The main idea of how Renaissance economics broke from Medieval economics was, renaissance political economy started with the idea that people were motivated by self-interest.
Adam Smith later modifies this idea to ‘enlightened self-interest’. This assumption replaced the ideal of fair or just economics in the understanding of theologians from the Middle Ages.
The idea in economics that self-interest motivates people for profit maximization and prices, not for the love of the ideal of justice, seems to be something people still argue against today. Accept it or not; it is essential as an assumption for economic theory. It is also not as bad as it sounds.
From the Medieval view of economics
The following series of quotes are from An outline of the History of Economics by Ernesto Screpanti and Stefano Zamagni. It describes this idea well.
This prescription (Medieval economics from the idea of Thomas Aquinas) aimed to encourage market transparency and the practice of fair trading and was justified by the doctrine of just price.
This all sounds good and what we want today. Even a great part of the political discussion in the USA is about economic justice. However, since self-initiative and fulfillment really motivate people when it comes to trade, it is a good place to start with a more realistic assumption.
The justification was, however, misleading because, according to doctrine, a just price should be determined by excluding monopolistic practices. An honorable profit should be earned, made up of two components: remuneration of managerial work, quasi stipendium laboris, and a fund for charity activities, a danaio di Dio, God’s money (although some guilds classified the danaio di Dio among the cost items).
What happens, in reality, is always different
Like Marxism, socialism, or any other idealistic system not based on self-interest, it failed. Self-interest is not bad. I could be motivated by self-interest to do great things for humanity. Even Plato argued there was no such thing as a true altruist; only people motivated to achieve happiness (I tend to not fully agree as to how someone actualized their self-interest makes all the difference, but that also was Plato’s point). This all being said, you need to start with the idea of self-interest, or your economic analysis will build an unstable foundation.
In actual fact, the major Florentine Guilds of the fourteenth and fifteenth centuries operated as authentic industrial syndicates, by controlling outlet and supply markets, regulating the labor market and wages and limiting competition among its members through fixing production quotas.
What what happened next to these Renaissance traders.
The ‘just’ price they fixed tended to be a monopolistic price collectively determined by representatives of the very subjects to whom it was prescribed. In view of the enormous profits it guaranteed, no one believed that it was just in the commonly accepted sense of the word, nor that it ensured only an honorable gain.
So as we can see, people often are thinking of themselves when it comes to trading and business. If you assume anything else, you will be burned, not in a medieval way, mind you, but by a business partner.
When you trade stocks in the stock market, you are not thinking about an honorable price, but the best price you can get. Now with the profits you make, you might give the rest to charity as many investors do, but the motive at the point of business is to optimizes your price.
This is how Renaissance economics gave birth to the modern political economy. A shift in the way analysis was done. A simple shift in the idea of just price and business to self-motivated action. Greed is an inordinate desire that distorts the soul. Enlightened self-interest is something else. It does help us understand aggregate economic behavior.
I think the above story of the Florentine traders illustrates this point well. This rest of this post will be more an economic sermon than the history of economics thought.
Road to serfdom again
Maybe the following idea is a bit of a stretch and a departure from the history of economics, but I thought I would make the case anyway. It related to those Florentine merchants in the above example.
Above, you can see that monopolistic power and market distortions create injustice. It distorts prices. The biggest problem today is government support of failing business, banks, oil interests, lobby groups, military complex, etc. We have today jettisoned the idea of fair trade, and the idea of economic justice goes out the door.
- The best thing the US can do today is to promote free market and nonmonopolistic competition. This includes, no lobbies from pharmaceuticals, insurance companies, oil interests, medical establishment, no government bailouts of failing businesses, no international military (25 to 50% of the budget depending on who calculated it), no Federal Reserve, no government or state agencies, as well as no government interference in free markets and little to no taxation.
- All these market distortions put money in someone’s pocket and lock in profits while citizens pay via debt and taxes. It creates higher prices and your lifestyle is less.
Therefore my thesis here is, the reality is there was no clear break from Medieval to Renaissance economics to modern economics. A massive government bureaucracy replaced the feudal state. People work more days if you aggregate taxes and debt spending for the government than people did for their feudal lords. It is true. We have a road to serfdom if you understand that debt spending is a form of taxation.
This monopolistic government power which distorts market competition no different from the Florentine guilds, you pay the price and work for your pittance.
Humanism, philosophy, and the explosion of trade all started to erode the feudal system. No longer did empowered lords and Bishops have such an economic hold on people who with justification from above. People wanted and rightfully so more economic freedom.
However, the feudal state has been replaced by the social state.
- The Renaissance that was not – This today holds parallels with people rebelling against working for empowered lords (favored corporations) and Bishops (government power and orthodoxy) thinking they know better than you when it comes to economics.
Government is nothing more than a drain on your life energy. You are a feudal serf with better gadgets but modest wages and high taxes: bye-bye renaissance economics and the idea of humanism for the good of all.