Fifteen years after the Global Financial Crisis: Recessions and Business Cycles in the History of Economic Thought

Thomas Aquinas on production and its financing

Pierre Januard, PHARE Université Paris 1 Panthéon-Sorbonne

Thomas Aquinas (c. 1225-1274) was the first of the Mediaeval scholars to think of economic activity as a whole through the notion of voluntary exchange and the activities that are related to this exchange. Production and its financing are thus addressed within the framework of the necessity and justice of exchange. Production appears through the issue of supply, since Thomas favours local production over the arrival of foreign merchants. The first way of financing production is payment by the buyer of the good. It is therefore a matter of knowing what expenses can be included in the selling price. Thomas mentions the three cases in which price increases are licit: the improvement of the good, the variation in prices, and the expenses and risks of transport. The merchant’s service and that of the craftsman are therefore taken into consideration and the just price that allows the exchange to take place must cover the costs of production “in labour and in expenses”. To provide ex ante financing for manufacturing and trading activities, Thomas emphasises the societas model, where the investor shares the risk of the merchant or artisan and can therefore claim a share of the gain and bear a share of the loss. This financing is possible because the remuneration is licit since one shares in the risk and remains the owner of the sum invested. Conversely, interest-bearing loans are forbidden because, in the medieval conception, the lender is no longer the owner of the sum and the risk is borne solely by the borrower. The lender cannot therefore receive any remuneration that would encourage him to finance production. It should even be added that Thomas is more severe towards borrowing for production, which makes the merchant who borrows freely to develop his activity complicit in usury, than towards borrowing for consumption, where the borrower generally acts out of necessity. Moreover, while Thomas allows for some extrinsic titles, which may provide for some remuneration of the lender, the titles allowed by Thomas appear to be more like compensation to non-professional lenders, for transactions that probably fall under consumer lending. The need to finance production led to the development of other substitutes for loans in the 13th century. Although Thomas briefly mentions the census, we see that the bill of exchange and the combination of exchange and loan are only dealt with by Giles of Lessines, a disciple of Thomas, at the end of the century. Finally, it was not until the Franciscans of the 14th century, such as Peter John Olivi and above all Gerald Odonis, that production lending was justified by a new economic understanding of lending and interest, and prefigured the later developments that would be found, for example, in Turgot’s works three centuries later.

Area: Eshet Conference

Keywords: Aquinas, production, loan, price, scholastics

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