The Economics of the Counter‐Reformation: Incumbent‐Firm Reaction to Market Entry

The Catholic Church reacted to the Protestant Reformation by taking on the defensive posture of an incumbent-firm monopoly fighting to survive in the face of new competition. Contemporary firms typically respond to rival entry by rewriting their corporate charter. So did the medieval Catholic Church. But the Council of Trent failed as a reorganization plan because to keep economic rents flowing as before, it left intact the distribution of powers and property rights among the governing body of pope and cardinals--thus demonstrating that entrenched economic interests are powerful inducements to behavior, even in spiritual institutions. (JEL N00, D2, D4, D72, P16) It is to be desired that those who assume the episcopal office know what are their duties, and understand that they have been called not for their own convenience, not for riches or luxury, but to labors and cares for the glory of God. --The Canons and Decrees of the Council of Trent (Session 25, chapter 1) [Church] Reform ... usually meant tightening up the rules for collecting money. --Denys Hay (1977, 39) I. INTRODUCTION Although it has not been universally applauded, the extension of economics into new domains of social behavior has become increasingly common. Economic tools have now been applied to areas of human behavior as diverse as art, culture, marriage, and sumo wrestling. For some economists, one of the most intriguing of these "new" realms of inquiry is the economics of religion, a subject that relies on principles of rational behavior, interest-group analysis, public-choice and game theory to explain church membership as well as changes in religious institutions. Azzi and Ehrenberg (1975) advanced one of the earliest studies in this vein. More recently, Iannaccone (1998) enriched and continued the tradition. Our own previous contributions to this burgeoning body of literature have focused on the economics of the medieval church. In earlier studies, Ekelund et al. (1989, 1992) treated the medieval church as an economic firm to better understand the formation of religious doctrine; Ekelund et al. (1996) analyzed the industrial organization and rent-seeking practices of the medieval church; and Ekelund et al. (2002) explored the economics of the Protestant Reformation. From a historical perspective the landmark change in religious institutions was the Protestant Reformation of the sixteenth century, which eventually produced permanent changes in religious markets. In a previous study, Ekelund and colleagues (2002) analyzed this event as a form of market entry and showed that the Protestant Reformation (1517-1555) was a consequence of both demand-side and supply-side factors. This article takes the next logical step--it seeks to analyze the historical response to competitive entry of an incumbent finn, the medieval Catholic Church, by explicit reference to what historians and scholars refer to as the Counter-Reformation, or, alternatively, the Catholic Reformation (1555-1648). (1) We maintain that as a dominant firm the Roman Catholic Church responded to market entry in a way predicted by economic theory. After Protestantism gained a foothold in the religious market, the Catholic Church faced a residual demand curve that was composed of less elastic demanders. Consequently, it (a) lowered the average price of providing the Z-good "religious services"; (b) engaged in vigorous competition in the neighborhood of the new entrant's "price"; (c) attempted to raise rivals' marginal costs to move demanders back to Catholicism; and (d) tried to boost demand in its "retail" market, while simultaneously protecting and even intensifying its rent-seeking practices in its "wholesale" market. (2) In sum, the Roman Catholic Church responded to Protestant entry and to the encroaching "age of reason" with violence and nominal (rather than fundamental) doctrinal alterations. II. …