Just prices and wages require : Voluntary exchange ; Absence of violence, fraud, force, misrepresentation ignoranceand monopoly; Contractual fulfillment; Payments in non-debased currency; Set by the community/market. When monopoly, fraud, etc. exist the just price (price range) should be legally set.

21. Just Profits “To deal in shoes for a profit is not the chief use for which they were invented, which was to protect our feet; but that does not mean that to trade shoes is against nature.”(de Azpilcueta) “Those who by their own will go into business must expose themselves to profit and loss. And, when they suffer a loss, cling to the magistrate ….and attempt to alleviate their loss at the cost of the buyer or republic are the most pernicious of men.(Mercado) Just Profits Merchants do not have an inherent right to profit.tbe born by the merchant Just profits obtained by buying and selling at just prices. Profits (and losses) justifiable if prices for inputs and outputs are just. Profits not an increment to cost of Profits not the ultimate end of business: Provide for household; Compensation for work & risks. Improve the product. Help the poor; Ensure essential supplies.

22. Ethical Business Practices in Relation to the State “There is a law that says the profit obtained from metals and ironmongers belong to the king. Another says nobody without a privilege from the king is allowed to extract metals.” (de Soto) “If the expenditures of the Crown grow larger than taxes evil will be inevitable. It will be necessary to impose new taxes every day. The citizens will become exasperated and not listen to the king’s mandates. (de Soto) “…because so long as they make someone sell his property by force justice does not consist of this.” (Vitoria) Government has a vital role in protecting people and property for attaining peace, harmony, order and development. Taxes, an appropriation of a portion of property, are just as a means to finance government. Privileges from the king (monopolies) justified only in cases of grave public need

23. Mercado on Ethical Business Practices Mercado’s practical knowledge of business practices was so wide and deep he encouraged the clergy, in order to provide recourse and advice on ethics to business people, that it was preferable “…to have a mediocre knowledge of letters and great acquaintance of practice.” de Mercado: “In the drawing up of all contracts, sales, purchases, exchanges and loans, what is demanded of the Christian merchant is hardly more than what the Turk or the Arab ought to abide by. For justice and truth, which must be found in them emerge from and belonging to the natural law, to which everyone of any condition and profession is subject.”22 “ For the law of these contracts is encompassed within very few rules, but they are so universal and so ample a material that they are applied in a thousand ways. It is therefore of the highest importance to understand the praxis of business.”23 “… earn a living without losing one’s soul.”

24. Mercado on Money and Profit “Among the things necessary for good government and peace in the kingdom, one is that the value and tale of the money, and even its seal and design, must be durable and as invariable as possible.” “Those who by their own will go into business must expose themselves to profit and loss. And, when they suffer a loss, cling to the magistrate ….and attempt to alleviate their loss at the cost of the buyer or republic are the most pernicious of men.”

25. Mercado and Business Ethics • Merchants: “Imposing figures, having the greatest trade in Christendom.” • Money Changers:“traveling from fair to fair…with his table and boxes and books.” Evolved into fair-bankers/clearing houses. • Bankers: “The Seville bankers are in substance the treasurers and depositaries of the merchants.” His Sum of Deals and Contracts is a vivid description of the business world of his time. Mercado discussed the ethics of three main classes of businessmen.

26. Mercado on Business Ethics: Three Primary Types of Business Contracts “Sale is a contract to buy which can do what he pleases. It has the power to give or keep it or lose it and to use it an all that is right reason and good law.” “It is the cash flowing and used publicly this week and this time, as they say in the square, having no force or deceit in it, though it is more variable as experience shows than the wind.” “ But there is little if, as who we are, that is, as theologians, we treat only what is natural and divine law, do what is lawful. We can say that all they have done in this contract can be done and is lawful.” Mercado wrote extensively on the ethics of three primary types of business transactions and contracts. “And I want to write on business matters…Three contracts, among others, use a lot of people.” “One is to sell and to buy.” Mercado had the least to say about such contracts implying he viewed direct purchases and sales as the standard basis for business.

27. Mercado on Business Ethics: The Second Type of Contract “But wine, oil and wheat have the same substance,…but that alone is worth a thousand ducats and the use of ducats worth the same thousand.” Mercado wrote at length on risk sharing arrangements among lessors and leasees. ‘Acts of God’ which impaired, reduced, destroyed asset values were risks borne by lessors/owners. Such acts that impaired yields , returns, uses of rented assets were borne by the renters. Risks due to negligence were the responsibility of the negligent party. In the event of damages the lease contract should be re-written per customs, history and law. Higher than expected yields and returns accruing from investments and improvements should accrue to the party making them. “The second is to lease under which involves taking olive groves, pastures and fields, crops, cattle, ranches to rent. One can understand also rent house, road horses, weapons, clothing, jewelry and others to this tone.” Mercado makes a significant distinction between ‘rent’ on leased property and interest. He also argues that non-perishable items and money should not be leased, owing to the possibility of interest being charged and paid.

