Progress pill
The origins of freedom: the Middle Ages

The First Sketches of Capitalism

A Philosophical History of Freedom

The First Sketches of Capitalism

  • The Rise of Italian Cities
  • The issue of interest-bearing loans
  • A Critique of Monetary Manipulations
We have seen that Christianity imposes a moral duty on people to work towards improving the world. God wants man to be happy, but does not want to achieve his good in his place. It is therefore up to the Christian to fight moral evil, to love their neighbor, to help the victims, in short, to work for a more just and humane world. Is capitalism, that is, the free economy based on private property and the freedom of contracts, compatible with the Christian duty?
Part of the answer lies in the fact that capitalism originated in a religious context, well before the Protestant Reformation. The other part of the answer involves observing that capitalism is the most effective means of improving the material and moral condition of individuals. Only a free economy, based on property rights and voluntary cooperation, is capable of sustainably lifting people out of misery.
Let's focus on the first point. The second point will be addressed in the following section.

The Rise of Italian Cities

Henri Pirenne, a Belgian historian of the early 20th century, devoted part of his work to analyzing the emergence of capitalism in Europe. In his book History of Europe, he states:
All the essential features of capitalism — individual enterprise, the progress of credit, commercial profits, speculation, etc. — already existed from the 12th century in the Italian city-states, Venice, Genoa, or Florence.
According to Pirenne, these trading cities, thanks to their commercial dynamism and strategic position on maritime routes, had developed economic practices characteristic of nascent capitalism. He notably highlights:
  • The rise of individual enterprise: Italian merchants, often from wealthy families, invested their funds in distant commercial expeditions, thus assuming the risks and expecting substantial profits.
  • The expansion of credit: The development of international trade stimulated the use of various credit instruments, such as bills of exchange and banking operations, which allowed for the financing of transactions and facilitated capital movements.
  • The pursuit of profit: The primary motivation of Italian merchants was the pursuit of commercial profits. They engaged in risky ventures, hoping to maximize their gains by trading valuable products in distant markets.
  • The emergence of speculation: The uncertainty inherent in maritime voyages and price fluctuations gave rise to speculative practices, where merchants bet on the evolution of commodity prices.
Pirenne observes that these practices, although present in other regions of Europe, experienced a particularly early and intense development in the Italian city-states. He attributes this phenomenon to several factors, including the rise of maritime trade, the influence of the Crusades, the weakening of feudal structures, and the innovative spirit characteristic of these trading cities.

The issue of interest-bearing loans

The Scriptures condemn interest-bearing loans, known as usury, considering that lending money at interest amounts to exploiting vulnerable borrowers. However, in practice, the Church turned a blind eye to the issue.
Jacques Le Goff is a French historian specializing in the culture and mentalities of the Middle Ages. Following Pirenne, he recognizes the presence of capitalism's seeds as early as the Middle Ages, notably in Italian cities, where practices such as individual enterprise, the pursuit of profit, and the use of credit instruments were already present.
Or Le Goff highlights in L'usure au Moyen Âge (1967, republished in 1986 under the title: La bourse et la vie; économie et religion au moyen-age) that as early as the 13th century, Saint Albert the Great had theorized the notion of "legitimate interest" which was further developed by Saint Thomas Aquinas after him. Despite religious prohibitions, the practice of lending existed and met real economic needs. Long before Adam Smith, they understood that interest on loans was not usury but a means to compensate the lender for risk and the borrower for investment, which are at the foundation of capitalism.
However, according to the French historian, the rise of capitalism must be placed in a broader context of economic, social, and cultural transformations that unfolded over several centuries. Le Goff notably emphasizes the importance of the Commercial Revolution of the 15th and 16th centuries, characterized by the expansion of maritime trade and the discovery of new trade routes, which stimulated the accumulation of capital and the predominance of market logic.

A Critique of Monetary Manipulations

The systematic study of economic laws began in the High Middle Ages. The first economists are the scholastic theologians of the School of Paris. The first among them to write a scientific treatise entirely devoted to an economic subject is Nicolas Oresme (1325-1382). Around 1360, he composed his Treatise on the Origin, Nature, Law, and Alterations of Money, which summarizes and develops the ideas of the scholastics of his time.
At the heart of his monetary analysis lies the problem of "mutations" of money, that is, alterations in the metallic content of coins and their denomination. These alterations have occurred since the dawn of time and are well documented for Antiquity and the Middle Ages. Their most visible effect is to change the purchasing power of the monetary unit, especially to decrease it. This is a primitive form of inflation that Oresme clearly condemns as an evil.
Oresme immediately raises a central question: Is inflation beneficial for the community? He answers in the negative, arguing that inflation does not make money any more or less useful for exchanges. The economy can function well regardless of the price level, and thus, irrespective of the nominal money supply. But if that is the case, another question obviously arises: why do alterations of currency exist? And in particular, why seek to increase the money supply? Oresme responds that these alterations do not have the same consequences for different members of the community. They benefit certain people at the expense of others. The winners of currency alterations have a material interest in implementing them. Generally, these winners are the men in power. Oresme writes:
The primary and ultimate reason why the prince wants to seize the power to change currencies is the gain or profit he can derive from it, for otherwise, it is without reason that he would make so many and such considerable mutations.
Then he adds these details:
Whatever gain the prince derives from it, it is necessarily at the expense of the community. Now, whatever a prince does at the cost of the community is an injustice and the act, not of a king, but of a tyrant, as Aristotle says (...) If the prince can rightfully make a simple change in the currency and derive some gain from it, he can, for a similar reason, make a greater change and derive more gain (...) Thus, the prince could eventually attract to himself almost all the money or wealth of his subjects and reduce them to servitude, which would be to fully prove tyranny and even a true and perfect tyranny, as it emerges from the philosophers and the stories of the ancients.
Oresme emphasizes that currency alterations are not simply a game of redistribution in favor of power at the expense of the rest of the community. They lead to overall losses — the game is a negative-sum game. A currency that is frequently altered disrupts trade and invites counterfeiters to take advantage of the general confusion.
Moreover, if two different currencies benefit from legal tender, agents will hoard the one that is worth more, so that only the inferior currency remains in circulation. (Oresme here anticipates the famous "Gresham's law": bad money drives out good in a legal tender regime.) He concludes that currency manipulations are worse than usury and that, probably, they were a significant cause of the decline of the Roman Empire, as we have seen previously.
Quiz
Quiz1/5
What is the Italian merchant city that Henri Pirenne considers to be the cradle of emerging capitalism?