The Reform of Taxation

Don Boland

Supposing, as we must, that the current system of income taxation (1) is unable to be justified in a nation well endowed with natural wealth and resources, except by appeal to a state of emergency for which the taxing State bears no responsibility,(2) are there any other systems of taxation, or proposals for reform of the present system, that might be considered ethically acceptable?

Before dealing with this question it will be useful to elaborate upon two social institutions that, together with that of property, pertain to the economic order. The first took in ancient times the form of slavery, whereby a servant’s work or labour was legally regarded as belonging to another, the master. This was justified upon the basis that the servant had become the property of the master. Thankfully, we have reformed our notions both of property and service so that today property is, as it naturally and rationally should be, a relationship that belongs only between persons and things; and service, though it pertains to a relationship between persons, is such that it must be consistent with the fundamental freedom and dignity of the persons involved.

In the past the differences that do appertain between human beings, and even different societies, whereby some are thought to have a certain superiority, and indeed may in fact have in some particular (non-essential) respect, such as physical strength, native courage, organizational ability etc, were often taken as essential or natural. That meant that some were considered by others as naturally their inferiors, and indeed less than human. On that basis some believed that they could justify to themselves treating others as things that they might appropriate as property and subject to their own use or service.

The notion of property also was associated with the ancient notion of sovereignty or absolute lordship. By this notion one might do what one likes with one’s property. This was an exaggerated notion of power that one has over things, let alone over other persons. It meant that the servant was totally subject to the will (and even the whim) of the lord. Primitively, this sense of power extended to the relationship between men and women, and even to that between men and their wives and children.(3)

However, rather than this being a true notion of property it is a distorted one that only became evident as such after the advent of Christianity, though even so it took a long time before it was completely rejected. The true notion of property applies only to our relationship with things below us, and is beautifully expressed in the definition of St. Thomas as ius procurandi et dispensandi.(4) It is a right, not to use something as if it were exclusively for our benefit, nor to destroy it at our whim, but to take care of it (as a procurator) and to dispense it (like a pharmacist) for the benefit of all. It is more akin to the notion of stewardship than that of lordship.

The ancient notion of servant was thus not only too closely tied to that of property, which was bad enough, but to a notion of property that was distorted in the way referred to, which meant that, at least in theory, the master could use or abuse the servant at will. The institution of slavery, so understood, is now universally condemned, as it should be.

But that does not mean that there is no place for a social institution based upon a relationship of relative inequality between persons. This inequality might even be called "natural", provided it is understood that we are not talking about inequality between persons in the fundamental sense. For, we are all equal in respect of our common origin, end and dignity. But some are naturally better endowed than others, not just in terms of physical strength but also in terms of mental abilities, emotional balance, etc. Some are more abstractly intellectual, some more skilful with their hands, some more able to direct and organize others, some needing such direction and organization to fully realize their talents, and so on.(5)

Indeed, this natural inequality of "talents", if used properly, can work to the benefit of all. But it will only do so if all see their talents as gifts to be employed not just for their own purposes but primarily for the good of all. In the past, unfortunately, these gifts have been taken by some as signs of their (natural) superiority over others and as means to subjugate their fellow human beings for their own exclusive benefit. That immoral attitude found its ultimate logical expression in the system of slavery.

But, like the institution of property, the master/servant relationship is not something that needs to be abolished. It simply needs to be properly understood, and our distorted notion of it abandoned. If we fail to distinguish between the proper notion and the distorted one, we must identify the master/servant relationship with the social institution of slavery. In such a state of mind it is not surprising that any (relative) subjection of some persons to others, in the context of work, whether of workers to bosses, employees to employers etc, is seen to be intrinsically exploitative.

The true notion of service, then, needs to be purified of any suggestion

of subservience. It cannot, except by way of legal penalty or military necessity, be founded on force. Ordinarily, it is based upon contract. One cannot legitimately sell oneself into slavery, but one may "sell" one’s labour for a time, i.e. commit oneself to work for another’s benefit on terms that are just.

