adam smith religious market

Rational Choice, Religion, and the Marketplace:Where Does Adam Smith Fit In?

SCOT M. PETERSONBalliol College, Oxford University

Rational choice theorists of religion have assumed that Adam Smith’s Wealth of Nations advocates a free marketin religion, which, they argue, leads to increased religious vitality. In fact, while Smith opposed direct governmentsubsidies for religion and argued that a free market was the first-best solution, as a second-best policy he advocatedreligious regulation, including state-appointed clergy and the reduction of clergy income. Smith’s rational choiceapproach to religion, which springs from his understanding of public goods, externalities and the need for civilpeace, and government stability, can still provide direction for social scientific research, but it does not alwayssupport a policy of religious free markets.

“What we got here is . . . failure to communicate,” says the anonymous, sunglass-wearingprison guard “Cap’n” to Paul Newman’s Cool Hand Luke in the 1967 film. Rational choice hasthis problem in the field of politics, law, and religion. Theorists argue that religious regulationby governments dampens religious commitment (Iannaccone 1991; Stark and Fink 2000). Whenthey do so, they frequently rely on the 18th-century Scottish economist, Adam Smith’s An Inquiryinto the Nature and Causes of the Wealth of Nations:

[I]f politicks had never called in the aid of religion . . . it would probably have dealt equally and impartiallywith all the different sects, and have allowed every man to chuse his own priest and his own religion as he thoughtproper. There would in this case, no doubt, have been a great multitude of religious sects. . . . Each teacher wouldno doubt have felt himself under the necessity of making the utmost exertion, and of using every art both topreserve and to increase the number of his disciples. . . . The teachers of each sect, seeing themselves surroundedon all sides with more adversaries than friends, would be obliged to learn that candour and moderation which is soseldom to be found among the teachers of those great sects, whose tenets being supported by the civil magistrate,are held in veneration by almost all the inhabitants of extensive kingdoms and empires . . . (Smith [1776] 1981:V.i.g.81)

In this note I will put this statement into context to clarify Smith’s position on religiouseconomy. The debate about the validity of the rational choice theory of religion (see Bruce 1999)has failed thus far to clarify the concept of regulation in the context of Smith’s writings, and Ipropose to move that discussion forward.

The Placement of Religion in Wealth of Nations

Smith discusses organized religion once, under the following subheadings: Book V (Of theRevenue of the Sovereign or Commonwealth), Chapter I (Of the Expenses of the Sovereign or

Acknowledgments: The author would like to acknowledge constructive and helpful comments received from anonymousreviewers and to thank Iain McLean and Richard Povey for comments on earlier drafts.Correspondence should be addressed to Scot M. Peterson, Balliol College, Oxford University, UK. E-mail:[email protected] References to the Wealth of Nations are to the Glasgow edition, reprinted as Smith ([1776] 1981). Hereafter, referencesto Book V Chapter I Part III Article III (V.i.g.) are by paragraph (¶) without further specification; other references are byparagraph. Smith does not adhere to the modern distinction between sects and churches; I do not impose this distinctionon his thought.

Journal for the Scientific Study of Religion (2009) 48(1):185–192C© 2009 The Society for the Scientific Study of Religion

186 JOURNAL FOR THE SCIENTIFIC STUDY OF RELIGION

Commonwealth), Part III (Of the Expence of publick Works and publick Institutions), Article 3(Of the Expence of the Institutions for the Instruction of People of All Ages). The placement iscritical (Leathers and Raines 1992:499). The revenue of the commonwealth, Smith points out,can legitimately be spent on public goods and can be used to subsidize goods that have positiveexternalities. Smith’s friend, David Hume, formulated the problem with providing public goods:

Two neighbours may agree to drain a meadow, which they possess in common: because . . . each must per-ceive, that the immediate consequence of his failing in his part, is the abandoning the whole project. But itis . . . impossible, that a thousand persons should agree in any such action; . . . each seeks a pretext to free himselfof the trouble and expense, and would lay the whole burden on others. Political society easily remedies . . . theseinconveniences. (Hume [1738] 1911: Book III Part ii ch. 7)

Pure public goods are nonrival and nonexcludable: once they are provided for some, otherscan enjoy them without detracting from anyone else’s enjoyment; and once they are provided forsome, they are available to everyone. Public statues, national defense, and the justice system fallinto this category. Hume explains why people defect from the common enterprise; public goodseither will be underprovided by the market or will not be provided at all. Thus, the state mayproperly fund them.

