The last Salamancans Lessius and de Lugo

The last Salamancans: Lessius and de Lugo

One of the last great Salamancans was a Jesuit but not a Spaniard. Leonard Lessius (1554-1623) was a Fleming, born at Brecht near the great city of Antwerp. During the sixteenth century, Antwerp had become the outstanding commercial and financial centre of northern Europe, a focus of trade from the Mediterranean. Lessius's parents had originally planned for him to become a merchant, but he entered the University of Louvain, and was received into the Jesuit Order in 1572. He taught philosophy for six years at the English college at Douai, in France, and then went to Rome for two years to study under Francisco Suarez. It was at Rome that Lessius became a Salamancan in spirit, and from then on struck up a friendship with Luis de Molina. Returning to Flanders, Lessius assumed a chair in philosophy and theology at the University of Louvain. In theology, Lessius took up the great Molinist cause of free will against a pro-determinist wing of theologians at Louvain. There he confronted the crypto-Calvinist Dr Michael de Bay, chancellor of the University of Louvain, who had adopted the concept of predestination and salvation of the elect. Lessius also advanced the Suarezian view that original political power was conferred by God on the people, and hence he attacked the growing adherence to the divine right of kings, especially as put forth by King James I of England.

Lessius's most important work was De Justitia et Jure (1605), the same title as the works of Molina and de Bafiez. The book was enormously influen­tial, being published in nearly 40 separate editions in Antwerp, Louvain, Lyons, Paris and Venice. Not only was Lessius's knowledge of his predeces­sors encyclopedic, but he was renowned for his knowledge and analysis of contemporary commercial practices and contracts and for his applications of moral principles to such practices. Lessius was consulted frequently on these matters by statesmen and church leaders.

On the theory of price, Lessius, like his scholastic forbears, held the just price to be that determined by the common estimate of the market. A legally fixed price could also be the just price, but in contrast to many of his fellow scholastics, for whom the legal price took precedence, Lessius pointed out several cases in which the market price would have to be chosen over the legal price. Following Juan de Medina, these were: first, when the market price is lower; and second, when, 'in change of circumstances of increasing or diminishing supply and similar factors, the authorities were notably negli­gent in changing the legal price...'. Even more strongly, even a 'private individual' may request a price above the legal ceiling when the authorities are 'ill informed about the commercial circumstances', which is likely, of course, to happen a good deal of the time.
Attacking the cost of production theory of price, Lessius points to market demand as the determinant of price, regardless of a merchant's expenses:

But if the merchant's expenses have been greater, that is his hard luck, and the common price may not be increased for that reason, just as it need not be de­creased even if he had no expenses at all. This is the merchant's situation; just as he can make a profit if he has small expenses, so he can lose if his expenses are very large or extraordinary.

Leonard Lessius had an insight into how all economic markets are interre­lated, and he analysed and defended in turn the workings of foreign ex­change, speculation, and the value of money and prices. In particular, Lessius engaged in the most sophisticated analysis yet achieved of the workings of wages and the labour market. Like other scholastics, he saw that wages were governed by the same supply and demand principles, and therefore by the same canons of justice, as any price. In asking what is the 'minimum justifi­able wage' for any given occupation, Lessius declared that the existence of other people willing to perform the work at any given wage shows that it is not too low. In short, if a supply exists for the labour at that wage, how can it be unjust?

Lessius also discovered and set forth the concept of psychic income as part of a money wage. A worker can be paid in psychic benefit as well as money: 'if the work brings with it social status and emoluments, the pay can be low because status and associated advantages are, so to say, a part of the salary'. Lessius also advanced the view that workers are hired by the employer because of the benefits gained by the latter, and those benefits will be gauged by the worker's productivity. Here are certainly the rudiments of the marginal productivity theory of the demand for labour and hence of wages, which was set forth by Austrians and other neoclassical economists at the end of the nineteenth century. Indeed, Lessius's sophisticated analysis of wages and the labour market were lost to mainstream economics until they were independ­ently rediscovered in the late nineteenth century.

