Economics of the Protestant Revolt

Rome, your avidity deludes you, and you shear too much wool from your sheep. So great is your avarice that you pardon sins for money.

—Felix Rocquain, La Cour de Rome, et l'Esprit de Réforme avant Luther, vol. 2

When land, like movables, is considered as the means only of subsistence and enjoyment, the natural law of succession divides it, like them, among all the children of the family____But when land was considered as the means, not of subsistence merely, but of power and protection, it was thought better that it should descend undivided to one.

—Adam Smith, The Wealth of Nations

Readers who have persevered this far have been asked to consider that changes in the form of religion take place as rational decisions determined by comparisons of benefits and costs. Individuals demand a Z-good, religious services, for which they pay some full price (monetary and time costs) and receive some benefits. Demand for this Z-good is determined by a number of factors, including, but not limited to, income, education, and risk tolerance. In societies that allow plural religions to compete with each other, religious entrepreneurs adjust product characteristics to match different sets of demands and, in the process, sometimes create alternative forms of religion.

In this chapter we employ the economics of religion in order to deepen our understanding of the first major break in the Roman Catholic religious monopoly, the Protestant Reformation. Prior to the Protestant Reformation there had been numerous attempts to break into the medieval religious market dominated by Catholicism. But earlier attempts fomented by Christian "heretics" (e.g., the Gnostics and Cathars) were put down, often violently, by the Roman Catholic Church. So the issue that confronts us is as much a matter of timing as it is of substance. In order to explain why the Protestant Reformation occurred when it did, as well as why it did, we enlist the language and theory of economics. We treat the medieval Roman Catholic Church as a firm that provided religious and legal services and used its market power to extract rents from its customers. We assert that by the late Middle Ages the Catholic Church was pricing its product too high in full-price terms to dissuade market entry by rival Protestant churches, and we attempt to test this theory by comparing regions that remained Catholic to those that switched to Protestantism.

The extensive literature on the Protestant Reformation contains essentially three competing hypotheses. The first, advanced by Protestant theologians, maintains that the Catholic Church gradually lost influence because it became ethically and morally corrupt. The second, advanced by historians, asserts that circumstances forced the Catholic Church to take sides in a series of conflicts between emergent northern European states and emergent cities. Its side often lost, leading to the Catholic Church's gradual decline of influence and prestige. The third, advanced by economists, follows an argument originated by Adam Smith in 1776: It holds that state-supported religious monopolies behave inefficiently in many ways, thereby opening up the possibility of entry by more efficient competitors.

We first advanced the idea that rent extraction through the selling of spiritual services at very high prices had important historical consequences about a decade ago.1 One major finding of our earlier research was that control by religious authorities of portions of the legal system provides market power that can be used to exclude rivals. Thus, we were able to refine Adam Smith's general argument regarding inefficiency of monopolies, and simultaneously support Iannaccone's contention that religious monopolies do a poor job of providing religious services. We achieved this by explicitly recognizing rent extraction in the Roman Catholic Church's administration of justice and in exercising its gatekeeper function (control of the keys to heaven). We now advance an additional argument, that if the religious monopoly overcharges, it risks two forms of entry: (1) the common citizenry may choose other dispensers of religious services; and (2) the civil authorities may seek a different provider of legal services. The Protestant Reformation may be seen, in part, as a manifestation of both forms of entry.

Our explanation of religious form change explores supply-side as well as demand-side factors affecting the timing and acceptance of the Protestant Reformation. We recognize that the Protestant Reformation was neither a singular nor a homogeneous event. In discussing it, therefore, we accept Max Weber's stylized version. According to Weber, "the complete elimination of salvation through Church and the sacraments (which was in Lutheranism by no means developed to its final conclusions), was what formed the absolutely decisive difference from Catholicism.''2 We argue that the medieval church extracted rents by practicing sophisticated forms of price discrimination and that this gave new encouragement to market entry by a rival "firm" offering a modified "product." Moreover, we seek to test this hypothesis as best we can with limited historical data. Our test rests on the premise that the medieval church was most likely to maintain its incumbent-monopoly position in less heterogeneous, semi-feudal, rent-seeking societies that were mostly dissipating rather than creating wealth, whereas Protestant entry was most likely to occur in emerging market-order societies that were creating wealth through expansion of profit opportunities.

Superficially our hypothesis may appear to resemble Weber's socio-historical view which maintains that Protestantism emerged in areas of highest economic development, that is, those most favorable to a revolution in the Church. But Weber's thesis is closely linked to Calvinism, which, according to Richard H. Tawney, was seriously divided between its teachings and its practice (at least in England and Holland).3 In these markets, interference in business and control of economic enterprise by state and church leaders was resisted by budding entrepreneurs and capitalists. According to Tawney, this desire for independence from traditional authority reflected Weber's true meaning of the "spirit of capitalism.'' Protestantism, in short, not only molded the social and economic order, but was molded by it. Our argument, in contrast, asserts that individuals, seeking higher net utility, opted for a lower cost, implicit contract.

In the Middle Ages rent-seeking societies were characterized by tradition-bound rules and practices that encouraged alliances between church, state, and aristocracy, and by a stable, concentrated distribution of wealth. The emerging market-order societies were characterized by the entrepreneurial spirit, and by increasing opportunities to participate in market activities and to earn profits. The resulting distribution of wealth was fluid and unstable, and increasingly heterogeneous with respect to social class and status. In this setting the Catholic Church's system of price discrimination induced many of the faithful to embrace a substitute religion.

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