Self Interest and Competition Outside the Firm

Religion does not play a central role in Smith's seminal work, An Inquiry into the Nature and Causes of the Wealth of Nations, but it becomes significant in Book V, when he embarks on a discussion of the source and use of government revenues. The critical issue for Smith throughout The Wealth of Nations was to show how private interest vented through free and open markets winds up promoting the public interest. In education this link was severed, Smith argued, by the practice of paying teachers from endowments: "The endowments of schools and colleges have necessarily diminished more or less the necessity of application in the teachers. Their subsistence, so far as it arises from their salaries, is evidently derived from a fund altogether independent of their success and reputation in their particular professions.''2 Smith believed that a system of remuneration based on fees paid by students would produce greater economic efficiency and public welfare. He endorsed the same idea as it pertains to the performance of clergy, noting that despite other glaring shortcomings, ''In the [post-Reformation] church of Rome, the industry and zeal of the inferior clergy is kept more alive by the powerful motive of self-interest, than perhaps in any established protestant church.''3 In this regard, Smith clearly regarded competition as an energizer of enterprise, whether secular or religious: ''The parochial clergy are like those teachers whose reward depends partly upon their salary, and partly upon the fees or honoraries which they get from their pupils, and these must always depend more or less upon their industry and reputation. The mendicant orders are like those teachers whose subsistence depends altogether upon their industry. They are obliged, therefore, to use every art which can animate the devotion of the common people.''4

What makes Smith's discussion of the competitive principle in religious activity significant is the fact that he recognized and explored the nature of competition on several different levels in religious organizations. In addition to being advantageous to civil order, organized belief can threaten it as well. Religion produces certain public spillovers as well as private benefits. What Smith perceived as a threat is the tendency of religion to monopolize certain aspects of culture, in part because civil governments invariably seek to mold religious institutions to their advantage. Smith maintained that it is in the interest of civil governments to keep the clergy indolent, just as it is in the interest of church administrators to subdue rivals. Government opportunism exerts a strong tendency in favor of established churches—by endorsing a single religion, the state buys domestic tranquility, whereas by aligning itself with civil government, the church buys relief from institutional competitors. The tendency, in other words, is for established churches to become monopolies: "The interested and active zeal of religious teachers can be dangerous and troublesome only where there is, either but one sect tolerated in the society, or where the whole of a large society is divided into two or three great sects; the teachers of each acting by concert, and under a regular discipline and subordination.''5 If left free from government affiliation, many small religious sects will neither "disturb the public tranquility," nor be "productive of any very hurtful effects, but, on the contrary, of several good ones.''6

This official alignment of church and state is capable of engendering conflict between the two.

The clergy of every established church constitute a great incorporation. They can act in concert, and pursue their interest upon one plan and with one spirit, as much as if they were under the direction of one man; and they are frequently too under such direction. Their interest as an incorporated body is never the same with that of the sovereign, and is sometimes directly opposed to it. Their great interest is to maintain their authority with the people; and this authority depends upon the supposed certainty and importance of the whole doctrine which they inculcate, and upon the supposed necessity of adopting every part of it with the most implicit faith, in order to avoid eternal misery.7

The question for society is how to resolve the conflict of interest that arises from what in most cases springs from the voluntary incorporation of political and religious interests.

For Smith to resolve this issue, he had to establish the goal of religion. Just as he believed that state religions created public mischief, so he believed that the separation of church and state promoted a well-ordered polity. The separation of church and state permitted competition among religions, which Smith thought was justified because beliefs regarding religious precepts (e.g., moral behavior, conditions for salvation) differed among individuals. He was keenly aware that religion is not a homogeneous good and that, in some kind of moving equilibrium, different forms of religion evolved and had to be supplied. Competition produces consumer sovereignty, which helps to establish a well-ordered society.

Consumers are sovereign by virtue of free choice among alternatives offered to them by rival vendors. Optimality in terms of meeting consumer demands is achieved by open competition in output markets— that is, between religious firms. This is essentially the position taken by Nathan Rosenberg8 and by Gary M. Anderson9 who have analyzed this issue. As we will see momentarily, however, Smith also analyzed consequences of consumer sovereignty produced within the Coasian firm.

We must remember that Smith was a historian as well as a philosopher and economist. So it is no surprise that after establishing the superiority of competitive religious markets to established religions, he introduced a bit of conjectural history.

But if politicks had never called in the aid of religion, had the conquering party never adopted the tenets of one sect more than those of another, when it had gained the victory, it would probably have dealt equally and impartially with all the different sects, and have allowed every man to chuse his own priest and his own religion as he thought proper. There would, in this case, no doubt, have been a great multitude of religious sects. Almost every different congregation might probably have made a little sect by itself, or have entertained some peculiar tenets of its own. Each teacher would no doubt have felt himself under the necessity of making the utmost exertion, and of using every art both to preserve and to increase the number of his disciples. But as every other teacher would have felt himself under the same necessity, the success of no one teacher, or sect of teachers, could have been very great.10 (emphasis added)

In other words, if history could be rewritten, the desired path would be clear. But given the evolution of government and the pattern of incentives in existence between civil government and religious institutions, the deregulation of established churches into free religious markets was not likely, in Smith's view. Therefore he turned his attention to an assessment of the relative merits of various established religions and, in doing so, made a clear contribution to the theory of organizational economics—that is, to efficiencies possible within the religious firm.

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