A Time to Rebuild on Firmer Foundations III

Now that we have examined some of the teaching regarding wealth and its use, it is time to look at the practice of being in business. What does Catholic teaching say about the choice of being engaged in commerce, as distinguished from working in agriculture or being an artisan? Commerce is the work of buying and selling. Is such a choice licit?This question is addressed by Catholic thinking on two levels, the general and the individual. First, the question of whether trading and commerce is permissible at all as a profession must be addressed. Secondly, individual business transactions must be examined to see if they comport with justice. Before addressing these topics, I wish to make one caveat. I am not here addressing which institution is charged with enforcing the norms of the natural law regulating business. Thus, as we conclude that certain businesses or forms of transactions are illicit, it does not follow that the civil law must necessarily prohibit it. I ask you not to conclude that just because Catholic teaching prohibits a form of economic activity, that the government must regulate it. Natural law is enforced through in different fora. The internal forum, the confessional, is the proper locus for certain of the issues addressed. In other cases an external forum is more appropriate. Even if an external forum is appropriately designated to address a particular issue, there remains the question of whether a civil or church court is more suited to ruling on the matter. Do not make an unwarranted assumption about what the government should and should not prohibit. This is a second level inquiry governed by principles of political prudence. I am attempting to lay out the principles of economic justice.The process of buying goods to resell to others (trade) met with great biblical skepticism. Now I would guess that 90% of Americans have probably never even considered this possibility that trading in goods could be morally problematic. The American economy seems based on buying goods (from China) and reselling them to American consumers. As with the biblical skepticism regarding wealth, the bible does not state that being in commerce is ipso facto impermissible. It expresses skepticism; such a profession is dangerous. “A merchant shall hardly keep himself from doing wrong.... As a nail sticketh fast between the joinings of the stones; so doth sin stick close between buying and selling.” St. Ambrose echoes this biblical theme: “Why do you change the industry of nature into fraud? Why do you diminish the abundance for the people? Why do you produce scarcities? ... This you call industry; this you term diligence, which is the deceitfulness of craft, which is the cunningness of fraud.... This I call robbery and usury.... Your gain is the public’s loss!” He is not saying that all merchants are evil but that there appears to be a real near occasion of sin in that merchants easily succumb to these frauds and deceits. Aristotle shared this skepticism in his discussion of the proper political order. He argues that a merchant who regulates his profits by his needs was involved in natural and legitimate acquisition but “business” engaged in to amass wealth and not just satisfy needs was unnatural because it had no limits and was an “appetitus divitiarum infinitus [an infinite appetite of riches].” Since a desire for riches has no limit, one must be imposed from human reason. This is why Gratian recommends that those in a weakened spiritual state, penitents, refrain from engaging in business. It is dangerous and as penitents are still recovering from the effects of prior sin they should not put themselves in such a position of danger. Commerce may be a necessary occasion of sin (it is necessary to some extent to enable necessary exchange transactions) but it is still an occasion of sin.What precisely does a tradesman do? Given dangers identified by the authors under what circumstances can one choose such a path? The following passage from St. Thomas addresses both questions. “A tradesman is one whose business consists in the exchange of things. According to the Philosopher,[note]Polit. i, 3.[/note] exchange of things is twofold; one, natural  as it were, and necessary, whereby one commodity is exchanged for another, or money taken in exchange for a commodity, in order to satisfy the needs of life. Such like trading, properly speaking, does not belong to tradesmen, but rather to housekeepers or civil servants who have to provide the household or the state with the necessaries of life. The other kind of exchange is either that of money for money, or of any commodity for money, not on account of the necessities of life, but for profit, and this kind of exchange, properly speaking, regards tradesmen, according to the Philosopher.[note]Ibid.[/note] The former kind of exchange is commendable because it supplies a natural need: but the latter is justly deserving of blame, because, considered in itself, it satisfies the greed for gain, which knows no limit and tends to infinity. Hence trading, considered in itself, has a certain debasement attaching thereto, in so far as, by its very nature, it does not imply a virtuous or necessary end.... Nevertheless gain which is the end of trading, though not implying, by its nature, anything virtuous or necessary, does not, in itself, connote anything sinful or contrary to virtue: wherefore nothing prevents gain from being directed to some necessary or even virtuous end, and thus trading becomes lawful. Thus, for instance, a man may intend the moderate gain which he seeks to acquire by trading for the upkeep of his household, or for the assistance of the needy: or again, a man may take to trade for some public advantage, for instance, lest his country lack the necessaries of life, and seek gain, not as an end, but as payment for his labor.”We see that engaging in buying and selling to acquire the things necessary for oneself or one’s family (or household) does not make one a “tradesman.” One is not trying to profit from the activity but merely obtain needed goods. This former type of exchange is distinguishable from people who engage in trading solely for the purpose of profit. After expressing concern over such activity, he concludes it is morally neutral. It is not inherently virtuous but not intrinsically evil. Thus, the act of being in the business of trading for profit must be evaluated in light of the reason for seeking the profit. As Gratian explains, seeking profit merely for its own sake is disgraceful: “Everyone who in the time of harvest or grape gathering, not out of necessity but on account of greed, gathers together the year’s food harvest or wine, by a proverb of credit, he gathers together one peck for two denari (silver coins), and he continuously stores it up until it may be sold for four denari or six, or more, we call this disgraceful profit.” According to St. Thomas to be licit the intention of profiting from trade must be limited in two ways. First it must be oriented towards a proper good such as the support of one’s family or the poor or for the common good of the community. Secondly, the amount of profit sought must be moderated (subjected to a limit). One limit is that the profit must be proportional to the value added by the merchant to the goods transferred. Secondly, it must be moderated in proportion to the ultimate good for which use the profit is sought. John W. Baldwin provides an excellent overview of the way in Catholic writes used these concepts to work out a hierarchical system of evaluating different uses of commerce and concluding which were licit and which were not. He addresses the specific question when, if ever, is it licit to buy something for one price and sell it for a higher price:

First of all there is the case of one who buys goods for his own or household use with no intention of reselling these goods at a profit. At a later date, he discovers that he is forced through circumstances of necessity (necessaritas) or expediency (utilitas) to sell these goods...

The second category deals with the artisans and craftsmen and occurs when one buys goods cheap and then by changing or improving them, he is able to sell them at a higher price. The higher price for which he sells the goods is justified by both the expenses (impendium) and the labor (labor) he as an artisan has expended upon the goods in order to improve them. This type of business (negotiatio) is essentially honorable (honestus) and permitted always to the laity...

The final category of buying cheap to sell dear is exclusive of the first two. If one buys goods cheap with the sole motive of selling them later at a higher price for profit without having changed the form of the goods through added expenses or labor and without being compelled to do so by necessity or expediency, then that one is conducting a commercial enterprise (negotiatio) in the truest sense of the word. This pure merchandising, although permitted (licitus) to the laity was unconditionally forbidden to the clergy. To the laity it could be an honorable (honestus) or a shameful (turpis) affair. If no labor or expense were involved, for example if one made profits by observing the market and buying in times of plenty and selling in times of famine, the enterprise was immoral.... If, however, heavy expenditure had been made or if the merchant was fatigued by hard labor, then the enterprise was assessed as honorable, unless some other unworthy means intervened.