Externalities are costs and benefits that accrue to people who are not parties to a privatemarket transaction (McLean 1987). If I purchase a rose bush from a florist and plant it in my frontyard, passers-by enjoy the benefit (externality) of its color and fragrance at no cost; similarly, if Ipurchase gasoline and use it in my vehicle I impose costs (externalities) on others in the form ofcarbon emissions and air pollution. Externalities lead to market failure, because costs and benefitsare not fully reflected in the market price. Government intervention can correct for this. The trickis to internalize the costs (and benefits) so that I pay a sufficient amount to compensate for theexternalities. A Pigouvian tax (subsidy) like this can discourage (promote) activities with negative(positive) externalities. Another reason for market failure is myopia; failure by individuals to fullytake into account future costs (or benefits). An example would be the use of health-damagingaddictive substances. Again, a tax or subsidy can correct for this. These are the types of issuesSmith explores in Book V.

Nonreligious Markets

Smith is an empiricist. Different kinds of markets must be evaluated independently to deter-mine whether they fail, so that goods are overprovided or underprovided, and why. Even nationaldefense is not a simple issue to address, as Smith must determine whether government shouldalter incentives (punishing defectors) in order to ensure that citizen militias are sufficiently pow-erful to defend against foreign attack or whether government should subsidize a standing army(V.i.a.17–18; given the division of labor in commercial society, the latter prevails). The justicesystem presents similar questions, and here Smith approves a system in which fees are paid tojudges, but he still imposes regulation to prevent corruption, insisting that the fees be “preciselyregulated and ascertained, . . . paid all at once, at a certain period of every process, into the handsof a cashier or receiver” to be distributed “in certain known proportions” among the judges afterthe case is decided (V.i.b.20).

Education is a closer question. Smith believes that primary education should be heavilysubsidized by the state, with parents paying only minimal fees that would encourage both diligenceamong the teachers, who should compete for students, and vigilance by the parents to monitortheir performance (V.i.f.54–55). Smith even implicitly advocates compulsory primary educationin reading, writing, and mathematics. On the other hand, Smith asserts that instructors at ancientEnglish universities like Oxford, where he had both studied and taught, were lazy and incompetent.This defect arose from the size and administration of the endowments, which reduced the faculty’s

RATIONAL CHOICE, RELIGION, AND THE MARKETPLACE 187

incentive to provide useful instruction to their pupils in return for students’ fees (like those paidat Scottish universities) (V.i.f.5–9). Education is never a pure public good, as it can be purchasedand classrooms can be crowded, but a workforce educated in basic skills of reading, writing, andarithmetic provides sufficient positive externalities that a substantial subsidy is warranted in earlyyears.

Religious Markets

The title of Book V, Chapter I, “Of the expenses of the Sovereign or Commonwealth”connects Smith’s discussion of organized religion with his debate on the subject with DavidHume, from whose History of England he quotes (¶ 3–6, quoting from Hume 1778: iv.30–31).Hume writes that clergy (at least those of radical sects) are inherently dangerous and that ifallowed to compete with one another will inspire in their adherents “the most violent abhorrenceof all other sects, and continually endeavor, by some novelty, to excite the languid devotion of[their] audience.” He concludes that the solution is “to bribe their indolence, by assigning statedsalaries to their profession, and rendering it superfluous for them to be farther active, than merelyto prevent their flock from straying in quest of new pastures” (Jordan 2002:700–01). Hume, anagnostic if not an atheist, takes the position that religion is not a public good but its opposite—apublic bad—and that government intervention will avert the pervasive negative externality ofreligious controversy, which clergy create and that threatens public safety.