Lessius also stressed the importance of entrepreneurship in determining income. This quality of entrepreneurial 'industry', of efficiently combining jobs, is rare, and therefore the able entrepreneur can acquire a much higher income than his fellows. Lessius also provides a sophisticated analysis of money, demonstrating that the value of money is dependent on its supply and demand. More abundant money will make it less valuable either for buying goods or foreign exchange, and a greater demand for money will cause the value of the currency to rise: 'For example, if great princes are in urgent need of money for war or other public purposes, or if a large quantity of goods come on to the market; for whenever money is urgently needed for matters of great moment, so is it more highly esteemed in terms of goods.'

In his application of moral principle to trade practice, Lessius had a liber­ating effect on trade. This was particularly true of usury, where Lessius, while formally continuing the traditional prohibition, was actually a highly influential force in its ongoing destruction. Lessius provided the most sweep­ing defence so far of the guaranteed investment contract, and he treated benignly even high rates of return on capital. He also removed all the remain­ing restrictions on lucrum cessans. First, he widened the doctrine to apply, not only to specific loans that would otherwise have been invested, but to any funds, since they are liquid assets that always might have been invested. Thus the pool of funds can, as a whole, be considered opportunity cost foregone of investment, and therefore interest may be charged on a loan to that extent. As Lessius puts it:
Although no particular loan, separately considered, be the cause, all, however, collectively considered, are the cause of the whole lucrum cessans: for in order to lend indiscriminately to those coming by, you abstain from business and you undergo the loss of the profit which would come from this. Therefore, since all collectively are the cause, the burden of compensation for this profit can be distributed to single loans, according to the proportion of each.

But this meant that Leonard Lessius justified not only businessmen or investors planning to invest their money, but also any people with liquid funds, including professional money-lenders. For the first time among scholastics, all loans by money-lenders were now justified. With Leonard Lessius, then, the last of the barriers to interest or usury were smashed, and only the hollow shell of the formal prohibition remained.

Lessius adds that the lender may charge interest, even though a reserve of money is kept out of fear, and even if that fear is irrational. Note that to Lessius the important point was the reality of the lender's subjective fears, not whether the fears are objectively correct.

Furthermore, Lessius takes the Medina-Molina assumption of risk argu­ment for interest, about which they had tended to hedge in practice, and widens it greatly. All loans, he points out, carry risks of non-payment: 'a personal right is almost always joined with some difficulties and dangers'. In a careful analysis of lenders' risk, Lessius pointed out that a greater risk, and a greater charge, would be incurred by lending to someone not known to the lender, or whose credit is doubtful.
But that is not all. For Leonard Lessius contributed his own, new and powerful, weapon against the usury ban: a new 'title' or justification for interest. The new justification - prefigured only by the neglected Summenhart - was carentia pecuniae: charging for lack of money. Lessius pointed out quite cogently that the lender suffers the lack of his money, the lack of his liquidity, during the term of the loan, and therefore he is entitled to charge interest for this economic loss. In short, Lessius saw perceptively that every­one derives utility from liquidity, from the possession of money, and that being deprived of this utility is a lack for which the lender may and will demand compensation. Lessius pointed out that unexpected situations can and do arise which could be met far more effectively if one's money were in one's possession and not absent for a period of time. Time, in short, can and should be charged for, for that reason, 'for it can never be obtained that the merchants do not value a long-term concession higher than a short-term one'. And those who are deprived of their money 'value more the lack of their money for five months than the lack of it for four, and the lack of it for four more than three, and this is partly because they lack the opportunity of gaining with that money, partly because their principle is longer in dan­ger...'.
Furthermore, Lessius points out that bills of exchange, or rights to future money, are always at a discount compared to cash. This discount is, of course, the rate of interest. Lessius explains: 'This is a matter of common experience in that money provides the means to a multitude of things which those rights do not provide. Therefore they may be bought at a lower price'. Lessius also notes that merchants and exchangers daily determine the 'price of the lack of money' on the Antwerp Bourse, averaging about 10 per cent; and foreign exchanges, of inestimable value to the economy, would perish if such prices could not be charged.