It is true that often one who ought to be master is placed, by force of circumstance, in the position of a servant. But, in principle, both servant and master benefit by the arrangement, as well as society generally. It is too true, that social circumstances may be such that the law may not be always able to prevent exploitation in the relationship, and be constrained at times to allow such to some extent, as it is constrained to tolerate other social evils. But, like the institution of property, the institution of master and servant is something that is naturally designed to preserve due economic order within society. Without it we will inevitably fall into social disorder and, eventually, general economic destitution.

What particular form it takes in any particular society is not something that is fixed in stone, as neither is that of the institution of property. Each community will have a degree of freedom in this regard in order to adapt it to its particular situation. The form of the relationship, for example, in terms of the length of time for, or the conditions under, which one may customarily commit one’s labour to another, might vary even within a particular community, the relationship in agriculture, for instance, being different to that in commerce.

There is a mental tension, indeed, between the thought of a master/servant relationship being a social institution and the modern emphasis upon personal freedom. This, however, will be seen to issue rather from a defective notion of freedom that we have than of freedom properly understood.(6) Though there is no social necessity in regard to this relationship of service, unlike that of marriage, for it to be life-long, nor, like marriage, any personal obligation to enter into any particular such relationship, there will generally be found to be many who will be content to be directed in their employment and a comparative few who will be better equipped to direct others. That is to say the work "force" will tend to be an organized one, with a more or less identifiable hierarchical structure. At the top there will be those who are masters only (hopefully aware that their relative superiority is God-given and carries with it serious responsibilities); at the bottom those who are servants only (and generally quite content with their lot). This order of things will therefore be in some sense "natural" but as noted this is not to be taken too strongly. It might be better to call it simply a naturally reasonable arrangement for a society at the economic level.

This, however, is the picture of a settled society, not an unsettled one. In modern times the picture is complicated by the turbulent course of events in which long standing institutions and laws have been radically revised, generally in the name of individual freedom. That these laws and institutions needed to be reformed no one will now question. But some will wonder whether the reformers have been carried away in their zeal for absolute liberty, or, as the Americans put it, "have thrown out the baby with the bathwater".

In any case what we have to consider is a society in a constant state of change, at times radical and even revolutionary. As a result we have a most unsettled society in which traditional social structures strain to hold their position of respect. With the prospect of material bliss being promised in the name of absolute liberty, some have been even so bold as to demand the radical "reform" of all such social institutions. By extremists we have calls for the abolition of property and marriage and other social institutions that we are discussing here. But even by what we might term moderate liberals we have proposals which would undermine these institutions.

Liberty, rightly honored, has unfortunately been given quasi-divine status. Having been made into an absolute, nothing will be allowed to stand in her way. In such a climate, it is hard to see how one can properly appreciate the role of the social "stabilizers"; or how we will ever be able to appreciate that we have to be bound, or rather bind ourselves, in some (intermediate) respect, in order to be truly and finally free.

It is true, as noted already, that in the past the master/servant relationship was too much bound up with the notion of property. We have rightly fought to rid ourselves of the demeaning social institution that was slavery, in whatever form it took. But we have on the way been deceived into thinking that free of that institution we are thereby all equal in every respect, so that no person should be the servant of another, even in the mild and quite reasonable sense of working, in a quasi-permanent way, for someone else.(7) We are made to think that anyone might be a "millionaire", the implication being that we could all "make it" on our own, if only we were astute enough to make the most of our opportunities.

That brings us to the other social institution we mean to discuss here, namely, that of the system of exchanges, or the "market". If in times past the master/servant relationship suffered by its too close association with the institution of property, or rather with a mistaken notion of property; we may say that it now suffers in being dominated by the market, or rather by the distorted modern notion of the market.(8) For, whereas among social institutions that of property ruled supreme in ancient society and the market was not as much in evidence;(9) in modern society it is commerce which holds the stage and more or less dictates how we think about all things economic.

