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 Smiths 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 rst-best solution, as a second-best policy he advocated religious regulation, including state-appointed clergy and the reduction of clergy income. Smiths 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 scientic 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 Capn to Paul Newmans Cool Hand Luke in the 1967 lm. Rational choice has this problem in the eld 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 Smiths 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 Smiths 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 Smiths 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 specication; 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.

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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 is critical (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 positive externalities. Smiths 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 perceive, that the immediate consequence of his failing in his part, is the abandoning the whole project. But it is . . . impossible, that a thousand persons should agree in any such action; . . . each seeks a pretext to free himself of the trouble and expense, and would lay the whole burden on others. Political society easily remedies . . . these inconveniences. (Hume [1738] 1911: Book III Part ii ch. 7)

Pure public goods are nonrival and nonexcludable: once they are provided for some, others can enjoy them without detracting from anyone elses enjoyment; and once they are provided for some, they are available to everyone. Public statues, national defense, and the justice system fall into this category. Hume explains why people defect from the common enterprise; public goods either will be underprovided by the market or will not be provided at all. Thus, the state may properly fund them. Externalities are costs and benets that accrue to people who are not parties to a private market transaction (McLean 1987). If I purchase a rose bush from a orist and plant it in my front yard, passers-by enjoy the benet (externality) of its color and fragrance at no cost; similarly, 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. Externalities lead to market failure, because costs and benets are not fully reected in the market price. Government intervention can correct for this. The trick is to internalize the costs (and benets) so that I pay a sufcient amount to compensate for the externalities. 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 fully take into account future costs (or benets). An example would be the use of health-damaging addictive substances. Again, a tax or subsidy can correct for this. These are the types of issues Smith explores in Book V. Nonreligious Markets Smith is an empiricist. Different kinds of markets must be evaluated independently to determine whether they fail, so that goods are overprovided or underprovided, and why. Even national defense is not a simple issue to address, as Smith must determine whether government should alter incentives (punishing defectors) in order to ensure that citizen militias are sufciently powerful to defend against foreign attack or whether government should subsidize a standing army (V.i.a.1718; given the division of labor in commercial society, the latter prevails). The justice system presents similar questions, and here Smith approves a system in which fees are paid to judges, but he still imposes regulation to prevent corruption, insisting that the fees be precisely regulated and ascertained, . . . paid all at once, at a certain period of every process, into the hands of a cashier or receiver to be distributed in certain known proportions among the judges after the case is decided (V.i.b.20). Education is a closer question. Smith believes that primary education should be heavily subsidized by the state, with parents paying only minimal fees that would encourage both diligence among the teachers, who should compete for students, and vigilance by the parents to monitor their performance (V.i.f.5455). Smith even implicitly advocates compulsory primary education in reading, writing, and mathematics. On the other hand, Smith asserts that instructors at ancient English 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 facultys

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incentive to provide useful instruction to their pupils in return for students fees (like those paid at Scottish universities) (V.i.f.59). Education is never a pure public good, as it can be purchased and classrooms can be crowded, but a workforce educated in basic skills of reading, writing, and arithmetic provides sufcient positive externalities that a substantial subsidy is warranted in early years. Religious Markets The title of Book V, Chapter I, Of the expenses of the Sovereign or Commonwealth connects Smiths discussion of organized religion with his debate on the subject with David Hume, from whose History of England he quotes ( 36, quoting from Hume 1778: iv.3031). 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, 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 stated salaries to their profession, and rendering it superuous for them to be farther active, than merely to prevent their ock from straying in quest of new pastures (Jordan 2002:70001). Hume, an agnostic if not an atheist, takes the position that religion is not a public good but its oppositea public badand that government intervention will avert the pervasive negative externality of religious controversy, which clergy create and that threatens public safety. Both authors recognize the characteristics of what we now call a prisoners dilemma. Consider a town in which two ministers (A and B) are competing for adherents, on which some part of their income depends. Each has a choice between adopting an extremist position, arguing that God will punish those who do not adhere to one religion, and a moderate one, in which adherence to one sect is desirable but other options may be equally acceptable to God. If A adopts extremism, then B is better off adopting extremism in order to combat As condemnation of Bs religion. Even if A adopts moderation, B will still be better off adhering to extremism, so that B can condemn As tolerance, threaten As adherents with eternal punishment, and recruit As members. In either case, extremism is the best answer, although conict would diminish, peoples consciences would rest easier, and society would benet if both ministers were moderates. As each adopts a more extreme position, with stricter rules and stronger punishments, the other must respond in kind. Humes solution to the problem is to bribe ministers to be moderate. Smith sees that the problem is more complex. Religion as a Good Neither Smith nor Hume treats religion as a public good. In this respect they agree with rational choice theorists of religion: religion should not be publicly funded or produced in the same manner as, say, national defense. Smith, however (unlike Hume), is willing to identify positive externalities that accrue from an individuals decision to adhere to a religion. Smith identies two systems of morality applicable to civilized society: the strict or austere, which benets society, and the liberal or loose ( 10). Common people admire the former; people of 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 weeks thoughtlessness and dissipation is often sufcient to undo a poor workman for ever, and to drive him through the despair upon committing the most enormous crimes. . . . The disorder and extravagance of several years, on the contrary, will not always ruin a man of fashion, 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.

