Aristotle and Markets

Writings on the different kinds of exchange can be traced back to Classical Antiquity. The Greeks were fascinated with markets, especially the ethical implications of such transactions, and soon began to formulate their  own opinions on the emerging markets in ancient Greece. Aristotle, especially, devoted some of his writing to understanding its complexity. He observed four types of exchanges in the developing market of Ancient Greece:

1.     C –> C ; where C = commodity

Better known as bartering, Aristotle had little issue with this mechanism of exchange in the market. He found it to be the most “natural” out of all exchanges, but saw major drawbacks in its inability in dealing with surpluses and deficiencies properly. The reason for exchange, from Aristotle’s understanding, was because an individual viewed the seller’s surpluses as being of higher value than his or her own surpluses, thus creating a transaction of equal value. He based the need for exchange around the concept of “use value” or “true value,” which a commodity holds if it is necessary for one’s life, household, or even community. He equated value with necessity. Therefore, Aristotle’s reasons for exchange can be seen as one of the early precursors the the subjective theory of value, since it acknowledges different use values for different households — based on their respective surpluses.

2.     C –> M –> C ; where M = Medium of exchange (i.e money)

The most prevalent method of exchange today — Aristotle was ambivalent to it. He found money to be necessary in establishing a common comparable measurement for all commodities in the market, however he also felt it facilitated the next two forms of exchange (3 & 4).  This particular transaction is very similar to barter in that the purpose of it is consumption. The use-value for each receiving end of the transaction is virtually the same, therefore the exchange is equal, with money serving as simply ameans, rather than as an end. Important to note also, is that Aristotle did not see money as a representation of value or wealth; it was a representation of want by agreement. Keep this in mind, because this is the one of the foundations for his criticism of the next two transactions.

The economy of Ancient Greece is useful to bear in mind when trying to understand Aristotle’s  analysis of markets. The majority of the work in Ancient Greek society was done by slave labor, mostly agricultural work, and many of the commodities on the market were products of individual artisans. Therefore, the full value was realized in its exchange of another commodity because the artisan’s sweat and work was fully accounted for in the transaction — the artisan kept all of what he produced, including his surpluses, and traded it likewise for a commodity of relatively equal value.

3.    M –> C –> Mp ; where Mp = M prime or M + profit

This mechanism of the market Aristotle found to be ethically problematic and abominable. He calls this retail trade and the issue, he felt, was that money served as a starting and end point of a transaction, rather than a medium of exchange. He also felt this violated the principle that market transactions should serve the needs of thehousehold, rather than succumbing to endless exchanges to increase profit. Aristotle did not consider this to be true wealth because the end goal is a greater quantity of money; it is simply a representation of exchange value in moneyed form — because it is purely qualitative, it lacks a limit, which was present in the first two kinds of market transactions. He believed there was no natural restrain on this form of transaction because the market exchange, in and of itself, was not entirely equal. In the first two methods of exchange, trade was limited to commodities that were produced by, presumably, individuals – therefore the starting point required an exertion of labor, and the transaction itself was virtually equal in its entirety. Because the starting point of this transaction, “M,” lacks that necessary productive capacity and because the individual is acquiring more of the same item he started with there is fundamentally no restriction on how much profit can be acquired — and the need to acquire more is intensified. Frankly, the major difference lies in that the first two transactions were to consume, this particular one is to accumulate.

4.      M –> Mp 

This market behavior is usually grouped with the third one shown, but Aristotle groups it differently because “C” is absent. He calls this usury, and the most unnatural of all market exchanges. He considered the reason for loans to be exploitative in that the giver of the loan was demanding higher returns than what was handed out — abusing the situation of the receiver of the loan.

Granted, there are issues with Aristotle’s understanding of basic market functions. The fourth market mechanism, in particular, is lacking in analysis — it fails to understand that that the interest payed back is a portion of the new productive potential that was created by that loan (i.e what it was put to use for, invested in, etc). Requesting a loan does not necessarily mean an individual is in distress, but since Aristotle was primary concerned with ethics, it is easy to see why he made that assumption. Aristotle’s fascination with ethics is also the driving reason he criticizes the moneyed interests driving the marketplace. His bare-boned economic analysis as an ethicist, albeit lacking in much empirical reasoning, does bring an important aspect of the market to light — the market is amoral. This is crucial. It is precisely due to this amorality, and because the market lacks any moral mechanisms and requirements, that the market sometimes succumbs to moneyed excesses of the socially damaging kind.

– Much of the information mentioned can be found in this article titled “Aristotle and Economics”
– More information on Plato’s and Aristotle’s economic views can be found here.

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