Both authors recognize the characteristics of what we now call a prisoners’ dilemma. Considera town in which two ministers (A and B) are competing for adherents, on which some part of theirincome depends. Each has a choice between adopting an extremist position, arguing that God willpunish those who do not adhere to one religion, and a moderate one, in which adherence to onesect is desirable but other options may be equally acceptable to God. If A adopts extremism, thenB is better off adopting extremism in order to combat A’s condemnation of B’s religion. Evenif A adopts moderation, B will still be better off adhering to extremism, so that B can condemnA’s tolerance, threaten A’s adherents with eternal punishment, and recruit A’s members. In eithercase, extremism is the best answer, although conflict would diminish, people’s consciences wouldrest easier, and society would benefit if both ministers were moderates. As each adopts a moreextreme position, with stricter rules and stronger punishments, the other must respond in kind.Hume’s solution to the problem is to bribe ministers to be moderate. Smith sees that the problemis more complex.

Religion as a Good

Neither Smith nor Hume treats religion as a public good. In this respect they agree withrational choice theorists of religion: religion should not be publicly funded or produced in thesame manner as, say, national defense. Smith, however (unlike Hume), is willing to identifypositive externalities that accrue from an individual’s decision to adhere to a religion. Smithidentifies two systems of morality applicable to civilized society: the strict or austere, whichbenefits society, and the liberal or loose (¶ 10). Common people admire the former; “peopleof fashion,” the latter. The former, promoted by religious sects attractive to the working class,protects adherents from what Smith calls the vices of levity:

The vices of levity are always ruinous to the common people, and a single week’s thoughtlessness anddissipation is often sufficient to undo a poor workman for ever, and to drive him through the despair uponcommitting the most enormous crimes. . . . The disorder and extravagance of several years, on the contrary, willnot always ruin a man of fashion, and people of that rank are very apt to consider the power of indulging in somedegree of excess as one of the advantages of their fortune.


Sects that promote strict morality in cities provide a means of precommitment for theworker, enabling him to avoid myopic, short-term defections from long-term strategies (workingand saving) that benefit him and his family. In villages his neighbors attend to his conduct,but they ignore it in a metropolis, unless he belongs to a small, monitoring religious group(¶ 12). Deviation from the austere morals imposed by rigorous religions results in expulsion andexcommunication, which are serious punishments even when they have no civil consequences.

Although they have benefits, austere sects create additional negative externalities (such as theincreased likelihood of violent confrontation), insofar as the sects’ morals “have frequently beenrather disagreeably rigorous and unsocial” (the danger Hume identified). Here, Smith argues,religion can be regulated indirectly (¶¶ 14–15). Education for those who hold power (and arequirement that they prove their education, for example, through testing) will prevent theirfalling into superstition or enthusiasm, and unregulated speech, in the form of painting, poetry,music, dancing, and theater, will make it possible to ridicule the more extreme and dangerousgroups and to limit their social harm. Both of these are ways of preventing what Nathan Rosenberg(1960) has called unfair ecclesiastical practices and eliminating the prisoners’ dilemma. Onceoutsiders have free speech and education, they can make fun of the religious extremist and canconstrain his potential to recruit new adherents. A free market in ideas and their expression(whether religious, ideological, or scientific) undermines intellectual monopoly and cartelization.In the market for moral codes, this phenomenon operates directly in the case of religious freedombut also indirectly in the case of general freedom of expression, because other ideas are oftenclose substitutes for religious ones.

Religion as a Bad

Smith concedes Hume’s argument that religious organizations have presented a threat topublic safety, although he disputes the cause. The threat is not from the prisoners’ dilemma butfrom the power achieved “where there is, either but one sect tolerated in society, or where the wholeof a large society is divided into two or three great sects” (¶ 8). The combination of centralized,hierarchical organization and substantial wealth, in a precommercial society when clergy couldnot use income to purchase luxury goods, made it possible for the clergy to become “a sort ofspiritual army, dispersed in different quarters . . . [but] directed by one head, and conducted uponone uniform plan” (¶ 21). As landowners, the clergy could keep the peace without the assistanceof the sovereign and were independent of the king’s courts (¶ 22). Moreover, their wealth made itpossible for them to provide not only for “almost the whole poor of every kingdom” but also for“many knights and gentlemen” who travelled “from monastery to monastery, under the pretenceof devotion, but in reality to enjoy the hospitality of the clergy.”

