(Haptopraxeology) - '..We have lost three centuries as a result of ignoring our scholars!'
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(Haptopraxeology) - '..We have lost three centuries as a result of ignoring our scholars!'

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The Ethics of Money Production - '..the care of souls.' - 'The point is to return to a universal respect for property rights.'

'Our scholastics of the Spanish Golden Century established the foundations of modern economics .. which is based on real human beings endowed by entrepreneurial creativity and who are the true and only protagonists of all dynamic market processes.

These contributions are centered around the subjective theory of value and the moral principles related to private property rights that are indispensable for a market economy..


Traditionally it was thought that economic science had its origin in the contributions of Adam Smith. Adam Smith is an Scottish thinker with Calvinist Protestant origins who wrote “
The Wealth of Nations” in 1776, essentially wiping out the contributions of our Golden Age scholars.


How different human history would have been if these important contributions relating to the monetary field and the economic cycle had not been forgotten! We have lost three centuries as a result of ignoring our scholars!'

The Scholastics and Economic Science

By Jesús Huerta de Soto
The Cathedral of Segovia
November 8, 2013

Today we are celebrating the 500th anniversary of Diego de Covarrubias y Leyva who was bishop of Segovia, minister in the government of King Philip II and one of the most important representatives of the School of Salamanca.

Our scholastics of the Spanish Golden Century established the foundations of modern economics, and specifically of the Austrian School of economics, which is based on real human beings endowed by entrepreneurial creativity and who are the true and only protagonists of all dynamic market processes.

These contributions are centered around the subjective theory of value and the moral principles related to private property rights that are indispensable for a market economy. All these contributions were later developed in detail by the Austrian School.

Should these contributions were not forgotten, most of the economic crises and recessions as well as many of the wars and genocides that have affect humankind in the last century could have been avoided. But we have many reasons to be optimistic: today we are in a position to rebuild the economic science based on the great contributions of our scholastics like Diego de Covarrubias, Martin Azpilcueta, Saravia de la Calle and many others.

In this way we will be able to offer a truly fruitful economic science at the service of humankind and civilization. Thank you very much, again, Bishop, members of the cathedral chapter, and all those present today.

What I will attempt to do in my closing presentation is highlight the influence that the contributions of our scholars from the Golden Age in general, and specifically, our great Diego de Covarrubias, have in our current situation. That is, what is the relevance of the thinking of our Golden Age scholars in our lives today, here and now, in the circumstances in which we find ourselves today. These influences are truly profound.

If economics professors can attest to one thing, it is that today—and I think this would be felt at the popular level as well—the science of economics is in a profound crisis. We are in a great economics recession. There are millions of unemployed, and it seems that the science of economics has been unable to respond to the demand and challenges that we, as citizens, have the right to expect from it.

And that is the reality. This is a “mea culpa”. I'm making a public acknowledgment here.

And what I wanted to emphasize and clarify first and foremost it that to a great extent this inadequacy of our discipline has its origin in having abandoned the bulk of the contributions that were already discovered and studied by our theorists of the Spanish Golden Age.

The 20th century was the century was the century of genocides, it was the century of the great wars, it was the century of communism. It seemed that the fall of the Berlin Wall had ushered in a new era, but we find ourselves in a disappointing situation, having once again fallen into the excesses of social engineering and into a profound crisis that most citizens are still unable to understand.

What explains this?

Traditionally it was thought that economic science had its origin in the contributions of Adam Smith. Adam Smith is an Scottish thinker with Calvinist Protestant origins who wrote “The Wealth of Nations” in 1776, essentially wiping out the contributions of our Golden Age scholars.

The great error of Adam Smith is his introduction of the virus of the objective theory of value, according to which it is supposed that the value of things is intrinsic to them. His successors in the classical English school went one step further and asserted that value depended on the labor incorporated when things are made. And while it is said that the theorists of the classical English school are liberals, defenders of the market economy, in fact, what they did was to serve up on a platter to Karl Marx and the Marxist theorists the basis of the theory of exploitation, which later served as the ideological underpinning of all the genocides and all of the great conflicts and wars that have plagued during the last century.

If Adam Smith had read the contributions of our scholars and had paid them heed, he wouldn't have mad that mistake, because the great Diego de Covarrubias, in 1555, and I have here volume II of his Complete Works (page 131), sets forth for the first time and already explains better than anyone and articulates the subjective theory of value, in which he indicates that the value of a thing does not depend on its objective nature, but rather on the subjective estimation of men, and he adds: “even if such estimation is crazy.”

In addition, he gives the following example. He says: “Wheat has exactly the same nature here as in the Indies, however, in the Indies its value is much higher because it is much more scarce there and men value it more.”

