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

SCOT M. PETERSON
Balliol College, Oxford University

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

“What we got here is . . . failure to communicate,” says the anonymous, sunglass-wearing prison guard “Cap’n” to Paul Newman’s Cool Hand Luke in the 1967 film. Rational choice has this problem in the field of politics, law, and religion. Theorists argue that religious regulation by governments dampens religious commitment (Iannaccone 1991; Stark and Fink 2000). When they do so, they frequently rely on the 18th-century Scottish economist, Adam Smith’s An Inquiry into 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 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. . . . 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. . . . The teachers of each sect, seeing themselves surrounded on all sides with more adversaries than friends, would be obliged to learn that candour and moderation which is so seldom 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 religious economy. 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 I propose 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 the Revenue 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 anonymous reviewers 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: scot.peterson@politics.ox.ac.uk
1 References to the Wealth of Nations are to the Glasgow edition, reprinted as Smith ([1776] 1981). Hereafter, references to Book V Chapter I Part III Article III (V.i.g.) are by paragraph (¶) without further specification; other references are by paragraph. Smith does not adhere to the modern distinction between sects and churches; I do not impose this distinction on his thought.

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

Nonreligious Markets Smith is an empiricist. and would lay the whole burden on others. . . passers-by enjoy the benefit (externality) of its color and fragrance at no cost. Externalities lead to market failure. each must perceive. Political society easily remedies . where he had both studied and taught. If I purchase a rose bush from a florist and plant it in my front yard. Thus.a. Different kinds of markets must be evaluated independently to determine whether they fail. paid all at once.f. is the abandoning the whole project. and vigilance by the parents to monitor their performance (V. . Smith’s friend. but he still imposes regulation to prevent corruption. the state may properly fund them. others can enjoy them without detracting from anyone else’s enjoyment. were lazy and incompetent. On the other hand. The justice system presents similar questions. But it is . a tax or subsidy can correct for this. and here Smith approves a system in which fees are paid to judges.54–55). insisting that the fees be “precisely regulated and ascertained. these inconveniences. so that goods are overprovided or underprovided. as Smith must determine whether government should alter incentives (punishing defectors) in order to ensure that citizen militias are sufficiently powerful to defend against foreign attack or whether government should subsidize a standing army (V. David Hume. at a certain period of every process. Even national defense is not a simple issue to address. given the division of labor in commercial society. and once they are provided for some. . Smith asserts that instructors at ancient English universities like Oxford. and mathematics.20). . the latter prevails). These are the types of issues Smith explores in Book V. A Pigouvian tax (subsidy) like this can discourage (promote) activities with negative (positive) externalities. Government intervention can correct for this. similarly. Smith even implicitly advocates compulsory primary education in reading. into the hands of a cashier or receiver” to be distributed “in certain known proportions” among the judges after the case is decided (V. (Hume [1738] 1911: Book III Part ii ch.i. . formulated the problem with providing public goods: Two neighbours may agree to drain a meadow. which reduced the faculty’s . . Smith points out. if I purchase gasoline and use it in my vehicle I impose costs (externalities) on others in the form of carbon emissions and air pollution. This defect arose from the size and administration of the endowments. Hume explains why people defect from the common enterprise. Article 3 (Of the Expence of the Institutions for the Instruction of People of All Ages).i. . which they possess in common: because . writing. who should compete for students. each seeks a pretext to free himself of the trouble and expense. Again. public goods either will be underprovided by the market or will not be provided at all. and the justice system fall into this category. failure by individuals to fully take into account future costs (or benefits). 7) Pure public goods are nonrival and nonexcludable: once they are provided for some. that the immediate consequence of his failing in his part.i. impossible. Public statues. Externalities are costs and benefits that accrue to people who are not parties to a private market transaction (McLean 1987). Smith believes that primary education should be heavily subsidized by the state. The placement is critical (Leathers and Raines 1992:499). national defense.17–18. Part III (Of the Expence of publick Works and publick Institutions). The trick is to internalize the costs (and benefits) so that I pay a sufficient amount to compensate for the externalities. they are available to everyone. that a thousand persons should agree in any such action. The revenue of the commonwealth.186 JOURNAL FOR THE SCIENTIFIC STUDY OF RELIGION Commonwealth). . can legitimately be spent on public goods and can be used to subsidize goods that have positive externalities. . . and why. Education is a closer question. An example would be the use of health-damaging addictive substances. because costs and benefits are not fully reflected in the market price.b. with parents paying only minimal fees that would encourage both diligence among the teachers. Another reason for market failure is myopia. .