28. Mercado on Business Ethics: The Third Type of Contract Mercado’s views did not prohibit, though they strongly discouraged, borrowing and lending. Potential for social discontent over what and how much to return if items lost, damaged, etc. • “If I borrowed a clothes…and we came to the point that not all could be saved is not understood at the expense of my own finances and stock.” • Lost items can not be loaned to others. “forced to postpone charity for my neighbor.” • Borrower may become the master of the lender. “And, when providing a home not lend them to become lord of them.” “The third pay.” Borrowing and Lending Mercado’s views did not prohibit though they strongly discouraged borrowing and lending.

29. Mercado on Business Ethics: The Third Type of Contract - Extended to Usury “Simply return the sum and value in good currency and used. Money is not commonly loaned but to spend, if I give to expend how can you but return?” Mercado’s views on usury were rooted in Church teachings and Canon Law, Scriptures, and studies of prior philosophers and fellow Schoolmen who viewed money as a ‘sterile’ and therefore not worthy of any renumeration. “All the sages (Schoolmen) say that nothing is more sterile than money, that bears no fruit either,” “There is no crime more infamous, nefarious outside, among the nations than is usury.” “Usury is a vice not only detrimental to the soul, but infamous to the person.” “Call this (usury) sin against nature, and the abominable sin.” “Man was not born for profit and only profit, …but speaking in short for good.”

30. Mercado - Continued on Usury Two exceptions to charging interest: • Delay in borrower repayment. “ Item if the deadline does not get paid, you can take your usury. In all these cases, the merchant may be paid without question the harm that came to him and he lost interest.” • Adjust principal amount for changes in purchasing power. “To return the loan in the same amount that was received …it was worth back as when I loaned it.” Mercado enumerated a wide range of transactions on which interest was prohibited. These included trade credit, purchases on credit (installment sales), advances (pay-day loans) and inheritances which included an interest component. Borrowers could appeal to Canon Law to prevent paying interest. Restitution and penance required of usurers.

31. VI. Their Original Ideas Business and Economics • Subjective Value and Utility Theory. • Price Determination. • Operation of Markets. • Causes of Inflation. • Foreign Exchange Rate Determination.

32. Utility Theory and Subjective ValueHuman needs and wants are subjective and personal.Utility (value) placed on human actions is also subjective. Powerful defense of (a) Indians dominion over their persons and resources; and (b) formulation of rights to natural partnership and communication including commerce and free dealings with all people. • “The value of an article does not depend on its essential nature but on the estimation of men, even if that estimation be foolish.” ( Vitoria) • “In the second place we should observe that the just price depends on the relative appreciation which each man has for the use of the good. This explains why the price of a pearl is higher than the price of grain, wine, meat and horses.”8 ( Vitoria) • “Consider the example of a book. For one, it is of great value and price; for another it is of low value and for others, its value is nil. And the same thing happens with all products.” (Molina) • “But this one standard which truly measures all things is demand. This includes all commutable things inasmuch as everything has a reference to human need. Articles are not valued according to the dignity of their nature, otherwise a mouse, an animal endowed with sense, should be of greater value than a pearl, a thing without life. But they are priced according as man stands in need of them for his own use.” (Aquinas)

33. II. Prices and Markets “It follows that whenever there is a marketable good for which there are many buyers and sellers, neither the nature of the good nor the price for which it was bought, that is to say how expensive it was, nor the toil and trouble it was to get it should be taken into account.” (de Vitoria) “ Mankind progresses from imperfection to perfection. For this reason, in the beginning, barter was sufficient… But afterward, with the development of a more educated, civilized and distinguished life the need to create new forms of trade arose. Among them, commerce is the most respectable, despite the fact that human avarice can pervert anything.”(de Soto) Just Prices do not equal cost of production plus some ‘markup.’ They emerge from subjective value; relative scarcity and cost of production, “In the first place, it should be observed that a price is considered just or unjust …due to their ability to serve human utility. In the second place, it depends on the relative appreciation which each man has for the use of the good.” (de Molina)