This is a subjective theory of value that is completely contrary to the erroneous objective theory of value that would be developed later by Adam Smith. Along these same lines, we have another scholar, Luis Saravia de la Calle, who writes his work in Spanish and titles it “Instruction to Merchants” and therein for the first time explains the correct relationship between prices and costs, in the sense that it is not the costs that determine the prices, as Adam Smith and his successors will later theorize, but rather it is exactly the opposite. It is the prices of things that determine the costs.

Saravia de la Calle says, precisely: “Those who measure the just price of things according to the labor, costs and risks involved in or of which the merchandise is made up miss the mark because a fair price is tied to the abundance or scarcity of merchandise, or of merchants and monies, and not of costs, labor and risks.” Note, it is not the cost that determines the value, nor much less the cost of labor, but rather subjective estimation, scarcity, abundance, and also the entrepreneurial spirit (“Instruction to Merchants”).

He calls the entrepreneur a “merchant”. This is the figure of the entrepreneur invested with an innate creative capacity, which is what all of the contributions of the scholars revolve around. It is the human being endowed with free will versus the predestined human being of the Protestants and Calvinists. And it is important because Adam Smith also injects another lethal virus into our discipline, which continues to effect my colleagues even to today, and that is the obsession with studying a phantasmagorical world of equilibrium, where all of the information is given, where those in charge of social engineering can mold our lives at their whim.

In fact, Adam Smith focuses his research program on the study of equilibrium in the long term and not on the study of the prices occurring in the market on a daily basis. However, our scholars had shed a clear light on this issue. In 1615, the great Juan de Lugo asks: Is it within the capacity of human beings to determine the equilibrium price of things? And he answers that the fair price or equilibrium price of things depends on such an enormous number of circumstances that only God can determine what it is.

Pretium iustum matematicum licet soli deo notum. This is a lesson that my colleagues who are today obsessed with building sophisticated mathematical models should heed. They give them highly elaborate names, such as Dynamic stochastic general equilibrium models, with thousands of formulas, enormous programs, highly powerful computers, with which they seek to predict all possible scenarios so that Father State can take charge of our lives, all objectives are met and all problems solved. However, Alan Greenspan, the great engineer of the crisis we are all suffering today, very recently published a book titled “The Map and the Territory".

I just read it and there is one good thing in the book: it acknowledges that none of those presumptuous models in which millions and millions of dollars and millions of euros have been invested have been successful, that all of them have failed. He says that even the most sophisticated mathematical model, the one in which the most has been invested and to which thousands of scientists dedicated themselves, which was the model of the Federal Reserve, failed regrettably in this crisis. And the same thing happened with the International Monetary Fund model, and with the mathematical models of Goldman Sachs,

And he concludes: “I don’t understand what caused the crisis”. Poor Alan Greenspan. If he had read Juan de Salas, who already in 1647 asked: Is it possible for us to collect all of the information that human beings on the ground continually generate in the market? And he answers: This information is so enormous, so huge that quas exacte comprehendere et ponderare Dei est non hominum that is, that only God and not men can come to comprehend, manage and understand precisely that enormous mass of information, that great knowledge.

To put it succinctly, we are indebted to our scholars for a lesson in humility: the spontaneous order of the market driven by human beings on the ground, billions of human beings like us, continually creating and generating new information, new knowledge about ends and means, in a creative way.

In fact, if there is a point of connection between God and man, if man is created in God’s image and semblance, we could say that precisely that point of connection is rooted in the innate creative capacity of human beings. God as creator out of love for all things would have wanted to transmit to man that trait of His: that despite all of our miseries, we are continually capable of creating, of discovering new information, new knowledge about ends and means.

And that is essential because it leads to the marvelous process of social cooperation that our scholars also study. And concretely, we are also indebted to them for a third contribution of enormous value: the dynamic concept of competition, which they called "concurrentia" in Latin. We have the book, for example, of Jerónimo Castillo de Bobadilla, “Politics for Administrators", in which he explains that competition is a process of rivalry, and when entrepreneurs try to emulate each other, "emulatio" is the term he uses, they better serve consumers and drive the market price down.

And this obvious conception of competition collides head-on with the concept of “competition” as described in the mathematical models of my equilibrium colleagues, as a phantasmagorical model of static equilibrium that they call “competition”, and what is even more laughable, that they even call “perfect” —in quotes— which is characterized by all entrepreneurs doing the same thing, no one does anything different, no one tries to surpass or emulate others, and, in addition, everyone sells the same product at the same price.

