ECONOMICS OF RELIGION: THE ROLE OF RELIGION ON ECONOMIC
PERFORMANCE
A Review of Literature
Davood Manzoor, Assistant Professor, Imam Sadiq University
' It will not perhaps surprise people that economists have something to say about the
economics of religion, since economists believe they have something to say about
everything; what is surprising is that religion has something to say about economics.’
Deirdre N. McCloskey, University of Illinois, Chicago
Introduction
Can belief in heaven or hell be a competitive advantage for nations? It's not the sort of
question that many economists ask. With exceptions like Adam Smith, the giants of
economic theory have had little to say on matters of faith.
Most of economists have tended to accept the secularization thesis advanced by Max
Weber in "The Protestant Ethic and the Spirit of Capitalism,"- as economies become
more advanced and as technology progresses, religion will decline as a force.
But the wall separating religion and economics is being breached. In the past 5 to 20
years, more and more scholars have been using conventional economic methods to
understand the way in which religion relates to the rest of society and to the economy
in particular.
Douglass North (1971, 1991) has proposed—and a steadily growing body of
empirical literature has confirmed—that institutions, more than any other factor,
determine economic performance. For a long time, economists were of the opinion
that institutions were at best peripheral to economic performance for most of the
twentieth century, but the failure of more conventional models to account for
economic performance through time has induced many economists to look to more
non- traditional explanations of economic performance. In other words, physical
capital accumulation, human capital accumulation, and technological change as such
only account for a fraction of economic growth through time. Something more elusive
must be responsible for the earth-shattering economic growth of the last two and a
half centuries.
Standing on the shoulders of North, many economists have re-oriented their focus
away from the material forces of production and toward the “rules of the economic
game” embodied in institutions.
Institutions are the formal rules, informal norms, and enforcement mechanisms that
comprise the “rules of the game” and determine the incentives to which people
respond. Institutions should give people an incentive to produce and exchange which
in turn results to “economic success”. It is the incentive structures that determine
whether or not an economy will stagnate or succeed, and it is changes in these
incentive structures that determine whether or not stagnation or success will persist
over time. A country’s institutional constellation has its foundation in the beliefs and
ideologies of the polity, beliefs and preferences shape the performance of economies
through time. Religions share a body of common ethical propositions that govern
human behavior. It is uncontroversial to assert that we are to help those who cannot
help themselves, that we are to love our neighbors as ourselves, and that we are to
refrain from theft, murder, adultery, covetousness, and false witness.
Economic theory teaches us that people do not act in a vacuum. The fundamental
lesson of economics is that people respond to incentives, and a change in formal
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institutions (such as redistributive intervention) necessarily changes the structure of
incentives in the long run and may, in fact, work to frustrate the entrepreneurial
mechanisms.
Theoretical Approaches
Regarding the conceptual or theoretical approaches to the connection between religion
and economy, there are two causal directions that analysts tend to think about. This
work has appeared especially in the literature on the sociology of religion. One
important line of research posits that religion (or measures of religiosity) is dependent
upon developments in the economic and political aspects of contemporary life. This
research suggests that events in an economy—levels and standard of living or
governmental market interference—influence such things as attendance at religious
services or religious beliefs. The second theoretical approach looks at the connection
between religion and economic and social life from the other direction. Religion is
thought of as being the independent variable, influencing something about outcome
on the economic, political, and social side. For example, Max Weber’s famous theory
about capitalism is in that line: Religiosity influences economic performance, and
perhaps political institutions.
Secularization Hypothesis
Going back to the first type of model, in which religion is seen as being dependent on
social and economic factors. There are two important sociological theories about how
religion responds to these factors. One approach is called the “Secularization
Hypothesis.” It’s a part of what is often called “Modernization Theory,” which looks
at how the economies of developing countries develop institutional capabilities to
alleviate poverty and rationalize markets.
The Modernization theory posits that as an economy develops and gets richer, certain
societal institutions and features change in a regular way. The "Secularization
Hypothesis" applies this theory to religiosity: As economies develop and get richer,
people supposedly become less religious. “Less religious” is measured either by
participation in organized religion or by certain indicators of religious belief.
