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Church presentation

  1. 1. An Economic Model of the Medieval Church:Usury as a Form of Rent Seeking ROBERT B. EKELUND, JR., ET ALJOURNAL OF LAW, ECONOMICS & ORGANIZATION EDWARD H. FREDERICKS, JR.
  2. 2. Background Study treats the institutional Roman Catholic church of the middle ages as an economic organization For purposes of this paper medieval is defined as year 1000 ending in year 1500 Study models church policy on usuary as a ‘static’, profit-maximizing, monopoly
  3. 3. Background During the Middle Ages the Roman Catholic Church was the dominant firm in the salvation industry It operated as a loose confederation of ownership and management interests with economic agents operating far from decision-making Communication, transportation, and other transaction costs were high within the hierarchy due to low-level technology and geographic dispersion of the ultimate sellers The medieval church may be viewed as an economic unit directed by a Coasian entrepreneur – an individual or body of individuals who take the place of the price mechanism in the direction of economic resources
  4. 4. Background• Church supplying monopoly input -- Conditions of Salvation • Offered hope, belief in support of an afterlife • Hope against brutish conditions of medieval life • Found many demanders, even at steep prices • Demand for salvation was price-inelastic, church preached only way to salvation was through church doctrine • In return for payments, church dispensed solace, status and ultimately salvation• Preconditions of active rent-seeking were woven into the fabric of the medieval church
  5. 5. Background• Authors suggest medieval Roman Catholic Church resembled:  An upstream monopolist supplying:  Goodwill and intangibles  Doctrinal purity  Brand distinction  Guarantees  And other factors creating demand inelasticity  To downstream suppliers of final output• Church behaved as a rent-seeking monopoly, but faced coordination problems typically associated with various forms of profit-capture in a nonintegrated vertical chain of production and distribution• Enforcement of policy and doctrine and collecting revenues were an ongoing problem.
  6. 6. Entry Control and Demand Inelasticity• Church established institutions helped to fix the role of the papacy as an input monopolist: • Church accelerated efforts to maintain doctrinal purity, instituting prohibitions against heresy, engaging in disputes with papal pretenders and declaring holy wars. Church asserted exclusive right to interpret Holy Scripture • Established regulations against specific practices and policies that diminished its authority or its revenues, especially concerning simony, usuary, and jurisdictions of monastries and churches • Established a corporeal agency – the apostolic camera – to collect rents, to enforce control, and to suppress interlopers, cheaters and malfeasors. • The rite of confession gave clerics a unique method of determining a penitent’s demand elasticity for the purchase of release time from purgatory.
  7. 7. Entry Control and Demand Elasticity• Church history is replete with many attempts to punish heretics and interlopers. • Consistent with spirtitual goals but also economic goals of protecting papal monopoly.• Rent collection, cheating and interlopers were major concerns. Interloping opportunities existed in connection with practices of simony and investiture.• The sale of ecclesiatic offices were widespread and the papal staff grew to accomadate it• During Leo X (1513 – 1521), one-sixth of the papal income came from the sale of offices.
