Thursday 1 March 2012

Markets, Morality and Mathematics

One of the key critics of Aquinas’ argument that a merchant could charge what heliked, providing the future was uncertain, was Pierre Jean Olivi, who was born near Béziers in Languedoc around 1248. Olivi entered the Franciscan order when he was twelve and was sent to Paris to study theology in 1267, and although he spent four years at the University he did not graduate with a masters degree. When he left Paris he appears to have started working on a theological work that took him over twenty years to complete and addressed a a range of questions, including the nature of free will. During this time he travelled widely in southern France and Italy and came into conflict with the Church hierarchy. 

Franciscans had an oath of poverty, and within a couple of generations of the founding of the order this oath began to be re-interpreted. Some Franciscans took the view that they kept to the oath if they did not own anything, others believed that this was a loop-hole, the oath required that a Franciscan should limit their use of goods. Olivi became a leader of this ‘rigorist’ or ‘spiritual’ wing of the Order. In 1282 he was accused of heresy and his writings destroyed, though he successfully defended himself in 1287 and was able to carry on teaching until his death in 1298. However, his tomb quickly attracted pilgrims and the Church, faced with a growing cult banned his writings in 1299, destroyed his tomb in 1312, and finally, when the Holy Roman Emperor, Louis the Bavarian, used some of Olivi’s arguments to attack the Papacy, he was condemned, again, as a heretic and all his works were obliterated. Umberto Eco’s book, The Name of the Rose, and the subsequent film, have these events in the background. 

Olivi’s fideism, the view that faith and reason are independent of each other and that you cannot rationalise faith, meant that he was sceptical towards Aristotelian empiricism and it was in this context that he made a revolutionary observation with regard to the selling of grain to the starving Rhodeans. He argued that the metaphysical probability of more grain arriving in Rhodes, giving the merchant excessive profits, had a certain reality, which Aquinas was ignoring by focusing on the ‘physical reality’ of the prices being offered in the market1. Olivi said
 The judgement of the value of a thing in exchange seldom or never can be made except through conjecture or probable opinion, and not so precisely, or as if understood and measured by one invisible point, but rather as a fitting latitude within which the diverse judgements of men will differ in estimation.2
This does not mean Olivi, despite his belief in absolute poverty, felt the merchant should charge a lower price for the grain. While Aquinas felt the market price was justifiable, but it was more moral for the merchant to lower the price, Olivi believed that the market mechanism was important. It was to the common good if prices did rise during a famine as it would encourage an increase in the supply of food3.

Olivi applied this approach to the question of loans. As the historian Joel Kaye explains
if someone intends to invest his money in trade or profit, and instead, out of charity, lends the money to a friend in need, can he expect back from his friend not only the sum lent but in addition the profit he lost in not investing in trade? Olivi’s answer to this question was an unqualified yes: the borrower was responsible for indemnifying the lender for his loss of “probable profit”. and for restoring a “probable equivalence”.4
 Olivi introduces the idea that market exchange is about equating expectations.

Olivi, despite his position in the Spiritual Franciscan movement, seems to have been a close observer of markets. As well as developing the ideas of Aquinas and Albert the Great, he commented that the market price depended not just on ‘need’ but on three factors; its scarcity, usefulness and desirability. Since desirability is subjective, different people will value the same good differently and based on these ideas, Olivi was able to explain the ‘value paradox’, why water, essential to life, was less valuable than gold, of no use, because gold is scarcer than water.5

As a result of his condemnation for heresy, Olivi’s economic thought was retained only by a few Franciscans who secretly read his works, but, of course, could not acknowledge the influence he had on them. As a result has been only recently realised that the writings of another Franciscan, San Bernardino of Siena, were based on Olivi6. Bernardino was born into a noble family in Tuscany in 1380 but was orphaned when he was six. Raised by an religious aunt he spent much of his spare time studying law and nursing the sick, remaining in Siena when it was hit by plague in 1400 and miraculously surviving. Bernardino became a strict Franciscan, abstaining from all pleasures, developed a reputation as an inspiring preacher, and now he is he regarded as the most important Italian missionary of the fifteenth century.