The “Secularization Hypothesis” is widely held among analysts.
Religion Market Model
The second important approach in the sociology of religion literature is often called
the “Religion Market Model.” It speaks about the way government interacts with
religion and influences the extent of participation in religion—or even the extent of
religious beliefs. Thus, sometimes the government regulates the market, possibly
promoting a monopoly religion or making it difficult for other religions to flourish.
Under this theory, the government might make it difficult for people to practice their
religion by going to services. On the other hand, it might subsidize religious activity.
Yet, in one way or another, the government will be influencing the amount of formal
religious activity. One example of this influence is the establishment of an official
religion in a country. There are, however, different views in the literature about
whether such governmental action will promote religiosity or detract from it. The
argument that it might detract from religiosity is as follows: If you have an established
religion, you tend to have a monopoly, and monopolies tend to function inefficiently.
For example, it is thought that a monopoly church— such as the Catholic Church in
predominantly Catholic countries or the Anglican Church in England— doesn’t
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perform efficiently and is not attractive to practitioners. In response, people are
thought to participate less.
On the other hand, established religion tends to go along with government funding of
religious activities. The government might be paying for religious buildings or
religious personnel. In this case, one might predict that subsidizing something might
result in greater religious participation. In general, this Religion Market Model argues
that the way state and church interact is quite central. Extreme examples are
communist regimes, including the Soviet Union and China. But many Eastern
European countries also tried very hard to eradicate organized religion and apparently
had some degree of success.
Adam Smith
In Wealth of Nations, Adam Smith argued that participation in religious sects could
potentially convey two economic advantages to adherents (Anderson 1988). The first
could be as a reputational signal: membership in a “good” sect could convey a
reduction in risk associated with the particular individual and ultimately improve the
efficient allocation of resources. Second, sects could also provide for extra-legal
means of establishing trust and sanctioning miscreants in intragroup transactions,
again reducing uncertainty and improving efficiency, especially where civil remedies
for failure to uphold contracts were weak.
A variant of this notion offered by modernization theorists such as Hoselitz (1960),
McClelland (1961), and Hagen (1962) is that traditional societies resist change, and
innovative groups can be important in the process of modernization. Religious
affiliation could serve as the base for group cohesion necessary to successfully
challenge established institutions and practices. For example, according to Lal (1998),
Buddhism and Jainism played just this sort of role in ancient India.
Max Weber
In a second line of argumentation, most prominently associated with Max Weber, it is
the content of religious belief that is essential. In The Protestant Ethic and the ‘Spirit’
of Capitalism, Weber (1905/2002) contended that the Protestant Reformation was
critical to the rise of capitalism through its impact on belief systems. Weber argued
that the Calvinist doctrine of predestination and the associated notion of the “calling”
were essential for transforming attitudes toward economic activity and wealth
accumulation. In John Calvin’s view, individuals were predestined to salvation or
damnation, and “good works” were a means of self-assurance and demonstration to
others of one’s fate. Each had a “calling,” and the successful completion of this
religious mission on a daily basis was pleasing to God and a mark of His blessing. In
contrast to Catholicism’s glorification of monasticism (self-denial and active selfrestraint), this conception projected economic activity into the center of religious life
and replaced the Catholic cycle of sin, repentance, atonement, and release, followed
by more sin. The result was a “this-worldly asceticism,” which focused adherents on
diligent, efficient economic activity, thrift, and non-ostentatious accumulation of
wealth, which he saw as the bedrock of modern capitalism. This development was not
predetermined—Weber was explicit that the development of ideas and institutions
congenial to capitalism was endogenous, path-dependent, and not determined by any
iron laws of history. Such an extraordinary thesis was sure to attract critics, and it did.
Weber stands accused of mischaracterizing Protestant theology, misinterpreting
Catholicism, ignoring nonreligious sources of intellectual ferment, misunderstanding
the economic antecedents of industrial capitalism, thoroughly confusing the historical
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record with respect to the rise of capitalism in Catholic and Protestant communities in
Western Europe, and even mishandling the statistical data he had at his disposal.
