Martin Luther fascinates me, not least because he is such a bundle of contradictions. This is true as much in his economic thinking as anywhere else. In his sermon “On Trading and Usury,” Luther argues that it is sinful for merchants to sell their goods for the highest possible profit. [1] Here, he says, “occasion is given for avarice, and every window and door to hell is opened.”[2] Luther says the ideal civil law would involve a government agency that would set a fair price, but he thinks “we Germans have too many other things to do; we are too busy drinking and dancing to provide for rules and regulations of this sort.”[3] Since government regulation of this kind is not feasible, he suggests that “the next best thing is to let goods be valued at the price for which they are bought and sold in the common market, or in the land generally.”[4] He also suggests that crafts people should price their goods based on the amount of labor they put into creating them, at a rate comparable to a day laborer in some other occupation.[5]
Luther’s argument here is interesting because, to anyone with a sense of how economics works, it seems incoherent. The “highest possible profit” for any commodity is simply the price the market will bear, which is one of Luther’s suggestion for a fair price. It may be that Luther is writing against the backdrop of an economy that is not really a free market because of the influence of trade guilds and general lack of consumer information. Perhaps candle makers in Wittenberg could charge much higher prices than candle makers in Münster because the markets were so localized. Or, perhaps the furniture maker’s guild artificially inflated prices because of its monopoly on the trade. In any event, in modern regulatory economics, that kind of problem is addressed through antitrust law, not through government price-setting.
Luther’s alternate suggestion of setting a price equal to the value of labor in another occupation – in addition to being inconsistent with looking to an ordinary competitive market price – makes no sense unless the other occupation involves comparable skill, training, precision, and so-on. Even then, the monetary “value” of a unit of labor is not something that can be established ex ante without reference to the market for whatever commodity the labor produces. What Luther seems to have in mind here is luxuries versus necessities. He might have a point on this score. Modern microeconomics recognizes that demand for luxury goods (sometimes called “Veblen” goods after the economist who first described this effect in detail) is highly price inelastic – that is, the quantity demanded does not vary significantly as price is raised.[6] This is why a mid-range Mercedes costs $25,000 or so more than a comparable quality Toyota.
[1] Martin Luther, “Trade and Usury,” in William C. Placher, ed. Callings: Twenty Centuries of Christian Wisdom on Vocation (Grand Rapids: Eerdmans 2005).
[2] Ibid., Kindle Loc. 3091.
[3] Ibid., Kindle Loc. 3113.
[4] Ibid.
[5] Ibid.
[6] For a description of this and other price elasticity effects, see David W. Opderbeck, Patents, Essential Medicines, and the Innovation Game, 58 Vanderbilt Law Review 501 (2005).