First published as a two-part article in 1904-5, The Protestant Ethic and the Spirit of Capitalism is one of the cornerstones of the field of sociology. In the book, Weber is trying to figure out why it is that capitalism developed faster in countries that adopted Protestantism while the development of capitalism in Catholic and other non-Protestant countries lagged behind. And what he finds is this:
The central question for a Christian is whether he/she is going to heaven. In Catholicism, for hundreds of years, the path to heaven was very clear -- pay "indulgences" to the church, and your sins are forgiven and when you die, you go to heaven. Indulgences were basically a way for the Catholic Church to tax all of Europe for hundreds of years. But Martin Luther and John Calvin hated the practice of indulgences (and many feudal princes in Germany and other provinces hated them too). Luther and then Calvin argued that God is so great, no human works could possibly be enough to earn his (sic) favor. Rather, everything is predestined, determined ahead of time by God. They argued that those who go to heaven are saved through God's grace alone, not human works (read: indulgences).
Which is fine as far as that goes, but people naturally want to know if they are one of the chosen, one of the elect who will be going to heaven. Weber writes:
"The question, Am I one of the elect? must sooner or later have arisen for every believer and have forced all other interests into the background." --The Protestant Ethic & The Spirit of Capitalism, p. 110.
This was no small matter either. Luther argued that only 144,000 people were going to heaven, so there were a limited number of seats on the bus, so to speak. So people started to look around for signs that one is "chosen." And what are the signs? Well according to Luther and Calvin, the chosen are those who dedicate their lives to creating God's will on earth. So the signs are that one works without ceasing -- and here's the kicker -- and one never spends much on the sins of the flesh. Luther and Calvin hated the sensuality of Catholicism, that peasants could get drunk, dance, and have sex with each other on Saturday and then pay their indulgences on Sunday and be forgiven. The mark of Protestantism became those who so ordered their lives so that they NEVER gave in to the sins of the flesh and never spent their earnings on bodily desires. Hence the Protestant Ethic was born.
"On the one hand it is held to be an absolute duty to consider oneself chosen, and to combat all doubts as temptations of the devil, since lack of self-confidence is the result of insufficient faith, hence of imperfect grace... On the other hand, in order to attain that self-confidence intense worldly activity is recommended as the most suitable means." --The Protestant Ethic and the Spirit of Capitalism, p. 111 and 112
"The God of Calvinism demanded of his believers not single good works, but a life of good works combined into a unified system. There was no place for the very human Catholic cycle of sin, repentance, atonement, release, followed by renewed sin.... [Protestantism] had developed a systematic method of rational conduct with the purpose of overcoming the status naturae, to free man from the power of irrational impulses and his dependence on the world and on nature." p. 117 - 118
"Sebastian Franck struck the central characteristic of this type of religion when he saw the significance of the Reformation in the fact that now every Christian had to be a monk all his life.... By founding its ethic in the doctrine of predestination, Protestantism substituted for the spiritual aristocracy of monks outside of and above the world the spiritual aristocracy of the predestined saints of God within the world." p. 121
Just to be clear, the relentless work ethic of Protestants was not a means to attain salvation but rather a system of self assurance (a method of existential anxiety control if you will) that simply affirmed one had already attained salvation through grace.
But something curious happens when people work extremely hard and rarely spend money. For the first time in human history you have large accumulations of capital. And large accumulation of capital naturally lead to banks (places to store that capital), which then provides the catalyst (and the capital) for the emergence of capitalism in all of the Protestant nations.
The explanatory powers of the theory are so strong that indeed, a whole academic discipline, sociology, emerged in its wake. And the writing in The Protestant Ethic and the Spirit of Capitalism is both so direct and searing that it has endured as one of the great academic treatises of all time.
And yet, as great as The Protestant Ethic and the Spirit of Capitalism is, I wonder if there are some additional factors that also help to explain the rise of capitalism in Protestant countries.
In an earlier post, I asked whether in fact, slavery, not Protestantism, was the catalyst for the emergence of capitalism? Indeed Eric Williams makes that point in his book Capitalism & Slavery and Eduardo Galeano builds upon that idea in, Open Veins of Latin America.
But I don't think it's an either/or situation. I think it's a both/and. Protestantism led to the accumulation of capital that developed the bourgeois class that accumulated even more capital that paid for the ships that participated in and profited from the African slave trade that further fueled the growth of capitalism.
After reading The Ascent of Money, I think I may have stumbled upon another important facet of the story: fractional reserve banking. I'll explain:
The early Christian Church and Islam too forbade the lending of money and charging interest. It was called usury and was considered one of the worst possible sins.
"For Christians, lending money at interest was a sin. Usurers, people who lent money at interest, had been excommunicated by the Third Lateran Council in 1179. Even arguing that usury was not a sin had been condemned as heresy by the Council of Vienna in 1311-12. Christian usurers had to make restitution to the Church before they could be buried on hallowed ground." --The Ascent of Money, p. 35
The earliest forms of modern banking began in Italy with the emergence of the powerful Medici family serving as an intermediary between various businesses.
"Of particular importance in the Medici's early business were the bills of exchange (cambium per literas) that had developed in the course of the Middle Ages as a way of financing trade. If one merchant owned another sum that could not be paid in cash until the conclusion of a transaction some months hence, the creditor could draw a bill on the debtor and use the bill as a means of payment in its own right or obtain cash for it at a discount from a banker willing to act as broker. Whereas the charging of interest was condemned as usury by the Church, there was nothing to prevent a shrewd trader making profits on such transactions. That was the essence of the Medici business. There were no checks; instructions were given orally and written in the bank's books. There was no interest; depositors were given discrezione (in proportion to the annual profits of the firm) to compensate them for risking their money. " --The Ascent of Money, p. 43-44
But it wasn't until the Reformation that modern banking and the modern capitalist system really took off. And Martin Luther and John Calvin were key in revising church teachings on lending with interest.