and society would benefit if both ministers were moderates.” the latter. on the contrary. . Hume writes that clergy (at least those of radical sects) are inherently dangerous and that if allowed to compete with one another will inspire in their adherents “the most violent abhorrence of all other sects. Chapter I. In either case. people’s consciences would rest easier. say. quoting from Hume 1778: iv. B will still be better off adhering to extremism. RELIGION. Religion as a Good Neither Smith nor Hume treats religion as a public good. Even if A adopts moderation. national defense. promoted by religious sects attractive to the working class. then B is better off adopting extremism in order to combat A’s condemnation of B’s religion. Smith sees that the problem is more complex. and continually endeavor.” He concludes that the solution is “to bribe their indolence.5–9). and a moderate one. As each adopts a more extreme position. arguing that God will punish those who do not adhere to one religion. by some novelty. Both authors recognize the characteristics of what we now call a prisoners’ dilemma. Common people admire the former. will not always ruin a man of fashion. AND THE MARKETPLACE 187 incentive to provide useful instruction to their pupils in return for students’ fees (like those paid at Scottish universities) (V. which benefits society. “Of the expenses of the Sovereign or Commonwealth” connects Smith’s discussion of organized religion with his debate on the subject with David Hume. Religious Markets The title of Book V. and a single week’s thoughtlessness and dissipation is often sufficient to undo a poor workman for ever. Hume’s solution to the problem is to bribe ministers to be moderate. Smith. and people of that rank are very apt to consider the power of indulging in some degree of excess as one of the advantages of their fortune. with stricter rules and stronger punishments. although conflict would diminish. and to drive him through the despair upon committing the most enormous crimes. to excite the languid devotion of [their] audience. Smith identifies two systems of morality applicable to civilized society: the strict or austere. threaten A’s adherents with eternal punishment. and the liberal or loose (¶ 10). Each has a choice between adopting an extremist position. but a workforce educated in basic skills of reading. If A adopts extremism. in which adherence to one sect is desirable but other options may be equally acceptable to God. . “people of fashion. so that B can condemn A’s tolerance. The disorder and extravagance of several years. Hume. Education is never a pure public good. . an agnostic if not an atheist. . on which some part of their income depends. as it can be purchased and classrooms can be crowded. and arithmetic provides sufficient positive externalities that a substantial subsidy is warranted in early years.RATIONAL CHOICE. extremism is the best answer. which clergy create and that threatens public safety. by assigning stated salaries to their profession. protects adherents from what Smith calls the vices of levity: The vices of levity are always ruinous to the common people. Consider a town in which two ministers (A and B) are competing for adherents. In this respect they agree with rational choice theorists of religion: religion should not be publicly funded or produced in the same manner as.30–31). the other must respond in kind.f. however (unlike Hume). writing.i. is willing to identify positive externalities that accrue from an individual’s decision to adhere to a religion. and recruit A’s members. than merely to prevent their flock from straying in quest of new pastures” (Jordan 2002:700–01). and rendering it superfluous for them to be farther active. from whose History of England he quotes (¶ 3–6. The former. takes the position that religion is not a public good but its opposite—a public bad—and that government intervention will avert the pervasive negative externality of religious controversy.