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Sects that promote strict morality in cities provide a means of precommitment for the worker, enabling him to avoid myopic, short-term defections from long-term strategies (working and saving) that benet 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 and excommunication, which are serious punishments even when they have no civil consequences. Although they have benets, austere sects create additional negative externalities (such as the increased likelihood of violent confrontation), insofar as the sects morals have frequently been rather disagreeably rigorous and unsocial (the danger Hume identied). Here, Smith argues, religion can be regulated indirectly ( 1415). Education for those who hold power (and a requirement that they prove their education, for example, through testing) will prevent their falling 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 dangerous groups 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. Once outsiders have free speech and education, they can make fun of the religious extremist and can constrain his potential to recruit new adherents. A free market in ideas and their expression (whether religious, ideological, or scientic) undermines intellectual monopoly and cartelization. In the market for moral codes, this phenomenon operates directly in the case of religious freedom but also indirectly in the case of general freedom of expression, because other ideas are often close substitutes for religious ones. Religion as a Bad Smith concedes Humes argument that religious organizations have presented a threat to public safety, although he disputes the cause. The threat is not from the prisoners dilemma but from the power achieved where there is, either but one sect tolerated in society, or where the whole of 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 could not use income to purchase luxury goods, made it possible for the clergy to become a sort of spiritual army, dispersed in different quarters . . . [but] directed by one head, and conducted upon one uniform plan ( 21). As landowners, the clergy could keep the peace without the assistance of the sovereign and were independent of the kings courts ( 22). Moreover, 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, under the pretence of devotion, but in reality to enjoy the hospitality of the clergy. The clergy, under these circumstances, comprised a state within the state: In such circumstances the wonder is, not that [the sovereign] was sometimes obliged to yield, but that he ever was 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 was formed against the authority and security of civil government, as well as against the liberty, reason, and happiness of mankind, which can ourish only where civil government is able to protect them. ( 24)

Just like Hobbes before him, Smith is aware that public safety and the sovereigns monopoly on the legitimate use of force is also a public good. So long as a church competes with the state for the legitimate use of force, society is inherently unstable because the church can realign itself with a competitor for political power and destabilize the regime. Following the Reformation, which weakened the Roman Church, governments and religious factions combined, so that secular and political cleavages reinforced one another ( 30). The situation improved but could still not be ideal. Denmark, Sweden, and some Swiss cantons

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ended up Protestant, but cooperation between the Pope and the nobility in France and Germany suppressed Protestants there. In Smiths Scotland, the Reformation overturned both the unpopular Roman Catholic Church and the unpopular state that supported it ( 32). Smith states the problem from then on generally: The clergy of every established church constitute a great incorporation . . . Their interest as an incorporated body is never the same with that of the sovereign2 ( 17). Once church and state are interdependent, both are threatened by competing religious and political factions, and the problem is best solved for each of them, but not for society, through payment of political and economic rents: an agreement to share power and spoils. Each is interested in promoting its interests at the expense of the other and especially at the expense of the public. 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 Smiths 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 quoted passage 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 men have 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 of religious tolerance, eliminating the hostility that Smith and Hume identify. The outcome would be a plurality of sects, but they would all be tolerant ones of the kind that wise men have wanted to establish. Such establishment is probably impossible. In normative economic terms, religious competition of the kind described at the outset is what welfare economists call the rst-best solution, but religious markets fail when natural monopolies exist, 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 increased popularity for the church; instead, he advocates management and persuasion ( 9). To some extent, commercial society naturally leads to the decline of an overly powerful church (again, a positive point) ( 25). Once commercial society makes it possible for the clergy to spend money on 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 (Anderson 1988:1083). However, more is necessary. 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. He writes that Anglicans and Lutherans (both hierarchical and episcopal), which grant the sovereign power to appoint high-ranking ecclesiastics, were from the beginning favorable to peace and good order ( 34). In the Calvinist churches on the Continent, disputes over the election of ministers originally created factions, and the magistrate very soon found it necessary, for the sake of preserving the publick peace, to assume to himself the right of presenting all vacant beneces ( 36). In Scotland government had assumed that power following confusions and disorders during the 22 years before reinstating lay patronage in 1711. The

