According to modern propaganda, ‘economic thought’ as a discipline, arose only in the 18^th century through the work of men such as Adam Smith, or David Ricardo.  The ‘Enlightenment’, so goes the myth, generated ideas about ‘free markets’, individual pursuit of ‘liberty’ and economic exchange, and somewhat complex ideas about economics worked at the regional, national and international levels.  Without such ‘genius’ and ‘innovation’ modern ‘economics’ would never have been birthed.  So goes the fable.

Joseph Schumpeter, an economic historian of the last century, wrote a ‘History of Economic Analysis’ in 1954.  In this book he pays homage to the medieval Scholastics who created almost all of what is later found in the ‘Enlightenment’ on economic theory.

“It is they (the scholastics or schoolmen), who come nearer than does any other group to having been the founders of scientific economics.”

There is nothing much ‘scientific’ about economics.  Gross Domestic Product, developed by Kuznets in the 1930s and used today to gauge economic strength or vitality is a poor metric to assess a country’s economic output.  GDP is just a spending algorithm, with public spending and state spending included which in essence is a false accounting, since state expenditure is either tax or debt.  So much for ‘scientific economics’.

Schumpeter’s assessment is joined by other economic historians including Murray Rothbard, who in his celebrated books, stated that the schoolmen were brilliant social thinkers and economic analysts.  The economic concepts of the schoolmen reached their conclusion in the ‘Austrian’ school of economics, dedicated to free market and libertarian ideals – the very opposite of what the Church is often accused of supporting.  The Austrian school includes Carl Menger, Eugen von Bohm-Bawerk, Ludwig von Mises and F.A. Hayek who won a Nobel in economics in 1974.

The foundations of ‘modern’ economic analysis can be traced back to the 13^th - 14^th centuries.  Jean Buridan (1300-1358), as Rector of the University of Paris, made very important contributions to the understanding of money and inflation.  It was Buridan and those before him who first described money as a medium of exchange, a market-driven necessity, and not a state-produced product.  Voluntary exchange and not government interdicts were the foundation of monetary value.  The scholastics first described money as portable, divisible, durable with a defined value per unit weight that could not be debased. 

Nicholas Oresme (1325-1382), a student of Buridan’s, is called the founding father of monetary economics, outlining a comprehensive regime of money creation and management in his, ‘A Treatise on the Origin, Nature, Law and Alterations of money’.  This book is the most comprehensive approach to monetary analysis until the 19^th century.  It contains for example what is now called, ‘Gresham’s law’, which is the fixed value ratio between 2 units (gold, silver), or 2 currencies.  If the government artificially undervalues one unit over time against the other, it will disappear from circulation.  An example would be that if initially 15 silver units were equal to 1 gold unit, but this was changed to 10, the market would naturally stop using gold and use instead the now artificially created higher value of silver. Thus, the destructive effects of inflation were well known by the 13^th and 14^th centuries. 

Spanish scholastics and theologians were well acquainted with the reality of high inflation.  The quantity theory of money was formed by Martin de Azpilcueta (1493-1586), who wrote a history of the inflationary effects of American gold and silver on the Spanish economy, a key factor which led to Spain’s decline as an economic and military power, “Thus we see by experience that in France, where money is scarcer than in Spain, bread, wine, cloth, and labour are worth much less.”

Cardinal Cajetan (1468-1534) in 1499 wrote ‘De Cambiis’ or ‘On Exchange’, which vindicated the foreign exchange market from a moral standpoint.  He also wrote that the current value of money is affected by its perceived future value and the predictions of future market strength.  War, poor harvests, a looming state bankruptcy, extravagant public spending, rumours of large tax increases, an expanding or declining empire, disease, government competence or incompetence, a succession crisis, all these and many more would affect the currency’s value.  This is now termed ‘economic expectations theory’.

Subjective value economics was also developed by the Church.  This concept states that the real value of money is based on perception as much as real value.  Also confidence plays an important role.  Pierre Olivi (1248-1298) proposed a value theory based on subjective utility.  He and others in the 13^th century argued that the value of a good is derived from the subjective analysis of its utility or desirability.  A pearl for example has a much greater perceived value than the utilitarian, practical working horse, due only to desirability and perception.  Further elaboration of these ideas was developed by San Bernardino of Siena, a notable economic thinker in the 15^th century and Cardinal Juan de Lugo (1583-1660), in the 17^th. 

Subjective value is an extremely important economic insight.  It is not found in Smith’s works, where he attributes a good’s value to its labour content.  This theme was picked up by Marx to elaborate his apocryphal analysis of economic Communism.  The value theory of economics is the right approach to understand a unit’s value, not the labour theory of exchange.  Smith and Marx have everything backwards.  A good does not derive its value from the labour cost, but the labour expended on the good, derives its value from the customer’s valuation of the final product.  Hence the pearl and horse analogy.

Alejandra Chafuen in, ‘Faith and Liberty: The Economic Thought of the Late Scholastics’ (2003), meticulously proves that the scholastics and medieval thinkers developed the ideas around free markets, free exchange, goods valuation, monetary policy, inflation and currency values.  From prices and wages to money and value theory, the Scholastics anticipated all of the ‘Enlightenments’ propositions.  Such Catholic innovations are well known to many scholars, but are deliberately kept out of the media, educational systems and textbooks.