The clergy, under these circumstances, comprised a state within the state: “In such circum-stances the wonder is, not that [the sovereign] was sometimes obliged to yield, but that he everwas able to resist.” Smith concludes with an indictment of the entire system:

[T]he constitution of the church of Rome may be considered as the most formidable combination that ever wasformed against the authority and security of civil government, as well as against the liberty, reason, and happinessof mankind, which can flourish only where civil government is able to protect them. (¶ 24)

Just like Hobbes before him, Smith is aware that public safety and the sovereign’s monopolyon the legitimate use of force is also a public good. So long as a church competes with the statefor the legitimate use of force, society is inherently unstable because the church can realign itselfwith a competitor for political power and destabilize the regime.

Following the Reformation, which weakened the Roman Church, governments and religiousfactions combined, so that secular and political cleavages reinforced one another (¶ 30). Thesituation improved but could still not be ideal. Denmark, Sweden, and some Swiss cantons


ended up Protestant, but cooperation between the Pope and the nobility in France and Germanysuppressed Protestants there. In Smith’s Scotland, the Reformation overturned both the unpop-ular Roman Catholic Church and the unpopular state that supported it (¶ 32). Smith states theproblem from then on generally: “The clergy of every established church constitute a great incor-poration . . . Their interest as an incorporated body is never the same with that of the sovereign”2

(¶ 17). Once church and state are interdependent, both are threatened by competing religious andpolitical factions, and the problem is best solved for each of them, but not for society, throughpayment of political and economic rents: an agreement to share power and spoils. Each is in-terested in promoting its interests at the expense of the other and especially at the expense ofthe public. The equilibrium is unstable and suboptimal. How can their interests be realigned in abetter way?

Smith and Religious Competition

The famous passage I quoted at the outset is not a part of Smith’s positive analysis of religion,with which I have been primarily concerned up to now. Smith does not say that the normative,free-market solution to the problem of regulation is practical; quite the contrary. The quotedpassage continues, describing the religion that would result from such competition as

that pure and rational religion, free from every mixture of absurdity, imposture, or fanaticism, such as wise menhave in all ages of the world wished to see established; but such as positive law has perhaps never yet established,and probably never will establish in any country. . . (¶ 8 emphasis added)

According to this passage, freedom of religion should lead to the eventual development ofreligious tolerance, eliminating the hostility that Smith and Hume identify. The outcome wouldbe a plurality of sects, but they would all be tolerant ones of the kind that “wise men” have wantedto establish. Such establishment is probably impossible.

In normative economic terms, religious competition of the kind described at the outset is whatwelfare economists call the first-best solution, but religious markets fail when natural monopoliesexist, which they did in post-Reformation Europe. A monopoly sect has serious disadvantages,but these may be tempered through religious regulation. Smith rejects the use or threat of force,which can be characterized as persecution and can lead to further radicalization and increasedpopularity for the church; instead, he advocates management and persuasion (¶ 9). To someextent, commercial society naturally leads to the decline of an overly powerful church (again, apositive point) (¶ 25). Once commercial society makes it possible for the clergy to spend moneyon luxury goods for themselves, rather than on food for the poor, for knights, and for gentlemen,their prestige and political support from these dependents automatically diminishes (Anderson1988:1083). However, more is necessary.

The most important measure Smith advocates is appointment of clergy either by the govern-ment or by lay patrons (who have a material interest in maintaining civil peace) and civil controlof their promotion. He writes that Anglicans and Lutherans (both hierarchical and episcopal),which grant the sovereign power to appoint high-ranking ecclesiastics, were “from the beginningfavorable to peace and good order” (¶ 34). In the Calvinist churches on the Continent, disputesover the election of ministers originally created factions, and “the magistrate very soon found itnecessary, for the sake of preserving the publick peace, to assume to himself the right of pre-senting all vacant benefices” (¶ 36). In Scotland government had assumed that power following“confusions and disorders” during the 22 years before reinstating lay patronage in 1711. The

2 In this respect established churches are subject to the same forces that corrupt monopolistic commercial corporationsformed to advance their members’, but not others’, interests (WN V.i.e) (Leathers and Raines 1992).


interests of appointed clergy and their churches align better with those of the governing politicalorder, to which they owe their position, and they are less likely to engage in politically destructivebehavior in order to increase their own rents or to extract rents from the party out of power inexchange for political support.