  8. 8. Entry Control and Demand Elasticity• Interlopers involving Investiture: • Investiture meant the appt. of church officials • Lords, Dukes, and Kings often sought support of monasteries because they were quasi-independent and administered real property (also were sources of loans) • To gain control lay rulers frequently claimed rights to appt heads of religious houses • The church viewed this as usurpation of its authority • Such behavior is consistent with a monopolist protecting its ability to collect economic rents. • Spiritually, consistent with maintaining doctrinal purity and quality control
  9. 9. Collection and Enforcement:The Apostolic Camera• Metaphorically – the church consisted of a board of directors (the pope and curia) that oversaw a large number of geographically dispersed franchises (the clergy)• The ecclesiastical enforcement mechanism set up to control downstream activity was the papal camera (treasury)• Financial adminsitration became important as the church grew• By the 14th century, the the camera became the central power within the papacy and the most efficient taxation system in Europe• The camera combined finance and judicature• Auditors of the camera were given sweeping powers [to make enquiry into and punish crimes…to admonish, excommunicate and absolve all persons concerned…]• Jurisdiction over clerical usurers was clearly established
  10. 10. Usury Usura, which usury derives, meant payment for the use of money in a transaction that resulted in a gain for the lender Interesse, which interest derives, meant loss and was recognized by ecclesiastic and civil laws as as a reimbursement for loss or expense. Interest was commonly regarded as compensation for delayed repayment or for loss of profits to the lender who could not employ his capital in some alternative use during the term of the loan Risk was not considered as a justification because loans were generally secured with property worth more than funds advanced
  11. 11. Usury: A Case Study of Monopoly Church Behavior The first official prohibition of usury appeared in 325AD, banning the practice among clergy Later, the Hadriana (Charlemagne), a collection of canons, extended the prohibition to everyone, defining it as a transaction where more is asked than given Subsequent practice made the ban an absolute prohibtion, with the laws enjoying widespread and official support Civil prohibitions varied widely from country to country Usury laws had the effect of constraining credit and of altering resource allocation By the 15th century, usury was treated as a relative prohibition rather than an absolute Pope Nicholas V in 1452 determined a redeemable census (mortgage) was licit provided it did not pay over 10%.
  12. 12. Usury: A Case Study of Monopoly Church Behavior Church officials manipulated the usury doctrine to bolster the monopoly power of the church Hypothesis: the church recognized rent-seeking opportunities that the doctrine of usury permitted As a lender – church priced loans at market rates or above therefore extracting rents As a borrower, the church enforced the doctrine, thereby extracting rents by reducing its cost of credit Consistent with the activities of a rent-seeking monopoly Consistent with monetary and non-monetary goals  Monetary – finance salvation efforts  Nonmonetary – preserve and extend doctrinal hedgemony
  13. 13. Usury: A Case Study of Monopoly Church Behavior Church officials gathered residuals from usury doctrine Policies of restitution for usury changed overtime but favored the church Usary was classified as:  Certa: known victims  Incerta: unknown or unidentifible victims Church policy permitted known victims to receive certa restitution Policy required incerta restitution to go to the poor or be used for pious purposes Licenses were issued to clerics entitling them to a percentage of incerta restitution Policy similar to sales/revenue royalties contracts employed by franchised firms Church routinely looked the other way for favored transgressors but continued to condemn [manifest, public usurers ]
  14. 14. Usury: The Church as Borrower Papal loan demand was heavy as the church financed the crusades and other territorial conquests Records are sparse as the terms of the loans were often camouflaged in papal rhetoric (i.e. references to gifts, etc.) Medici Bank was paying interest on deposits of 5% - 10% Camera was paying 2.3% to 6.6% on loans Loan activity continued unabated through the middle ages A camera document of 1492 lists 47 papal creditors to whom the camera owed 128,424 ducats, approx. ½ of the total estimated papal income that year
  15. 15. Usury: The Church as Lender Historians maintain the papacy was not a lender but Vatican records show a history of lending in-house to its own clerics Camera financed loans incurred by clerics required to pay a tax (servitia) to the papacy upon being raised to the episcopate Pope designated special clerks to execute the ecclesiastical penalities and processes if the borrower did not meet the terms of the loan Monasteries incurred heavy debts, typically backed by real property Not unusal for the pope to use his influence to insure repayment In one instance, monasteries were forced to lend to the English monarchy to repay Vatican loans The monasteries borrowed from the Vatican and were charged interest rates between 16% and 21% Monks were threatened with excommunication if they did not repay the loans
  16. 16. Usury: The Church as Lender Church operated on both sides of the loan market  Borrowed freely from its own bankers  Made usurious loans to prelates while outwardly declaring public doctrine of usuary in creative ways Financing the crusades and recruiting personnel for the holy wars Recruited fighters by selectively absolving volunteers of guilt and dispensing of restitution Exempted payment of usury on past loans Encouraged crusaders to seek long-term loans versus short- term leases Policy had the effect of essentially financially ruining many of the crusaders
  17. 17. Conclusion Church acted as a vertically integrated monopoly Institutional framework of the church created many opportunities for rent-seeking Created numerous problems for enforcement Church manipulated doctrine of usury to enforce monopoly position and promote its rent-seeking opportunities