That is to say, what they call “competition”, and further characterize as “perfect” is a simple situation that, if it can be characterized by one thing, is characterized by the fact that no one competes. And all of this, again, due to forgetting the contributions of our great scholars of the Spanish Golden Age.

And we could spend a lot of time going over other aspects of the science of economics. Perhaps it is relevant to touch on monetary theory in this context. Because our scholars were direct witnesses to economic circumstances that are being repeated today: the massive arrival of precious metals, which represents a tremendous increase in the monetary supply, as a result of the discovery of America. I say tremendous increase, but in reality it was child’s play compared to what we are experiencing today, because, to give you an idea, the monetary supply doubled in one century, however, with the growth rates we have seen since the beginning of this century up to the recession (some years there has been 7, 8, 9, 10, even 14 percent growth in the money supply, both in the U.S., particularly, where the monetary binge has been spectacular,and, though to a lesser extent, in Europe as well) the money supply has doubled every seven years: not in a century, but rather every seven years!

And the fact is that our scholars had already developed theories about the disruptive effects of monetary growth, which today we call “inflation”. We have the crystal clear contribution of the great doctor from Navarre, Martín de Azpilcueta, who explains with great clarity that money is worth less in Spain than in France because it is more abundant here, or to say it another way, that the nominal prices of the prices in Spain are much higher than in France. In fact, the idea is what is known today as the Quantitative Theory of Money, and it had already been described by Nicolaus Copernicus some years prior, but not in such detail nor applied to the concrete economic facts of the XVI century, as Martín de Azpilcueta does, to whom we are also indebted for another very valuable contribution, which is the revival of the old Thomistic doctrine of “temporary preference” according to which things are worth more today than things in the future from the point of view of justice.

And this is important because the theory of temporary preference is at the heart of the foundation and legitimation of interest as a key price in the market for present goods as a function of future goods, and at that time there was still a very heated debate over usury and interest, and it was our scholars who started, already at this time, trying to find a way to accept the idea of interest under certain circumstances or conditions, that is to say, to open a door to let in the oxygen the market needs, in the form of interest-bearing loans, the remuneration of necessary savings to finance productive investment.

But the contribution of Alzpilcueta in the monetary area must be combined with the contributions of another important scholar, born in Talavera de la Reina (a place that I believe is very dear to the heart of our Bishop) in 1537, the great Father Juan de Mariana. Juan de Mariana, as you know, was charged by Felipe II with the task of drafting a short manual to educate the future king, Felipe III, which was given the title De rege et regis institutione, about the monarchy and the royal institution, in which Juan de Mariana develops the theory of tyrannicide.

First he defines the tyrant. He says a tyrant is a king who disregards the rights of his subjects, levies taxes without their consent, organizes secret police forces, prohibits meetings and assemblies, and he reaches the conclusion that it is legal to murder a tyrant under certain circumstances. I believe it was a warning call so the future Phillip III would be respectful of human rights as king, which I believe he in fact was.

Even the much reviled Duke of Lerma can be said to have been a dictator, but a “dictablando” (“soft dictator”) so to speak, at least compared to the Count-Duke of Olivares, who succeeded him. This doctrine of tyrannicide is important because the book was publicly burned in Paris because it was said to have been used to justify the assassinations of the French kings Henry III and Henry IV.

It was not burned in Spain. Possibly because all the things that bothered the French, we Spaniards liked, aside from the fact that it was written in Latin and the authorities thought that its popular impact would not be very great. But the theory of tyrannicide is important because Mariana develops it in some way years later in his most important book on economics, titled De Monetae Mutatione, in Spanish “A Brief Treatise and Discourse on the Billon Currency Presently Minted in Castilla and Other Disorders and Abuses". In this book, Mariana condemns the Duke of Lerma for having debased the precious metal in the currency.

What he was doing was taking out what little silver was left in the coin and leaving only the pure copper coin. Of course, with this stunt, it seemed very easy to meet payments, but it amounted to multiplying the money supply. The effect it caused was a tremendous increase in prices and a revolution, the destruction of the exchange system, which is what Juan de Mariana describes perfectly in his book. What happened was not just what Quantitative Theory would predict, that prices in general would go up, but rather it caused the complete disorganization of commerce, which to a great extent effected and laid the foundation for what would be the situation of profound and chronic economic recession that has ravaged our country since that time.