The result of appointing clergy, Smith acknowledges, is that they will become indolent place-seekers. Smith repeatedly points to the vulnerability of clergy who “possess all the virtues ofgentlemen, or . . . can recommend [themselves] to the esteem of gentlemen; but . . . [who] lose thequalities, both good and bad, which gave them authority and influence with the inferior ranks ofpeople” (¶ 1). This problem can in turn be corrected by equalizing the status and pay of the clergyand by moderating their compensation downward (Leathers and Raines 1992:509). Smith is notexplicit that clergy should receive additional compensation from members of their congregations,but he does not foreclose the possibility. Rather, he emphasizes the sympathy between the clergy“of small fortune” and “exemplary morals” and the members of their congregations, who “lookupon [them] with that kindness with which we naturally regard one who approaches somewhatto our own condition, but who, we think, ought to be in a higher” (¶ 38). It is not only theestablished churches that are weak because of overpayment. Denominations that we know asold dissent (Unitarians, Congregationalists) had become wealthy through “trust rights, and otherevasions of the law” and were being overtaken in popularity by the Methodists, who were lesswealthy (¶ 1). Publicly and privately endowed religion was subject to the same dangers to whichthe English universities had succumbed and could benefit from the same remedy: clergy earningpart of their wages directly from their congregations (Cf. ¶ 2; WN V.i.f.6).

This topic of pay leads Smith back to consideration of his principal consideration in Book V:the revenue of the sovereign or commonwealth (¶ 41). Tithes, the right of the clergy to a share ofthe produce of the land, are, according to Smith, “a real land-tax, which puts it out of the powerof the proprietors of land to contribute so largely toward the defence of the state as they otherwisemight be able to do”: an instance of crowding out. Just as the clergy may form a state within astate, the church competes with the state for the latter’s revenue. He points, however, to the Swisscanton of Berne, which expropriated this source of revenue, devoted a portion to compensatingthe clergy at a reasonable (i.e., low) rate, and saved “several millions,” which it invested in thepublic funds of other European nations, including France and Great Britain (which paid intereston them to the Swiss). Pointing to a contemporary analysis of clergy revenue in Scotland, heshows that £68,500 supported 944 ministers, and the church had total revenue of £80–85,000per year. Elsewhere (I.x.c.34) Smith says that Church of England curates were well paid at £40per year (actually, many were notoriously underpaid); on average (at £721/2) Church of Scotlandclergy were comparatively well off. Instead of subsidizing the clergy, as Hume recommends,Smith’s tacit solution is to appoint them but to take away part of their endowments, to makethem responsible to their congregations, and to use the remaining funds for their proper purpose:funding legitimate objects of public finance.3

The quotation so frequently relied upon to link Smith with religious free market competition,understood in this light, does not say what some claim it says. It provides a hypothetical first-best, which should eliminate the negative externalities Smith and Hume were concerned about.Religious groups may multiply, but religious diversity is a means of achieving civil peace,not of increasing religious vitality or commitment. Smith’s practical solution is empirical, nottheoretical. He points to practical, second-best solutions for real problems: free speech andeducation; appointing clergy; and limiting their income, the source of which becomes revenue forthe state. Those solutions are based upon wide-ranging empirical evidence from different periodsin history and different cultures and nations. Smith starts with empirics and induces general laws

3 This conclusion, which is only indirectly expressed, would have been highly offensive to his readers, as tithes were atthe time uniformly treated as a form of property (an interest in land), rather than as a tax.


of human behavior, and he bases policy recommendations on practical considerations in specificcontexts. Nevertheless, the underpinnings of his thought are both game-theoretic and scientific(McLean 2006:77).

