'The Price of Economic Injustice...'

By Matt C. Abbott

The following is a reprint of an article from The Latin Mass journal. The article, "The Price of Economic Injustice: Rediscovering Catholic Just Price Doctrine," was written by Brian M. McCall, associate professor of law at the University of Oklahoma. Many thanks to Professor McCall and to John Blewett, editor of The Latin Mass journal, for allowing me to reprint this material.


The Price of Economic Injustice: Rediscovering Catholic Just Price Doctrine

by

Brian M. McCall
In a general sense, St. Thomas Aquinas predicted the paralysis of our financial and economic system which we have been witnessing for several months when he predicted that in a society where unjust exchange transactions dominate, eventually all exchanges will cease to occur. [1] St. Thomas also points out that although human law does not and cannot prohibit all injustice, [1] society cannot escape the consequences of transgressing the divine law which leaves "nothing unpunished." [3] Thus, at least part of the explanation for the current economic and financial crisis lies in continuous and systemic violations of natural justice by our economic system. Now, there is likely not one product or market or factor completely responsible for these injustices. Yet, there is one area of economic justice, understood in light of Catholic doctrine, which has certainly been largely ignored in 20th and 21st century America — the Just Price Doctrine. The search for causes and solutions to the current crisis must therefore involve in part a re-acquaintance by our society with this element of Catholic Truth.

As early as Aristotle, philosophers recognized the necessity of the exchange of goods. A house builder needs shoes and a shoemaker needs a house. [4 ] As the exchange is to be mutually beneficial to each party (each needs what the other is to exchange), the costs should not be born disproportionately by one party. [5] If unequal exchanges were to occur, they would serve as random instances of wealth redistribution; if wealth were to be redistributed at all it should be done according to a normative scheme not on the basis of random individual transactions. [6]

An apparent contradiction existed in the philosophy of Aristotle (as well as Plato). Although recognizing the need for exchange of goods (exchange was necessary to society), Aristotle was skeptical of tradesmen (those engaged in retail exchange) and only reluctantly allowed them into his ideal community. [7] The theory of the just price can be seen as a reconciliation of the apparently contradictory acceptance of exchange transactions but wariness of those who facilitate them. Aristotle was interpreted as arguing that exchange is necessary for society but exchange was not possible unless equality was maintained in an exchange. [8] It was those tradesmen who engaged in unequal exchanges who were to be restrained and it was these who gave rise to the skepticism.

Based on Aristotelian theories of justice as the mean, advocates of the just price theory assert that voluntary exchanges need to be proportional in value. No person should profit from another's loss. [9] In an exchange, justice is found in an equal exchange but injustice is found in an unequal one as the mean is not maintained. [10] Yet, equality does not mean identical items be exchanged (this would defeat the idea of exchange). A proportionality of value needs to be maintained. So if a shoemaker were to exchange with a homemaker, one would not exchange one shoe for one house but rather that number of shoes which equate to the value of the house. [11] Since a homebuilder will not necessarily need so many shoes, money was invented to serve as a method for achieving this proportion. [12] With the invention of money, value can be expressed in prices quantified in a standardized manner by that money. A just price is thus a price that equals the value of the thing being purchased. [13]

It is important to note that equality in exchange is not to be confused with the communist notion of equality of wealth. Equality in exchange does not require that wealth be equalized but that exchanges between individuals not occur on unequal terms. Thus, to use the example of the shoemaker, he may increase his wealth by investing more labor in the production of more shoes which he then exchanges for their just value for other items of production or wealth. His overall wealth may increase (due to his labor) but it is not at the expense of those to whom he sells shoes; they transfer wealth equal to the value of the shoes they receive.

