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The Capitalist Peace

Authors:
Release Date: September 27, 2005
With terrorism achieving “global reach” and conflict raging in Africa and the Middle East, you may have missed a startling fact -- we are living in remarkably peaceable times.

For six decades, developed nations have not fought each other. France and the United States may chafe, but the resulting conflict pitted French fries against “freedom fries,” rather than French soldiers against US “freedom fighters.” Tony Blair and Jacques Chirac had a nasty spat over the EU, but the English aren’t going to storm Calais anytime soon.

The present peace is unusual. Historically, powerful nations are the most war prone. The conventional wisdom is that democracy fosters peace but this claim fails scrutiny. It is based on statistical studies that show democracies typically don’t fight other democracies.

Yet, the same studies show that democratic nations go to war about as much as other nations overall. And more recent research makes clear that only the affluent democracies are less likely to fight each other. Poor democracies behave much like non-democracies when it comes to war and lesser forms of conflict.

A more powerful explanation is emerging from newer, and older, empirical research – the “capitalist peace.” As predicted by Montesquieu, Adam Smith, Norman Angell and others, nations with high levels of economic freedom not only fight each other less, they go to war less often, period. Economic freedom is a measure of the depth of free market institutions or, put another way, of capitalism.

The “democratic peace” is a mirage created by the overlap between economic and political freedom. Democracy and economic freedom typically co-exist. Thus, if economic freedom causes peace, then statistically democracy will also appear to cause peace.

When democracy and economic freedom are both included in a statistical model, the results reveal that economic freedom is considerably more potent in encouraging peace than democracy, 50 times more potent, in fact, according to my own research. Economic freedom is highly statistically significant (at the 1 percent level). Democracy does not have a measurable impact, while nations with very low levels of economic freedom are 14 times more prone to conflict than those with very high levels.

But, why would free markets cause peace? Capitalism is not only an immense generator of prosperity; it is also a revolutionary source of economic, social, and political change. Wealth no longer arises primarily through land or control of natural resources. Prosperity in modern societies is created by market competition and the efficient production that arises from it. This new kind of wealth is hard for nations to “steal” through conquest.

In days of old, when the English did occasionally storm Calais, nobles dreamed of wealth and power in conquered lands, while visions of booty danced in the heads of peasant soldiers. Victory in war meant new property. In a free market economy, war destroys immense wealth for victor and loser alike. Even if capital stock is restored, efficient production requires property rights and free decisions by market participants that are difficult or impossible to coordinate to the victor’s advantage. The Iraqi war, despite Iraq’s immense oil wealth, will not be a money maker for the United States.

Economic freedom is not a guarantee of peace. Other factors, like ideology or the perceived need for self-defence, can still result in violence. But, where economic freedom has taken hold, it has made war less likely.

Research on the capitalist peace has profound implications in today’s world. Emerging democracies, which have not stabilized the institutions of economic freedom, appear to be at least as warlike – perhaps more so – than emerging dictatorships.

Yet, the United States and other western nations are putting immense resources into democratization even in nations that lack functioning free markets. This is in part based on the faulty premise of a “democratic peace.” It may also in part be due to public perception. Everyone approves of democracy, but “capitalism” is often a dirty word. However, in recent decades, an increasing number of people have rediscovered the economic virtues of the “invisible hand’’ of free markets. We now have an additional benefit of economic freedom – international peace.

The actual presence of peace in much of the world sets this era apart from others. The empirical basis for optimistic claims – about either democracy or capitalism – can be tested and refined. The way forward is to capitalize on the capitalist peace, to deepen its roots and extend it to more countries through expanding markets, development, and a common sense of international purpose. The risk today is that faulty analysis and anti-market activists may distract the developed nations from this historic opportunity.


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