[The First Amendment] created tolerance in its fullest sense: not just the top-down tolerance involved in allowing dissent but the bottom-up tolerance that recognizes that individuals have a right to choose their own religious opinions. And it introduced competition: churches had to get people in through the door. (P. 62)Why did this make lead to religious vitality in the U.S. while religiosity declined in Europe?
Adam Smith gave the best answer to this question more than two centuries ago in The Wealth of Nations: a free market in religion forces clergy to compete for market share. (P. 64)By drawing lines between churches and the state, religion was actually, and perhaps surprisingly, strengthened. This is less surprising if we imagine that government, should it intrude into churches, would undermine churches' innovation in the face of competition, just as government intrusions into other markets could undermine innovation. In fact, religion might be one of the best examples of this.
Government involvement in religious markets can be justified by arguments similar to those used to justify other government interventions. For example, if religion is a public good that is under-supplied in open markets, then government intervention would be warranted according to standard economic theory. The fact that religion thrives in places like the U.S. where it is not provided by government raises questions. Is there something about religion that makes it different from other goods that we believe ought to be supplied by government? What exactly makes it different? What are the economics behind any difference?