which are serious punishments even when they have no civil consequences. . not that [the sovereign] was sometimes obliged to yield. and conducted upon one uniform plan” (¶ 21). this phenomenon operates directly in the case of religious freedom but also indirectly in the case of general freedom of expression. which can flourish only where civil government is able to protect them. enabling him to avoid myopic. Once outsiders have free speech and education. governments and religious factions combined. or scientific) undermines intellectual monopoly and cartelization. short-term defections from long-term strategies (working and saving) that benefit him and his family. dispersed in different quarters . religion can be regulated indirectly (¶¶ 14–15). which weakened the Roman Church. will make it possible to ridicule the more extreme and dangerous groups and to limit their social harm. but that he ever was able to resist. through testing) will prevent their falling into superstition or enthusiasm. So long as a church competes with the state for the legitimate use of force. and some Swiss cantons . and unregulated speech.” 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 was formed against the authority and security of civil government. they can make fun of the religious extremist and can constrain his potential to recruit new adherents. (¶ 24) Just like Hobbes before him. under the pretence of devotion. and theater. unless he belongs to a small. although he disputes the cause. Moreover. Religion as a Bad Smith concedes Hume’s argument that religious organizations have presented a threat to public safety. under these circumstances. comprised a state within the state: “In such circumstances the wonder is. made it possible for the clergy to become “a sort of spiritual army.” The clergy. their wealth made it possible 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. Deviation from the austere morals imposed by rigorous religions results in expulsion and excommunication. Denmark. and happiness of mankind. the clergy could keep the peace without the assistance of the sovereign and were independent of the king’s courts (¶ 22). The situation improved but could still not be ideal. poetry. A free market in ideas and their expression (whether religious. Smith argues.188 JOURNAL FOR THE SCIENTIFIC STUDY OF RELIGION Sects that promote strict morality in cities provide a means of precommitment for the worker. as well as against the liberty. Although they have benefits. Following the Reformation. The combination of centralized. or where the whole of a large society is divided into two or three great sects” (¶ 8). Sweden. insofar as the sects’ morals “have frequently been rather disagreeably rigorous and unsocial” (the danger Hume identified). Both of these are ways of preventing what Nathan Rosenberg (1960) has called unfair ecclesiastical practices and eliminating the prisoners’ dilemma. because other ideas are often close substitutes for religious ones. either but one sect tolerated in society. The threat is not from the prisoners’ dilemma but from the power achieved “where there is. Education for those who hold power (and a requirement that they prove their education. for example. music. monitoring religious group (¶ 12). Smith is aware that public safety and the sovereign’s monopoly on the legitimate use of force is also a public good. society is inherently unstable because the church can realign itself with a competitor for political power and destabilize the regime. [but] directed by one head. but in reality to enjoy the hospitality of the clergy. . but they ignore it in a metropolis. so that secular and political cleavages reinforced one another (¶ 30). in the form of painting. Here. As landowners. ideological. hierarchical organization and substantial wealth. dancing. in a precommercial society when clergy could not use income to purchase luxury goods. austere sects create additional negative externalities (such as the increased likelihood of violent confrontation). In villages his neighbors attend to his conduct. In the market for moral codes. reason.

(¶ 8 emphasis added) According to this passage. and the problem is best solved for each of them. RELIGION. The equilibrium is unstable and suboptimal. How can their interests be realigned in a better way? Smith and Religious Competition The famous passage I quoted at the outset is not a part of Smith’s positive analysis of religion. both are threatened by competing religious and political factions. . with which I have been primarily concerned up to now. but these may be tempered through religious regulation. . freedom of religion should lead to the eventual development of religious tolerance.i. In Scotland government had assumed that power following “confusions and disorders” during the 22 years before reinstating lay patronage in 1711.e) (Leathers and Raines 1992). rather than on food for the poor. eliminating the hostility that Smith and Hume identify. for knights. and “the magistrate very soon found it necessary. In Smith’s Scotland. religious competition of the kind described at the outset is what welfare economists call the first-best solution. but not others’. Smith states the problem from then on generally: “The clergy of every established church constitute a great incorporation . free-market solution to the problem of regulation is practical. The most important measure Smith advocates is appointment of clergy either by the government or by lay patrons (who have a material interest in maintaining civil peace) and civil control of their promotion. but such as positive law has perhaps never yet established. free from every mixture of absurdity. Their interest as an incorporated body is never the same with that of the sovereign”2 (¶ 17). describing the religion that would result from such competition as that pure and rational religion. . The quoted passage continues.RATIONAL CHOICE. Once church and state are interdependent. but not for society. and for gentlemen. . to assume to himself the right of presenting all vacant benefices” (¶ 36). through payment of political and economic rents: an agreement to share power and spoils. Smith rejects the use or threat of force. which they did in post-Reformation Europe. but religious markets fail when natural monopolies exist. imposture. He writes that Anglicans and Lutherans (both hierarchical and episcopal). for the sake of preserving the publick peace. their prestige and political support from these dependents automatically diminishes (Anderson 1988:1083). The 2 In this respect established churches are subject to the same forces that corrupt monopolistic commercial corporations formed to advance their members’. he advocates management and persuasion (¶ 9). a positive point) (¶ 25). A monopoly sect has serious disadvantages. In the Calvinist churches on the Continent. disputes over the election of ministers originally created factions. The outcome would be a plurality of sects. . interests (WN V. but cooperation between the Pope and the nobility in France and Germany suppressed Protestants there. However. Each is interested in promoting its interests at the expense of the other and especially at the expense of the public. Such establishment is probably impossible. more is necessary. and probably never will establish in any country. were “from the beginning favorable to peace and good order” (¶ 34). which grant the sovereign power to appoint high-ranking ecclesiastics. AND THE MARKETPLACE 189 ended up Protestant. Smith does not say that the normative. instead. but they would all be tolerant ones of the kind that “wise men” have wanted to establish. To some extent. quite the contrary. the Reformation overturned both the unpopular Roman Catholic Church and the unpopular state that supported it (¶ 32). or fanaticism. Once commercial society makes it possible for the clergy to spend money on luxury goods for themselves. such as wise men have in all ages of the world wished to see established. which can be characterized as persecution and can lead to further radicalization and increased popularity for the church. commercial society naturally leads to the decline of an overly powerful church (again. In normative economic terms.

