The greatest untold story of economic science occurred more than 250 years before the Scottish Enlightenment and the English and French classicists of the late 18th century. It is widely thought that market driven economic theory was born in 1776 with the publication of Adam Smith’s Wealth of Nations, but Smith cannot take ownership of his great book’s great ideas. In the 15th and 16th centuries, economic theory was being developed by the School of Salamanca in Spain. And these were not economists, economic science didn’t exist yet. They were moral theologians in the Scholastic tradition of Poetic Justice Warrior St. Thomas Aquinas.
As the Mises Institute explains:
Because natural law and reason are universal ideas, the Scholastic project was to search for universal laws that govern the way the world works. And though economics was not considered a separate discipline, these scholars were led to economic reasoning as a way of explaining the world around them.
Their ideas about the justice of the price mechanism (Francisco de Vitoria), the morality of currency exchange (Martin de Azpilcueta Navarrus), subjective value and the inviolability of property rights (Diego de Covarrubias y Leiva), and theories of hard money, credit, inflation, and interest (Luis de Molina) were revolutionary, and are as relevant as ever.
Common to all of them is their focus on individual human action and the hopelessness of government interference in voluntary exchange. In other words, they were the first to discover that entrepreneurial activity is at the core of widespread human vitality.
In the late 19th and 20th centuries, Salamanca’s economic traditions were resurrected and further developed by Austrian School economists Carl Menger, Ludwig von Mises, Friedrich Hayek, and Murray Rothbard, among notable others. Jesus Huerta de Soto, professor of economics at King Juan Carlos University in Madrid, is the Poetic Justice Warrior who is today’s greatest exponent for moral clarity in economic science. As he wrote in 2010:
Entrepreneurship is undoubtedly the quintessential social function, given that it makes life in society possible by adjusting and coordinating the individual behaviors of its members. Without entrepreneurship, it is impossible to conceive of the existence of any society.
The Ethics of Capitalism
As Llewellyn H. Rockwell of the Mises Institute explains about the School of Salamanca, “Spanish universities spawned a revival of the great Scholastic project: drawing on ancient and Christian traditions to investigate and expand all the sciences, including economics, on the firm ground of logic and natural law.” In other words, the economic theories of these moral theologians is rooted in reason and ethics. Unfortunately, according to de Soto, this moral standard of academic excellence has been tossed aside by socialist economic planners. As he explains in his 1999 essay The Ethics of Capitalism:
It seemed that a universal guide for human behavior had been found. Science had apparently managed to eliminate considerations related to justice by rendering them obsolete.
This is a stunning observation, de Soto has proven that collectivist central planning is devoid of individual ethical considerations. In this essay, he also anticipates the remedy:
The formation of an evolutionary theory of social processes, also developed by the Austrian economists, has shown how the most important institutions for life in society (linguistic, economic, judicial, and moral) arise spontaneously over an extended period of time, on the basis of customs, as a consequence of the participation of a large number of human actors.
As Huerta de Soto concludes, “The dynamic concept of markets makes it easier to adopt an ethical position, and to strengthen the argument that markets driven by entrepreneurship are not only more efficient, but also just. There is no justification for any entrepreneur to feel any sense of guilt in appropriating the results of his or her creative activity.” Of course guilt, along with envy, is what the collectivists are selling.
Entrepreneurs and Dynamic Efficiency
Not only do socialist economic planners ignore ethics, Huerta de Soto also proved that the Neoclassical economists, the ones using calculations designed for mechanical physics, were replacing human creativity with a non-existent concept they call aggregate utility. He did this by resurrecting the original definitions of static and dynamic efficiency from ancient Greece – Xenophon taught that dynamic efficiency is “the effort to increase one’s goods by way of entrepreneurial creativity.”
As Huerta de Soto discovered, the equilibrium calculations of the Neoclassical economists were based on static assumptions that are useless in a dynamic world:
The influence of mechanical physics eradicated the creative, speculative dimension which belonged to the idea of economic efficiency from its very origins, and all that remained was the reductionist, static aspect, which focuses exclusively on minimizing the waste of (known or given) economic resources.
In addition to taking on the socialist and econometric central planners, Huerta de Soto has also taken on their fractional reserve banking system. His rationale is that it distorts economic incentives for entrepreneurs and it violates the legal property rights of depositors, rights that evolved over centuries and became substantive law. In his signature treatise on banking – Money, Bank Credit, and Economic Cycles, Huerta de Soto makes the radical case for full reserve banking, meaning all customer deposits are held in reserve, money cannot be created by lending it.
He sharply rebukes fractional reserve banking for their inevitable economic booms and busts. As Austrian Business Cycle theory explains, these are the predictable consequences of their artificial credit expansion. Jeff Deist of the Mises Institute writes,
Applying a businessman’s touch, Huerta de Soto called the 2008 financial and monetary crisis with compelling accuracy in the first (1998, Spanish) edition of his treatise.
Money printing also hamstrings entrepreneurs by replacing their long-term creative capacity with short-term incentives. Whether it is socialist designs, mathematical models, or artificial credit expansion, Huerta de Soto teaches, “To impede the private ownership of the fruits of each human action is to remove the most powerful incentive to create.”
The Essence of Human Flourishing
Jesus Huerta de Soto has issued a powerful condemnation of all economic systems that interfere with property rights, and by extension, a person’s freedom to produce, their incentive to live. As Poetic Justice Warrior Jean-Baptiste Say (he invented the word entrepreneur) discovered with Say’s Law, “the mere circumstance of creation of one product immediately opens a vent for other products.”
After all, living things exist to live, and for human beings, it is our moral duty. Besides the laws of nature, which our gift of reason allows us to master, the only thing that can get in our way is other people. Huerta de Soto is that Poetic Justice Warrior who clears the way for his students, employees, customers, and all entrepreneurs and their customers across the world –
All human actions are driven by the force of entrepreneurship, which continually creates, discovers and transmits information, as it adjusts and coordinates the contradictory plans of the different individuals through competition and enables them to live and coexist in an increasingly rich and complex environment.