The history of the modern fight for freedom has been very much allied to the rise to prominence of commerce. The beginnings of the movement for greater freedom of exchange go back right into the heart of the middle ages, well before what is normally regarded as the beginning of the modern era. Right from the start, however, there was a failure to make any philosophical (moral) distinction between the two modes of exchange familiar to the moral theologians. For the theologians were thought to be enemies of the freedom rightfully sought.(10) Inevitably, therefore, the notion of exchange, and accordingly freedom of exchange, was a distorted one. This distorted notion has been carried through to today.

Thus, so far as the workers are concerned, having thrown off one bad institution (chattel slavery) based upon a debased notion of property, they have found themselves encumbered with another (wage slavery) based upon a debased notion of freedom of the market. The labourer, having ceased to be regarded as property, his labour, with much the same result, became a commodity (to be bought as cheaply as possible). Free competition amongst the workers for work ("provided" by the new entrepreneurs) meant in fact taking the lowest (subsistence) wage or starving.(11)

However, before elaborating further upon the significance for Labour of modern free market economics,(12) let us take a closer look at the nature of commerce itself. Merx (pl. mercedes) is Latin for wealth. Com signifies communication in respect of wealth. So the meaning of the word is the same as exchange of goods. The most elementary form of commerce, therefore, is barter, i.e. the exchange of goods for goods without a medium. Let us adopt for ease of presentation a symbolism where C stands for goods (though taken from the word "commodity"). We can thus represent barter by the formula CC. Money, however, is soon invented to facilitate exchange, by splitting the exchange and acting as a medium. If we use M for money, this kind of exchange can be simply expressed in the formula CMC.

It is these exchanges that Aristotle called natural. For in them there is exchange of natural wealth, each exchanger ending up with goods that naturally satisfied his wants. Money, though also called wealth (merx), was seen to be of a special kind (merx sui generis), not like ordinary or natural wealth but "artificial", its value depending indeed purely on social agreement or convention (of itself it cannot satisfy, nor is it meant to). Because of the flexibility and flux in the relations of value between goods in exchange astute people soon discovered that there is a way to make money out of the very exchange process. Hence arose the mode of exchange that we may symbolize as MCM, where goods or wealth of some sort is used as the medium, the result sought being to sell dearer what one had previously bought. A more direct exchange of money, indeed, was also found to be possible. That was where money was handed over or "lent" to be repaid with other money of the same value plus interest. This may be symbolized by MM.(13)

These latter two types of exchange or commercial dealing Aristotle characterized as unnatural. As noted above, by this he meant the same as unethical. What these two unnatural modes of exchange have in common is that they both are ordered to having (more) money. What is naturally a means has been made an end, something sought for its own sake.

St. Thomas takes over Aristotle’s analysis in this regard.(14) But with respect to MCM he finds a way to legitimize it. The exchange process here is based upon accidental differences between the prices of the same goods that need not affect the essential equality or justice of the transaction. No one is necessarily being required to pay something outside the range of a just price for the goods (the just price not being a mathematically exact equality of value). Hence, there is nothing intrinsically unjust in the exchange process itself. Moreover, even though the process has no natural end (like CMC), nevertheless the money gained may be voluntarily directed to a good (natural) end. If so limited the exchange may be legitimate. With MM, on the other hand, the process is intrinsically unjust (the value of money being in fact able to be expressed exactly)(15) and so no good or natural end can justify it.

Thus in St. Thomas’ analysis of commerce we have two ethical (natural) modes of exchange, CC and CMC, one unethical (unnatural), MM, and one that is not natural in itself but may be made ethical by being voluntarily limited to the satisfaction of natural needs or rational requirements. It is to be noted, though, that this is talking essentially or according to what is intrinsic to the transactions. In the concrete case one has also to take into account extrinsic factors.(16)

These extrinsic factors may be peculiar to individual sellers and lenders (which the mediaeval analysts were aware of) or they may be general, as is common in modern unsettled economic conditions, consisting for example in measurable changes in the standard of value itself (money) that come about as a result of endemic pressures and tensions existing within modern society. Often these changes are caused by the multitude of wage-earners striving to increase their relative share of the wealth produced within the community to which they belong. However, rarely do these wage pushes result in any permanent improvement of their economic condition, but rather issue in increases in prices (inflation) that make the gains merely nominal.