000 per year. as Hume recommends. . and saved “several millions. Smith’s practical solution is empirical. “a real land-tax.. Smith repeatedly points to the vulnerability of clergy who “possess all the virtues of gentlemen. who “look upon [them] with that kindness with which we naturally regard one who approaches somewhat to our own condition. however. the church competes with the state for the latter’s revenue. but who. Smith is not explicit that clergy should receive additional compensation from members of their congregations.500 supported 944 ministers. who were less wealthy (¶ 1). Elsewhere (I. to make them responsible to their congregations. and the church had total revenue of £80–85. This topic of pay leads Smith back to consideration of his principal consideration in Book V: the revenue of the sovereign or commonwealth (¶ 41).e. including France and Great Britain (which paid interest on them to the Swiss).” which it invested in the public funds of other European nations. . many were notoriously underpaid). which expropriated this source of revenue. devoted a portion to compensating the clergy at a reasonable (i.34) Smith says that Church of England curates were well paid at £40 per year (actually. Publicly and privately endowed religion was subject to the same dangers to which the English universities had succumbed and could benefit from the same remedy: clergy earning part of their wages directly from their congregations (Cf. Congregationalists) had become wealthy through “trust rights. to the Swiss canton of Berne.c. The result of appointing clergy. . understood in this light. second-best solutions for real problems: free speech and education. This problem can in turn be corrected by equalizing the status and pay of the clergy and by moderating their compensation downward (Leathers and Raines 1992:509). Just as the clergy may form a state within a state. . both good and bad. Rather. which is only indirectly expressed. It provides a hypothetical firstbest. Smith’s tacit solution is to appoint them but to take away part of their endowments. It is not only the established churches that are weak because of overpayment.190 JOURNAL FOR THE SCIENTIFIC STUDY OF RELIGION interests of appointed clergy and their churches align better with those of the governing political order. and limiting their income. Those solutions are based upon wide-ranging empirical evidence from different periods in history and different cultures and nations. is that they will become indolent placeseekers. which gave them authority and influence with the inferior ranks of people” (¶ 1). the right of the clergy to a share of the produce of the land. on average (at £721/2 ) Church of Scotland clergy were comparatively well off.f.i. and to use the remaining funds for their proper purpose: funding legitimate objects of public finance. does not say what some claim it says. He points. he emphasizes the sympathy between the clergy “of small fortune” and “exemplary morals” and the members of their congregations. rather than as a tax. low) rate. can recommend [themselves] to the esteem of gentlemen. but . . appointing clergy. Religious groups may multiply. according to Smith. and other evasions of the law” and were being overtaken in popularity by the Methodists. or .x. Smith acknowledges. Denominations that we know as old dissent (Unitarians. [who] lose the qualities. Instead of subsidizing the clergy. we think. which puts it out of the power of the proprietors of land to contribute so largely toward the defence of the state as they otherwise might be able to do”: an instance of crowding out. Pointing to a contemporary analysis of clergy revenue in Scotland. the source of which becomes revenue for the state. WN V. Smith starts with empirics and induces general laws 3 This conclusion. Tithes. and they are less likely to engage in politically destructive behavior in order to increase their own rents or to extract rents from the party out of power in exchange for political support. are. ¶ 2. but religious diversity is a means of achieving civil peace. which should eliminate the negative externalities Smith and Hume were concerned about. ought to be in a higher” (¶ 38). not of increasing religious vitality or commitment.6). but he does not foreclose the possibility. as tithes were at the time uniformly treated as a form of property (an interest in land).3 The quotation so frequently relied upon to link Smith with religious free market competition. not theoretical. to which they owe their position. would have been highly offensive to his readers. he shows that £68. He points to practical.