Blum and Dudley (2001) provide another version of the Weber thesis, arguing that the
Calvinist doctrine of predestination (in contrast to the Catholic practice of ritual
penance), in game-theoretic terms, increased the cost of contractual defection (i.e.,
breaking contracts was a bigger deal for Protestants). This Protestant reluctance to
break contracts contributed to greater trust and willingness to honor contracts with
strangers and thereby contributed to the spread of more extensive information
networks in the Protestant lands of Northern Europe, and it was these network
externalities that promoted growth and the rise of industrial capitalism.
Arthur Lewis
Until recently, economists have paid little attention to this issue; Nobel Laureate W.
Arthur Lewis, is one of the few who expressed skepticism that religious beliefs had
any significant impact on economic behavior and indeed argued that the causality
probably ran the other direction: Despite religion’s claim to be the ultimate primal,
changes in economic circumstances spurred theological adaptation (Lewis 1955). In
this regard, Lewis, in asserting the primacy of economics over religion, followed the
common practice of elevating one’s own scholastic specialty to the primal. Hofstede
(1997), a sociologist, also wrote “If we trace the religious histories of countries, we
find that the religion a population has embraced seem to have been a result of
previously existing cultural value patterns”.
This puzzles —how to sort out the pattern of causality among economics, culture, and
religious belief—is a central challenge.
Robert J. Barro and Rachel M. McCleary
The scholars now include Robert J. Barro and Rachel M. McCleary, a husband-andwife team based at Harvard. Professor Barro is a prolific economist who has long
been interested in studying how and why economic growth rates differ among
countries. Professor McCleary, who directs the Project on Religion, Political
Economy, and Society at Harvard's Weatherhead Center for International Affairs,
gained an appreciation of the importance of religion in economic life while studying
in Guatemala.
In order to get a broad cross-country sample of the extent of religiosity, the things
they are measuring come from six important international surveys of values and other
activities. These were carried out from the early 1980s through 1999. Three of these
surveys are waves of the so-called World Value Survey: 1981, 1990, and 1995.
The World Value Survey now covers around 50 countries and surveys 1,000 to 2,000
individuals in each country to get an idea of their values in various respects. They use
data about attendance at formal religious services in addition to a number of specific
religious beliefs. The data they are looking at concern beliefs—related, for example,
to an afterlife or whether people believe in heaven/hell. There are some more general
questions, such as belief in God, and there are also questions that are more robust
across religions: for example, whether or not you consider yourself to be a religious
person. There exist these three waves from the World Value Survey, and there are two
waves from the International Social Survey program in the 1990s.In a paper published
last year in the American Sociological Review, the couple set out to investigate the
correlation between variables like church attendance and belief in heaven and hell and
comparative economic growth rates from 1965 to 1995. "We thought there might be a
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positive relationship between certain religious beliefs and economic performance,"
Professor Barro said.
Investigating such a hypothesis can be difficult, in part because different religious
systems have starkly different practices when it comes to their mode of participation
and belief in the afterlife.
But over all, the study confirmed the assumption that greater economic development
is associated with less religiosity. In their results, which Dr. McCleary notes are
preliminary and need further investigation, the two also reached some counterintuitive
conclusions. First, in two countries where religious service attendance is essentially
the same, the one whose people have a greater belief in heaven and hell would
experience faster economic growth. Second, in two countries where the populations
have similar rates of belief in heaven and hell, the one in which church attendance is
greater would have slower growth.
Why? This "quantitative approach to the study of religion," as Professor McCleary
calls it, rests on the assumption that religion can affect economics by fostering beliefs
that influence productivity-enhancing traits like thrift, hard work and honesty. A
widespread feeling that such behavior may ultimately be rewarded (a belief in
heaven), or that a lack of such behavior may be punished (a belief in hell) may
therefore spur economic growth. And if more people and resources are devoted to
holding religious services without producing the desired output (a higher level of
belief), that would tend to lessen productivity in an economy.
In other words, countries' economies may perform best when people have relatively
higher levels of religious belief than religious participation. Among the nations falling
into this category are Japan, South Korea, Singapore and some Scandinavian
countries - all of which performed well economically in the period studied. Countries
in which belief was low compared with religious participation included India and
many in Latin America.