Nonetheless this inflation has an effect beyond the relations between employees and employers. It necessarily has an impact upon all parties to exchanges involving money. Hence it extends to the relations between buyers and sellers and borrowers and lenders, who are obliged to take measures to compensate for any losses caused by the changes to the very measure according to which these transactions are carried out. With lenders particularly this means an increase in the interest charged upon loans. Hence the control of both wage-rises and interest rates becomes a matter of central concern to governments.(17) Necessary as this may be it is really only a case of preventing the boat from rocking too much.(18) It does not address the more basic, if less immediate, concern of where the boat is headed – for without addressing the serious issues of social justice it is certainly destined for shipwreck..(19)

The presence of such extrinsic factors, especially where general, within the modern economy makes the morality of MCM and MM most difficult to judge. Who is to say, for instance, to what extent the interest demanded upon a loan of money is to be attributed to compensation not only for loss of opportunity to invest the money legitimately elsewhere but also for loss arising from inflation for the period of the loan, rather than to a charge for the simple use of the money by the borrower? It is another question, of course, as to why there should be so many unable to engage in business or even survive without recourse to borrowing from the few of great wealth. There may be no doubt, then, that much iniquitous usury is practiced but it is hard to identify and is in any case largely a by product of the more fundamental injustice of the mal-distribution of wealth and income within the modern economy.

Certainly, loan transactions between ordinary individuals, which are part and parcel of one’s participation in the modern economy, are not generally motivated by any unjust motive to exploit one’s fellow man. Moreover, for the most part the interest rate generally set may indeed represent no more than what can be attributed to the extrinsic factors referred to. This seems to me to be the reason why the Church has "changed" its attitude to the charging of interest on loans. The change is not in the moral doctrine of usury but in its application in the circumstances of the modern economy.

However, these are considerations that go beyond our immediate purpose. We mean here only to outline the features of the market as a social institution, and to indicate how it has been (ab)used with particular regard to the condition of the modern worker. Capitalism has generally come to signify a social economy where the exchange system is seen more in terms of MCM (and MM) rather than CMC (and CC).(20) This distorted view of the market is only possible where there is already a disproportionate concentration of wealth, and consequently of capital, in the hands of the few. The many are therefore dispossessed, with only their labour to offer in exchange for the wealth of others. Being many their labour may be "bought" cheaply, regardless of their contribution to the product of their labour (and others’ capital). Such labour, therefore makes a perfect medium ( C ) in a MCM transaction, where one’s profit is achieved by buying cheap and selling dear the same commodity. Labour, in this economic system, is seen as no different from any other commodity.

How is this related to the question of the reform of taxation? We have gone into the examination of these socio-economic institutions in order to show the serious institutional disorders that exist at the economic level. In fact, humans being flawed as they are, the just functioning of the three basic socio-economic institutions of property (capital), employment (labour) and freedom of trade (market) is, as it always has been to some extent, honored in the breach rather than in the observance. And it is the poor labourer who has borne the brunt of the injustices thereby perpetrated. For he is caught in the middle as it were, not being able to work without tools (capital) or the opportunity to sell (market) his labour. It is easy, therefore, for those who own or control property, or can operate the market to their advantage or profit, to exploit the worker.

No attempt to reform the taxation system will come to anything if these more basic institutional reforms are not addressed. But the questions of taxation and taxation reform are tied up with these fundamental social issues. For all these issues have a direct bearing upon the distribution of property and income. So it is that they need to be addressed all together. This will require a preliminary discussion of the basic principles of modern social and political theory as they bear upon matters economic.

Modern political and economic thinking is underscored by an individualism or liberalism wherein the freedom of the individual is seen as the supreme value. In this view of things the roles of political authority and social institutions tend to be downplayed for they logically contradict the absolute freedom of individuals. However, the theory is never taken to its logical extreme, but absolute liberty of the individual rather remains as an ideal.