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

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interests of appointed clergy and their churches align better with those of the governing political order, to which they owe their position, 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. The result of appointing clergy, Smith acknowledges, is that they will become indolent placeseekers. Smith repeatedly points to the vulnerability of clergy who possess all the virtues of gentlemen, or . . . can recommend [themselves] to the esteem of gentlemen; but . . . [who] lose the qualities, both good and bad, which gave them authority and inuence with the inferior ranks of people ( 1). 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). Smith is not explicit 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 look upon [them] with that kindness with which we naturally regard one who approaches somewhat to our own condition, but who, we think, ought to be in a higher ( 38). It is not only the established churches that are weak because of overpayment. Denominations that we know as old dissent (Unitarians, Congregationalists) had become wealthy through trust rights, and other evasions of the law and were being overtaken in popularity by the Methodists, who were less wealthy ( 1). Publicly and privately endowed religion was subject to the same dangers to which the English universities had succumbed and could benet from the same remedy: clergy earning part 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 of the produce of the land, are, according to Smith, a real land-tax, 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. Just as the clergy may form a state within a state, the church competes with the state for the latters revenue. He points, however, to the Swiss canton of Berne, which expropriated this source of revenue, devoted a portion to compensating the clergy at a reasonable (i.e., low) rate, and saved several millions, which it invested in the public funds of other European nations, including France and Great Britain (which paid interest on them to the Swiss). Pointing to a contemporary analysis of clergy revenue in Scotland, he shows that 68,500 supported 944 ministers, and the church had total revenue of 8085,000 per year. Elsewhere (I.x.c.34) Smith says that Church of England curates were well paid at 40 per year (actually, many were notoriously underpaid); on average (at 721/2 ) Church of Scotland clergy were comparatively well off. Instead of subsidizing the clergy, as Hume recommends, Smiths tacit solution is to appoint them but to take away part of their endowments, to make them responsible to their congregations, and to use the remaining funds for their proper purpose: funding legitimate objects of public nance.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 rstbest, 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. Smiths practical solution is empirical, not theoretical. He points to practical, second-best solutions for real problems: free speech and education; appointing clergy; and limiting their income, the source of which becomes revenue for the state. Those solutions are based upon wide-ranging empirical evidence from different periods in history and different cultures and nations. Smith starts with empirics and induces general laws

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

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of human behavior, and he bases policy recommendations on practical considerations in specic contexts. Nevertheless, the underpinnings of his thought are both game-theoretic and scientic (McLean 2006:77). Smith and Social Science Assuming that agents are fully rational members of a commercial society, a free religious market may be optimal, as it would diminish the risk of mutual rent seeking by church and state and would lead to pure and rational religion, free from every mixture of absurdity, imposture, or fanaticism. This rst-best solution is not possible because the assumption of full rationality cannot be fullled. Once that assumption fails, the second-best is to ensure that powerful members of society are educated and to guarantee free expression of ideas. Austere religion can benet workers and society. Its risk is moderated by outside criticism (through plays and entertainments), and as a result competing sect-leaders payoffs are modied 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 demand will not tolerate overly rigorous religious requirements. This approach to regulation is indirect, but it also reinforces proper functioning of the intellectual market. Smith identied the principal practical threat from religion, its potential for religious monopoly or cartelization, as competition with the secular government to undermine its monopoly on 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 realign the interests of the church with the state, to prevent mutual rent seeking, and to serve the public interest, Smith recommends state-appointed clergy, reduced incomes, and expropriation of church property for public purposes (perhaps even including that held by nonestablished denominations through trust rights, and other evasions of the law). 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. Smith balances the states interest in social control, served by regulated clerical appointment, with the need 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 intellectualmust be evaluated on its own terms and within concrete, 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. He does not begin with general theories, nor does he limit himself to historical or anthropological description; 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 additional data). Smith is not an ideologue, but he is certainly a social scientist, and his methodology provides a useful tool when we are attempting to communicate in social scientic disciplines.

REFERENCES
Anderson, Gary M. 1988. Mr. Smith and the preachers: The economics of religion in the Wealth of Nations. Journal of Political Economy 96(5):106688. 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, Everymans 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):15677. Jordan, Will R. 2002. Religion in the public square: A reconsideration of David Hume and religious establishment. Review of Politics 64(4):687713.

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Leathers, Charles G. and J. Patrick Raines. 1992. Adam Smith on competitive religious markets. History of Political Economy 24(2):499513. McLean, Iain. 1987. Public choice: An introduction. Oxford: Basil Blackwell. . 2006. Adam Smith: Radical and egalitarian: An interpretation for the twenty-rst century. Edinburgh: Edinburgh University Press. Rosenberg, Nathan. 1960. Some institutional aspects of the Wealth of Nations. Journal of Political Economy 68(6):55770. 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.