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Religion, Economics, and the Market Paradox

R&L: In your latest book, you compare economics to religion. Why?

Nelson: Because economics is a belief system with powerful moral implications. I use the term religion in a broad sense, as something that provides a framework for one's values or some purpose to one's life. I am convinced that people must have some sort of religion, that no one can live entirely free from a framework of meaning. Of course, not all religions require a God, as Judaism or Christianity do.

Further, I refer to economic theology because many economists explain the nature of the world in economic terms. In this way, the members of the economics profession function as the “priests” of economic progress. In fact, economic progress has been the leading secular religion of the modern age, especially since the late nineteenth century and the Progressive Era.

R&L: What is the origin of American economic religion?

Nelson: Through the latter part of the nineteenth century, there was a powerful secular Calvinist strain in American life, especially in Social Darwinism. In this perspective, successful businessmen—the Andrew Carnegies and so forth—were the “elect,” as revealed through the results of the competitive market system. Successful entrepreneurs were God's agents and the advocates of progress leading to heaven on earth.

In the twentieth century, the progressive movement had closer affinities with the Roman Catholic tradition. Each placed a great emphasis on helping the poor, for example. And in terms of the structure of authority, the welfare state is similar to the Catholic Church, with a central authority in Washington, D.C., rather than in Rome. There are obviously crucial differences, but Thomas Huxley did once describe socialism as “Catholicism minus God.”

However, American progressivism was a watered-down, Milquetoast version of European socialism, because progressivism had to accommodate itself to the very powerful democratic traditions in the United States. For example, the government could not nationalize most industries, such as transportation, communications, and electricity. The government, through regulation, did tell businessmen in these industries what to do, but it did not actually seize their property, as often happened in Europe.

As I see it, economic progress has become increasingly suspect—not in the sense that people do not want to have nice things and a good life but in the sense that, today, the roots of salvation, of attaining a heaven right here on earth, are less likely to be seen in material progress. And as secular religions based on economic progress wane, old-style religions are making a comeback.

R&L: Has the United States been successful economically because its citizens share a common value system, despite their religious differences?

Nelson: The idea of America as a “City on the Hill” goes back to the Puritans. This idea arises from the conviction that America should provide a moral example for the rest of the world. In this way, America—or, more accurately, “Americanism”—has become another example of a secular religion. The reason Americans have had such a long-standing separation of church and state is that they have had powerful common values, apart from official church doctrine, that have helped to hold them together. There have been shifts in the vision of America over time, but through its history, American secular religion has been based on a belief in democracy, capitalism, free enterprise, and economic progress.

This belief in the superiority of the “American way” has been a common bond that has helped our society deal with economic challenges and achieve cooperation, trust, and honesty. This American religion has helped greatly to resolve what I call in my book the market paradox. This normative foundation is a main reason for the success of the American economy. Religion, in this sense, can play an important practical role in an economic system by providing the normative foundations that make economic interactions workable.

R&L: What is the market paradox, and what have been some of the attempts to resolve it intellectually?

Nelson: The market paradox arises from the fact that an economic system has to be based on a considerable degree of honesty and altruistic behavior, but it must also encourage individuals to pursue their own advantage in the market.

A well-functioning market requires people who are fairly aggressive at pursuing their self-interest. However, if everyone pursued his self-interest without any inhibitions and tried to eliminate competitors, which may be the quickest way to get rich quick, he would undermine the market.

A sound market also requires honesty and concern for the public good. Strangers have to be able to trust each other because many transactions occur between people who may never see each other again, so it helps to be confident that the other person is going to be honest and that he is not ruthlessly pursuing his self-interest to the point of cheating and lying.

This tension creates a paradox: How can people be both self-interested and altruistic? Which ethics do we teach—to work for one's own interest or for society? Most societies have not resolved this tension satisfactorily, and this has resulted in major economic problems in many parts of the world, including Russia, most of Africa, and much of the Islamic world. And one reason that these societies have not been able to resolve this tension is that they lack an ethical or theological framework that can encompass a modern market economy.