Now Christianity built upon these Aristotelian principles when it asserted that Christians could not benefit from the loss of another in an exchange. In contrast, pagan Roman law had acknowledged that parties to exchange transactions had some freedom to take advantage of each other: "it is naturally permitted to parties to circumvent each other in the price of buying and selling." [14] Yet, St. Paul, in a passage that strikingly parallels the Roman law text, claims that the divine law is contrary to such permissiveness. He says:

For you know what precepts I have given to you by the Lord Jesus. For this is the will of God, your sanctification . . . that no man overreach, nor circumvent his brother in business: because the Lord is the avenger of all these things, as we have told you before, and have testified. [15]

Thus, Christians are obligated by divine "precept" and the "will of God" not to overreach or circumvent each other when exchanging goods. This obligation has been referred to over the course of Catholic centuries as the Just Price Doctrine. One of the most concise statements of the normative requirement of paying a just price is that of St. Thomas Aquinas:

Now whatever is established for the common advantage, should not be more of a burden to one party than to another, and consequently all contracts between them should observe equality of thing and thing. Again, the quality of a thing that comes into human use is measured by the price given for it, for which purpose money was invented, as stated in Ethic. v, 5. Therefore if either the price exceeds the quantity of the thing's worth, or, conversely, the thing exceed the price, there is no longer the equality of justice: and consequently, to sell a thing for more than its worth, or to buy it for less than its worth, is in itself unjust and unlawful. [16]

St. Thomas explains that the purpose of exchange transactions is to mutually benefit both parties. They are exchanging things because each will benefit from the thing exchanged by the other. Since the intended purpose is mutual benefit, the burdens should be mutual and not disproportionate. It is unjust for one party to bear the cost of a mutually beneficial transaction. To sell something at a variation from the just price disproportionately burdens one party and is therefore unjust in itself. However, St. Thomas continues by explaining that to achieve such equality it is sometimes just to compensate a party for losses incurred in accomplishing the exchange. He says: "On such a case the just price will depend not only on the thing sold, but on the loss which the sale brings on the seller. . . . [H]e may charge for the loss he suffers" [17]

The converse of the legitimate right to be compensated for costs incurred is not true. It is not licit to exact a profit above the just price because the other party has a particular need for the item exchanged. "Yet if the one man derive a great advantage by becoming possessed of the other man's property, and the seller be not at a loss through being without that thing, the latter ought not to raise the price, because the advantage accruing to the buyer, is not due to the seller, but to a circumstance affecting the buyer. Now no man should sell what is not his. . . ." [18] Here is an example. I buy your deceased grandmother's wedding ring in a pawn shop for $200 and I have it appraised and find it to be worth $200. If we agree that I will sell it to you for $2,500 because you really want it because you have no memorabilia of your grandmother, I have violated the moral law by selling for more than the just price. Notice a non-Catholic market definition of economic morality would have to conclude there is nothing wrong with our transaction since you agreed to pay $2,000. The ring was worth more to you thus I am free to extract this higher price from you. Now St. Thomas does remark that people who derive special advantages from a sale are free to give a gift out of gratitude. But a freely given gift is different from a required term of transaction on the part of the seller. [19]

This statement of the Just Price Doctrine (no one should pay more or less than a thing is worth) begs at least two questions which are necessary to apply the norm to real exchanges: (1) what is something worth? and (2) should all unjust exchanges be corrected? Each question will be addressed in turn.

Value is determined by the relation that a thing bears to the satisfaction of a human need. [20] Therefore the just price is the common estimation of the satisfaction of human needs achieved by a particular thing. [21] The common estimation may or may not be the prevailing market price, where "market price" is defined as whatever a buyer is willing to pay. If the agreed market price corresponds to the common estimation of the value of human need satisfaction then the two will be identical. What is significant about common estimation is that it is common. A particular or unique need or desire of a buyer or a community is not a legitimate factor in determining the just price. [22] Just because a buyer is starving and without food does not entitle the seller to ask a price more than the common price for such food. Those who simply declare that there can be no moral limitation on freely agreed prices or that the price agreed by buyers and sellers in a free market is by definition a just price have no reason to condemn the sale of bread commonly bought and sold for $2.00 to a family who is about to starve because their food supply was destroyed by a natural disaster for $25.00. Catholic economic theory clearly condemns such a price and requires restitution.