"From 1515 until early 1524, Luther's works indicate that he was completely opposed to lending money at interest. In the second time period, from late 1524 until his death in 1546, while still principally against usury -- especially among Christians -- Luther's writings indicate that he allowed for the practice of lending money at interest, albeit with certain restrictions." --Reforming the Morality of Usury: A Study of the Differences that Separated the Protestant Reformers, David Jones p. 52
In 1524, just 4 years after surviving the Diet of Worms and excommunication (but not execution) by the Catholic Church, Luther displayed a notable shift in his writing on usury:
"Luther's writings reveal that he tolerated and even suggested guidelines whereby usury may be practiced in the kingdom of this world. These guidelines include a call for itemized collateral, shared risk, and governmental oversight of usurious transactions." -- Reforming the Morality of Usury: A Study of the Differences that Separated the Protestant Reformers, p. 61
So too, Calvin's views on usury also represented a break from earlier church teachings. In Calvin's letter on usury in 1545 he makes a biblical case that usury might be permitted under certain circumstances:
"Calvin knew there were two Hebrew words translated as “usury.” One, neshek, meant “to bite”; the other, tarbit, meant “to take legitimate increase.” Based on these distinctions, Calvin argued that only “biting” loans were forbidden. Thus, one could lend at interest to business people who would make a profit using the money." -- Norman Jones, Utah State University
As a result of these theological shifts, the modern banking system began to emerge in Protestant countries in Europe.
"It was in Amsterdam, London and Stockholm [all cities that broke from Catholicism during the Reformation] that the next decisive wave of financial innovation occurred, as the forerunners of modern central banks made their first appearance. The seventeenth century saw the foundation of three distinctly novel institutions that, in their different ways, were intended to serve a public as well as a private financial function. The Amsterdam Exchange Bank (Wisselbank) was set up in 1609 to resolve the practical problems created for merchants by the circulation of multiple currencies in the United Provinces, where there were no fewer than fourteen different mints and copious quantities of foreign coins. By allowing merchants to set up accounts denominated in a standardized currency, the Exchange Bank pioneered the system of checks and direct debits or transfer that we take for granted today. This allowed more and more commercial transactions to take place without the need for the sums involved to materialize in actual coins. One merchant could make a payment to another simply by arranging for his account at the bank to be debited and the counterparty's account to be credited. The limitation on this system was simply that the Exchange Bank maintained something close to a 100 percent ratio between its deposits and its reserves of precious metal and coin....
It was in Stockholm nearly half a century later, with the foundation of the Swedish Riksbank in 1656, that the barrier was broken through. Although it performed the same functions as the Dutch Wisselbank, the Riksbank was also designed to be a Lanebank, meaning that it engaged in lending as well as facilitating commercial payments. By lending amounts in excess of its metallic reserve, it may be said to have pioneered the practice of what would later be known as fractional reserve banking, exploiting the fact that money left on deposit could profitably be lent out to borrowers. Since depositors were highly unlikely to ask en masse for their money, only a fraction of their money need to be kept in the Riksbank's reserves at any given time." --The Ascent of Money, p. 48-49
Think about how important fractional reserve banking is to the history of the world. I deposit $100 in a bank that is required to hold 10% reserves. The bank then lends out $90 to a business that spends that $90 on equipment to run their business and make a profit. The seller of that equipment deposits that $90 in a bank that then lends out $81 and so on. In just 3 transactions, the original $100 has been turned into $271 of economic activity.
Basically, while the Catholic countries (Spain, Portugal, Italy) were still thinking that money was metal and building far flung empires to dig the metal ore out of the ground, the Protestant countries of Europe figured out how to make money out of nothing more than trust. And in the end, money based on credit (trust in business relationships) proved to be more resilient than money based on metal. How crazy is that!?
The important point to note here is that, it was not just the Protestant ethic that led to (capital formation which caused) the emergence of modern capitalism. It was also the theological openings by Luther and Calvin to allow usury, to allow lending with interest that sparked the emergence of capitalism in Reformed countries as well. Free from the dictates of the Vatican, the Protestant countries quickly liberalized lending rules in ways that reshaped the balance of power in the world and gave birth to our modern capitalist economy.
Final thought: it's interesting to reflect on how different church doctrines lead to different lending patterns in the economy. Basically, the Catholic ban on usury led to the rise of mafia-style families like the Medici -- informal financial intermediaries who don't charge interest but take a cut of each transaction. By contract, Protestant support for usury can be said to lead to the development of the multinational banks. They both have their problems of course, but it's fascinating to reflect on the role of theology in dictating the direction of the economy.
Update #1: A number of researchers have noted that the ban on charging interest in Islam has impeded the economic growth of the Middle East, leading in part to the millions of young men with limited financial futures (who are then a target for recruitment by radical Islamic organizations). Also I think it's interesting to note that religions that tend to de-emphasize the importance of the physical world and give priority to the spiritual or invisible world, for example Buddhism and Hinduism, both lead to economic structures that are a complete disaster -- basically leaving the society stuck with a stone age economy. Western liberal support for Tibet is always something of a mystery to me given that Tibet was a theocracy with a population left destitute by a theology that paid little attention to the need to improve living standards. The Indian economy has shown remarkable growth in recent years but I would argue that Hinduism is not driving that growth -- rather as the country has become more secular, it has devoted more resources towards economic development (investing heavily in education and infrastructure).