Aristotle and Economics

by | Sep 28, 2016

Political-Economic Ideas of The Greeks, Part 3

When we turn to the other most famous ancient Greek philosopher, Aristotle (384 B.C. – 322 B.C.), we find little of the political regimentation that characterizes his teacher, Plato. For Aristotle, the appropriate behavior is the “golden mean,” that is, the avoidance of “extreme” or unrealistic goals or conduct in the affairs of men.

While he hopes that wise policies may help to improve the conditions and actions of men, Aristotle recognizes that man possesses a human nature that cannot be molded or bent or transformed to conform to some ideal of a perfect State populated by transformed people in the way that Plato believed was in principle desirable and possible.

Aristotle and the Importance of Private Property

This comes out most clearly in Aristotle’s discussion of private property, and his rejection of Plato’s call for a communist social order in which material things are held in common.  Aristotle argued that if all land was held owned communally with work performed jointly, there existed the potential for animosity and anger among the participants.

Why? Because it was now that men would feel that they had not received what was rightly theirs, when work and reward was not strictly and tightly connected, as it is under a system of private property.

Aristotle saw property rights as an incentive mechanism. When individuals believe and feel certain that they will be permitted to keep the fruits of their own labor they will have an inclination to apply themselves in various productive ways, which would not be the case with common or collective ownership. Said Aristotle:

When they till the ground together the question of ownership will give a world of trouble. If they do not share equally in enjoyments and toils, those who labor much and get little will necessarily complain of those who labor little and receive or consumer much . . .

Property should be . . . as a general rule, private; for when everyone has a distinct interest, men will not complain of one another and they will make progress, because everyone will be attending to his own business . . .

Break this connection between work and reward and you weaken the productive impulse and plant, instead, the seeds of envy and anger among men concerning the distribution of what they have been made to produce in common.

The Private Property and Human Benevolence

There was another reason that Aristotle defended the right to private property against the claims of Plato. He believed that a right to property often led to a spirit of benevolence and liberality toward others. Aristotle explained:

How immeasurably greater is the pleasure, when a man feels a thing to be his own . . . And further, there is the greatest pleasure in doing a kindness or service to friend and guests or companions, which can only be rendered when a man has private property. The advantage is lost by the excessive unification of the State.

Aristotle seemed to think that there was a healthy balance on the issue of property in society when property was private, so as to reap the benefits from the greater productivity and work that would be forthcoming under such a system; and, at the same time, he believed that the fruits of property should be generously shared with others by a spirit of benevolence on the part of the those who had prospered from the ownership and use of property, in the form of hospitality and charity

Aristotle on the Character of Man within Society

While Aristotle defended private ownership of property, he did not place the individual at the center of social concerns.  Aristotle referred to man as a “political animal.” In his view, there was no life for man outside the city-state into which he was born, neither a physical nor a moral existence independent of the community and the State. Man is born into and lives his life as a citizen of the State; and as such he was subject to being regulated in the various aspects of his life by the laws and customs of the city-state into which he is an inseparable part.

Like his teacher, Plato, Aristotle was concerned with asking: What is “the good” and what life is best and proper for man? The highest ideal, in Aristotle’s view, is the life of the philosopher; the next best life is that of perfect moral virtue, as manifested in the interests and conduct of the individual as a participant in the life of the city-state. Neither the philosopher nor the good citizen can fulfill this potential without leisure. And leisure requires wealth so as to have the time to pursue and live a life of truth and virtue.

In this context of the two highest “callings” for man to follow, wealth and its acquisition could never be an end in itself. Rather the acquisition and use of wealth is a means to pursuing and attaining those two “higher” ends. The free man must have a sufficient access to wealth so that he may separate himself from the concern of earning a living that would, otherwise, distract him from the pursuit of these higher goals.

Aristotle’s defense of slavery under the presumption that some people may be born “naturally” for servitude since they lacked the potential for these “higher” callings and pursued ends helped reinforce an institution that freed up the enlightened few of ancient Greek society to supposedly devote their lives to the non-material purposes of life, while others under coerced compulsion provided the goods and services permitting them their lives of leisure.

Aristotle also distinguished between “art” and “action.” In the creation of a work of art, we do not require that the artist be “good” in any ethical sense, only that the finished work of his artistic efforts express and capture “beauty” and “perfection.”

But the chief aim of man, Aristotle argued, is not the production of products or even works of art, but rather the “actions” themselves. Man’s conduct in “action” was an end in itself, not the specific, concrete result of the action. What Aristotle is arguing may be captured in the phrase: It is not whether you win or lose, but how you played the game.

That is, has the individual acted with honesty, integrity, courage, modesty, and loyalty to his values? Here the individual is being judged and evaluated in terms of the standards he has set for himself to follow, and whether these standards guiding action were “virtuous” ones; and did he act according to them, regardless of the outcome?

Virtuous Economics vs. Unnatural Wealth-Getting

Wealth, therefore, in Aristotle’s view, is a legitimate subject for study as an essential means to the proper ends of man. Thus, we find in Aristotle a subject matter called oikonomik, or “household management.”  The concern is with the wise stewardship of the landowner’s or property owner’s material wealth so as to not squander it or misuse it in the pursuit of man’s “higher” human ends.

Household management in this context meant more than an economical use of land, tools and other means of production. It also carried the meaning of a wise management of the property owner’s family – his wife, children, and slaves.

This was in contrast to another category of behavior towards wealth, which the Greeks called chrematistik. Chrematistics was concerned with wealth getting, including moneymaking and exchange. Aristotle condemns many merchants and traders in Greek society as corrupted followers of wealth for the wealth, itself.