In liberal politico-economic theory, then, the acquisition of property and how it is used are the business of individuals, not the State or society generally. In such a political and economic system taxation is somewhat of an anachronism. The economy in particular is conceived as a self-operating mechanism wherein the flow of individual transactions is to be given free rein ("laissez faire"). The intervention of a "visible hand" is seen to be at best unnecessary and at worst disturbing to this natural order.

In reality, however, some provision has to be allowed for the support of the State. So a theory of taxation had to be somehow grafted upon the classical economic theory Right from Adam Smith, therefore, we have the discussion of taxation in which he enunciated his famous four canons of taxation, which are set out below in abbreviated form.(21)

1. The subjects of every State ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State.

2. The tax each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, and the quantity to be paid, ought all to be clear and plain to the contributor, and to ever other person.

3. Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it.

4. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the State.

These four rules are sometimes described shortly as principles of equity, transparency, convenience and efficiency.

Only the first canon is of interest to us here. For it is the one that goes to the substance of the matter, the other three going only to the manner in which the tax is levied. Our concern here is with justice. Even an unjust tax may have the "virtues" of transparency, "convenience" and efficiency.

What is noteworthy about this first liberal canon is its conception of the relation between the individual and the State in terms of a purely voluntary association where payments are of the nature of a quid pro quo. Though expressed in the language of proportion the tax is conceived as a payment for service rendered. The problem here, however, is that there is no way of measuring the value to an individual of the "protection of the State". Once one tries to put it into particular terms, in pure or individualistic liberal economic theory the protection of the State is, or should be, irrelevant, unless specifically contracted for. Taken in the particular sense of providing a police force, the firm might wish, after all, to employ its own security staff.

Significantly, when society is conceived in individualistic terms there is no way of defining the proper role of the State or Government. It is a case of attempting to conceive a whole as simply the sum of its parts. In considering the whole "apart", then, one is pushed to an all or nothing position.

There is a sense, indeed, in which we can say that individuals depend totally upon the protection of the State for the enjoyment of their revenues. Ironically, then, the first liberal canon of taxation contains the germ of the first principle of taxation in Radical Socialism; "from each according to one’s abilities", with no limit upon how much might be taken. This is not surprising for both ideologies are rooted in the same individualistic philosophy; "les extremes se touchent".

Liberalism’s canon of equity, therefore, turns out to be rather meaningless. It provides no objective criterion to restrain the exaction of taxes by the State. Socialism explicitly rejects any limitation on the power of the State to appropriate the property of individuals; indeed the right to private property is rejected. So it is that much of modern taxation reform comes down to a battle of wills between those who, in the actual distribution of the nation’s property (and income from same) have much, and it has to be said in some cases too much, and those who have too little or no property (or income from same) – this battle tends to be reflected in the basic stances taken in this regard by political parties. Tax reform, therefore, can mean either less taxation or more taxation depending upon who has the ascendancy for the moment.(22)

There is one school of modern economic thought, however, that has advocated the reform of taxation upon what appears to be a meaningful basis. That is what was proposed by Henry George in America at the end of the nineteenth century.(23) Noting the fact that in a society subject to significant growth of population many might grow rich simply by owning land in the right situation, or by buying and selling land at the right times, he observed that the increase in the values of the lands concerned was not due to anything done by the owners but was a by-product of social demographic movements.

Indeed, he reasoned, land values generally were the economic expression of a social advantage in relation to production or exchange attaching to pieces of land according to their socio-economic situation. So land value was really a differential site value which did not derive necessarily from anything done on the site but from what was happening around it. Moreover, he noticed that such a value was not like the value of a physical capital asset such as cattle from which one derived an income, but was rather a capitalization of an actual or a potential income, as occurs in the case of rents obtainable from monopoly rights.

In economic terms, then, land values derived from land rents that could be demanded simply by reason of the relative advantage of the site so far as production and exchange were concerned. The more favourable the situation in this regard the higher the site or ground rent obtainable and therefore the higher the "capital" value of the land.

