Over at ChronicleMagazine.Org, Scott Richert has wondered what I’d make of the just price theory that developed out of Scholasticism and how I’d compare it to my own views.

The concept of a just price has varied considerably over the course of time, and so for me to interact with it, I need a definition to work from. Fortunately, Mr. Richert has provided one. In the combox over yonder, he endorses the following as a good working definition of the just price concept:

all commodities [in the Middle Ages] had a certain value which common estimation could
determine and which accidental circumstances, such as scarcity or the
special needs of the buyer or seller, could not substantially change.

Mr. Richert takes this definition from Fr. Edward Cahill’s book Framework of a Christian State, which was first published in the 1930s. In order to understand the above passage in the sense that Fr. Cahill wrote it (and, I assume, the sense in which Mr. Richert means it), one needs to see it with a bit of context. Here is the full quote as given by Mr. Richert (emphasis in original):

The doctrine of the Just Price and the whole mediaeval attitude towards
trading profits imply a fundamental contrast between the Catholic
economic outlook and the one that prevails in modern times. Although it
may be difficult to determine with exactness the intrinsic value of a
commodity or the just price at which it might be sold, it was
universally admitted that all commodities had a certain value which
common estimation could determine and which accidental circumstances, such as scarcity or the special needs of the buyer or seller,
could not substantially change. Competition was thus confined within
the limits of natural equity, and the unjust activities of the
financier, the middle-man and the trader were kept in check [p. 45].

This brings out an important element that one needs to understand the just price concept. Fr. Cahill alludes to the difficulties that exist if one wants to "determine with exactness the intrinsic value of a commodity or the just price at which it might be sold," which indicates that commodities have intrinsic values that are relevant to the price that may justly be charged for them.

Just before this passage, in a section Mr. Richert does not quote, Fr. Cahill is even more clear on the point:

According to medieval teaching on the other hand, the price of a commodity was supposed to be determine by objective value alone; and could not be justly influenced by the special need or ignorance of buyer or seller [p. 43].

We might try to combine these conditions to form a definition of the just price as follows:

The just price of an item is a sum of money equivalent to (a) the intrinsic value of an item (b) as determined by the common estimation of the community and which (c) is not substantially affected by accidental circumstances.

Without feedback from Mr. Richert, I can’t say if this is an accurate rephrasing of his understanding of the just price, but I have tried to make it accurate. If I’m wrong, I hope Mr. Richert will correct me.

Now here are the problems with this definition.

The first problem concerns the notion of intrinsic value. Many people, including those setting prices in the Middle Ages, tended to have a simplistic understanding of the value of an item, as if particular items had a single intrinsic value and the trick was simply to figure out what amount of money (or another commodity in the case of barter) corresponded to that value. Thus the intrinsic value of a hammer might be represented by ten coins, while the intrinsic value of a loaf of bread might be represented by three coins.

A key problem (though far from the only one) in establishing what the value of an item might be is the fact that the value of an item depends on the use to which it will be put. If you are trying to drive a nail then, all things being equal, a hammer will be much more useful for that purpose than a loaf of bread. On the other hand, if you’re trying to drive away your hunger pains then, all things being equal, a loaf of bread will be of much more use than a hammer.

This fact will become very important below.

The second criterion of the just price definition we gave is that the price of a good be set based on the intrinsic value of an item as determined by the common estimation of the commuity.

In principle, I don’t have a problem with this. The community that will use a set of goods knows better than anyone else how valuable those goods will be to it. The question is: How does the community arrive at its esimation of value?

If it arrives at it through individual economic transactions in which the law of supply and demand is allowed to act in the absence of price controls and if from these transactions a typical price for a commodity emerges, fine. In that case the just price of an item is identical to the concept of the natural price point of an item.

But this is not how the concept functioned in the Middle Ages.

Though it was always hard to figure out the exact price that should
be charged for an item, the community through some mechanism agreed on
a price which was then regarded as the just price irrespective of
circumstances, so that you couldn’t charge substantially more for
hammers or loaves of bread if they were suddenly in short supply. When merchants
tried to charge more, angry customers would appeal to the local ruler
to impose price caps on what merchants could charge.

Sound familiar? Those are what we’d today call anti-price gouging laws.

Conversely, when commodities were in abundant supply, customers would not complain that some merchants were charing less for
them. Instead, other merchants would complain, and guilds would
impose minimum prices that could be charged by its members.

