Stoic salesmanship

‘In today’s courts, Cicero would prevail over Aquinas, who acquitted the Merchant of Rhodes for withholding information from customers’

In retail financial markets, mis-selling has become a high-profile and costly issue. Investors who lose money may sue for compensation over mis-selling if they can show their professional adviser did not tell them as much as they needed to know before they made their decision. With settlements for mis-selling claims on PPI and on interest rate swaps having run into billions of pounds, financial advisers have found out how costly it can be to fall short of requirements to disclose risk. But where does that responsibility stop? For all the regulatory and legal attention trained on definitions of mis-selling, no hard and fast rule draws the line between disclosing too little and disclosing enough. Today’s investment markets may have coined the term mis-selling, but the borders between fair und unfair selling practices were already in dispute in the second century BC when Greek Stoics tabled the ethical dilemma facing the Merchant of Rhodes.

Consider — a famine on the island of Rhodes has squeezed up the price of grain, several grain merchants from Alexandria have set sail to deliver supplies, and when one of these merchants arrives ahead of his competitors he has to choose: should he reveal more grain is on the way, or keep his knowledge to himself? Depending on his choice, buyers will pare back bids for grain, or otherwise pay extraordinary prices. For Greek Stoics, the right choice for an ethical man was to share information, even if this meant he had to settle for lower profits. For 1,500 years, this verdict stood unchallenged — endorsed by Cicero, Ambrose of Milan, and Augustine (the latter did not think salesmen were entitled to profits in the first place). However, after Thomas Aquinas (1225-1274) had another look at the issue, conventional wisdom was overturned. 

Aquinas devoted an entire chapter of the Summa theologiae to the ethics of salesmanship. The gist of De fraudulentia was that a salesman had to play it straight with customers, but not to the point of undercutting his own business. Aquinas drew the fine line separating fair from unfair salesmanship with an everyday example from the trade in horses: suppose a horse was lame, then that should be made known to a buyer because lameness would only be discovered after the sale was closed. On the other hand, if a horse was blind in one eye, then a buyer could find that out without having been told and so the seller had no liability to disclose. Aquinas then turned to the Merchant of Rhodes, where the issue was not a defect in the product itself but the risk that prices might drop. Aquinas wrote that if the Merchant of Rhodes told Rhodians prices would drop soon,  his goodwill was commendable — but he would have been within his rights had he kept his knowledge to himself and sold at prevailing prices. Aquinas arrived at this assessment on the grounds that whilst a salesman had to disclose defects inherent in his merchandise, fluctuations in market conditions were not intrinsic to the product. Thus, Aquinas acquitted the Merchant of Rhodes of wrongdoing.

Post-Aquinas, scholastic economists weighed in on the issue of the Merchant of Rhodes’s right to remain silent. Gabriel Biel (1425-1495), who taught theology at the University of Tübingen, wrote that the merchant could not know for sure how long it would take for other ships to arrive, indeed, whether they would arrive at all: no merchant was liable for future contingencies.  John Mair (1467-1550),  Principal of Glasgow University, added the consideration that the merchant owed his family the duty to earn a profit, and letting go of an immediate gain was hardly prudent. The cutting edge of economic thinking at the time was in Spain, where Franciscus de Vitoria (1483-1546) and Diego Covarruvias y Leyva (1512-1577) corroborated Aquinas’s treatment of the merchant. Their opinions helped tip the scales in favour of a merchant’s right to make a profit from price fluctuations, with ramifications for understanding the nature of entrepreneurship.

Vitoria pointed out that to remain silent was not tantamount to telling a lie, and further, that anticipating future developments was what business was all about (“est ars mea quod scio esse sic futurum”). Covarruvias added that everyone had to comply with an ethical code of conduct, but it was unreasonable to expect a merchant to comply with the same exacting standard that applied to a saint: a merchant had to make a living. Besides, the Merchant of Rhodes could not be accused of having broken any known law. 

There were other commentators on Aquinas, more than there is room to quote here, which attested to the impact of Aquinas on opinion about sales disclosure. After the Middle Ages, Aquinas was endorsed by two notable 17th-century philosophers, Hugo Grotius (1583-1645) and Samuel von Pufendorf (1632-1694). Grotius agreed that the Merchant of Rhodes could not be held to have broken any law; Pufendorf added that Rhodians, reputedly men of means, would have suffered no hardship from having paid up.

If Grotius and Pufendorf agreed with Aquinas, noticeably, neither actually referred to him — perhaps post-Reformation Protestants considered it unwise to betray familiarity with Catholic literature. In any event, from then on, the Merchant of Rhodes was topical no more.

In his estimation of a seller’s duty to disclose price risk, Aquinas had prevailed over Cicero, with ramifications for the subsequent treatment of business ethics. Fast-forwarding to the present, however, legal opinion would probably come down on the Merchant of Rhodes for having withheld information from his customers. In today’s courts, Cicero would prevail over Aquinas. Somewhat counterintuitively, a medieval theologian held more radically free-market views than a Roman jurist.

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