500 years ago, the seeds of capitalism
On 31 October 1517, Martin Luther posted his Ninety-Five Theses on the door of the All Saints’ Church in Wittenburg. Thus began the Reformation, a rebellion against the religious authority and temporal power of the Catholic Church that would soon fracture Europe. This reordering of the continent was the beginning of a political and economic evolution that has shaped the modern world.
In the early part of the 20th century, German sociologist Max Weber and English economic historian R.H. Tawney drew a direct causal link between the Calvinist Protestantism founded during the Reformation and modern capitalism. Their theory of the Protestant work ethic—the self-discipline and frugality that lent itself so well to capital accumulation and industry—has been influential since. But it is a woolly logic that ignores historical counter-examples and fails to give proper weightage to the economic evolution of other cultures. Diarmaid MacCulloch, arguably the pre-eminent Reformation historian today, has pointed out that for every post-Reformation economic powerhouse like Protestant England or Protestant Netherlands, there was an economic backwater like Protestant Scotland or Protestant Transylvania.
The true impact of the Reformation on economic evolution lies elsewhere: it broke the Church’s monopoly in the religious marketplace and promoted religious competition. The consequences were profound.
Pre-Reformation Catholic theology positioned the Church as the gatekeeper to salvation—an important concern for the common man at the time. The importance of divine right to monarchical rule also meant that it was the most influential banker of political legitimacy across Europe. Monopolies lead to corruption; the Church was no different. By the time the Reformation came around, it had grown fat on royal endowments, tithes and taxation rights. The princes of the Church often amassed fortunes to rival their secular counterparts; monasteries and churches controlled immense wealth.
When Protestant theology championed salvation by faith rather than by good works, it threatened the penitential system that was the basis of the Church’s gatekeeper role. This had numerous first and second order effects. In Religious Competition and Reallocation: The Political Economy of Secularization in the Protestant Reformation, Davide Cantoni, Jeremiah Dittmar and Noam Yuchtman have examined historical data to show the extent of the post-Reformation secularization of early modern Germany’s—then the Holy Roman Empire (HRE)—economy.
Secular rulers now able to bargain with multiple providers of political legitimacy were able to secure better deals. This drove down their costs and reflected in the wider economy with more efficient allocation of resources. For instance, after 1517, the construction industry shifted from being dominated by religious construction such as churches to secular construction such as palaces and administrative buildings.
The religious competition also spilled over in ways that improved human capital in Europe with a resultant boost to the economy. While the traditional elite clung to the Church in several regions, the rising class of merchants and traders were attracted by Protestantism’s anti-corruption message. The increase in their political power as the Reformation took hold meant a change in patterns of public spending with a rise in public goods institutions relevant to them, such as educational institutions.
This fed into—and was strengthened by—the birth and rapid growth of the printing industry. As German theologian Bernd Moeller has put it, “No printing, no Reformation.” Pamphlets and booklets spread the Reformation’s ideas across the continent while bibles published in the vernacular took scripture—until then confined to Latin—out of the hands of the Church and gave it to the common people. Cities like Wittenberg and Geneva that became centres of the new industry saw economic booms. The growth of the industry also fuelled the rise in public education. This, coupled with the changing demands of the secular economy, was reflected in another interesting change: after the Reformation, university degrees shifted sharply from religious fields to secular fields such as law and the arts.
These developments are not historical artifacts relevant only to their times. Increasing urbanization and a shift from agriculture to manufacturing and services; rationalization of laws; the rise of entrepreneurship; rise in income tax revenue; and social safety nets—the Reformation established principles that are as important for economic development now as they were then. And by unleashing the economic potential of Europe, the post-Reformation era saw global trade rise to unprecedented levels, shaping power dynamics that would continue well into the 20th century. All of it found its apotheosis in the Enlightenment —Europe’s great leap forward that has given the modern world the ideals of liberal democracy, the secular state and free markets. This era cemented the pre-eminence of the European powers and enabled the exploitation of much of the rest of the world. But its ideals are universal; they continue to enable developing nations today.
Adam Smith, one of the Enlightenment’s champions, understood the importance of religious competition much as he understood the importance of economic competition. Perhaps he should have the last word: “The teachers of each little sect… would be obliged to respect those of almost every other sect, and the concessions which they would mutually find… convenient and agreeable… might in time… reduce the doctrine of the greater part of them to that pure and rational religion, free from every mixture of absurdity, imposture, or fanaticism”.
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