Thus, for Lessius, the price for a lack of money is established on organized loan markets. But to the extent that a loan market exists, there is no need to justify each merchant's loan on the basis of his particular opportunity cost or deprivation of funds. That price, which becomes the just price, is set on the loan market. As Lessius puts it:

Moreover, any merchant seems able to demand this price... even though there is no gain of his that stops because of his loan. This is the just price for the privation of money among merchants; for the just price of an article or obligation in any community is that which is put upon it by that community in good faith for the sake of the common good in view of all the circumstances...Therefore, even if through the privation of money for a year there is no gain of mine that stops and no risk of capital, because such a price for just causes has been put upon this privation, I may demand it just as the rest do.

With carentia pecuniae, therefore, Leonard Lessius delivered the final blow to smash the usury prohibition, while unfortunately still retaining the prohibition in a formal sense. It is no wonder that Professor Noonan, the great scholar of the scholastics on usury, holds Lessius to be 'the theologian whose views on usury most decidedly mark the arrival of a new era. More than any predecessor he would probably have felt completely at ease in the modern financial world.'

The last Salamancan was the Jesuit Cardinal Juan de Lugo (1583-1660). De Lugo takes the Salamancans into the seventeenth century, the century of the decline of Spanish power in Europe. After studying law and theology at Salamanca, de Lugo went to Rome to teach at the great Jesuit College. After teaching theology in Rome for 22 years, de Lugo was made a cardinal and became a member of various influential Church commissions in Rome. A learned and comprehensive theoretician, de Lugo has been called the greatest moral theologian since Aquinas. Author of a book on psychology and another on physics, de Lugo's masterwork in the area of law and economics was De Justitia et Jure, published in 1642. This work went through numerous edi­tions during the seventeenth and eighteenth centuries, its last edition having appeared as late as 1893.
In his theory of value, this culminating work of the Salamancan School displayed a subtle and advanced subjective utility explanation. The prices of goods, de Lugo pointed out, fluctuate 'on account of their utility in respect of human need, and then only on account of estimation; for jewels are much less useful than corn in the house, and yet their price is much higher'. Here de Lugo, once again, comes very close to the late nineteenth century marginal utility explanation of value, and to solving the value paradox. Corn is higher than jewellery in use value, but is cheaper in price. The answer to this paradox is that subjective estimates or valuations differ from objective use value, and these in turn are affected by the relative scarcities of supply. Again, only the marginal concept is needed to complete the explanation.

Subjectivity, de Lugo goes on, means that the 'estimation' or valuation is going to be conducted by 'imprudent' as well as 'prudent' men (no 'rational­ity' or 'economic man' assumptions here!). In short, the just price is the market price determined by demand and consumer valuations; and, if the consumers are foolish or judge differently than we do, then so be it. The market price is a just price all the same.

In his discussion of merchants' activities, de Lugo adds to the previous opportunity-cost concept of mercantile expenses. For a merchant will only continue to supply a product if the price covers his expenses and the rate of profit he could earn in other activities.

In his theory of money, Cardinal de Lugo follows his confreres: the value or purchasing power of money is determined by the quality of the metal content of coins, the supply of and the demand for money. De Lugo also set forth the idea that money moves from the area of its lower to that of its higher value.

On usury, de Lugo provided a mixed bag. On the one hand, he draws back from the clear implications of Lessius and others that the usury ban should become a hollow shell. For that reason, he refuses to accept Lessius's will­ingness to have the lender charge for lack of money during the period of the loan. On the other hand, de Lugo widens still further the powerful 'pro-usury' weapons of risk and lucrum cessans. He broadens the concept of risk to include explicitly every loan; for, as he puts it with remarkable bluntness: 'Where today is there to be found a debt so placed in safety that in security it equals ready cash?' But that, of course, justifies the charging of interest on every loan. De Lugo also widens lucrum cessans still further, for he allows the lender to include not only probable profit foregone from a loan, but also the expectation of remote profit foregone. Also, the lender, in charging inter­est, may calculate the profit he would have made by re-investing the lost profit on a loan. In sum, de Lugo asserts sweepingly that lucrum cessans is 'the general title for purging usury'.