He argued that this differential rental income, being derived from social causes, really belonged to society as a whole and should not be allowed to fall into private hands. It was a natural fund for providing revenue to the government for public purposes.

This proposal for taxation reform went by the names of the Single Tax and Land Value Taxation. But if we look closely at the proposal it will be seen that these names do not do it full justice. For the State is simply claiming what is rightfully its own and by doing this would in theory cause land values due to the economic advantages of situation to disappear. It has also been called "agrarian socialism". But it does not have application only to agricultural land. Indeed, it has least application there and most obviously in regard to land in the commercial centres of cities. The proposal has been criticized as denying the right of private property. But this criticism seems misplaced for the proposed reform does not affect the individuals’ right to use the land for production and profit from their own efforts on the land. It seems it would rather discourage the holding of land by those who wished to make a profit without working it.

This proposal for tax reform has much to commend it, especially in the modern politico-economic context. One can hardly fault its logic. But it involves an attempt to distinguish the contribution of the whole (society) from that of the parts (individuals). These are, however, in principle incomparable. As noted above, in terms of any particular measure, one may argue that society or human association makes all the difference.

The phenomenon of land or site value also seems to be a feature of the modern highly commercialised economy where practically everything and anything is exchangeable and given an exchange value. Land, which in a settled society is not much bought and sold, becomes reduced to the status of a "commodity" (like Labour). In that sort of economic order (or disorder), things not directly measurable may come to be indirectly, but even so the measure has to evaluate differences derived from conditions that may be quite unnatural.

George’s proposal for raising public revenue leaves the more fundamental distortions in regard to the general distribution of private property and income unaddressed. Its implementation would no doubt strengthen the financial position of the State but it would not necessarily improve that of the dispossessed poor.

That does not mean that the proposed tax reform might not be valuable as a tool for reducing, or moderating the effect of, income and other taxes upon the general population. Nor does it mean that there might not be call for the State taxing away the "windfall" profits associated with inordinate movements in land values due purely to social factors.

Such a differential "tax" has many advantages in comparison with other taxes on income.(24) It would be easy to administer. It would be hard to avoid, as is not the case with the present income tax. It would not be a direct disincentive to production. It would target particularly the rich and privileged, who own most of the landed property in the community. It would discourage speculation in land, which is a serious cause of social and economic instability.

In the end, however, we can see that in modern economic theory and practice there is no principle upon which income taxation might be reformed. Indeed, such is the conception of the relation between the individual and the State it seems almost inevitable that taxation becomes an ever increasing burden on the population.

The understanding of the problem lies outside the "square" of modern thought. We must return to basics, as they have been understood from time immemorial.The first thing necessary, therefore, is the reform of the way the most fundamental of all economic institutions, namely that of property, is applied - which requires the correction of the huge disproportion in the distribution of property. The misuse of the market in modern times is due largely to the fact that is only superficially a free market because of the necessitous condition in which the many dispossessed are.(25) The malfunction of the master/servant institution, i.e. the exploitation of the common worker, is very much tied up with the condition of poverty to which they have generally been reduced.

No attempt to reform the taxation system, therefore, will come to anything if these more basic reforms are not addressed. As can be seen this must concentrate upon the reform of the institution of property. The present taxation regime has grown out of the virtual abandonment by government of its own rights to its due proportion of the natural wealth of society. A large step, and a necessary first step, towards righting the mal-distribution of property must be the restoration to government of its rightful proportion. Rather than selling off what assets it has, the government should be accumulating assets, from which it can obtain the public revenue it needs for the purposes of government. But, more than that, it should be taking back assets, from those who have a disproportionate amount.

The reform of taxation, which consists, as may be seen, in its abolition in its current form, or at least in its great reduction, will proceed automatically as the government recovers control over its own resources. But, this correction is not enough by itself. There will still exist, of course, much disproportion in the possession of property in private hands which will need correction. So the reform in the area of public property must be accompanied by the reform in the area of private property. Otherwise, the government will have the additional burden of providing for the many poor still unjustly deprived of their rightful share in the wealth of the community.