34. III. Inflation “…other things being equal, in countries where there is a great scarcity of money all other saleable goods, and even the hands of labor and men, are given for less money than where it is abundant.”(de Azpilcueta) “The first is the plentifulness of this money, which causes a reduction in its value and increases the quantities of goods that must be traded for it. The second is that this money is so debased that everyone will try to avoid having it in their homes.”(Mariana) Inflation has a monetary basis. “We likewise see that money is far less valuable in the New World (especially in Peru, where it is more plentiful) than it is in Spain.. But in places where it is scarcer than in Spain, it will be more valuable.” (de Molina)

35. IV. Foreign Exchange Rates “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 less in Spain than in Flanders.” (de Soto) “After the Indies the place where money is less esteemed is Seville…, and after Seville the other parts of Spain. Money is highly esteemed in Flanders, Rome, Germany and England.” (de Mercado) Foreign exchange rates are determined by the relative supplies for and demands for monies in different nations. Changes in foreign exchange rates reflect actual and expected inflation differentials between countries. Exchange rates will depreciate (appreciate) in countries with relatively higher (lower) actual and expected exchange rates.

36. V. Usury “that if a merchant deposits cash with a bank, the bank will guarantee to repay a larger sum….because it is very profitable for a banker to have cash available. There is no evil in this.”(de Soto) “Nor is it true that to use money, changing it at a profit, is against nature.” (Azpilcueta) “The usury doctrine was the Achilles heel of Scholastic economics. It involved the Schoolmen and their 16th and 17th century successors in insuperable difficulties that contributed greatly to bringing their whole doctrine into dispute.” (Schumpeter) Struggle to reconcile scripture, Papal writings, and reason. “Sterility” of money key logical flaw. Resources have an opportunity cost. Humans have positive –though different- rates of time preference

37. VII. A Summing Up • We are all called to act with virtue and morality in our business dealings. 2. Reason and truth that emerge from objective inquiry of economics and business are critical in working towards this aim. 3. Business initiatives, cemented in ethical practices, have been and can be a powerful and effective force in alleviating economic injustices. 4. The mission of the Andreas School of Business of Barry University is driven by these principles.

38. VIII. Acknowledgements • Special thanks are owed to Mr. Phil O’Neil, Senior Reference Librarian, Barry University for his untiring support in locating and providing reference materials; in engaging discussions on this research; and for assistance with Spanish translations.

39. References:Books • Alves, Andre Azevedo, and Jose Manuel Moreia. The Salamanca School. New York, Continuum International Publishing Group, 2010. • Aquinas, Saint Thomas. Summa Theologica. London: Blackfriars Press English translation, 1975. • Chaufen, Alejandro A. Faith and Liberty : The Economic Thought of the Late Scholastics. New York, Lexington Books 2003. • de Azpilcueta, Martin. Comentario Resolutorio de Usuras. Salamanca, 1556.

40. References • de Mercado, Tomas. Suma de Tratados y Contratos. Salamanca, 1571. • de Soto, Domingo. De Iustitia. Madrid: IEP Publishing, 1968. • de Vitoria, Francisco. De Justitia. Madrid: Publicaciones de la Associacion Francisco de Vitoria, 1934-1936. Book 2. • Grice - Hutchison, Marjorie. The School of Salamanca. Glasgow, Oxford University Press 1952.

41. References • Hamilton, Earl J. American Treasure And The Price Revolution in Spain, 1501 – 1650. Harvard Economic Studies, Volume XLIII. Cambridge: Harvard University Press, 1924. • Popper, Karl. Epistemological Problems in Economics. Princeton: Princeton University Press, 1950. • Rothbard, Murray N.. Economic Thought Before Adam Smith, Volume I. London: Edward Elgar Publishing Ltd., 1995. • Schumpeter, Joseph A. History of Economic Analysis. New York: Oxford University Press, 1954.

42. References: Journals Mele, Domenec. “ Early Business Ethics in Spain: The Salamanca School (1526-1614).” Journal of Business Ethics. Volume 22, 1999. pp. 175-189. Mau, Vladimir. “Lessons of the Spanish Empire.” Russia in Global Affairs. Volume 3, July, 2005. pp 22-35. Roover, Raymond. “Scholastic Economics: Survival and Lasting Influence from the Sixteenth Century to Adam Smith.” The Quarterly Journal of Economics. Volume 69, 1955. pp. 161-190.

43. References: Web Sites Preachers from Abroad http://www.dom.edu/export/sites/dominican/mcgreal/volumeone/DaHCHAP01.pdf Accessed September 4, 2011 Sitio Escolastico. http://escolasticos.ufm.edu/index.php/Tom%C3%Als_de_mercado Accessed September 11, 2011. .