ECONOMICS OF RELIGION: THE ROLE OF RELIGION ON ECONOMIC PERFORMANCE A Review of Literature Davood Manzoor, Assistant Professor, Imam Sadiq University

“ It will not perhaps surprise people that economists have something to say about the economics of religion, since economists believe they have something to say about everything; what is surprising is that religion has something to say about economics. ” Deirdre N. McCloskey, University of Illinois, Chicago

Introduction Can belief in heaven or hell be a competitive advantage for nations? It's not the sort of question that many economists ask. With exceptions like Adam Smith, the giants of economic theory have had little to say on matters of faith.

Introduction Most of economists have tended to accept the secularization thesis advanced by Max Weber in "The Protestant Ethic and the Spirit of Capitalism: As economies become more advanced and as technology progresses, religion will decline as a force.

Introduction The wall separating religion and economics is being breached. In the past 5 to 20 years, more and more scholars have been using conventional economic methods to understand the way in which religion relates to the rest of society and to the economy in particular.

Introduction Douglass North (1971, 1991) has proposed—and a steadily growing body of empirical literature has confirmed—that institutions, more than any other factor, determine economic performance. failure of more conventional models to account for economic performance through time has induced many economists to look to more non- traditional explanations of economic performance physical capital accumulation, human capital accumulation, and technological change as such only account for a fraction of economic growth through time.

Introduction Institutions are the formal rules, informal norms, and enforcement mechanisms that comprise the “rules of the game” and determine the incentives to which people respond. A country’s institutional constellation has its foundation in the beliefs and ideologies of the polity, beliefs and preferences shape the performance of economies through time. Religions share a body of common ethical propositions that govern human behavior.

Theoretical Approaches Regarding the conceptual or theoretical approaches to the connection between religion and economy, there are two causal directionsin the literature on the sociology of religion First: Religion is dependent upon developments in the economic and political aspects of contemporary life. Events in an economy—levels and standard of living or governmental market interference — influence such things as attendance at religious services or religious beliefs.

Theoretical Approaches There are two important sociological theories about how religion responds to these factors One approach is called the “Secularization Hypothesis” a part of “Modernization Theory,” which says that As economies develop and get richer, people supposedly become less religious. “Less religious”.

Theoretical Approaches The second important approach is the “Religion Market Model.” The way government interacts with religion and influences the extent of participation in religion Sometimes the government regulates the market, possibly promoting a monopoly religion or making it difficult for other religions to flourish.

Theoretical Approaches It might detract from religiosity : If you have an established religion, you tend to have a monopoly, and monopolies tend to function inefficiently. Established religion tends to go along with government funding of religious activities which might result in greater religious participation

Theoretical Approaches The second theoretical approach looks at the connection between religion and economic and social life from the other direction. Religion is thought of as being the independent variable, influencing something about outcome on the economic, political, and social side.

Theoretical Approaches: Adam Smith In Wealth of Nations, Adam Smith argued that participation in religious sects could potentially convey two economic advantages to adherents Reputational signal: membership in a “good” sect could convey a reduction in risk associated with the particular individual and ultimately improve the efficient allocation of resources Sects could also provide for extra-legal means of establishing trust and sanctioning miscreants in intragroup transactions, again reducing uncertainty and improving efficiency

Theoretical Approaches: Adam Smith Hoselitz (1960) and McClelland (1961): Traditional societies resist change, and innovative groups can be important in the process of modernization. Religious affiliation could serve as the base for group cohesion necessary to successfully challenge established institutions and practices

Theoretical Approaches: Max Weber In The Protestant Ethic and the ‘Spirit’ of Capitalism, Weber (1905/2002) contended that the Protestant Reformation was critical to the rise of capitalism through its impact on belief systems Calvinist doctrine of predestination and the associated notion of the “calling” were essential for transforming attitudes toward economic activity and wealth accumulation

Theoretical Approaches: Max Weber individuals were predestined to salvation or damnation, and “good works” were a means of self-assurance and demonstration to others of one’s fate. Each had a “calling,” and the successful completion of this religious mission on a daily basis was pleasing to God and a mark of His blessing. The result was a “this-worldly asceticism,” which focused adherents on diligent, efficient economic activity, thrift, and non-ostentatious accumulation of wealth, which he saw as the bedrock of modern capitalism.