Just as it is surprising that Olivi observed markets, it is also surprising that such an ascetic as Bernardino wrote the first book on entrepreneurship, On Contracts and Usury between 1431 and 1433. Bernardino realised that to be successful a merchant had to be well informed; of prices, the qualities of goods and the market, be diligent in keeping accounts; be hard working; and, importantly, be willing to take on risk and he recognised that there were very few people who had all the these qualities7. The book was written at a time when the Catholic Church had condensed morality into three ‘Christian’ virtues, Hope (Spes), Faith (Fides) and Charity (Caritas), and four ‘Pagan’ or ‘Cardinal’ virtues, Courage (Fortitudo), Justice (Iustitia), Temperance (Temperantia), and Prudence(Prudentia). An ethical life was one that exhibited all, not just some, of the virtues and within this context a merchant could, just as much as a knight, be seen as being ethical. 
Seven Virtues  c. 1460 Pesellino (Francesco di Stefano) workshop,  Birmingham Museum of Art, Birmingham, AL

The thirteenth century saw a flowering of European science, driven by a flood of classical texts being translated from Arabic. Aristotle became “the Philosopher” and his works came in for particular attention. In Nicomachean Ethics Aristotle considers the justice of economic exchange and argues that reciprocal, fair, exchange in the market as being fundamental to a well functioning society since it binds individuals together8. Exchange is not performed in order to generate a profit, for gain, but to correct for inequalities and to establish a social equilibrium. So, for medieval scholars, like Aquinas and Olivi, the virtue of Justice should be central to the actions of a merchant.

Prudence is the ability to judge between different courses of action, it is at the root of reason and rationality and can be seen as the motivation for all science. This virtue is the one most closely associated, in the modern mind at least, with effective merchants. Temperance is the virtue least associated with modern bankers, its corresponding vice being gluttony. However, the modern understanding of temperance as denial is not only how a medieval friar would have understood the virtue. Temperance is at the root of humility, an acceptance that the human is not all-knowing. A good merchant would exhibit the virtue by allowing for the unforeseen, and consequently, diversifying, or at least not betting the house on a single venture. Prudence and Temperance complement each other.

Courage, the remaining Pagan Virtue, is demonstrated by the merchant in being able to commit to a risky venture. However, Courage untempered by the other virtues is rashness, and should be avoided.

Faith is the ability to believe without seeing, and was central to Olivi’s whole philosophy. The Latin root is fides, which gives federal, and captures the concept of trust, the very essence of finance. While Faith is backward looking, you build trust, Hope is its forward-looking complement. When Christian Huygens was translating his ‘On the Reckoning at Games of Chance’ from the Dutch into the more scholarly Latin he had a lot of trouble translating the word kans (‘chance’), which would normally be translated as sors. Eventually, he, or his editor van Schooten, chose expectatio , giving the English term ‘expectation’ (in the mathematical sense). While the English are left expecting, Huygens had also considered using the term spes, or ‘Hope’9 and the French have taken this line, using the word espérance when referring to mathematical expectation. Statistics can be seen as the mathematical expression of Faith, while Probability captures Hope. Again, a merchant would need to express these virtues if they wished to be successful in business.

Charity, along with Temperance, is the virtue least likely to be associated with merchants. While we now think of charity in terms of giving to others, in the past it was associated with a love, or care, for others. When business people talk about being ‘customer focused’ they are talking about exhibiting the virtue of Charity. Shakespeare’s play The Merchant of Venice is not about the moneylender Shylock, but ‘Antonio, a merchant of Venice’ who characterises Christian love or agape demonstrated by his sacrifices for his young friend Bassanio. The view that Antonio and Bassanio were physical lovers is a modern misreading based on an ignorance that the medieval mind was much capable of distinguishing storge (famillial love), philia (friendship), eros (physical love) and agape (spitritual love).

In the U.S. the review of the financial crisis of 2007–2009 was not undertaken by the regulator, which was possibly not inclined to give a thorough and independent review of what crippled the economy, but passed to an independent commission, The National Commission on the Causes of the Financial and Economic Crisis in the United States. They concluded that
We conclude there was a systemic breakdown in accountability and ethics. The integrity of our financial markets and the public’s trust in those markets are essential to the economic well–being of our nation. The soundness and the sustained prosperity of the financial system and our economy rely on the notions of fair dealing, responsibility, and transparency. In our economy, we expect businesses and individuals to pursue profits, at the same time that they produce products and services of quality and conduct themselves well.
Unfortunately–as has been the case in past speculative booms and busts–we witnessed an erosion of standards of responsibility and ethics that exacerbated the financial crisis. This was not universal, but these breaches stretched from the ground level to the corporate suites. They resulted not only in significant financial consequences but also in damage to the trust of investors, businesses, and the public in the financial system.10
Olivi and Bernardino would be spinning in their graves.

