Religion and Economics

The modern study of religion and economics begins with Adam Smith’s An Inquiry into the Nature  and  Causes of the Wealth of Nations (1776). Smith applied his economic analysis to several aspects of religion that researchers since developed with quantitative research. Smith’s fundamental contribution to the study of religion was that religious beliefs and activities are rational  choices. As  in  commercial activity, people respond to religious costs and benefits in  a  predictable,  observable manner.  People choose a religion and the degree to which they participate and believe (if at all).

In the 1970s, the rational choice approach to religion, or the economics of religion, reinvigorated  social science investigation of  religion (Young 1997). The first formal model of religious  participation  was developed by  Corry Azzi and Ronald Ehrenberg (1975). Laurence Iannaccone’s (1998) literature  survey of economics attributes to Azzi and Ehrenberg the framework that served as the basis for future research on religion. Using Gallup survey data, Azzi and Ehrenberg found that the opportunity cost  of  time  influences  religious  behavior. Within a given household, women whose wages are typically lower will spend more time in religious activity. Likewise, individuals whose real wages increase over time can be expected to participate less in religious activities. Education, just as wages, plays an important role in participation in religious activities. Edward Glaeser and Bruce Sacerdote found that  the  level of education of believers influences their choice of religion. The payoff for higher educated people is social capital in the form of networking rather than stronger religious beliefs. Benito Arrunada found that more education increases the costs of participating in  the  institution  of confession. Individuals  with  higher  education  tend   to engage in moral ‘‘self policing,’’ relying less on priests for such enforcement.

The family and its dynamics, a popular subject of anthropology, sociology, and psychology, are currently undergoing reinterpretation by  rational  choice  theorists.  Evelyn  Lehrer  (1999), using data from the  National Survey of Families and Households, looks at how religious  upbringing  influences  the  number  of years of schooling a person attains. She also explores how a woman’s religious preference influences her choice of marriage or cohabitation.  Maristella Botticini and  Aloysius Siow (2003) reexamine the  dowry  institution  and seek to explain parental choices in using different forms of intergenerational transfers.

Religious extremism,  both  in  non violent and  violent forms, is explained according to rational choice theory for similar reasons. Ian naccone’s cost benefit  analysis of  strict  religions led to the development of a theoretical model of the evolution of organized religion. Taking Ernst Troeltsch’s (1931) sect–denomination distinction, Iannaccone applied a cost induced commitment to organized religion. He argued that denominations and extremist sects can be construed as distinct modes or ‘‘clubs’’ of  religious organization based on  consumer (believer) preferences. Using  the  club model of religion, Iannaccone sought to explain the success of strict religions (cults, sects). Using a cost benefit analysis, Iannaccone argued that people  choose  to  undergo  stigma  and  self sacrifice and engage in unconventional behavior to eliminate free riders, thereby increasing the commitment of believers and benefits to members. Iannaccone’s economic analysis provided a rational explanation for behavior that  other professions categorized as brainwashing or  a form of pathological behavior. Eli  Berman (2000, 2003) applied the  club model to Israeli Ultra Orthodox Jews, as well as  to  Hamas,  the  Taliban,  and  the  Jewish underground  militias.  Berman  found  in  the case of the Israeli Ultra Orthodox community that  the  benefits of remaining in  the  group outweighed the costs of sacrifice and stigma. For  the  Taliban, the  sacrifices demanded by the  group,  seemingly gratuitous  acts of violence, destroyed outside options and, thereby, increased group loyalty.

Scholars who investigate the demand side of religion tend  to favor the view that  religious preferences change over time for both the individual and  social groups.  Sociologists Roger Finke and Rodney Stark (1992) maintain that individual preferences remain constant. Finke and Stark contend that the supply of religious goods changes over time, not the demand for them. Analyzing membership data beginning in the American colonial period, Finke and Stark argue  that  religions  begin  small,  supplying the religious goods that consumers want. As the religion grows and more members join, the religion accommodates the variety of membership demands by becoming less strict until it loses its religious relevance and declines.

However, religious strictness can reach an optimal level, after which it becomes detrimental to a religion. Extreme religions deter people from joining. A common example is the Shaker movement that practiced celibacy. Because of its inability to attract new members, it became obsolete. Religious strictness is not  the  only reason a religion declines. Adam Smith argued that state subsidies to organized religion create a dependency upon a regular and enforceable income.  State subsidized  religion  tends   to change in two ways. It devolves, losing those aspects of religious devotion that are relevant to people practicing their faith and the authority of its doctrine. Second, it tends to become a religion for elites, and to the degree that the clergy itself becomes an elite group in society, of elites. By contrast, those religious groups that depend solely on voluntary contributions must continually address the religious needs of their congregants to stay in existence.