In considering these ideas, one contemporary issue comes to my mind, the pricing of fuel. What is Congress currently conducting hearings to investigate? What does almost every news agency report as a significant factor in the recent spectacular rise in gas prices? The answer is pure speculative trading of derivative instruments based on the price of gasoline. Fuel speculators are people who do nothing other than trying to buy today and sell tomorrow at a higher price. As what they buy is purely synthetic, they add no value to the product. They do not transport it; they do not store it; they do not refine it. They merely speculate to take advantage of price movements for a profit. As money has poured out of the mortgage markets (due to another crisis) and into the fuel futures markets, are we witnessing the fruits of this pure speculative trading?Now if one of the limits on legitimate trading activity is a moderation of profit, how does one define and quantify what is a moderate as opposed to excessive profit? William of Rennes explains: “Although business can scarcely be conducted without sin, merchants may receive a moderate profit from their wares for the maintenance of themselves and their families. Since they work for all and perform a kind of common business by transporting merchandise back and forth between fairs, they should not be held to pay their own wages. From the merchandise itself they can accept a moderate profit, which is regulated by the judgment of a good man, because the amount of profit permitted cannot be exactly determined in shillings, pounds, or pennies.” Note first that William places the same qualification on the definition of a legitimate merchant, he must actually add some value to the goods sold. As to determining the moderate profit he explains there is no generally applicable mathematical formula. He uses the concept of the “judgment of a good man.” This was a reference to a concept in Roman Law of referring a difficult factual determination to an experienced man who demonstrated expertise in applying right reason. In the context of a Catholic confessional state this reference can be understood as a reference to the confessional. The “judgment of a good man” is the advice of a well-informed confessor, one who possesses the grace of office to assist in discerning the proper moderation of profit in a particular case.Beyond fulfilling these general requirements for conducting legitimate commerce, moderating profit based upon the assessment of a confessor and having a worthy purpose for which profit is sought, each individual transaction of a merchant is also subject to a further moral principle, the just price doctrine. Even if being a merchant in general is being conducted in a Catholic manner, the Catholic merchant must make sure that individual sales are in and of themselves made on just terms.Just price theory is not solely a matter of divine law; it is part of the natural law as evidenced by the fact that even pagan Roman law recognized its existence, although imperfectly. Often Capitalist Catholics will seize upon the following two excerpt from Roman law to justify pure self-interest profit seeking: “Pomponius says that it is naturally permitted to parties to circumvent each other in the price of buying and selling.” and “In buying and selling natural law permits the one party to buy for less and the other to sell for more than the thing is worth:  thus each party is allowed to outwit the other.” Yet, merely looking at these passages ignores the restrictions placed by Roman law on charging more than a thing is worth. First, Roman law forbade the use of fraud (dolus) in the sale. All but the most extreme libertarian capitalists will accept this limitation. One cannot lie or deceive someone about the thing sold in order to charge more. But where libertarians part ways with Roman law is the limitation of lesio enormis. This doctrine provided for ex post facto correction of a sales price for certain non-fraudulent sales if the price were less than one half of the just price. So even the civil Roman law provided a legal remedy for one who sold something for significantly less than its just price notwithstanding the absence of fraudulent activity by the counterparty.Christianity, with its capacity to discern the natural law more clearly due to grace, perfected the Roman law theory by expanding its application. Grace perfects nature. St. Thomas explains: “It is altogether sinful to have recourse to deceit in order to sell a thing for more than its just price, because this is to deceive one's neighbor so as to injure him...” Here we meet the first aspect of Roman law, the prohibition of deceit or fraud in the sale. St. Thomas continues to explain the application of just price theory to non-fraudulent transactions: “But, apart from fraud, we may speak of buying and selling in two ways.... [First] Now whatever is established for the common advantage, should not be more of a burden to one party than to another, and consequently all contracts between them should observe equality of thing and thing.... Therefore if either the price exceed the quantity of the thing's worth, or, conversely, the thing exceed the price, there is no longer the equality of justice: and consequently, to sell a thing for more than its worth, or to buy it for less than its worth, is in itself unjust and unlawful. Secondly