The status of morality and ethics in finance has changed significantly between the seventeenth century, when Huygens and Bernoulli constructed mathematical probability on the basis of commercial ethics11, and today when ethics seems to have been expunged from the science of economics12. The change point is often associated with the early Victorian period, associated with Romanticism. The ‘liberal’ philosopher John Stuart Mill argued that (political) economics
is concerned with [man] solely as a being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end.13
Around the same time, the future poet-laureate, Alfred, Lord Tennyson, wrote about nature “red in tooth and claw”. In 1859 Darwin published the On the Origin of Species by Means of Natural Selection, or the Preservation of Favoured Races in the Struggle for Life which explained evolution in terms of natural selection. In the popular perception, nature became seen as being driven by a bitter struggle for survival, un-regulated by a divine architect14. Modern science was demoting man from being created in God’s image to the status of a higher ape, as Darwin wrote in his 1871 book, The Descent of Man
My object in this chapter is to shew that there is no fundamental difference between man and the higher mammals in their mental faculties.15
The Descent of Man goes on to argue that “the civilised races of man will almost certainly exterminate, and replace, the savage races throughout the world”16, and Adolf Hitler would be the champion of the Romantic triumph of will over reason in the twentieth century.

The reaction to Romantic Fascism was ‘positive science’, and consequence was the abandonment of six of the virtues from economics, and to focus on what Deirdre McCloskey has described as “Prudence Only”, blind rationality17. Prof McCloskey is, perhaps, being too extreme, the widespread use of mathematics suggests residual Faith and Hope, but there has definitely been an associated lack of humility (Temperance) The irony is, ethics have been banished from finance, in the main, by academics teaching students to focus on ‘rational expectations’ (Prudent Hope) and ignore Temperance (the counterbalance to Gluttony) and Charity (the counterbalance to Greed), not because the markets are fundamentally unethical and immoral, but because this is seen to be “good science”.

Ian Hislop, the British commentator also discusses how banking changed around the time that Romanticism dominated culture in When Bankers Were Good.


1 Kaye [1998, p 121]
2 Kaye [1998, p 124]
3 Kaye [1998, p 126]
4 Kaye [1998, p 119], also Franklin [2001, pp 265–267]
5 Rothbard [1996, pp 60–61], Kaye [1998, pp 123–124]
6 Rothbard [1996, pp 81], Kaye [1998, p 118]
7 Rothbard [1996, pp 81–82]
8 Kaye [1998, p 51]
9 Hacking [1984, p 95]
10 FCIC [2011] p xxii
13 Persky [1995, quoting Mill, p 223]
14 MacCulloch [2009, pp 861–862]
15 Darwin [1871, pp 36]
16 Darwin [1871, pp 200–201]


   C. Darwin. The descent of man, and selection in relation to sex. John Murray, 1871.
   J. Franklin. The Science of Conjecture: Evidence and Probability before Pascal. Johns Hopkins University Press, 2001.
   M. Friedman. The methodology of positive economics. In M. Friedman, editor, Essays In Positive Economics, pages 3–43. Univ. of Chicago Press, 1953.
   I. Hacking. The emergence of probability. Cambridge University Press, 1984.
   J. Kaye. Economy and Nature in the Fourteenth Century. Cambridge University Press, 1998.
   D. MacCulloch. A History of Christianity. Allen Lane, 2009.
   D. N. McCloskey. The Bourgeois Virtues: Ethics for an Age of Commerce. University of Chicago Press, 2007.
   J. Persky. Retrospectives: The ethology of Homo economicus. The Journal of Economic Perspectives, 9(2):221–231, 1995.
   M. N. Rothbard. Economic Thought before Adam Smith. Edward Elgar, 1996.
   E. D. Sylla. Business ethics, commercial mathematics, and the origins of mathematical probability. History of Political Economy, 35:309–337, 2003.
   E. D. Sylla. Commercial arithmetic, theology and the intellectual foundations of Jacob Bernoulli’s Art of Conjecturing. In G. Poitras, editor, Pioneers of Financial Economics: contributions prior to Irving Fisher, pages 11–45. Edward Elgar, 2006.


  1. That is absolutely fascinating. I have read all of Umberto Eco's books and I had no idea Name of the Rose was patterned on the events you described.
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  2. Nice informative post, I have California Hard Money Lenders and this post is really helpful for me as investment point of view.

  3. Tim,

    As evidenced by the sheer number of references, what a great survey of the evolution of the our current financial/economic situation from many perspectives.

    I like reading historical fiction, and one of my favorite authors is Sharon Kay Penman, who wrote about the time of King Henry II and Eleanor of Aquitaine up until King Edward ("Longshanks"). Your discussion of Olivi seems a great story during that time period in the making! I wish I could introduce you two to each other.

    In music there is a term called transposition, which essentially means moving from one key to another (e.g. Do-re-mi still retains its character whether it is in A or C). I some sense this is what you have done by taking the 7 virtues and layering them into current economic and financial thought.

    I cannot pretend that I have understood this post entirely the first time through, so I will read it again in a day or two, but I appreciate you ability to really make me think!



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