Yet, how does one know the common estimation of value or price? In Roman law (and later European law rooted in Roman Law), there were two possible methods, the price could be fixed ex ante by the legitimate governmental authority (as is done with utility company prices in modern times) or it could be determined in an ex post facto proceeding by the judgment of a good man (ad abitrium boni viri), or what we would call in modern times — an expert. [23] Depending on the particular facts, sometimes this expert was in a public forum, an ecclesiastical or civil court, and sometimes he was a priest in the internal forum of the confessional.

Given the difficulty of determining an exact just price in the absence of a fixed legal price, when should the human law require rectification of an ex ante incorrect assessment of the just price by contracting parties as determined ex post facto by an expert? St. Thomas Aquinas argues that a sale at any variation from the just price violates the normative principle of equality in exchange [24] but the law only requires restitution for knowingly contracting at an unjust price [25] or when the error was without knowledge ("absque fraude") but the variation from the just price is great ("nimius excessus"). [26] The limitation of a legal remedy only to cases of intentionally contracting at variance to the just price or an unintentional great difference does not mean abandonment of the more rigorous normative principle. [27] Yet, the recognition that the just price can change over time [28] and cannot always be determined with exact precision but can only be estimated, [29] necessitates that only intentional or notable variations should be corrected by the force of law. [30] Thus, for example, Roman law only required restitution to one who sold land for less than one half of the just price. [31] The post Roman period of Western Catholic law saw the gradual expansion of this remedy to a wider range of transactions than the original Roman remedy yet it never corrected all deviations from the just price. [32]

One inference drawn from this two part analysis of when the civil law should correct unjust prices is that the law should correct even some unintentional violations. Putting aside difficulties of determining with perfect precision the common estimation of a type of goods, the thing sold may have a hidden defect which makes the particular thing worth less than the common estimation. St. Thomas explains that if the defect is later discovered, the seller must repay a portion of the price attributable to the impairment of value. Although one may not be culpable for unwittingly selling something at an unjust price (due to the defect), once the defect is discovered, the seller is obligated to compensate for the defect: "But if any of the foregoing defects be in the thing sold, and he knows nothing about this, the seller does not sin, because he does that which is unjust materially, nor is his deed unjust, as shown above (59, 2). Nevertheless he is bound to compensate the buyer, when the defect comes to his knowledge. Moreover, what has been said of the seller applies equally to the buyer. For sometimes it happens that the seller thinks his goods to be specifically of lower value, as when a man sells gold instead of copper, and then if the buyer be aware of this, he buys it unjustly and is bound to restitution. . . . " [33] Thus, the Just Price Doctrine is a requirement of transactions independent of the obligation not to lie or commit fraud (by for example denying a known defect).

The recognition that the just price for particular goods could change over time, led to the development of a corollary theory to address situations when a buyer pays for a purchase at a different time than the contract (in modern terms, a credit sale). The theory of venditio sub dubio allowed a seller of goods to charge more than the current just price if payment was to be separated from delivery by time and there was legitimate doubt as to the just price of the goods at the applicable future time. [34] Two conditions must be met to licitly charge more than the current just price. There must be a real doubt that the current just price would remain the same at the time of payment and the agreed price must not clearly be in excess of a reasonable estimate of the future just price. [35] A price clearly in excess of the expected just price constituted disguised usury for a loan. [36] Many who considered the issue recognized that although certain credit sales at higher prices could be licit, the risk of evasion of usury and just price normative principles was great and therefore counseled caution. [37]

Just price theory held that normatively nobody should sell something for more than its common estimation of value plus costs of sale. A particular need or desire of the buyer for the good was an illegitimate factor in determining price. The exact just price could vary over time and unless fixed by law could only be arrived at by estimation. This doubt and variability of price restricted those cases where the human law would correct errors to notable variations or unreasonable estimates of future prices in credit sales. Yet, the divine law leaves nothing unpunished. Despite the civil law allowing unjust exchanges, the society will still bear the consequences.

