History of Economic Thought: Aristotle Was Wrong on Money and Business

You know who Aristotle is. Even if you are not particularly familiar with his thought, his name alone is recognizable to nearly everyone who hears it. His is one of the names that never goes unrecognized. Aristotle covers numerous topics in his philosophy. These topics include everything from biology to art to logic. Including in these topics, however, is economics. Well, not exactly economics. A bit of explanation is required first:

Economics as a subject of study didn't truly exist until the 18th century. Richard Cantillon wrote what the first true book on economics, meaning that the book was explicitly and purposefully studying economic activity. This is not to say that no one had ever studied economic issues before. Writings about economic issues first started with the Ancient Greeks, even before Aristotle. However, these were not writings on economics per se. Any discussions on economic issues was always simply a part of some other and larger discussion. In Aristotle, it was in his Politics that his few writings on economics reside. The book is about politics and governemnt, not economics. He simply takes a detour to talk about economic issues. Other famous philosophers like Augustine and Aquinas also commented on economic issues, but again, it was always in the context of another discipline. The 18th century brought about the first writers to study economics by itself, absent from discussion of politics, ethics, or anything else. Economics started to stand on its own. Any writings on economics before that are simply writings on economic issues, not economics.

Even though economics was not established as a separate discipline until the 18th century, that does not mean that there were no economic contributions before this point. The supremacy of laissez-faire, subjective utility, elements of monetary theory, and other questions had already been settled before Cantillon wielded his pen to start put the discipline in a state of independence. Did Aristotle make any notable contributions to economics? There are several places in his Politics were he discusses some economic matters, but the most famous is in full below:

" There are two sorts of wealth-getting, as I have said; one is a part of household management, the other is retail trade: the former necessary and honorable, while that which consists in exchange is justly censured; for it is unnatural, and a mode by which men gain from one another. The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it. For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of getting wealth this is the most unnatural." (Politics Bk. I: Ch 10)

This passage is the culmination of several pages on the discussion of wealth. Aristotle is essential making a distinction between two kinds of wealth-accumulation: natural and unnatural. The natural methods are those of "household-management", which is essential that of a plantation or some kind of estate that would produce some kind of good (Slaves would likely be doing the "producing" here). The unnatural methods are those that don't "produce" anything. Aristotle is listing retail merchants and lenders under this category, but other trades like these would he would likely put under the same banner.

First, the retail merchants. These merchants would be the kind that would be out for a profit. Buying low in one place and selling high in another. Aristotle condemns them by saying that it is "...a mode by which men gain from one another." The retail merchant, cunning and crafty as he is, is taking advantage of the buyers! The merchant loads his pockets at everyone else's expense! Gasp!

As you might see, Aristotle's analysis isn't right here. How exactly is the merchant gaining from the buyer? The merchant does receive the buyers money, but the buyer also receives the goods from the merchant. Unless the merchant forced the buyer to buy from him, the buyer also bought the goods out of his own choice! So if the merchant wanted the buyer's money, and the buyer wanted the goods, what exactly is unnatural about two people both trading voluntarily with each other? Plus, Aristotle gives no real rational for exactly why it is the merchant who benefits. One could easily say that the buyer is the one who is benefiting off of the merchant! That is because there is no reason.

What about usury? Aristotle has a particular hatred for usury, and this hatred would extend itself through Scholastic thinkers throughout the Middle Ages into the Renaissance. Aquinas would adopt Aristotle's argument against usury and it would parroted for several hundred years. If there was an award for "Biggest Economic Headache of All-Time", it would probably go to usury. It wasn't until around the Protestant Reformation that it started to die out. Even today, however, caps on very high interest rates have at least some appeal to the general population.

Aristotle's argument against usury is much more complex than against retail trade. Money is meant to be used in exchange, he says. Usury, however, is not an exchange, as money is traded against money. Interest is therefore unnatural, as it is a violation of the nature of money. Thus, the lenders of money are making an unnatural income! We must put a stop to this! This analysis is, again, missing a few key points about interest. I'll try to be brief, as the discussion that this question launches could last quite a while.

First, Aristotle is right that money is used in exchange. He does not see that lending money at interest is an exchange. Aristotle is think only in terms of items exchanged, but not in terms of the time they are exchanged. In a lending situation with interest involved, money is lent at one point in time, and is paid back with interest at a future point in time. Aristotle's complain is that money is being exchanged for money, but with interest changed on the return. The exchange isn't a money swap with interest, but money in the present exchanged for money in the future with interest.

Interest is simply a premium that is paid to the lender by the borrower for the privilege of using the money in the present. The lender could have used the money in the present to spend on goods and services, but decided to lend it instead. The interest is a return given to him for the dissatisfaction of having to wait to receive his money back. As stated with the retail merchant, how is this exchange unnatural? The lender wishes to lend and the borrower wishes to borrow. No one is gaining from the other, as long as the transaction is voluntary!

Aristotle's views on trade and usury both fall prey to the same fallacy, one which is still alive and well today. It is the idea that someone gains from another, even though the transaction is voluntary. Aristotle adds some flair by calling it "unnatural". As pervasive as the idea is, it is remarkably easy to refute. The very concept and definition of "exploitation" or "expropriation" necessarily means that the actions taken are not voluntary! Maybe a dictionary would have helped Aristotle work out his economics.

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