we may speak of buying and selling, considered as accidentally tending to the advantage of one party, and to the disadvantage of the other: for instance, when a man has great need of a certain thing, while another man will suffer if he be without it. On such a case the just price will depend not only on the thing sold, but on the loss which the sale brings on the seller. And thus it will be lawful to sell a thing for more than it is worth in itself, though the price paid be not more than it is worth to the owner.... Yet if the one man derive a great advantage by becoming possessed of the other man’s property, and the seller be not at a loss through being without that thing, the latter ought not to raise the price, because the advantage accruing to the buyer, is not due to the seller, but to a circumstance affecting the buyer. Now no man should sell what is not his, though he may charge for the loss he suffers. On the other hand if a man find that he derives great advantage from something he has bought, he may, of his own accord, pay the seller something over and above: and this pertains to his honesty.”St. Thomas explains that the purpose of exchange transactions is to mutually benefit both parties. They are exchanging things because each will benefit from the thing exchanged by the other. Since the intended purpose is mutual benefit, the burdens should be mutual and not disproportionate. It is unjust for one party to bear the cost of a mutually beneficial transaction. To sell something at a variation from the just price disproportionately burdens one party and is therefore unjust in itself. Although to achieve this equality it is just to compensate a counterparty for losses incurred in effecting the exchange, the converse is not true. It is not licit to exact a profit above the just price because the counterparty has a particular need for the item exchanged. So for example, if I find your deceased grandmother’s wedding ring in a pawn shop, I cannot charge you more than its just price since it is of greater value to you. The particular benefit you derive does not give rise to a corresponding  loss on my side. On the other hand if the sale places an economic burden beyond the just price, it is permitted to seek compensation. So if I have grain stored in another city and you are in great need of it, I can charge above the just price of the grain to the extent of the cost I incur in transporting the grain. Yet, I cannot add to this an amount because you are in great need of the grain. As St. Thomas says the seller can charge for his own expense but he cannot charge more because the buyer will receive a particular advantage due to circumstances independent of the seller. A seller who does so charge is selling something that is not his (the particular benefit the buyer derives). To return to the prior example, the seller of your grandmother’s ring does not own the particular advantage derived from the ring (which belongs to the buyer) but only the ring itself. The seller can thus only legitimately charge for the value of the ring. Now people who derive special advantages from sales are free to give a gift out of gratitude. But a freely given gift is different from a demand of the seller.Now we might wonder what if we unintentionally sell something for more than it is worth. So we are selling a car that has a just price of $10,000 if it functions to the same level of other cars of the same make and model. This car, however, has a hidden defect, not known to buyer or seller. If the buyer later discovers the defect, does the seller have to repay a portion of the price attributable to the impairment of value? A standard libertarian answer would be only if the buyer negotiated for such a right. St. Thomas answers otherwise. Although one may not be culpable for unwittingly selling something at an unjust price (due to the defect), once the defect is discovered, the seller is obligated to compensate for the defect: “But if any of the foregoing defects be in the thing sold, and he knows nothing about this, the seller does not sin, because he does that which is unjust materially, nor is his deed unjust, as shown above (59, 2). Nevertheless he is bound to compensate the buyer, when the defect comes to his knowledge. Moreover what has been said of the seller applies equally to the buyer. For sometimes it happens that the seller thinks his goods to be specifically of lower value, as when a man sells gold instead of copper, and then if the buyer be aware of this, he buys it unjustly and is bound to restitution...“So far we have not addressed the definition of the just price. It is held to be the common estimation of the good. There is much to be said on this topic but for our purpose it means that price which represents the amount of human need supplied by the good in common (i.e. without taking into account any particular benefit to a particular person as discussed above.). Again more could be said on how one discovers this common estimation but in the interests of time we will have to leave this detail unexplored.Now once a violation of the just price has occurred and been discovered, what is to be done? As in many other cases, the Catholic answer is a nuanced one. Catholic teaching does not require, for example, the government to establish all prices (although it does not prohibit some public establishment of certain prices when