R&L: Do economists need to do more to incorporate cultural values into their work?

Nelson: In a sense, Paul Samuelson's approach—which most of the economists in the decades after World War II followed—boils down to one huge tautology. He assumed a world of perfect information and perfect equilibrium, which is tantamount to a world of zero transaction costs. By making these assumptions, Samuelson, in effect, assumed the market system was perfectly efficient. It was not until the 1970s that economists developed a convincing basic explanation of how American industry is organized. Economists had shown little ability to explain why some industries were fragmented into many small firms, while other industries were dominated by a few large corporations. Large corporations were hard to explain by standard market theory, because the corporation internalized a large part of economic activity in a single business. The standard explanation of large business size relied on economies of scale, but that did not explain the success of, say, a McDonald's. There was a need for a new approach to economics to get at these “transaction-cost” considerations.

As a result, a new school of institutional economics has developed in the past twenty-five years. The new institutional economists have pointed out that neoclassical economics ignored many important considerations for explaining the rate of economic progress: How does the economy use information? How does it get from one state of equilibrium to another? And what are the transaction costs associated with dynamic change in the economy? Neoclassical economics, in its pure form, assumes that transaction costs are zero. But if that were true, there would be no transitional costs, any economic system would work perfectly, and there would be no economic problems to solve. As I said, economics becomes a tautology—developing forms of artistic symbols to admire rather than offering any scientific explanation.

R&L: Are economists trained to ignore cultural factors?

Nelson: Economists consider cultural explanations to be virtually illegitimate. If an economist cannot explain an economic development by any other means, she might be forced to resort to culture. But if she does, it is like confessing her failure as an economist. The kinds of economists who have had the deepest understanding of culture and institutions are economic historians and developmental economists. If you look at what is going on around the world, the standard economic explanations simply do not work in many cases.

For example, economists typically explain economic growth in terms of the level of capital inputs. Zambia became independent in 1964; since then, its income per capita has remained static. But if Zambia simply had taken all of the foreign aid it had received since 1964 and invested it to receive a normal rate of return, its per capita income would now be around $20,000 per year. In this case, something is happening that a growth model built on capital inputs is missing. You have to look at institutions and culture to have any hope of developing an adequate explanation, and most economists have not been trained to do that.

R&L: Is the economics discipline adopting different approaches to address these issues?

Nelson: I think there are signs that things are changing. Douglass North, who won the Nobel Prize in economics in 1993, focuses on cultural factors, and he considers religion a central element of almost all cultures. However, many economists are trying to do it in ways that I doubt will work in the long run.

Economists try to fit cultural and religious factors into some kind of formal model—often with some mathematics or regression analysis or other statistics. Young economists, like all academics, are worried about tenure and are trying to preserve their legitimacy in terms of the current quantitative research conventions of the profession. But these conventions are a large part of the problem in the first place.

Another shortcoming is that economists and other social scientists tend to take preferences as given. They may look at religion, but their analysis is always: Given such-and-such religion, what happens? However, if you believe culture is central to economic progress, and if you want to do something to stimulate greater progress, then you have to talk about changing the culture, or even the religion. But if you told an economist that the best way to achieve more rapid economic growth would be to change people's religion, he would be perplexed.

R&L: Do economists believe they are advancing a set of values?

Nelson: Formally, most of them would say no, that economic research is value neutral. But they are sort of faking it. Many know they are preaching values, but they say for public consumption that they are not. Economists' position of influence in society is based on their claim to be value-free experts. If they give that up and say they are proselytizing a value system—really a religion—they are afraid that the future of the economics profession might be in doubt. This is a realistic fear, I might add.

R&L: How do economists function as theologians?

Nelson: There are two types of economic theologians. The first is an economist who functions as a theologian of the religion of progress by helping to provide an ethical foundation for society. If economic progress is the route to salvation, these “priests” will be the experts on how to achieve that progress. Because society looks to economists for this knowledge, they logically become the leading priesthood of the age.

The second way to be an economic theologian is to study economics from a theological perspective. I strive to be something of an economic theologian of this type.