Smith extended his analysis to the evolution of organized religion. Observing the nonconformist  religious groups  – ‘‘upstarts’’ –  Smith noted that the spiritual, imaginative, and emotional bases of the  new religious movements successfully challenge state sanctioned religion. As a reaction to popular criticism of its elitist ways, state religion resorts to coercion, repression, and even violence to maintain its financial, political, and  social arrangement  in  society.

Religion, Smith  concluded,  is  more  vibrant where there is a disassociation between church and state. The absence of state religion allows for competition, thereby creating an environment for a plurality of religious faiths in society (Smith  1791 [1776]). By showing no  preference for one religion over others,  but  rather permitting  any  and  all religions to  flourish, the state encourages an open market in which religious groups engage in rational discussion.

This  competitive  but  non coercive environment supports an atmosphere of ‘‘good temper and moderation.’’ Where there is a state mono poly on religion or an oligopoly among religions,  one   will  find   zealousness  and   the imposition of ideas on the public. Where there is an open market for religion and freedom of speech, one will find moderation and reason.

Correcting Adam Smith’s argument, it has been contended that the relaxing of state regulation on religion unleashes competitive forces in the economic marketplace but not necessarily competition  among  religious  faiths  ( Jeremy 1988). The focus of this variant argument lies with the legal recognition in England during the Industrial  Revolution of  nonconformist  religious groups – the upstarts. These groups challenged the dominant religion – in some cases state religion – with different views of the linkages between salvation and economic activity. Although these nonconformist religious groups did not necessarily increase in membership to challenge the  dominant position of the  state religion or mainstream faiths, they contributed to and altered economic activity. Thus,  state inclusion  of  nonconformist  religious  groups can have a positive effect on the economic productivity of society without seriously challenging state religion. This variant view is compatible with what Smith said the effect of religious pluralism would be: the continual subdividing of sects into numerous ones and small units so that a single religion does not dominate (Smith 1791 [1776]).

Economic historians have applied economic analysis to religious institutions. For example, Robert  Ekelund,  Robert Hebert,  and  Robert Tollison  treat  a  religious organization as  an economic firm to explain the rent seeking practices of the  medieval church.  More recently, they assess the competitive entry of Protestants into  the  medieval religion  market  (Ekelund et al. 2002). They analyze the Roman Catholic Church’s response in the form of the Catholic Reformation. Timur Kuran (2004) investigates the effects of Islamic legal institutions on economic growth and the  distribution  of goods. Kuran finds the institutions that generated evolutionary bottlenecks include the Islamic law of inheritance, which inhibited capital accumulation; the absence in Islamic law of the concept of a corporation and the consequent weaknesses of civil society; and the  waqf – the  religious endowment of  property for  specific, usually philanthropic, purposes to the exclusion of all other uses – which locked vast resources into unproductive organizations for the delivery of social services. All of these obstacles to economic  development  were largely  overcome through radical reforms initiated in the nineteenth  century. Nevertheless, traditional Islamic law remains an impediment to economic growth.

A recent application of economic analysis to religion and religious beliefs is the cross country  quantitative analysis of Robert Barro and Rachel McCleary (2003). Using  international survey data on religiosity for a broad panel of countries, they investigate the effects of church attendance and  religious beliefs on  economic growth.  They  find  that  religious beliefs are more  important  for  economic  activity  than religious participation. Rene Stulz and Rohan Williamson, using data on financial markets of various countries, find that a country’s principal religious preference is relevant for predicting creditor   rights.   The   improvement  of  data collected on various religions as well as aspects of  religious preferences and  institutions  will continue to spur research on religion, particularly from  an  international  perspective. The more important  data sets used are described below.

The World Values Survey (WVS), directed by  Ronald  Inglehart  at  the  Inter University Consortium for Political and Social Research (ICPSR), offers four waves of surveys (1981–4; 1990–3;  1995–7;  1999–2001), now  covering over 50 countries. Each survey includes a series of questions on religious beliefs, activities, commitments, and values, as well as a variety of economic, political, and social variables. For discussions and uses of these data, see Inglehart and Baker (2000).