No one pretends that this can be other than a slow and politically painful process. The "patient" (i.e. the whole community) will naturally resist the measures required to bring about the reform on this account. The "doctor" (government) will need therefore to be convinced of the rightness of the treatment and convince the "patient" of its urgency. Such a regime of political and economic reform in regard to the distribution of property, however, is the only way to restore society to that order of social justice which is to society what health is to the individual.

dgboland © 2004

(1) We are primarily concerned with taxation of incomes, such as rents profits and wages, because of the major dependence of modern governments upon this source of revenue. But analogous considerations would apply to goods and sales taxes and taxes upon property generally. For all are taxes upon private property of one sort or another.

(2) Cf. "The Ethics of Taxation" D.G. Boland, 2004.

(3) As, for example, was had in the Roman Paterfamilias.

(4) St. Thomas, II-II, 66, 2 c.

(5) We are not taking into account here moral differences.

(6) cf. "Freedom without Honour", D.G. Boland, 2004.

(7) We are not talking here of the duty of obedience to legitimate political authority, which is connected with another social institution, that of government, and therefore matter for another discussion.

(8) The exchange system, as the pagan Aristotle was able to note, takes two forms or modes, one he termed natural the other unnatural, which terms translate here into ethical and unethical. Though, as we shall see, there are qualifications to be made to this simple opposition, the development of modern commerce has been characterized rather by the adoption of the latter mode than the former. Freedom of exchange, therefore, has the paradoxical history of being rather a means of exploitation, especially of workers, than of being something self-evidently beneficial (as it is when operating according to the natural mode). Even more evident today, when the notion of free trade has been translated to the exchanges made between nations, is this exploitation (especially of the workers of the poor countries).

(9) That is not to say, however, that it was absent. Indeed, the features of modern commerce were to be found also in ancient Greece and mediaeval Europe. The contrast is made here with particular reference to the way labourers were and are regarded.

(10) This was plain prejudice for this moral distinction was originally taken, not from a Christian theologian, but from a pagan philosopher, Aristotle.

(11) This is the picture at the turn of the twentieth century when liberal capitalism and laissez faire economics were at their zenith. A reaction inevitably set in and the twentieth century was a battle ground of the clash of two extreme politico-economic ideologies, pure liberalism (unbridled capitalism) and radical socialism (communism). Communism seemed for a time to be winning, and Capitalism was able to hold the fort in the "free world" only by compromising its principles to a large extent – ushering in a period of the "mixed" economy. At the turn of the twentieth century, however, we saw the sudden collapse of Communism in its stronghold the USSR. The advocates of Capitalism have therefore returned to the defence of the principles of pure liberalism, and gullible governments have listened to them. So we have entered the new era of "deregulation". It remains, however, a very unstable social situation.

(12) One significant difference we might note here is the fact that the market is an impersonal master. Thus whilst the old system of slavery could be cruel this at least depended upon the master being heartless, which no doubt often was not the case. The market is necessarily heartless. The system of modern wage slavery also tends to mix hypocrisy with exploitation; it is rather galling to be so exploited in the name of freedom.

(13) There is another exchange of monies only that involves currencies of different countries. But that exchange is better symbolized by MCM, for the currency of another country is not a measure of value in one’s own, and accordingly variable in value in relation to one’s own currency. In such circumstances it functions, therefore, rather like a commodity than money.

(14) Cf. II-II, 77.

(15) There is no flexibility or flux in the value of money under normal circumstances or in a settled society, where money acts as the measure of value, and whose virtue is in its stability. St. Thomas’ analysis does not envisage an economy where money itself is subject to significant inflation or frequent and measurable changes in value. In such circumstances some difference between the value of the money lent and repaid may be necessary to maintain equality in the exchange. That, however, does not represent a payment for the use of money, but a compensatory payment. There are, of course, the traditionally recognised extrinsic reasons for an additional compensatory payment ("interest") as in the cases of damnum emergens and lucrum cessans.

