Future Depends on Capitalizing on Capitalist Peace

This article appeared in the Windsor Star (Ontario, Canada) on October 1, 2005.

With terrorism achieving “global reach” and conflict raging in Africa and the Middle East, youmay 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 UnitedStates may chafe, but the resulting conflict pitted french fries against “freedom fries,” ratherthan French soldiers against U.S. “freedom fighters.” Tony Blair and Jacques Chirac had anasty spat over the EU, but the English aren’t going to storm Calais any time soon.

The present peace is unusual. Historically, powerful nations are the most war prone. Theconventional wisdom is that democracy fosters peace but this claim fails scrutiny. It is basedon 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 othernations overall. And more recent research makes clear that only the affluent democraciesare less likely to fight each other. Poor democracies behave much like non‐​democracieswhen 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 warless often, period. Economic freedom is a measure of the depth of free market institutionsor, put another way, of capitalism.

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

When democracy and economic freedom are both included in a statistical model, the resultsreveal that economic freedom is considerably more potent in encouraging peace thandemocracy, 50 times more potent, in fact, according to my own research. Economic freedomis highly statistically significant (at the one‐​per‐​cent level). Democracy does not have ameasurable impact, while nations with very low levels of economic freedom are 14 timesmore prone to conflict than those with very high levels.

But, why would free markets cause peace? Capitalism is not only an immense generator ofprosperity; it is also a revolutionary source of economic, social and political change. Wealth no longer arises primarily through land or control of natural resources.

New Kind of Wealth

Prosperity in modern societies is created by market competition and the efficient productionthat 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 andpower 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 immensewealth for victor and loser alike. Even if capital stock is restored, efficient productionrequires property rights and free decisions by market participants that are difficult orimpossible to co‐​ordinate to the victor’s advantage. The Iraqi war, despite Iraq’s immense oilwealth, will not be a money‐​maker for the United States.

Economic freedom is not a guarantee of peace. Other factors, like ideology or the perceivedneed for self‐​defence, can still result in violence. But, where economic freedom has takenhold, it has made war less likely.

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

Yet, the United States and other western nations are putting immense resources intodemocratization even in nations that lack functioning free markets. This is in part based onthe 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 recentdecades, 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. Theempirical basis for optimistic claims — about either democracy or capitalism — can be testedand refined.

The way forward is to capitalize on the capitalist peace, to deepen its roots and extend it tomore countries through expanding markets, development, and a common sense ofinternational purpose. The risk today is that faulty analysis and anti‐​market activists maydistract the developed nations from this historic opportunity.

Erik Gartzke

Erik Gartzke is associate professor of political science at Columbia University and author of a study on economic freedom and peace contained in the 2005 Economic Freedom of the World Report, published by the Fraser Institute in cooperation with the Cato Institute.