doing so is for the common good). Thus, it would be a distortion of Catholic teaching to equate it with a communist system of complete government regulation of prices. Interestingly, capitalistic philosophy demands the complete opposite: no civil law involvement in correcting unjust prices. As opposed to both such utopian solutions which seek binary permission or prohibition by the civil law, the Catholic approach proposes a hierarchy of differing responses.If the violation of the just price is within one half of the just price (the Roman law concept of lesio enormis but expand to a one half variation up or down) a public court (sometimes civil and sometimes ecclesiastical) should remedy the variation. If, however, the variation is within this 50% of the just price band, it is to be the subject of determination by a good man (ad abitrium boni viri) or the priest in the internal forum of the confessional. The limitation of public correction of injustice to lessio enormis is not a compromise of the moral position but is fully consistent with the Catholic understanding of the limitations of human laws which for a just society must be supplemented by the operation of natural and divine law. As St. Thomas explains: “Hence human law was unable to forbid all that is contrary to virtue; and it suffices for it to prohibit whatever is destructive of human intercourse, while it treats other matters as though they were lawful, not by approving of them, but by not punishing them. Accordingly, if without employing deceit the seller disposes of his goods for more than their worth, or the buyer obtain them for less than their worth, the law [i.e. human law] looks upon this as licit, and provides no punishment for so doing, unless the excess be too great, because then even human law demands restitution to be made, for instance if a man be deceived in regard to more than half the amount of the just price of a thing[note]Cod. IV, xliv, De Rescind. Vend. 2,8.[/note]...On the other hand the Divine law leaves nothing unpunished that is contrary to virtue. Hence, according to the Divine law, it is reckoned unlawful if the equality of justice be not observed in buying and selling: and he who has received more than he ought must make compensation to him that has suffered loss, if the loss be considerable. I add this condition, because the just price of things is not fixed with mathematical precision, but depends on a kind of estimate, so that a slight addition or subtraction would not seem to destroy the equality of justice.”Thus, violation of the just price is always a violation of natural law and subject to punishment by divine justice. The civil law should in prudence select a point which will reflect a clear and certain violation of just price and subject it to public civil correction. Roman law drew this line at 50% of the just price. The exact location of this line is not dictated by Catholic teaching but is left to be determined by the legitimate rules of civil society. Thus, we can discuss in good faith where the appropriate point is to demarcate the limits of civil jurisdiction over this issue, but Catholic teaching is clear we cannot claim that there is no line or that anything beyond the limit of civil correction is permissible. For as St. Thomas said divine justice leaves no violation unpunished.I cannot help but contemplate unfolding economic events in the US and around the world as I ponder this warning of St. Thomas. We cannot escape the effects of violation of the natural law forever. Even if the civil law abdicates its responsibility with respect to just price, that does not mean we as a society can escape the natural consequences. What do we see around us? We see an economy that is grinding to a halt. We see a financial and monetary system that is paralyzed. St. Thomas warned of these consequences of violating natural economic justice when he said: “Without just exchange, no exchange will happen and it [exchange] is needed for society.” In a similar vein he predicts: “In a city that ignores commutative justice people will become slaves—that is one who is not justly rewarded for his work.” What individuals do in their “private” transactions affects society as a whole. We cannot systemically ignore and violate just price law and expect no economic consequences.As a final note in this section we need to note that Catholic teaching perfected Roman law recognition of just price in another way. As Leo XIII noted in Rerum Novarum it applies not only to goods but also the fixing of wages for labor. This was not a new idea of Leo XIII. He was merely drawing on Catholic Tradition. Again, St. Thomas exemplifies the understanding: “Merit and reward refer to the same, for a reward means something given anyone in return for work or toil, as a price for it. Hence, as it is an act of justice to give a just price for anything received from another, so also is it an act of justice to make a return for work or toil.” Now, in order to anticipate unfair objections, St. Thomas is not saying that the answer is some universally government determined minimum wage. But on the other hand, the justice of wages not something merely left to the bargaining of parties. The test is the value of the work done in and of itself, not the need of the worker for wages. To pay less than a just wage is equivalent to buying a good for less than the just price.