Another  useful  data  set  is  the  International Social Survey Program  (ISSP),  which is  a  cross national  collaboration  of  surveys (including the General Social Survey or GSS for  the  United  States).  The  1991 and  1998 waves are dedicated to religion, the latter for 30  countries.  As  with  the  WVS,  the  ISSP includes an array of other variables. For  discussions  and  uses  of  the   ISSP   data,  see International   Social  Survey   Program   2002 (available at

Gallup  International  has  collected  cross national survey data on religion for many years. The Gallup Millennium Survey has useful indicators on church attendance and religious beliefs for over 50 countries in 1999; see Gallup International Millennium Survey 2002. Currently, these data are not easily accessible to researchers, although negotiations with Gallup International are underway.

Jonathan Fox and Shmuel Sandler (2004) are assembling a religion and state database (RAS) in which they classify the relation between religion and state into four broad groupings: separation of religion and state, discrimination against minority religions, restrictions on majority religions, and religious legislation. They examine religion and state separation between 1990 and 2002 in  152 states with  populations of over 1 million.

The    American   Religion   Data    Archive (ARDA), under the leadership of Roger Finke at Penn State University, will prove beneficial. The ARDA (available at is widely used as a source of data on religion for the  United  States  and  Canada.  It  provides additional software enhancements for selected ecological files. For the most heavily used files, such as Church and Church Membership Surveys, the site offers ‘‘Mapping’’ and ‘‘Report’’ options. Here state or national maps on church membership totals or rates can be constructed for any denomination in  the  data file. Users can also get a profile of religious denominations for  any  state,  county,  or  metropolitan  area selected.


  1. Azzi, & Ehrenberg, R. (1975) Household Allocation of Time and Church Attendance. Journal of Political Economy 83, 1 (February): 27 56.
  2. Barro, & McCleary, R. (2003) Religion and Economic Growth. American Sociological  Review 68 (October): 760 81.
  3. Berman,  (2000) Sect,  Subsidy,  and  Sacrifice: An  Economist’s View of  Ultra-Orthodox  Jews. Quarterly  Journal  of  Economics 115  (August):905 53.
  4. Berman, (2003) Hamas, Taliban, and the Jewish Underground: An Economist’s View of Radical Religious Militias. National Bureau of Economic Research Paper, September.
  5. Botticini,  &  Siow,  A.  (2003) Why  Dowries? American Economic Review 93,  4  (September):1385 98.
  6. Ekelund, , Hebert, R., & Tollison, R. (2002) An Economic Analysis of the Protestant Reformation. Journal of Political Economy 110(3): 646 71.
  7. Finke, & Stark, R. (1992) The Churching of America, 1776 1990: Winners and Losers in Our Religious Economy. Rutgers University Press, New Brunswick, NJ.
  8. Fox,  &  Sandler,  S.  (2004) World  Separation of Religion and State in the Twenty-First  Century. Paper presented at the International Studies Association Conference in Montreal, Canada, March.
  9. Iannaccone, (1998) Introduction to the Economics of Religion.  Journal  of  Economic  Literature 36 (September): 1465 96.
  10. Inglehart,  & Baker, W.  (2000) Modernization, Cultural  Change, and the  Persistence of Traditional  Values. American Sociological  Review 65:19 51.
  11. Jeremy, (Ed.) (1988) Business and Religion in Britain. Gower, Aldershot.
  12. Kuran,  (2001) The  Provision of Public Goods under Islamic Law: Origins, Impact, and Limitations of the Waqf System. Law and Society Review 35, 4 (December): 841 97.
  13. Kuran, (2004) The Economic Ascent of the Middle East’s Religious Minorities: The Role of Islamic Legal Pluralism. Journal of Legal Studies 33 ( June): 475 515.
  14. Lehrer, (1999) Religion as a Determinant of Educational Attainment: An  Economic Perspective. Social Science Research 28: 358 79.
  15. Smith, (1791 [1776]) An Inquiry into the Nature and Causes of the Wealth of Nations, 6th edn., Strahan, London, Book V, Article III.
  16. Troeltsch, (1931) The Social Teaching of the Christian Churches, Vols. 1 and 2. Foreword by J. L. Adams. Westminster/John  Knox Press, Louisville, KY.
  17. Young, A. (Ed.) (1997) Rational Choice  Theory and Religion: Summary and Assessment. Routledge, New York.

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