But Mariana insists on another very important idea: he says that natural law is vastly superior to the power of each king or ruler. This is an essential idea that is still perfectly applicable today. I believe that we must be aware of and very proud of the fact that when Thomas Jefferson and the rest of the founding fathers of the United States were considering whether or not to rise up against the King of England in order to give encouragement to the rest of the found fathers of the great American homeland, he says to them: you only have to read one book, "The History of Spain" by Father Juan de Mariana. (and in fact, Madison even sends him a copy of the book). Because it is a history of Spain written from the perspective of freedom, unmasking the tyrants - Mariana categorizes as tyrants Alexander the Great, Julius Caesar etc. It is a history written from the perspective of man's tireless fight to defend his freedom against tyrants and others who would trample it.

And I believe it should be a source of pride and honor for all Spaniards who are aware of this, and there are certainly very few people who are aware of it. And it is a disgrace for Spain that this great “History of Spain” and the rest of the works of Father Juan de Mariana in general have not been published in revised editions with commentaries in our time. This is a challenge for all of us.

Now I would also like to mention the great contribution of our scholars, especially Luis Saravia de la Calle, regarding banking theory. Because they show that the deposit contract is incompatible with the loan contract. That if I make a deposit, the depository must maintain 100% of the equivalent of that thing available to the depositor at all times. If a person who receives something on demand deposit, whether wheat, oil or money, uses it to make a loan, in the first place he violates natural law, he violates property law, and in addition he brings about in the monetary realm an anomalous and pernicious phenomenon of creation, of duplication of monetary units.

One person, the one who deposited the money, continues to be the owner in all rights of the funds deposited and considers it part of his cash balance; and the other person, simultaneously, thinks that what he has received as a loan is also fully a part of his cash balance. The same cash balance simultaneously belongs to and is available to two people! That's an expansion of money or credit and Luis Saravia de la Calle explains that when the general principle of 100% is thus violated in the area of the deposit, this causes a distortion of monetary expansion, price growth, speculative bubble, and ultimately, sooner or later all of this will inevitably come crashing down, bringing ruin to the bankers, who go under, and causing a deep recession.

Here we see the Austrian business cycle theory that is the only theory capable of explaining what has happened to us and what is happening to us today. Luis de Molina also recognizes that the banks are capable of creating money out of thin air through a simple entry in their books, which he calls "quirographis pecuniarum" or scriptural money.

How different human history would have been if these important contributions relating to the monetary field and the economic cycle had not been forgotten! We have lost three centuries as a result of ignoring our scholars!

And I will conclude with two observations. One about the previous influences on our scholars, who of course did not work in a vacuum, but who stood on a whole previous tradition that can be traced back, even, to the contributions contained in the sermons of Pedro Juan de Olivi, of San Antonino de Florencia, of San Bernardino de Siena, which perfectly justify the role of the entrepreneur.

That is, that there is a right to entrepreneurial profit based on the fact that they assume, as they said in Latin, "su industria" and "pericula", that is the assumption of risks or dangers by entrepreneurs, and they also emphasize their industrious nature, their sound administration. But at the same time, they support their views on the whole Aristotelian tradition, which can be traced back to Saint Thomas Aquinas, who in turn is heir to the whole tradition of the jurists of the classical century of Roman law, represented by jurists such as Gayo, Ulpiano and Papiniano.

Without knowing it, they were the first economists because they were the first to realize that there are spontaneous orders in the market resulting from the interaction of many people, but which have not been deliberately created by anyone. As is logical, they applied this intuition to the field of law.

And we know, thanks to Cicero because he includes in “The Republic", that for Cato “the reason our political system—the Roman system—was superior to those of all other peoples was this: that the political systems of other countries had been created by introducing laws and institutions in accordance with the personal whims of specific individuals, such as Minos in Crete and Lycurgus in Sparta.

By contrast, our Roman Republic, did not come about as the result of the personal creation of a single man, but of many. It was not founded during the lifetime of a particular individual, but rather through a series of centuries and generations. Because never in the history of the world has there been a man intelligent enough to foresee everything, and even if we could combine all brains in the head of a single man it would be impossible for him to take everything into account at once without having accumulated the knowledge that comes from practical experience over a long period of time in history."

If today we replace the head of a single man with the supercomputer of the Federal Reserve, which contains all of the most advanced mathematical models, we can understand perfectly why they were bound to fail. These models use a caricature of human beings, they use an “ideal type,” a “penguin” type that only reacts mechanically to events, but that are not capable of modeling human beings as created by God, endowed with that innate creative capacity I referred to earlier.

And now we will see what influence these scholars have had in later times. Well, the truth is that these great professors taught many students who, in turn, ended up teaching in the recently created universities of the Americas.

Oreste Popescu published a book in which he approximates to some extent what we are doing here today but with the Spanish scholars who taught at San Marcos de Lima and at the University of Mexico, such as Juan de Matienzo and Bartolomé Frías de Albornoz.