It seems apparent that the Catholic doctrine of the Just Price is generally absent from our current economic discourse. It is almost a daily occurrence to hear people say "I got a great deal" (implying either that the person paid less than the just price or the pre-deal price was in excess of the just price and the deal was merely a return to a just price level). I would like to end this article by considering one particular application, the housing market. Most people would agree that this segment of our economy played an important role in the economic problems. Was there some aspect of it that suggests routine violation of just price doctrine?

Although our culture has become accustomed to calling the mortgagor of a property the owner, to what extent does one really "own" a house subject to a mortgage? Ownership is "[t]he bundle of rights allowing one to use, manage, and enjoy property, including the right to convey it to others." [38] Yet, one who has acquired a home subject to a mortgage does not possess the right to do these things absolutely but only contingently upon repayment of the loan supported by the mortgage plus required fees. If one doubts the restriction on ownership, consider the result of attempting to convey the property without discharging the mortgage. The rights of the home owner can better be described as contingent ownership or "[o]wnership in which title is imperfect but is capable of becoming perfect on the fulfillment of some condition." [39]

Economically, a mortgaged financed home purchase is a credit sale of property by the mortgagee. The bank in essence purchases the property and then agrees to resell it to the borrower over time at an increased price (the amount of the mortgage plus the interest factor). The fact that the lender requires some of the purchase price to be paid quickly (by only financing 80% or 90% of the price) does not alter this re-characterization. Although the bank does not take record legal ownership in our current legal system, economically it is no different. [40] The lender is entitled to enforce the sale of the property to the borrower at a pre-determined price (varying depending on the exact time of completion of the purchase (or in the current legal terms at maturity or prepayment) regardless of the real value of the house at the time of repayment. If the borrower does not pay by at least the times required, the lender has a right to use the force of law to remove all indices of ownership from the borrower (i.e. cancel the sale).

Re-characterized in this way, just price law, and the corollary of venditio sub dubio, can be used to evaluate the normative justice of the standard terms of such transactions. First, there must be genuine doubt that the current price of the residential property will be higher at the time of repayment. Second the total price (meaning the total amount paid by the borrower to the lender including fees, interest, charges, points, etc.) must not be so great as to clearly exceed a reasonable estimate of the value of the property at the time of payment plus the costs of entering into the transaction (legal and documentary fees). A simple example will illustrate the analysis. A agrees to buy a house from B for $100,000 and obtains from C a 100% mortgage at the following rates and amortized over the following periods. In each case a 1% origination fee is charged and reimbursement of transaction costs is excluded assuming that C only passes through the actual cash cost so C receives no net benefit from these payments.


The final column of the above table shows the implicit assumed rate of increase in the just price of the property over the life of the payments on the credit sale (this assumes the original $100,000 was the just price at the starting point). The just price theory then asks whether such percentage increases in property values appear reasonable. These percentages are significantly above the historical increase of housing prices. U.S. house prices increased a total of only 10 percent from 1975 to 1995. [41] From 1975 to 2004 housing prices appreciated annually at a more rapid annual rate of 2.23 percent (still significantly below annual interest rates) or cumulatively around 42 percent for the entire 19 year period. [42] Following further rapid appreciation, the current decline in housing prices seems to have begun in 2007 with an initial decrease in prices of 1.3 percent. [43] Such simple calculations suggest in general that at least some mortgages are priced at a level in excess of what just price theory would consider just in a case of a credit sale. (All of this assuming that the historic increases in housing prices were in themselves just increases of the common estimation of housing.)

Although the above analysis is simplified, it demonstrates the strong inference that unjust exchange transactions have pervaded throughout our historic housing markets. At least some of the causes of our current dilemma lie in a system that has been built without the foundation of Just Price requirements. Thus, as with so many social and economic problems, the Church's doctrine holds the answers to why this current crisis occurred and how we fix it. As Leo XIII commented about earlier economic turmoils: "the question under consideration is certainly one for which no satisfactory solution will be found unless religion and the Church have been called upon to aid." [44]

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© Matt C. Abbott