THE MYSTERIES OF THE MARKET: Keywords: Just prices, distributive justice, social justice, American communism, Mamdani, market ethics, currency debasement, seigniorage, justice, good intentions and the economy, Say's Law, barter and money, greed and profits.

“True thinkers are characterized by

 a blending of clearness and mystery.”

 Victor Hugo

Prices and Value: Two enigmatic concepts in economics

We don't know what they are, but we use regardless of our ignorance

VII

THE MYSTERIES OF THE MARKET

 A meditation about forgotten lessons of American Exceptionalism

By Xuan Quen Santos 

THE SEVENTH MISTERY 

THE MYSTERIOUS JUST PRICES

 

                PRICES, COST AND VALUE

                Three basic concepts in economics have remained mysterious enough that for thousands of years they invited many discussions but produced little agreement. Even today, there are still marginal controversies about their origin and meaning. In English, these concepts or ideas are represented by these three words: prices, cost and value. It is evident they are closely related, a fact that needs no further explanation. They are commonly confused and in common language they are often used as synonymous. They are not, but the details that separate them had been obscured by the previously unveiled mysteries.

                Prices are directly related to the appearance of money in any of its forms because money units are used to describe in numbers a trading “measure” for goods or services offered and exchanged in the market. From this axiom, and our unveiling of the first two mysteries, and the many mysteries of money, we can understand why the first efforts to define what prices are only created more confusion for many centuries.

                THE SOURCE OF CONFUSION

                Because prices are tied to money, their appearance dates to the same epoch. Because precious metals and money had been thought since then to be associated to the functions of government, prices began to be studied as related to the political system. They only began to be understood when the economic system was identified as different and separate after the XVII century when the first mystery was unveiled. The economic system is separate and different from the political system.

             The second mystery of the possible existence of human institutions that are not of human design and described with the description of “spontaneous” was first used by John Bramhall the Archbishop of Armagh, Ireland.  He was involved in a written polemic with Thomas Hobbes about his treatise on the nature of government titled “Leviathan” (1651). Hobbes has been pointed as the origin of the idea that the organization of political societies begins with a “social contract”, thus starting in a specific and explicit act resulting from human design. Bramhall’s intuition about a higher power was developed later by Locke in his recognition of “natural rights” that were not the result of human decisions or gracious concessions of the rulers. The only interest in those discussions was still limited to topics related to government.

          Once the idea that the political order and the economic order are not the same, but are interrelated, invitation to further inquiry was open. The philosophers of the XVIII century Scottish Enlightenment Hutcheson, Ferguson, Hume, and Smith explored further the “spontaneous orders”. Adam Smith made the breakthrough in 1776 by questioning the role of government in managing the economic affairs of the people and identifying the mysterious division of labor, the characteristics of voluntary transactions and their consequences, how laborers improve their productivity by improving their tools and machines, and the benefits of free trade, among many new insights into what he called “political economy”. Economics was born, but the matter of prices remained obscure.

Aristotle of Stagira
The most influential ancient philosopher

                TWO MILLENIA OF ARISTOTELIAN ERROR

              Adam Smith’s discussion about prices is illustrated by this well-known paragraph. “The things which have the greatest value in use have frequently little or no value in exchange; and on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce any thing; scarce any thing can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.” (“The Wealth of Nations…”, 1776, Book I, Chapter IV). Smith was just expounding what had become the accepted way of referring to prices as “value in exchange” since Aristotle used them 2,000 years before. He also took for granted that labor is the initial force that starts the transformational process of production that ends up for sale in the market. Labor was assumed to be the “cost” related to value. These two rabbitholes led many scholars astray. But, Smith did point to usefulness and scarcity as a factors, but did not connect them. It would take another century of discussions to formulate a theory that clarifies the relationship and functions of value, prices and cost.           

                What little Aristotle wrote on these subjects is in between the lines in his Book I, chapter 3 of “Politics”. He added other ideas years later in Book V, chapter 5 of “Ethics”. He was looking into the way trades occur in the market for some formula to abandon the ideas of justice in revenge or retaliation, known as the ancient “talion law”. Aristotle looked at what we now call "price" which appears at the end of the agreement to exchange between buyer and seller; the price in any contract. The necessary equality or equation, in view for all to see, hides the true explanation about the unequal valuation that previously happens in the minds of those who exchange. Why would they trade if they did not see in the trade a benefit? His interest was on the ethical considerations of trading and just deals.

                Centuries later, the Christian church turned everything Aristotle had proposed into a nearly indisputable truth, at the level of religious dogma. The focus was on “value in exchange”, referring to market agreements that are commonly referred to as prices. There was no theory about the “value in use”, what we now refer to as value. With few exceptions, the analysis was on “how just” the transactions were. The first explanations about prices, not theories yet, were born within the field of ethics without understanding value first or how the market’s autonomy functions.

St. Thomas Aquinas, the most influential Christian Theologian
and translator of Aristotle's writings

                DISTRIBUTIVE JUSTICE AND THE JUST PRICE

                These doctrines were born with Aristotle and influenced great thinkers, such as Saint Albert the Great and Saint Thomas Aquinas. It continued to be studied by the Scholastics for many centuries who slowly introduced more analysis. The initial errors were compounded by insisting on the idea of determining the “just price” and their support for price fixing by the authorities. Most of their comments were guidance to the royal court’s decisions. The discussion was also mixed with another more ancient topic known as “distributive justice”.