Sound familiar, again? This form of collusion between businesses is now known as price-fixing, and in the United States it is a felony.

The medieval just price system thus involved price controls imposed by the state and price-fixing on the part of businesses.These aspects of the medieval system are not mentioned by Mr. Richert, but Fr. Cahill is explicit about them, writing:

In
the case of most commodities, the Just Price was usually fixed by the
guilds or by the municipality, or even by the State [p. 44].

(Warning to those who might want to look up the quotes from Fr. Cahill: Many readers will find parts of Fr. Cahill’s book extremely
offensive. For example, he repeatedly laments the influence that "the Jews" have
in various sectors of society.)

From
what I gather, Mr. Richert is not in favor of price controls, but these
were a prominent part of the medieval just price system. By rejecting
them, Mr. Richert is advocating a significant departure from the just
price system as it was understood and practiced in the Middle Ages.

I am not sure, though, what Mr. Richert wants a merchant to look to in proposing prices for his goods. Mr. Richert obviously finds the concept of natural price point inadequate, so he can’t look or look solely to that. On the other hand, he doesn’t favor price controls set by the government (or, presumably, price-fixing forced on one by other guild members).

Instead, he seems to want the concept of the just price to serve as a kind of moral restraint on the prices that merchants propose. I think in order for him to successfully articulate a system in which the just price concept can be used in this way, he needs to spell out in further detail what criteria the merchant should use in proposing prices to his customers.

Presumably those criteria would involve the impact that a particular price would have on other people (e.g., it would force them to either do without a commodity or divert funds away from other commodities they also need).

This is where we hit the major problem with his articulation of the just price concept.

Quoting Fr. Cahill, Mr. Richert endorsed the notion that a just price is one "which accidental circumstances, such as scarcity or the special needs of the buyer or seller,
could not substantially change."

This is an ENORMOUS problem for one wishing to point to the impact that particular prices would have on other people as grounds for judging the prices just or unjust. The reason is that the needs of the buyer and seller directly reflect the impact that the prices will have on them. How one could could use the impact that prices will have on people without considering their needs, I simply don’t know.

Further, consider the role that scarcity or abundance has relative to people’s needs. You personally need a certian amount of food in order to survive and keep away hunger pains, and you’d no doubt pay well in order to get that amount of food. You’d also probably pay well to keep on hand a reasonable supply of food for future use. But beyond that? You wouldn’t pay nearly as well. You just don’t have much use for food beyond a certain point, and unless there’s a famine on (or coming), you don’t have any reason to stockpile it (i.e., hoard it) in large quantities.

But if a famine hits, you suddenly have a greater need for food. It’s not that you need to eat any more than you usually do. (In fact, you can probably get by eating less than normal.) It’s that there may be gaps in the supply-chain that you will need to weather, and having additional quantities of food in reserve will help you get through those periods. Buying that extra food will help minimize the impact of the new food scarcity on you.

The problem, of course, is that the famine doesn’t just affect you. It affects everybody in your area. They all have a greater need for food reserves in order to weather the famine, and they will all go out to buy the additional food.

When they get to the store the shelves will quickly be picked clean since the famine prevents them from being quickly refilled.

Or at least that is what will happen if the merchant is following Mr. Richert’s articulation of the just price concept. Under that system, the merchant can’t "substantially change" his prices to take into account the scarcity of the food and everybody’s corresponding need for it.

In the absence of price controls, he could. He could raise his prices and that would force everyone in the community to economize: to think, "Just how much extra food do I really need? Can I even get by with eating less than I usually do?" This behavior then will restrict the amount of additional food the buy and will help keep food on the shelves (and thus available for those who really need it) until the restocking problem can be solved.

When you think about it, Mr. Richert’s understanding of the just price concept seems economically perverse:

• The just price of an item is supposed to be its value without substantially taking into account "scarcity or the special needs of the buyer."
• Scarcity is the opposite of abundance, and together scarcity and abundance describe the supply of a commodity.
• The needs of the buyer, however, are what drive the demand for the commodity.

By asking for a price that reflects the value of an item apart from considerations of its scarcity or the needs of those who buy it, Mr. Richert seems to be asking merchants to charge prices that are not substantially affected by considerations of supply and demand.

That, of course, is a recipe for MASSIVE economic inefficiency.

No wonder they were so poor in the Middle Ages.