(16) Such extrinsic factors may turn what is a good act into a bad one, as when the equality of value to be observed in CMC is affected by deceit or indirect force (i.e. one party taking advantage of the necessity of the other). They may also turn what would otherwise be a bad act into a good one, provided the act itself is not necessarily bad, as in MCM when one is not motivated by love of money or profit without limit. In MM, which is concerned with making a profit on the loan of money as such, one may avoid the essential badness of the act by not charging for the use of the money but only seeking to be compensated for some loss incurred on the loan extrinsic to the borrower’s use of the money.

(17) This reached a critical point in the Great Depression of the 1930’s and governments were constrained to intervene thus ushering in the era of the managed economy. The focus then was very much on avoiding widespread unemployment, which meant in effect that for many workers their wages had been reduced to zero, and also avoiding too great fluctuations in the value of money. At the same time J.M .Keynes ingeniously invented an economic theory that provided an intellectual framework for the new fiscal (taxation) and monetary (interest rate) policies brought into play.

(18) Thus Keynesian (short term) Macroeconomics supplanted at least for a time the "classical" long vision Economics (renamed Microeconomics). This latter theory, based upon ideas of mechanically controlled stability or equilibrium inbuilt into the socio-economic order, posited that the boat would naturally right itself in the long run, so that government should resist any desire to intervene (a move that could only make matters worse). But, as Keynes tartly noted, "in the long run we are all dead", meaning that immediate dangers could not be addressed in such a fatalistic way. In any case the deterministic principles of the classical economics, modelled upon Newtonian Physics, (which Keynes was concerned not to deny so much as limit the application) are themselves flawed.

(19) This is probably a too pessimistic long term view of things. Adapting what Adam Smith himself observed, with in this case a justified optimism, the social economy being in a real sense natural (not physically but morally so) it seems to be able to survive not only the ignorant prescriptions of its doctors (the economists and politicians) but even the chronic and severe disorders it is made to endure.

(20) This is how Karl Marx understood it (cf. Capital, Book I). Indeed he used the same symbolism used here, based upon Aristotle’s distinctions, to assist his analysis. But he failed to note the necessary moral distinctions to be made and fell into the naturalistic trap of treating the economic level of society in the same (amoral) deterministic way as the classical economics, making use of Hegelian dialectic to accommodate the contradictions inevitably issuing from treating what is natural and unnatural or ethical and unethical in the same terms. Capitalism is not all evil or antithetical in the socio-economic order. Like money it names an exchange process that can be used well or ill. If it does tend to be an instrument of exploitation by some of others the fault lies in the lack of appropriate political (and self) control. It is the love of money or profit for its own sake that is at the root of the evil concerned. There is nothing inevitable about it whether personally or socially. Fundamentally it is a moral problem.

(21) Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Vol.V, Ch. II, part ii, ‘Of Taxes’.

(22) This is putting the matter too cynically. Many promoters of taxation reform, particularly politicians, are no doubt genuinely motivated, on the one hand, by fears that the State is suffocating the economic initiative of individual businesses, or, on the one hand, by desires to ensure justice for the dispossessed poor.

(23) Cf. Henry George, Progress and Poverty and The Science of Political Economy.

(24) These advantages have been noted ever since the rise of modern economics. Adam Smith and J.S. Mill, for instance, were particularly strong advocates of such a tax.

(25) Cf. Populorum Progressio, 59 "The teaching set forth by Our predecessor Leo XIII in Rerum Novarum is still valid today: when two parties are in very unequal positions, their mutual consent alone does not guarantee a fair contract; the rule of free consent remains subservient to the demands of the natural law. (57) In Rerum Novarum this principle was set down with regard to a just wage for the individual worker; but it should be applied with equal force to contracts made between nations: trade relations can no longer be based solely on the principle of free, unchecked competition, for it very often creates an economic dictatorship. Free trade can be called just only when it conforms to the demands of social justice."