An Economic Theory of the Counter Reformation

Protestants invaded the medieval market for religion by launching a relatively simple strategy that owed its success in part to the economic excesses of the medieval Catholic Church. Protestant sects gained members by making all-or-none offers using an uncomplicated pricing scheme that substituted for the highly discriminatory prices of the dominant firm. They were aided by historical, mostly exogenous factors, such as the absence of institutional arrangements that concentrated wealth and the presence of others that dispersed it. Once entry occurred, the Catholic Church could be expected to react in typical fashion. Therefore the questions that are paramount from an economic point of view are the following ones: What were the effects of market entry on the incumbent firm? How did the medieval Catholic Church react to the new kinds of competition, doctrinally and otherwise?

By adding a few embellishments to the simple model introduced in chapter 5, we can clarify our theory of the Counter-Reformation and highlight the testable economic implications of Protestantism's entry into the medieval religious market. In figure 6.1, let AD represent the market demand for church services. The vertical axis represents the full price of religious participation, in the form of money and in-kind contributions for a Z-good that contains one large component that we have been calling "assurances of eternal salvation.'' MCc and MCp represent the marginal production cost of two religions, Catholicism and Protestantism, which, at least initially, are assumed equal to each other. Assume that the medieval Roman Catholic Church practiced perfect price discrimination before Protestant entry. Prior to entry the area under the demand curve above cost (ABC) represents potential consumer surplus. Under the circumstances of first-degree price discrimination, the entire consumer surplus is extracted, putting all consumers at the margin of defection. The largest donors of consumer surplus are those purchasers in

Figure 6.1

Christian religion market, c. 1517

Figure 6.1

Christian religion market, c. 1517

the upper reaches of the demand curve. Under favorable conditions, entry takes place. Assume that Protestants enter as single-price monopolists charging Pp and selling Qp of religious services, as shown in figure 6.2. For this analysis we assume that Protestantism entered the religion market as a rival monopoly-like firm charging a simple (but different) monopoly price. Its membership (entry) price was cheaper, but not free: A 10 percent "biblical" tithe took the place of the many exactions of the Roman Church. Protestant entry involved, indeed initially required, the use of political power to legitimize the new churches. In 1517 Martin Luther published his Ninety-five Theses. By 1530, after the failure of Emperor Charles V to restore Catholic orthodoxy in Germany, Lutheran princes united in a league against the Emperor and Catholic princes. The freedom and the very lives of Luther and Calvin depended on the protection of secular rulers but, as both discovered, political power can be used against particular religions as well. Nevertheless, both Calvin and Luther espoused action by civil authorities to police "idolatry, sacrilege, blasphemy and other public affronts to religion.''2 This meant oppression of Roman Catholicism ("popery") and Anabaptism, and other sectarian dissent within emerging Protestantism. Further, Luther's characterization of the polity was "the sword" and Calvin's was "the bridle.'' Around such theories, monopoly or quasi-monopoly religions formed in Scotland,

138 Chapter 6 Full price of Z-good

Figure 6.2

Protestant entry into Christian market

Quantity of Z-good

Figure 6.2

Protestant entry into Christian market

Scandinavia, more than half of Germany, large sections of the Netherlands and Switzerland, and areas of Central Europe. Henry VIII, of course, declared religious monopoly in England as well.

Those demanders paying the largest amount of consumer surplus for religious services—those in the upper reaches of the demand curve— would tend to switch. Trades no longer take place at prices between A and B. This means that OQp demanders will likely switch from Catholicism to Protestantism, leaving BD as the residual demand curve for Ca-tholicism.3 Whether the Catholic Church continues to price discriminate or opts for a simple monopoly price, it is clear that average price will fall in response to entry.4 Note that this result would obtain whether the Catholic Church continues to perfectly price discriminate along the residual demand curve or whether it chooses to charge a simple monopoly price. A residual marginal revenue curve (not shown in figure 6.2) may be drawn originating from point B. Simple monopoly price would be established on the demand curve at the point of intersection between MCc (= MCp) and the residual marginal revenue curve—at a point lower than B, the Protestant entry price. This is the first testable implication of our theory.

A second testable implication is that competition will be most intense in the price region near Pp. Such competition might be expected even in areas that do not finally settle as Protestant. For example, some Spanish and French aristocrats located in the upper regions of demand curve AD may have wished to break away from the Catholic Church but were dissuaded from defecting by institutional impediments, such as primogeniture laws. Essentially, in areas where Catholics and Protestants were geographically contiguous, their prices and rent extractions would have been similar. This results because a Tiebout-like competition—where people "vote with their feet'' in response to local economic policies— would have made these local economies quite alike in their characteristics. (For example, a similar interest rate would have prevailed.) In this case Catholic areas should exhibit the same economic growth and institutional characteristics as Protestant areas. This, of course, confounds an economic interpretation of the effect of Protestantism on economic growth, but we defer discussion of this topic to chapter 8.

A third testable implication is that, post-entry, the Catholic Church will attempt to extend its own demand curve by driving up the marginal cost of Protestant churches (MCp in figure 6.2). In order to undertake this action, it must be cost-effective, that is, the marginal revenue of the action must be greater than the attendant marginal costs. For example, the organized suppression of defectors by Church-sponsored inquisitions must generate more revenue than costs. We expect more violence where the marginal product of violence is greater.

A fourth testable implication is that, as with any imperfectly competitive firm, the incumbent firm will try to develop policies that will shift BD to the right and make its demand more inelastic (e.g., advertising). Several strategies suggest themselves here: correcting abuses within the medieval Catholic Church; the development of alternative religious orders that are more resistant to corruption charges such as those leveled against the Catholic Church by Protestant reformers; and devoting more church resources to charitable endeavors or other means of social support.5

Did the medieval Catholic Church respond to Protestant entry by employing strategies that are predictable in light of the theory outlined above? We looked for evidence to support our thesis in the historical documents of the Reformation era and in the work of respected historians who have specialized in this field. Historical evidence shows that the medieval church responded to market entry on two different levels. On the retail side it took actions to raise and transform product demand, whereas on the wholesale side, the organizational structure of the Catholic Church acted as an impediment to meaningful reform.

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