That’s a whole treasure trove of great value that is still to be studied. And I must mention that there is a school, which, with great affection, has since its inception attempted to develop in our discipline and to study society using the methods and perspective initiated by our scholars: I am referring to the school called the Austrian School of Economics.

It is called the Austrian school because it is considered to have been founded by the hand of Carl Menger in 1871. But if we read the works of Menger we will see that he cites these scholars, concretely, for example, the book of Covarrubias Veterum Collatio Numismatum (Compilation on Vintage Currency), which studies the way the buying power of the maravedi currency evolves as a result of the impact of inflation during the previous century.

It’s a school founded in Vienna, Catholic in origin, which I am bent on renaming, so that it is no longer known as the Austrian school, but rather it is known by the name “the Spanish school” because that is the name that truly suits it, given who its founders were. And it is curious that Juan de Mariana, trying also to come up with practical solutions, asks: how can we help the government so it is not forced to create inflation to pay its debts? What can we do?

And Mariana proposes a very simple solution: dear Duque de Lerma, the solution is to balance the budget and, above all, and I quote: “for the Royal Family—that is the State—to spend less, because a moderate amount, spent in an orderly manner, looks better and reflects greater majesty than disorderly, superfluous spending.”

And he adds, in addition, for “our lord king to cut his favors, his gifts, his subsidies.” This is very clearly what is happening today with the welfare state, which seeks to subsidize everything: textbooks, family planning agencies and extravagances.

He says: “do not reward so generously the real or ostensible services of your subjects, granting them pensions for life—there is no kingdom in the world with so many public rewards, land grants, pensions, benefits and services as ours. By distributing them well and in an orderly manner, a savings could be achieved that would spare the royal treasury and other public funds.”

As we can see, the lack of control of public spending and the buying of political favors in exchange for subsidies, whether financed by taxes or not, have a very long history in our country and Mariana proposes that “the king avoid exempt companies and unnecessary wars.”

In sum, he advocates for austerity policies. And what is more relevant today than austerity policies? To some extent, in the current circumstances, Mariana would legitimize the policies of Ángela Merkel that favor austerity. He would also support the policies of the Tea Party, which opposes Obama on the basis that he is betraying the founding principles of the United States because he is increasing the power of Washington to such a great extent, to the detriment of the principles of the U.S. Constitution, which he is in fact betraying.

This is ultimately the message of the Tea Party, which is based on Jefferson, whose ideas, in turn, as we have already seen by his own admission, are also based on Father Juan de Mariana.

And I will conclude my presentation with a quote, from the great Jaime Balmes, another Spanish Thomist who died very young in 1844. This whole tradition, despite the dark legend, the influence of doctrinarian and theoretical imperialism of the classical English school, which results in the justification of Keynesianism, or the general equilibrium model in the representation of Walras, or in the theories of the Chicago monetarists (they are all first cousins and they all suffer from the same scientific errors).

But the flame stayed alive thanks to other thinkers, such as Jaime Balmes or others outside of our borders, such as Cantillon and Bastiat, and later the baton was taken up by Menger and his successors at the Austrian School of Economics of the second generation: Mises, Hayek; and the third: Rothbard, Kirzner; of the fourth or fifth, of which I am honored to be a leader in some sense, at least in our country.

But ultimately, as we have seen, we are all indebted to the thinking of these great scholars. Our great mission is to build on what they left us and bring about a complete revolution in economic sciences that stands it on its head and makes it into a truly useful tool for humanity. And that is the great challenge that I think we can say we have begun to assume today with this tribute to Diego de Covarrubias.

And I am going to conclude by reading the profile that Jaime Balmes wrote, in this case of Juan de Mariana, but I think it is equally applicable to all of the scholars and specifically to the great Diego de Covarrubias. Balmes says: Consummate theologian, perfect Latinist, expert in Greek and Oriental languages, brilliant man of letters, estimable economist, visionary politician; this is his head; add to that an irreproachable life, a severe morality, a heart that does not know duplicity, incapable of flattery, that beats with vitality at the mere mention of freedom, like the hearts of the fierce noblemen of Greece and Rome; a firm voice, intrepid, that speaks out against any manner of abuse, without preference for the elite, without trembling when addressing kings, and consider that all of these qualities were contained in one man who lived in a small cell of the Jesuits of Toledo, and you will certainly have a combination of qualities and circumstances that very rarely occur in a single person. Thank you very much.


(Spanish, English, Chinese) - The Values: 'You only have to read one book, "The History of Spain" by Father Juan de Mariana.' - Thomas Jefferson

Affective Introspection