The history of England from the invasion of Julius Caesar to the revolution in 1688. a free religious market may be optimal. Smith is not an unrelenting opponent of regulation. 1999. historical circumstances in order to know what interests and motivations predominate and in order to arrive at general rules of human behavior and practical recommendations for public policy. Smith recommends state-appointed clergy. served by their earning part of their living from their congregations. and as a result competing sect-leaders’ payoffs are modified to eliminate the prisoners’ dilemma. but he is certainly a social scientist. Hume. In this way clergy can be forced to serve the interests and gain the respect of those with whom they are in most frequent contact. David. but he also points to post-Reformation churches as presenting the same danger. Smith balances the state’s interest in social control. the second-best is to ensure that powerful members of society are educated and to guarantee free expression of ideas. to prevent mutual rent seeking. Journal of Political Economy 96(5):1066–88. Smith and Social Science Assuming that agents are fully rational members of a commercial society. The most dramatic example is the medieval Roman Catholic Church. nor does he limit himself to historical or anthropological description. 1991. Iannaccone. imposture. This approach to regulation is indirect.RATIONAL CHOICE. ——. and other evasions of the law”).” This first-best solution is not possible because the assumption of full rationality cannot be fulfilled. Once that assumption fails. REFERENCES Anderson. and members’ demand will not tolerate overly rigorous religious requirements. He does not begin with general theories. Choice & religion: A critique of rational choice. Cadell (available online through Gale Group. Nevertheless. Its risk is moderated by outside criticism (through plays and entertainments). religious leaders will be less likely to impose excessive costs on members. and his methodology provides a useful tool when we are attempting to communicate in social scientific disciplines. As a result. RELIGION. free from every mixture of absurdity. London: printed for T. Laurence R. In order to realign the interests of the church with the state. or fanaticism. Gary M. A treatise of human nature in two volumes. London: Dent. the underpinnings of his thought are both game-theoretic and scientific (McLean 2006:77). Smith is not an ideologue. with the need to meet popular demand. reduced incomes. accessed10 July 2008). he attempts to induce general rules from concrete observations (or. but it also reinforces proper functioning of the intellectual market. Review of Politics 64(4):687–713. and to serve the public interest. instead. . its potential for religious monopoly or cartelization. rather. Austere religion can benefit workers and society. 1988. Will R. Bruce. he is an empiricist. 2002. perhaps. Rationality and Society 3(2):156–77. Steve. educational. Jordan. Everyman’s library. or intellectual—must be evaluated on its own terms and within concrete. served by regulated clerical appointment. Smith and the preachers: The economics of religion in the Wealth of Nations. Each market— religious. Mr. 2 vols. and expropriation of church property for public purposes (perhaps even including that held by nonestablished denominations through “trust rights. The consequences of religious market structure: Adam Smith and the economics of religion. More extreme aspects of austere religion will be subject to more social criticism. Oxford: Oxford University Press. 1778. to justify the former with the latter. subject to further enquiry and contradiction by additional data). and he bases policy recommendations on practical considerations in specific contexts. as competition with the secular government to undermine its monopoly on the legitimate use of force. [1738] 1911. as it would diminish the risk of mutual rent seeking by church and state and would lead to “pure and rational religion. AND THE MARKETPLACE 191 of human behavior. Smith identified the principal practical threat from religion. Religion in the public square: A reconsideration of David Hume and religious establishment.

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