Thoughts on economics and liberty

The economic foundations of religion

Came across an excellent hypothesis about religion in the April 2010 issue of the Journal of Political Economy.  The paper by Daniel L. Chen of the University of Chicago is entitled: "Club Goods and Group Identity: Evidence from Islamic Resurgence During the Indonesian Financial Crisis". 

In brief, it finds that organised religion has a strong economic basis. The existence and survival of an organised religion depends on crises! If we get rid of crises, and allow credit markets to freely operate, religion would collapse. I haven't fully read the paper but its hypothesis seems plausible and likely underpins the following phenomena:

1) Religions tend to prosper during financial crises (personal/ society-wide). (The crises in communist societies led to a huge revival of Christianity.)

2) Societies with good social insurance programs are likely to see the most precipitous declines in religion (Generous social insurance in most parts of Europe has led to serious declines in religion. This doesn't explain home-grown Islamic terrorism, for which see point (3), next.

3) As the financial markets in a society become more complete, religion will decline (being replaced by fanatic environmentalism, perhaps!). The major religion that currently benefits from incomplete financial (primarily credit) markets is Islam. If Islamic societies (e.g. Palestine, Arabia) allow the financial services sector to prosper, fanatic fringe Islam will be significantly hit, through lack of demand for its economic services. 

It might be worthwhile exploring whether Islamic terrorists from the West (i.e. home-grown Western terrorists) were personally affected by financial or other crises, and found it difficult to raise credit to start a business or go for higher study.

The underlying low credit-worthiness of the relatively uneducated Islamic youth in the West could well be driving them into fanatic Islam. Giving them loans at low interest rates might reverse the tide of home-grown Western terrorism (I'd caution, though, that the government should have NO ROLE in giving loans. That must be endogenous to the financial markets. If total freedom is allowed, finance companies will give loans by charging a higher risk premium from youth coming from relatively less educated religious groups, but at least there would be no credit constraint).

While I don't have the time to type out the text published in the JPE paper, Chen's draft paper is available online (here). The following extract from the draft paper provides a few glimpses into the arguments.
Religion is "a risk-sharing mechanism where people pool their resources and redistribute the pool according to their relative religious intensities. Agents choose a proportion of income to put in Pengajian. This proportion represents their religious intensity. The pool is divided according to how much agents contribute as a fraction of their income. The model has the empirical implications that those who are hit harder by economic distress will increase their religious intensity and those who are hit less hard will decrease their religious intensity. The effect should be mitigated when other forms of credit are available."
"[R]eligious intensity is associated with alleviation of need for alms or credit to meet basic daily needs during the peak of the crisis. The effect of economic distress on religious intensity essentially disappears in places where credit is available. And religious institutions appear to facilitate consumption smoothing among villagers, suggesting religious intensity functions as expost social insurance".

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