Aristotle classified “Economics,” or “household-management,” as a “natural” pursuit in that it is conduct proper and essential to human existence and the fulfillment of man’s nature in developing his inherent potential for “good” as a human being. It incorporates both the production and consumption of wealth in attaining those “higher” ends. Chrematistics, on the other hand, has the potential to be either “natural” or “artificial.”

By “natural,” Aristotle meant wealth-getting activity that is clearly and consciously pursued as a means to the ends of “truth” and “virtue.” The problem with wealth getting, according to Aristotle, is that it can become an end in itself, that is, wealth acquisition becoming the goal rather than something subservient to a higher purpose.

Barter exchange is considered “natural” by him because it is a means by which individuals obtain those material goods essential to life, man’s “natural wants,” as Aristotle calls them. “Natural” chrematistics, including money exchange, is proper if it is a means to acquiring the things needed for the goal of the “higher” ends. But chrematistics becomes “artificial” or “unnatural” when money-acquisition and money-exchange, and its pursuit are the end goals that drive the actions of a person.

Aristotle and the Elusive Meaning of the “Just Price”

One of the themes in Aristotle’s writings on economics was the idea of a “just price.” Aristotle talked about appropriate “reciprocity” in any exchange for it to involve an “equality” of values traded, and, therefore, to reflect “justice” in trade. But what does “equality” of values mean? Aristotle spoke of equal values traded when they are exchanged in the proper proportions. What are the “proper” proportions?

Said Aristotle: “As a builder then is to a cobbler, so may the shoes be to a house,” If a builder is “A,” and a shoemaker is “B,” and if “C” is a house and a pair of shoes is “D,” and if the two individuals wish to exchange to acquire what the other can provide, then proportionate returns will be secured by reciprocal actions, and when goods are traded in the correct proportions

A:B =C:xD

What is the meaning of the left side of the equation? That is, what is the “proper” or “correct” relationship between a builder and a shoemaker, and by what standard could this be determined? The answer to this has eluded philosophers for hundreds of years.

And what is the proper, or “just,” ratio of so many pairs of shoes traded for one house? Aristotle stated: “In the truest and most real sense this standard [i.e., the basis of the value of commodities one for the other] lies in wants, which is the basis of all association of men.”

This suggests the importance of the usefulness or “utility” of goods as guiding the determination of the relative values of goods.  But Aristotle gives no answer about how a ratio of the value of wants might be calculated. Thus, he offers us no logically convincing or practically applicable conception of the value of goods or the “just” ratio at which they should trade.

The Usefulness of Money in Exchange

Since Aristotle admitted and argued for the “natural” usefulness of exchange as an appropriate part of “economics” – household management – he also saw that money was a useful and desirable invention to overcome the difficulties that inhabit trade under conditions of barter. Aristotle said:

As the benefits of commerce were more widely extended, the use of a currency was an indispensable device. As the necessaries of nature were not all easily portable, people agreed for purposes of barter mutually to give and receive some article, which, while it was itself a commodity, was practically easy to handle in the business of life, some such article as iron and silver, which was at first defined simply by size and weight; although finally they went further and set a stamp upon every coin to relieve from the trouble of weighing it . . .

Money, in Aristotle’s view, was to serve as a medium of exchange. In, itself, money is not “productive,” but was merely a device for the transfer of commodities, and therefore, of values. The problem was, Aristotle argued, was that the use of money was open to “unnatural” or chrematistic moneymaking – the accumulation of money for its own sake.  Always looking for the “happy medium,” in Aristotle’s mind, this was one of those excessively “extreme” types of action to be condemned on moral grounds.

Natural Profits vs. Unnatural Middlemen and Interest Income

Aristotle stated that the earning of money profits from the growing of trees or the rearing of animals caused no damage to one’s neighbors; plus, there were risks and expenses connected with providing the food and clothing needed by others in the community.  Thus, a profit earned on money invested, could be “natural” and proper when it did not involve any injustice in the exchange.

However, shop-keeping and commerce, in general, in which the individual specialized in the occupation of permanent middleman or merchant in the market – and, therefore, produced “nothing” but merely transferring goods from one person to another – was, in Aristotle’s view, nothing more than an avenue for cheating and “unnatural” conduct.

As an extension of this, Aristotle condemned the earning on interest on money that was lent to others.  Since money is only a medium of exchange, the facilitation of trading one commodity for another, all that a lender of money could “justly” ask for was a return of the sum – the “principle” – that had been lent.

In itself money was not productive, and as such, it should not be allowed to “breed” (obtain an amount in excess of the original amount lent), because, in his mind, this would be getting something for nothing. That which was  “barren” (money) could not bare “offspring” (interest on a loan).

Aristotle’s Insights and Limitations on Economics

In Aristotle, we find a more subtle and sophisticated understanding of some economic themes than in Plato. Aristotle adds a “behavioral” dimension to the analysis of property that asks what are the alternative incentives and responses by human agents when they live under different institutional arrangements within which they have the opportunity to act? That is, how will men act, respond and choose, in both their production and consumption decisions, if they are or are not permitted to own and dispose of private property?

We also find the rudiments of a discussion of the meaning and nature of exchange:  What is the source of value, or the basis of the relative prices among goods? What is an appropriate “balance” in the relationships of exchange?

While Aristotle’s answers were incomplete and often misdirected, as well as incorrect, he at least was among the first to ask the types of questions that centuries later became part of the heart of economic analysis and understanding.

His fundamental weaknesses were: A failure to explain the actual basis of value in exchange; a misunderstanding of the nature of money transactions in the market place through the intermediation of the professional merchant or “middleman”; and a confused analysis of the role and logic of lending, borrowing, and the paying of interest.

Dr. Richard M. Ebeling is the recently appointed BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He was formerly professor of Economics at Northwood University, president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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