Particularly in Protestant regions, new construction shifted from religious toward secular purposes, especially the building of palaces and administrative buildings, which reflected the increased wealth and power of secular lords. Reallocation was not driven by preexisting economic or cultural differences.
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Our findings indicate that the Reformation played an important causal role in the secularization of the West. How does religious competition influence the allocation of resources between religious and secular uses? In this article, we study the paradigmatic case of the Protestant Reformation: the moment when the most powerful institution in Western Europe—the Catholic Church—experienced a profound competitive shock.
We document how the introduction of religious competition during the Reformation transformed the European economy, sharply shifting the allocation of resources from religious to secular uses. We argue that the interaction between religious competition and politics was critical to this process. We argue that the introduction of religious competition crucially affects a second market—in which state authorities secure political legitimacy from religious elites Rubin Introducing this missing market generates novel hypotheses.
First, competition should induce resource reallocation away from the church sector and toward secular uses. Second, competition should drive resource reallocation toward uses specifically favored by secular rulers.
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We examine rich microdata on the allocation of resources in early modern Germany and find evidence supporting both hypotheses. We present a conceptual framework that captures a core feature of religion in history: the role in legitimizing political elites Weber ; North, Wallis, and Weingast Within our framework, the pre-Reformation era can be understood as an equilibrium in which a monopolist religious producer the Catholic Church provided political legitimacy to secular authorities at a high price—charged in the form of control over resources, tax exemptions, and some degree of political power.
Crucially, this shock to the market for salvation also affected the market for political legitimacy. Where Protestants were willing to grant secular authorities extensive control of church resources, the need to maintain doctrinal consistency restricted the bargains Catholics could offer.
The posited new equilibrium in the market for legitimacy has implications for the allocation of resources between secular and religious uses. Increased labor demand by enriched and empowered rulers, and the decline in clerical services required for salvation in Protestant theology, will reduce church sector labor demand relative to the secular sector.
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As a consequence, returns to investments in human capital specific to church careers will fall, and forward-looking students will shift their human capital investments accordingly. Shifts in resources toward secular authorities will also be reflected in fixed investments, such as large-scale urban construction, which embody a full set of factors of production. The new equilibrium will also have implications for the allocation of resources within the secular sector: specifically, resources will shift toward uses that reflect the enhanced bargaining power of secular rulers.
We begin to evaluate these hypotheses by documenting the new equilibrium in the market for political legitimacy in the years after , when Martin Luther first circulated his famous 95 Theses. As indicators of the shifting bargain between secular and religious authorities, we examine the expropriation of monasteries and wealth transfers from the Catholic Church to secular lords. Qualitative and quantitative evidence show sharp reallocations toward secular control of resources—not just a transfer from Catholic Church uses to Protestant ones.
Transfers of resources from the control of church elites to secular lords occurred in both Catholic and Protestant territories but were particularly pronounced in the latter. We directly test the implications of our framework for resource allocation using rich microdata. We assemble new, highly disaggregated data on the degrees received by and occupational outcomes of German university graduates and on construction events at the town-by-year level, across over 2, German towns.
We distinguish between religious and secular human capital investments, occupations, and fixed capital investments. Specifically, we assign to the religious sector the study of theology; taking a position as a monk, priest, and so on; and the construction of a church. We assign to the secular sector, nontheological degrees; occupations in public administration and the private sector; and the construction of a palace, hospital, or merchant hall.
To study the market for highly skilled labor, we examine individual-level data on the career choices of university graduates before and during the Reformation. Our results reflect the transmission of the shock to the market for religion into effects on the labor market. Indeed, we find that immediately after the start of the Reformation, individuals at Protestant universities reallocated their human capital investments away from theology degrees and toward the study of more general, secular subjects.
We also find significant shifts toward degrees in law and the arts, subjects that differentially prepared students for careers in public administration. We finally consider a third measure of resource allocation: major construction events as summary statistics for the allocation of bundles of resources, embodying land, physical, financial, and human capital. During the Reformation, new construction events shifted from religious purposes toward secular ones e. Figure I , Panel A shows a pivot from church sector construction to secular sector construction precisely at the time of the Reformation.
This sectoral reallocation away from church uses occurred differentially more in Protestant territories, as we document below. Again, the evidence is consistent with the Reformation playing a causal role: we find no evidence of a pre-Reformation shift toward secular construction or of differential pre-Reformation trends in construction between Catholic and Protestant territories. Consistent with our conceptual framework, Figure I , Panel B shows that within the category of secular construction, there was a sharp pivot precisely toward the uses favored by empowered secular lords: the construction of palaces and administrative buildings.
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Cumulative construction events by sector and subsector over time. Panel A shows the cumulative number of new construction events in the religious and secular sectors in Germany. Panel B disaggregates the secular sector construction events into mutually exclusive and exhaustive subsectors color version available in the online article. Vertical line marks , when Martin Luther circulated his 95 Theses. Indeed, we find a larger shift toward secular construction in comparing Protestant regions to Catholic regions far from a Protestant border than in a comparison with Catholic regions close to a Protestant border.
Our construction data also allow us to rule out competing explanations for our findings. One alternative to our proposed political economy mechanism is that what appears to be secularization is a mere relabeling of activities that were simply transferred from Catholic Church jurisdiction to Protestant secular lords. For example, historical construction supporting social service provision is difficult to assign definitively to the religious or secular sectors. Another alternative is that the apparent secularization reflects the transfer of spending commitments to religious warfare conducted by secular authorities.
However, in our analysis of finer categories of secular construction, we observe no shift in military construction through In assessing whether the Reformation played a causal role in driving sectoral reallocation one first worries about unobserved differences between eventually Protestant and Catholic territories and universities. However, it is unlikely that territory- or university-specific unobservables explain our findings: territories and universities that would become Protestant exhibit no significant differences in human and physical capital investment trends prior to the Reformation.