Smith and Social Science

Assuming that agents are fully rational members of a commercial society, a free religiousmarket may be optimal, as it would diminish the risk of mutual rent seeking by church and stateand would lead to “pure and rational religion, free from every mixture of absurdity, imposture,or fanaticism.” This first-best solution is not possible because the assumption of full rationalitycannot be fulfilled. Once that assumption fails, the second-best is to ensure that powerful membersof society are educated and to guarantee free expression of ideas. Austere religion can benefitworkers and society. Its risk is moderated by outside criticism (through plays and entertainments),and as a result competing sect-leaders’ payoffs are modified to eliminate the prisoners’ dilemma.More extreme aspects of austere religion will be subject to more social criticism. As a result,religious leaders will be less likely to impose excessive costs on members, and members’ demandwill not tolerate overly rigorous religious requirements. This approach to regulation is indirect,but it also reinforces proper functioning of the intellectual market.

Smith identified the principal practical threat from religion, its potential for religiousmonopoly or cartelization, as competition with the secular government to undermine its monopolyon the legitimate use of force. The most dramatic example is the medieval Roman Catholic Church,but he also points to post-Reformation churches as presenting the same danger. In order to realignthe interests of the church with the state, to prevent mutual rent seeking, and to serve the publicinterest, Smith recommends state-appointed clergy, reduced incomes, and expropriation of churchproperty for public purposes (perhaps even including that held by nonestablished denominationsthrough “trust rights, and other evasions of the law”). In this way clergy can be forced to servethe interests and gain the respect of those with whom they are in most frequent contact. Smithbalances the state’s interest in social control, served by regulated clerical appointment, with theneed to meet popular demand, served by their earning part of their living from their congregations.

Smith is not an unrelenting opponent of regulation; rather, he is an empiricist. Each market—religious, educational, or intellectual—must be evaluated on its own terms and within concrete,historical circumstances in order to know what interests and motivations predominate and in orderto arrive at general rules of human behavior and practical recommendations for public policy. Hedoes not begin with general theories, nor does he limit himself to historical or anthropologicaldescription; instead, he attempts to induce general rules from concrete observations (or, perhaps,to justify the former with the latter, subject to further enquiry and contradiction by additionaldata). Smith is not an ideologue, but he is certainly a social scientist, and his methodologyprovides a useful tool when we are attempting to communicate in social scientific disciplines.

REFERENCES

Anderson, Gary M. 1988. Mr. Smith and the preachers: The economics of religion in the Wealth of Nations. Journal ofPolitical Economy 96(5):1066–88.

Bruce, Steve. 1999. Choice & religion: A critique of rational choice. Oxford: Oxford University Press.Hume, David. [1738] 1911. A treatise of human nature in two volumes. 2 vols, Everyman’s library. London: Dent.——. 1778. The history of England from the invasion of Julius Caesar to the revolution in 1688. London: printed for T.

Cadell (available online through Gale Group; accessed10 July 2008).Iannaccone, Laurence R. 1991. The consequences of religious market structure: Adam Smith and the economics of

religion. Rationality and Society 3(2):156–77.Jordan, Will R. 2002. Religion in the public square: A reconsideration of David Hume and religious establishment. Review

of Politics 64(4):687–713.


Leathers, Charles G. and J. Patrick Raines. 1992. Adam Smith on competitive religious markets. History of PoliticalEconomy 24(2):499–513.

McLean, Iain. 1987. Public choice: An introduction. Oxford: Basil Blackwell.——. 2006. Adam Smith: Radical and egalitarian: An interpretation for the twenty-first century. Edinburgh: Edinburgh

University Press.Rosenberg, Nathan. 1960. Some institutional aspects of the Wealth of Nations. Journal of Political Economy 68(6):557–70.Smith, Adam. [1776] 1981. An inquiry into the nature and causes of the wealth of nations. Indianapolis, IN: Liberty

Classics.Stark, Rodney and Roger Finke. 2000. Acts of faith: Explaining the human side of religion. Berkeley, CA: University of

California Press.

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