Adam Smith's Industrial Organization of Religion: Explaining the Medieval Church's Monopoly and Its Breakdown in the Reformation

Abstract

Adam Smith characterized the medieval Roman Catholic Church as a force impeding Europe’s process of development. The Church was, in Smith words, “the most formidable combination that ever was formed against the authority and security of civil government, as well as against the liberty, reason, and happiness of mankind.” In many ways, the Church’s survival seems — as it probably did to Smith — “miraculous” (Minowitz 1993,176). How did the Church maintain this position, especially as the monopoly provider of religious services for several centuries; and how did that monopoly break down in the Reformation? Further, given that the secular lords had a comparative advantage in violence relative to the Church, how did the Church survive and maintain its power? And why did it prevent development? Smith developed a rich and systematic approach to the incentives, institutions, and competition surrounding the medieval Church. To understand the relationship between the secular and ecclesiastic lords, Smith raises the importance of a third group, the masses. According to Smith, the secular lords were unable to pacify the masses; but the Church could do so. The ability to influence the masses granted the Church a credible threat over the secular lords: were the latter to challenge the Church and attempt to appropriate some of its revenue, assets and control, the Church would turn against them. Given this setting, each of the two sets of elites had incentives to cooperate to exploit the masses. To maintain this equilibrium, the Church had to prevent economic growth. Growth would have granted the masses wealth, power, and independence, undermining the Church’s ability to mobilize the masses in times of threat from the secular lords. It therefore suppressed growth and liberty in order to maintain the peasants’ dependency.

As to the Reformation, Smith argues that the masses gradually became less dependent on the Church. Independence meant that they were less responsive to the Church’s direction. This change, in turn, removed the Church’s credible threat over the secular lords, allowing them to force considerable concessions from the Church or to remove the Church altogether in favor of newly established sects. I develop a simple game theoretic model to demonstrate the logic of Smith’s equilibrium and comparative static claims.

Keywords: Adam Smith, economics of religion, political-economics of development, violence, liberty

JEL Classification: B12, B25, D78, H11, K00, L22, L23, N43, O52