Another natural concern is that time-varying and territory-specific unobservables may have driven both the adoption of Protestantism and the reallocation of resources toward secular purposes. A large literature documents a wave of urban support for the Reformation and that cities were key locations where reformist ideas and constituencies developed Ozment ; Hamm One might wonder whether cities at the leading edge of the Reformation drive our findings. However, we find virtually identical results when we limit the analysis to small towns. Another possibility is that changes in economic conditions drove both the adoption of Protestantism and secularization.
To explore this possibility, we examine a set of territories where the timing of adoption was plausibly exogenous—due to unanticipated changes in rulers. We find that within these territories, where the timing of religious change was independent of underlying economic conditions, the same pattern of reallocation ensues. Our findings provide new empirical evidence on the links among the Reformation, secularization, and economic change. He specifically highlights the historic association between secularization and growth, contrasting Europe with the Islamic world see also Chaney ; Kuran Our finding that the Reformation in fact shifted resources to the state i.
The process of economic secularization that we document can be seen as having two components: first, the strengthening of territorial lords—promoting institutional secularization—and second, a reallocation of economic inputs toward secular purposes, specifically those favored by territorial lords—reflecting allocational secularization. First, conceptually, our findings point to political changes—consequences of the Reformation outside of the traditional macroeconomic production function—as potentially important drivers of economic change in the long run.
Consistent with this view, Dittmar and Meisenzahl forthcoming provide evidence that ideological and political changes in a subset of Protestant cities resulted in the enactment of church ordinances establishing the local government as a provider of public goods, with important consequences for human capital and economic growth. The Reformation had effects outside of Protestant regions, particularly in Catholic regions bordering Protestant ones.
The Reformation also had important effects in small towns as well as large cities. Our findings provide empirical evidence allowing us to contribute to classic debates in social science. In perhaps the most famous social science work on the Reformation, Max Weber argued that religious reform shaped economic behavior and thus contributed to the rise of capitalism. Our evidence suggests a causal effect of the Reformation on economic activity—as suggested by the stylized Weberian view—but along a very different margin, and working through a different mechanism from that which is traditionally emphasized.
First, prior to the Reformation, European society was already characterized by important forms of secularization—including the separation of secular and religious power that is central to the political market that we emphasize in our conceptual framework. The rich data we assemble on the allocation of resources before and after the Reformation allow us to observe patterns of economic activity that might have foreshadowed the Reformation. In data on human capital and fixed investments, we do not observe any trends toward secularization prior to the Reformation.
In occupational choice we do observe overall trends away from church employment, though we do not observe any differential pretrends toward secularization in regions that would adopt Protestantism. This suggests that the post-Reformation resource reallocation we observe was not previously in motion and was not inevitable. Yet initial conditions were critical to the process that we document. We thus emphasize that we identify a causal role for the Reformation on the allocation of resources, but we do not rule out economic factors driving the Reformation.
In Section IV we offer concluding thoughts. We model the Reformation as a competitive shock to the Catholic Church, which had been a monopolist producer of salvation for believers and the sole source of religiously derived political legitimacy for secular rulers in Western Europe for hundreds of years.
In this section, we first present our informal model of religious competition in Western Europe. We discuss the pre-Reformation equilibrium.
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Next we describe the Reformation as a shock to competition and discuss the post-Reformation equilibrium, providing historical evidence on the changed bargain between secular and religious elites. Finally, we discuss the implications of the new equilibrium for the allocation of resources in Europe, laying out the hypotheses that we test in our empirical analysis later. Believers pay a price, comprising financial, time, and other costs. This approach to the analysis of religious service provision provides a powerful lens through which to view religious monopoly and the entry of a competitor.
A monopolist church will charge a price above marginal cost, as would any monopolist service provider, and a perfectly price discriminating monopolist will extract all of the surplus in the market. Entry by a competitor will reduce prices in the market for salvation, leaving consumers better off. The bargains struck in this market for political legitimacy have been critical to the organization of human societies for millennia but have been relatively understudied by economists see Chaney ; Belloc, Drago, and Galbiati ; Rubin , for important exceptions. Entry of a competitor in a monopolistic religious environment will affect both markets.
First, the entrant will charge a lower price than the incumbent in the market for salvation. The market for legitimacy will in turn be affected through three channels. The entrant will reduce the ability of the incumbent church to confer legitimacy by questioning its theology. The attraction of believers to the entrant religion will also reduce the value of legitimacy conferred by the incumbent. Finally, the ability to bargain with two providers of religiously derived political legitimacy will allow secular rulers to bargain down the price paid to either entrant or incumbent.
Thus, entry will unambiguously reduce the price paid by secular lords to religious authorities. Our model delivers predictions that are not a feature of existing models that emphasize the market for salvation. By focusing on the political market, our model also predicts a shift in the bargain between secular and church elites. This shift—the lower price in the market for church-derived political legitimacy—could have first-order economic consequences, as we discuss below. At the start of the sixteenth century, just prior to the Reformation, the Catholic Church enjoyed a virtual monopoly in the market for religion in Western Europe and extraordinary wealth and power the foundation stone of St.
The Church functioned as an expensive intermediary between lay people and the divine, with services conducted in Latin and substantial resources devoted to supporting specialist clerics Cameron It is unsurprising that the Church was so rich: as a monopolist producer of salvation for believers and religiously derived political legitimacy for rulers, it was able to extract enormous rents from tithes and sacramental fees, as well as from its huge land holdings. The Church was also constrained in its ability to extract rents from secular lords, with whom there was continual conflict over the control of resources, jurisdiction over territory, and the authority to appoint individuals to positions of power e.