Usury

Now Catholic economic teaching is utterly incomplete without discussing the topic of usury. I have decided, perhaps wrongly, to omit a detailed consideration of this topic in this article. The reason is that it is such a large and important topic that an incomplete consideration would be more dangerous than none altogether. Please do not interpret my decision to omit it as a comment on its level of importance. I think usury theory holds the key to understanding many of the economic time bombs exploding around us. Yet to do justice to this topic would have required an article of equal length to the present article. I wish therefore to incorporate into the present discussion my recently published Cardozo Law Review article “Unprofitable Lending: Modern Credit Regulation and the Lost Theory of Usury.”All I will therefore do is quote for you the definitive summary of the nuanced first principles of usury theory as articulated by Pope Benedict XIV:

I. The nature of the sin called usury has its proper place and origin in a loan contract. This financial contract between consenting parties demands, by its very nature, that one return to another only as much as he has received. The sin rests on the fact that sometimes the creditor desires more than he has given. Therefore he contends some gain is owed him beyond that which he loaned, but any gain which exceeds the amount he gave is illicit and usurious.

. . .

III. By these remarks, however, We do not deny that at times together with the loan contract certain other titles-which are not at all intrinsic to the contract-may run parallel with it. From these other titles, entirely just and legitimate reasons arise to demand something over and above the amount due on the contract. Nor is it denied that it is very often possible for someone, by means of contracts differing entirely from loans, to spend and invest money legitimately either to provide oneself with an annual income or to engage in legitimate trade and business. From these types of contracts honest gain may be made.

IV. There are many different contracts of this kind. In these contracts, if equality is not maintained, whatever is received over and above what is fair is a real injustice. Even though it may not fall under the precise rubric of usury (since all reciprocity, both open and hidden, is absent), restitution is obligated. Thus if everything is done correctly and weighed in the scales of justice, these same legitimate contracts suffice to provide a standard and a principle for engaging in commerce and fruitful business for the common good...

V. But you must diligently consider this, that some will falsely and rashly persuade themselves-and such people can be found anywhere-that together with loan contracts there are other legitimate titles or, excepting loan contracts, they might convince themselves that other just contracts exist, for which it is permissible to receive a moderate amount of interest. Should any one think like this, he will oppose not only the judgment of the Catholic Church on usury, but also common human sense and natural reason. Everyone knows that man is obliged in many instances to help his fellows with a simple, plain loan.

Christ Himself teaches this: "Do not refuse to lend to him who asks you." In many circumstances, no other true and just contract may be possible except for a loan. Whoever therefore wishes to follow his conscience must first diligently inquire if, along with the loan, another category exists by means of which the gain he seeks may be lawfully attained.

My only two brief comments are that usury is a serious problem in the structure of our entire financial and monetary system and it is a serious component of natural and divine law. I will also just briefly respond to those who claim Catholic usury teaching would destroy business and bring production to a standstill. Lending at usury is different from investing in production. As Henry Somerville commented: “Now the Canonists never quarreled with payments for the use of capital, they raised no objection to true profit, the reward of risk, ability and enterprise, but they disputed the identification of the lending of money with the investment of capital and denied the justice of interest  as a reward for saving without investment.... The canonists’ principle was that sharing in trade risks made an investor a partner, a co-owner of capital, not simply a money lender, and gave a title to profit.”

Conclusion

With a topic so vast it is difficult to construct a conclusion. I thought it might be useful to use what we have examined from our Catholic Tradition to contrast several general principles of economic life advocated by the dominant culture with Catholic ones.

Whereas the secular world teaches that generation of wealth for its own sake is a good, the Church teaches that wealth must not be an end in and of itself but ordered towards another good.Whereas the secular world teaches that morality has no place in economics, the Church has always seen economics as involving moral questions.Whereas the secular world teaches that improving one’s economic station in life is always a good (the American Dream), the Church teaches that it is only a good if moderated in accordance with one’s station in life and if ordered to a higher purpose.Whereas the secular world teaches that almsgiving is optional; it may be praiseworthy for those who do it but it is a mere choice, the Church teaches that in certain cases it is an obligation of justice.Whereas the secular world exalts freedom of contract over substantive justice (with a possible exception for intentional fraud), the Church teaches it is unjust to sell a thing for more or less than the just price or pay a laborer more or less than a just wage.Whereas the secular world teaches, that private property means I can do what I want with my property, the Church teaches that God is the true owner of all property and our acquisition of property is subject to the rules laid down by Him and transmitted through His Church, which rules limit our use of property.Whereas the world teaches that prices of goods and services should be set at whatever individuals will pay as long as there is no fraud in the transaction, the Church reiterates God’s requirement of just price.Whereas the world teaches there is nothing wrong with profiting from pure speculation (buying cheap and selling dear), the Church teaches this is unjust profit.Whereas the world teaches there is no problem with usury, the Church teaches it is unjust.

Clearly these statements come from two different worlds. This is not a surprise. As St. Augustine observed over a millennium and a half ago, we see at work in the world two cities, the city of God and the city of Man. Which type of world, and economy do we wish to live in? For me and mine, I say the City of God. A half-breed City of God in private life and a City of Man in business is a house divided. Let us work together to restore all things in Christ, not just private life or marital issues, not just politics, but our entire society. When we turn once again, not to our own opinions, but the ancient and continuous intellectual tradition of Catholicism through the ages we will have the building blocks of a just Catholic social order.