The Supply Side and Growth in Post Reformation Europe

As we saw in previous chapters, the Reformation began a process of multiple-firm entry into a monopoly religious market in the sixteenth century. This process reduced the average price of religious services, thereby releasing capital from religious uses so that it could be redirected toward secular ends, the effect of which was to induce economic growth. Growth in Protestant areas was, of course, also premised on the failure of the Counter-Reformation to reclaim markets that it had lost to the new entrants. Rather than view the connection between religion and economic development in (Weberian) macroeconomic terms (i.e., a change in the labor supply or savings function of Protestants versus Catholics), we take a microeconomic approach that focuses on the effects of changes in individual and group consumer surplus. Our argument is that, in part, economic growth was made possible by the entry of new denominations offering religious services to consumers at costs lower than those offered by the Catholic Church. The consumer surplus released by this price reduction made it possible to invest in nonreligious capital, which had the effect of stimulating economic growth. We recognize that one of the chief criticisms of Weber's hypothesis (or the naive version of it at least) is that it is disproven by demonstrable economic growth in countries that remained Catholic, such as Hungary or Belgium. A supply-side economic perspective casts a different light on this argument, as we shall see.

It is important to note here that a steady stream of rents flowed to Rome as the Pope and his bureaucracy maintained their monopoly with entry-and-competition-deterring programs such as the Crusades, assaults on heresies, inquisitions, and witch hunts. Protestant entry produced three important effects: (1) a reduction in the amount of resources flowing to the Roman Catholic Church from the demand side for religious services; (2) a reduction in the cost inflation created by rents, both "voluntary" and forced, gathered to finance massive church investments in cathedrals throughout Europe in the twelfth and thirteenth centuries, and (3) competition between contiguous Protestant and Catholic regions resulting in greater economic development in these Catholic regions.

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