A Capitalist Peace?

Markets, more than democracy, may be the key to preventing war


President George W. Bush's foreign policy is predicated on the idea that spreading democracy will discourage war. But new research suggests that expanding free markets is a far more important factor, leading to what Columbia University's Erik Gartzke calls a "capitalist peace." It's a reason for even the left to support free markets.

The capitalist peace theory isn't new: Montesquieu and Adam Smith believed in it. Many of Britain's classical liberals, such as Richard Cobden, pushed free markets while opposing imperialism.

But World War I demonstrated that increased trade was not enough. The prospect of economic ruin did not prevent much of humanity from giving in to nationalism, ethnic hatred, and security fears, which combined to trump the power of markets.

In in the period following the two World Wars, war became essentially unthinkable among leading industrialized—and democratic—states. Support grew for the argument, going back to Immanual Kant, that republics are less warlike than other systems. Today's corollary is that creating democracies out of dictatorships will reduce conflict, an idea that animated some policymakers to support the invasion of Iraq.

But Gartzke argues that "the 'democratic peace' is a mirage created by the overlap between economic and political freedom." That is, democracies typically have freer economies than do authoritarian states. Thus, while "democracy is desirable for many reasons," he notes in a chapter in the latest volume of Economic Freedom of the World, created by an international group of think tanks, "representative governments are unlikely to contribute directly to international peace." Capitalism is by far the more important factor.

There are a number of reasons why economics appears to trump politics. The shift from statist mercantilism to high-tech capitalism has transformed the economics behind war. Markets generate economic opportunities that make war less desirable. Territorial aggrandizement no longer provides the best path to riches. Free-flowing capital markets and other aspects of globalization simultaneously draw nations together and raise the economic price of military conflict, because the political destabilization resulting from war deters profitable investment and trade. Moreover, sanctions, which interfere with economic prosperity, provides a coercive step short of war to achieve foreign policy ends.

These positive economic trends are not enough to prevent war, but then, neither is democracy. It long has been obvious that democracies are willing to fight—just usually not each other. Contends Gartzke, "liberal political systems, in and of themselves, have no impact on whether states fight."

In particular, poorer democracies perform like non-democracies. By his calculation, the correlation between economic liberty and peace is 50 times as great as that between democracy and peace. He explains: "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."

Gartzke considers other variables, including alliance memberships, nuclear deterrence, and regional differences. Although the causes of conflict vary, the relationship between economic liberty and peace remains.

His conclusion hasn't gone uncontested. R.J. Rummel, the author of several books and avid proponent of the democratic peace theory, challenges Gartzke's methodology and worries that it "may well lead intelligent and policy-wise analysts and commentators to draw the wrong conclusions about the importance of democratization."

Gartzke responds in detail, noting that he relied on the same data as most democratic peace theorists. If it is true that democratic states don't go to war, then it also is true that "states with advanced free market economies never go to war with each other, either."

The point is not that democracy is worthless. Free political systems naturally entail free elections. Other forms of liberty—civil and economic—are more likely to survive when politics also is free. But democracy alone doesn't yield peace. To believe is does is dangerous: There's no panacea for creating a conflict- free world.

That doesn't mean that nothing can be done. But promoting open international markets—that is, spreading capitalism—is the best means to encourage peace as well as prosperity. Notes Gartzke: "Warfare among developing nations will remain unaffected by the capitalist peace as long as the economies of many developing countries remain fettered by governmental control." Freeing those economies is critical.

It's a particularly important lesson for the anti-capitalist left. For the most part, the enemies of economic liberty also most stridently denounce war, often in near pacifist terms. Yet they oppose the very economic policies most likely to encourage peace.

If market critics don't realize the obvious economic and philosophical benefits of markets—prosperity and freedom—they should appreciate the unintended peace dividend. Trade encourages prosperity and stability; technological innovation reduces the financial value of conquest; globalization creates economic interdependence, increasing the cost of war.

Nothing is certain in life, and people are motivated by far more than economics. But it turns out that peace is good business. And capitalism is good for peace.

Doug Bandow is a senior fellow at the Cato Institute and co-editor of Perpetuating Poverty: The IMF, the World Bank, and the Developing World.