                Think of how the rules of the ancient tribal hunt distributed the cuts of the carcass: the hunter gets the trophy and choice pieces, the rest is distributed to the participating hunters and their families. In more organized tribal groups, after the hunter’s choice, the rest is distributed according to the status or hierarchy, that obviously begins with the chieftain and the shaman.

                Discussions about distributive justice appear again when the spoils of war are given as rewards to victorious armies. The commander usually gets to choose his part, up to half of the loot, which he shares with the highest ranks. Different armies had set rules for the rest. Looting was a right of the soldiers and served as a way to pay the conscripts. The rules served to maintain order and ensure that the spoils of war were distributed fairly. Looting during war was only declared a crime in the XX century.

                The feudal systems headed by a monarch that has power over all land and wealth, follow the same pattern of rules for distribution. Hierarchy and rules became the institutions of the political order. Historians have called it the “ancien regime”. The European feudal system of the Middle Ages was an offshoot of the hierarchy of the Roman Army where it had established colonies as rewards to discharged and furlowed armies. The centurions became the counts. The Kings with their concentration of power over armies and owners of the land, distributed the wealth of the realm at their pleasure, including people, towns, cattle and titles of nobility with many ranks. The duties to maintain military readiness to support the king’a armies was implied. Without any connection and at different times, the feudal systems of Cathay (China) and Cipango (Japan) followed similar patterns. The distribution of power and wealth is from the top down.

                It was inevitable that the roles of distributing wealth and power assumed by kings, at the same time they minted and controlled money, were transferred to the economic system. All those that point to the market as unfair because prices are high, or salaries low, or that it creates a “wealth gap” and ask the government to do something; and those that demand price controls, or minimum wages, or minimum guaranteed income, or to reduce income inequality are still fixated in the primitive notion of “distributive justice” believing that there is some form of distribution of wealth in the market that needs to be fixed.

                Distributive justice was the background of the early discussions that cast a thick fog over the early markets and prevented understanding its autonomous rules. It was just another consequence of the ancient takeover of the economic system by the political system that could be described in these terms: The ruler takes from everyone what he can, and gives to some what he wishes. Notice that the emphasis is in taking and distributing. There is no mention of the fundamental economic function which is production. Production allows consuming and exchanging, which is the base of the market. In today’s terms it is generally referred to as “the supply of goods and services” the key axiom of “supply-side” economics. This is identified now as “Say’s Law”, or “The Fundamental Law of Markets”.

                THE ZOMBIE OF ECONOMIC HISTORY

                This flaw is clearly reflected in what is lauded by its proponents as the modern and scientific ideal of distributive justice or social justice because it manifests the principle of “equitable distribution” of goods and services. Their slogan is self-explanatory, "From each according to his ability, to each according to his needs". The phrase was popularized by Karl Marx in  the “Critique of the Gotha Programme” (1875). It is supposed to describe the paradise of a communist society, where everyone must contribute based on their abilities in order to receive the goods and services they need, as determined by the government. Notice again, the emphasis is in taking and distributing with some made-up notion of justice as excuse. No interest is shown in stimulating production, the supply of what is supposed to be distributed. This explains without much theoretical jargon the abject failure of all the socialist ideas regardless of the label they are using to mask their identity. They distribute until there is no more to take.

Marxism, a return to the most primitive and arbitrary
idea of economic justice: distributing other people's property

                The ancient fusion of the political system over the economic system narrowed the focus on the mysteries of value, prices and cost to political considerations supported by convenient arguments that reinforced the power of the rulers. These ideas are still preached as doctrines under the label of “social justice”.

Distributive Justice or Social Justice negate any notion of justice in market economics.
In the market, everyone gets the value of what he has given others

                The critical and indisputable contributions to economic thought by the Scholastics of Salamanca in the fifteenth and sixteenth centuries are now hidden. All of them were priests, doctors of the church, missionaries and professors of theology at the once famous medieval university. The initial promoter was undoubtedly one of the main jurists of the Renaissance, Francisco de Vitoria. His criticism of the power of monarchs that had justified the conquest of the New World in Aristotle's idea of a "just war" opened the door to what we now call "equal rights" and "human rights." Martín de Azpilcueta and Tomás de Mercado number among his followers. They identified the justice -fairness- of the market price, which they called “precio de la plaza”, or the price of “common estimation” that appears in all markets. Those prices fluctuate depending on the needs, quantities and circumstances.

                It is only during the last two centuries their innovative and valuable contributions to economic thought have been recognized. They remain mostly inaccessible in books written in Latin such as one called “Handbook for Confessors and Penitents”, hidden in ancient library museums. They wrote in a time time when all universities in Europe still taught in Latin, and teachers and students traveled far and wide. Their ideas spread little by little. No one was studying or teaching economics. They were training missionaries and searching for justice.

After the Renaissance, the new world vision became an opportunity for world trading

                   THE ANSWERS ARE IN THE MARKET

                The search for the just price and a fair distribution of the wealth available continued looking for answers in the wrong place. The political system does not produce wealth, and it is a cost, a burden, that is paid by the economic system with the expectation of specific services. Any system of distributing what is produced requires an increase in the burden of government. Nevertheless, the Late Scholastics’ intuition that the answers were to be found in the activities of the market, in the exchanges made between sellers and buyers animated by competition, was a recognition of the autonomy of the economic system. A better understanding of prices was initiated, but no advances were made to explain the value of goods and services.