The economic consequences of Luther: Ideas have legs, but some come with leg-irons

Johannes Wessels

500 Years after Martin Luther hammered his 95 theses to a church door in Wittenburg, Davide Cantoni, Jeremiah Dittmar and Noam Yuchtman saved their theses to the internet: Beliefs have economic consequences.

Old news, one might say, recalling Weber. But Weber’s thesis was always contested: assumptions of cultural traits based on unreliable statistics from the 19th C. Cantoni, Dittmar and Yuchtman (further-on Cantoni and co.) offer hard micro-statistical evidence from the century when Luther protested against Papal authority : 1517 was a watershed year in how people viewed the world and those (world)views had economic consequences.

In a National Bureau of Economic Research Working Paper of October 2017 they state: “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. The Reformation represented a competitive shock in the market for salvation. Protestant reformers offered a popular, lower-cost alternative to the Catholic Church… This had implications for the allocation of resources between secular and religious uses…

Anyone who would equate this with a lower allocation of time to prayer, Bible reading and contributions to the church is far off the mark. Where Weber built his thesis mainly on the Calvinist work ethic and the doctrine of pre-destination, Cantoni and co. prove the Reformation in its Lutheran form in the German-speaking territories had an immense impact on economic life: ranging from careers to construction.

They examined the German-speaking territories in the Holy Roman Empire for the period 1475 to 1600 (Luther broke the Catholic mould in 1517). Using the Augsburg Treaty (1555) when it was agreed that within the German speaking part of the Empire the sovereign of a territory would decide whether Lutheranism or Catholicism would be the official religion of that territory, Cantoni and co. looked at a range of data.

The Protestant religion significantly lowered the “institutional cost” of salvation. The Catholic hierarchy from the Vatican down to the local priest with orders of monks and nuns all required support from the believers, whether prince or pauper. The Lutheran church had a substantially lower labour component since the church was neither hierarchical, nor the instrument for salvation: God was. No priest was required for reciting Latin prayers or for confession: the believer could him/herself say their prayers in German asking for and celebrating forgiveness.

The services of thousands of bishops, priests, monks and nuns were no longer required. The change in religion made numerous ecclesiastical office-bearers redundant in a similar fashion as what robotics are doing nowadays. Labour was freed up for uses other than administering salvation.

An obvious way to measure this decline in demand for ecclesiastical manpower, was to look at the closure of monasteries (Figure 1).

Luther's economic impact 1 Closure of monasteries .png

Within the German-speaking territories that became Protestant (predominantly the northern parts) there was a lower occurrence of monasteries within 25km from towns than in the areas that remained Catholic. In the period 1475 to 1517 there was a very slight increase in the average number of monasteries per town in both areas (the trend followed a parallel curve).

But within 5 years after Luther’s stance against Rome, the average number of monasteries in what became Protestant territories started to decline from an average of 7 within 25km from a town, to a significantly lower average of less than 2 per town by 1600. The decline in the territories that remained Catholic was significantly less: from an average of 8.4 per town to about 7 per town.

A major ecclesiastical labour component became redundant due to this paradigm shift in belief. This was however not the only “sector” where redundancies occurred. Construction had to adjust as well. Figure 2 indicates the average number of new construction projects within towns in Protestant and Catholic areas of German speaking territories.

Luther's economic impact 2 Church construction.png

In the spate of a few years after Luther’s stance, annual construction starts on ecclesiastical buildings (churches, monasteries, church supported orphanages and places of care) dropped below the number of secular construction projects. This was valid for both the Protestant and Catholic areas, but in Catholic territories construction starts on ecclesiastical buildings increased again and the gap between that and secular construction starts is significantly lower than in the case of the Protestant territories. The average number of construction starts on secular building projects per town (administrative buildings, schools, etc.) was also higher in the Protestant territories than in the Catholic parts.

Rather than protest action and strikes to demand these lost jobs back, the inhabitants of the Protestant areas embraced this change and took with a vengeance to acquiring new skills. Figure 3 indicates how the percentage of degrees in theology declined in the Protestant areas whilst retaining a significantly larger share in the Catholic areas. The result of this diversification of tertiary acquired knowledge and insight in the fields of Natural Sciences, Law, Medicine as well as Arts equipped the Protestant areas better for expanding knowledge pools in secular fields.

Secular professions were now considered a calling similar to the positions in the church.

Luther's economic impact 3 Degrees.png

Where Weber based the economic dominance of the northern European areas on the Protestant work ethic and cultural traits, Cantoni and co. have clearly indicated that the Reformation resulted in a drastic break regarding the allocation of resources: both investment (buildings and infrastructure) and human capital (skills and employment). The economic blossoming and outperformance of the northern European areas has therefore a clear founding in the availability of skills.

One could wonder why the advanced knowledge base under the Moors (e.g. with Cordoba as large vibrant city and centre of learning in the 9th & 10th centuries) did not result in economic growth and progress that occurred in northern European countries after the Reformation? Luther’s teachings made the priest and pope redundant for the believing individual and the rapid expansion of literacy following the introduction of moveable type (Gutenberg). The inquisitive individual was rescued from relying merely on informed authorities for solutions. That was not the case in Cordoba.

In the Age of Reformation, Lutheranism and Calvinism gave a final blow to a universalist hierarchical ecclesiastically dominated world perspective. It introduced much needed secularism by rightly arguing jurisprudence, politics, academic and economic activities should be free from church supervision and control, thus opening the way for pluralism. It accelerated skills accumulation outside the authority of the organised church, thus preparing the way for economic diversification and the eventual industrial revolution.

Luther's economic impact East Germany lower GDP.png

Medieval stuff? V S Naipaul and his sibling (the late Shiva Naipaul) described the cultural hold on societies. Just as religion had impacted on the differences in economic development of northern and southern European countries, culture and ideology also have economic consequences… The post WWII ideological division by the Iron Curtain had left Eastern Europe far behind. Despite massive “solidarity transfers” and subsidies from erstwhile West Germany to the states of erstwhile East Germany since re-unification in 1990, there remain fundamental differences in per capita GDP, skills availability and unemployment. The legacy of what state-led centralism resulted in, is there for everyone to see.

In South Africa, religious beliefs probably have had less impact on economic thinking than cultural and ideological blinkers. The roots of a centrally planned economy came from the monopolistic base when the Cape was governed by the first multi-national (the Dutch East Indian Company) and in the Eastern and Highveld areas, centrist strongman tribal cultures existed. The 40 years of apartheid saw a central state dictating who could do which work and used race as measure for economic planning. This has been followed for 24 years of BEE with race again the yardstick for economic engineering.

The conviction that the state knows best how to plan and manage the economy, has had dismal outcomes both under apartheid and in the new dispensation. Rather than growth and job creation, inequality, poverty and dependence are the outcomes.

The current economic dilemma is not merely due to corruption and poor management and inefficient administration. It is primarily due to ideological beliefs. Ideas have legs…

and some ideas have leg-irons…

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