Another finding was that belief in hell proved to be a more significant economic
factor than belief in heaven. "The stick of punishment may be more powerful
compared with the carrot," Professor Barro said.
INDEED, while Adam Smith's "Inquiry into the Nature and Causes of the Wealth of
Nations" has been the bible for generations of economists, signs indicate that some
older sacred texts matter to them as well. In December 2002, when Vernon L. Smith,
a pioneer in experimental economics, accepted the Nobel in economic science, he
noted that "the strictures against stealing or coveting a neighbor's possessions provide
the property-right foundations for markets. And the prohibition against murder,
adultery and bearing false witness provide the foundations for cohesive social
exchange".
Larry Iannaccone
Iannaccone, an economics professor at George Mason University who studied at
Chicago under Becker and who heads a new academic group, the "Association for the
Study of Religion, Economics & Culture" says that while academics ignored religion
in part out of a belief that it would fade under the onslaught of secularization we
finally figured out that religion remains a very powerful force in contemporary
society. While noting that "we need a lot more and better data before we can be
confident about the results" of such studies, Professor Iannaccone says economists
should pay more attention to the intersection of religion and economics. According to
him "It's almost impossible to live in the 21st century and look around and say that
religion has no impact anymore". Abundant evidence affirms that religious belief
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affects a wide range of behavioral outcomes and religious activity can affect
economic performance at the level of the individual, group, or nation through at least
two channels.
Marcus Noland
He is a senior fellow at the Institute for International Economics. In his paper
(2004)"Religion, Culture, and Economic Performance"he tries to test the hypothesis
that religious attitudes affect national economic performance.
For some time, economists have been troubled by the fact that the actual growth
trajectories of national economies seem to contradict both implications of the model.
Romer (1986), Lucas (1988), Robelo (1991), and others launched the endogenous
growth literature that sought to explain the first empirical anomaly through various
mechanisms that would temper the tendency of declining marginal returns to slow the
growth rate of rich economies; Barro (1991), Barro and Sala-i-Martin (1992, 1995),
and Mankiw, Romer, and Weil (1992) set off the now vast literature on the
determinants of long-run growth across countries.
In addition to the accumulation of physical and human capital, attention has focused
on indicators of macroeconomic stability, trade openness, political institutions, and
geography. Solow (2001) questioned the role of the many right-hand-side variables
that have been included in the long-run growth literature and instead argued for
focusing on national differences in the level and growth of total factor productivity or
TFP across countries as the left-hand-side variable to be explained. The problem, of
course, is that empirical estimates of TFP are themselves derived as the residuals from
growth-accounting exercises, and can be very sensitive to assumptions about the
underlying aggregate production function (Pack 2001) and the measurement of inputs
(Hsieh 2002). Setting aside these operational issues, Solow (2001) argues that nontechnological phenomena including “the security of contracts, the intensity of
competition, and the respect for instrumental rationality as a mode of behavior” could
have a major impact on resource allocation and hence TFP.
He has concluded that the theoretical literature on the subject is indeterminate.
Empirically, he has found correlations between religious affiliation, the intensity of
religious belief, and indicators of cultural tendencies. However, the national cultural
measures have no explanatory power with respect to national economic performance
once conventional economic fundamentals are taken into account.
In contrast, in both cross-country and within-country regressions, the null hypothesis
that religious affiliation is uncorrelated with performance can frequently be rejected,
though the regressions do not yield a robust pattern of coefficients with respect to
particular religions.
Some commentators have claimed that Islam is inimical to growth. He has found that
in general this is not borne out by the econometric analysis either at the cross-country
or within-country level.
He has also found that predominately Muslim countries are seldom outliers (either
positively or negatively) in the cross-country regressions. In most cases, the
coefficient on the Muslim population share is statistically insignificant. With one
exception, where it is significant, it is always positive. The only case of a statistically
significant negative coefficient is in the sub-national regression for Malaysia. Islam
does not appear to be a drag on growth or an anchor on development as alleged. If
anything, the opposite appears to be true. If one is concerned about economic
performance in predominately Muslim regions or countries, conventional economic
analysis may yield greater insight than the sociology of religion.
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