Theoretical Approaches: Max Weber Blum and Dudley (2001) provide another version of the Weber thesis, arguing that the Calvinist doctrine of predestination (in contrast to the Catholic practice of ritual penance), in game- theoretic terms, increased the cost of contractual defection (i.e., breaking contracts was a bigger deal for Protestants). This Protestant reluctance to break contracts contributed to greater trust and willingness to honor contracts with strangers and thereby contributed to the spread of more extensive information networks in the Protestant lands of Northern Europe, and it was these network externalities that promoted growth and the rise of industrial capitalism.

Theoretical Approaches: Arthur Lewis Nobel Laureate W. Arthur Lewis, is one of the few who expressed skepticism that religious beliefs had any significant impact on economic behavior and indeed argued that the causality probably ran the other direction: Despite religion’s claim to be the ultimate primal, changes in economic circumstances spurred theological adaptation (Lewis 1955).

Emprical Results: Robert J. Barro and Rachel M. McCleary Robert J. Barro and Rachel M. McCleary, are a husband-and-wife team based at Harvard. Professor Barro is a prolific economist who has long been interested in studying how and why economic growth rates differ among countries. Professor McCleary directs the Project on Religion, Political Economy, and Society at Harvard's Weatherhead Center for International Affairs

Emprical Results: Robert J. Barro and Rachel M. McCleary In order to get a broad cross-country sample of the extent of religiosity, the things they are measuring come from six important international surveys of values and other activities. These were carried out from the early 1980s through Three of these surveys are waves of the so-called World Value Survey: 1981, 1990, and 1995.

Emprical Results: Robert J. Barro and Rachel M. McCleary Greater economic development is associated with less religiosity. In two countries where religious service attendance is essentially the same, the one whose people have a greater belief in heaven and hell would experience faster economic growth. In two countries where the populations have similar rates of belief in heaven and hell, the one in which church attendance is greater would have slower growth.

Emprical Results: Robert J. Barro and Rachel M. McCleary Religion can affect economics by fostering beliefs that influence productivity-enhancing traits like thrift, hard work and honesty. A widespread feeling that such behavior may ultimately be rewarded (a belief in heaven), or that a lack of such behavior may be punished (a belief in hell) may therefore spur economic growth.

Emprical Results: Robert J. Barro and Rachel M. McCleary countries' economies may perform best when people have relatively higher levels of religious belief than religious participation. Among the nations falling into this category are Japan, South Korea, Singapore and some Scandinavian countries - all of which performed well economically in the period studied. Countries in which belief was low compared with religious participation included India and many in Latin America.

Emprical Results: Robert J. Barro and Rachel M. McCleary Belief in hell proved to be a more significant economic factor than belief in heaven. "The stick of punishment may be more powerful compared with the carrot,"

Emprical Results: Larry Iannaccone Iannaccone, an economics professor at George Mason University who studied at Chicago under Becker and who heads a new academic group, the "Association for the Study of Religion, Economics & Culture" While academics ignored religion in part out of a belief that it would fade under the onslaught of secularization we finally figured out that religion remains a very powerful force in contemporary society

Emprical Results: Larry Iannaccone Economists should pay more attention to the intersection of religion and economics It's almost impossible to live in the 21st century and look around and say that religion has no impact anymore Abundant evidence affirms that religious belief affects a wide range of behavioral outcomes and religious activity can affect economic performance at the level of the individual, group, or nation through at least two channels.

Emprical Results: Marcus Noland He is a senior fellow at the Institute for International Economics. In his paper (2004),"Religion, Culture, and Economic Performance” he tries to test the hypothesis that religious attitudes affect national economic performance.

Emprical Results: Marcus Noland The theoretical literature on the subject is indeterminate. He has found correlations between religious affiliation, the intensity of religious belief, and indicators of cultural tendencies The national cultural measures have no explanatory power with respect to national economic performance once conventional economic fundamentals are taken into account.

Emprical Results: Marcus Noland In contrast, in both cross-country and within- country regressions, the null hypothesis that religious affiliation is uncorrelated with performance can frequently be rejected Some commentators have claimed that Islam is inimical to growth. He has found that in general this is not borne out by the econometric analysis either at the cross- country or within-country level.

Emprical Results: Marcus Noland He has also found that predominately Muslim countries are seldom outliers (either positively or negatively) in the cross-country regressions. In most cases, the coefficient on the Muslim population share is statistically insignificant. With one exception, where it is significant, it is always positive.

Emprical Results: Marcus Noland Islam does not appear to be a drag on growth or an anchor on development as alleged. If anything, the opposite appears to be true. If one is concerned about economic performance in predominately Muslim regions or countries, conventional economic analysis may yield greater insight than the sociology of religion.