Capitalizing on the Capitalist Peace

By Alan W. Dowd

July 9, 2014

Filed under: World Watch, Culture, Government & Politics

The next time the United States is compelled to try to rescue and rehabilitate a broken nation, Washington needs to pay as much attention to building free markets as to holding free elections.

If Americans have learned anything from their well-intentioned, costly efforts in the unforgiving lands of Iraq and Afghanistan, it’s that democratic elections do not ensure freedom. Nor do democratic elections necessarily promote stability, as the post-Arab Spring chaos reminds us. But a new Fraser Institute study helps quantify how building up free-market institutions and promoting economic freedom can strengthen societies by increasing social trust and reducing the risk of war.

Starting from the premise that “adequate finance is a key ingredient for organizing violence against a state,” Indra de Soysa and Krishna Chaitanya Vadlamannati argue that “economic repression and market distortions create conditions that make armed conflict feasible.” These factors “supply the means, motive and opportunity for groups to challenge states because economic distortions spawn underground economies that form the organizational bases of insurgency.” The expansion of free markets and free economic exchange, on the other hand, “marginalizes violence because it binds people meaningfully in a way suited to addressing the collective dilemmas stemming from violence.”

“With economic freedom, people gain when they produce goods and services others desire in mutually beneficial exchange,” the report concludes. “People from other groups become customers, employees, employers, suppliers.” Together, they lay the building blocks for social trust and become essential ingredients in economic expansion — rather than enemies in a zero-sum struggle over scarce resources. In other words, economic freedom raises the costs of violence — and helps remove the incentives and benefits of civil disorder.

Economic freedom raises the costs of violence — and helps remove the incentives and benefits of civil disorder.

Of course, others have pointed out the limitations of democracy in promoting stability and prosperity — and even the dangers of prematurely opening up a society to democratic governance. For instance, Robert Kaplan observed in his 2000 book The Coming Anarchy that “Democracies do not always make societies more civil — but they do always mercilessly expose the health of the societies in which they operate … If a society is not in reasonable health, democracy can be not only risky but disastrous.”

He wrote those words two years before America began its nation-building project in Afghanistan, four years before Iraq’s postwar war, and more than a decade before Egypt descended into its spiral of re-revolution.

“Democracy,” Kaplan noted, “emerges only as a capstone to other social and economic achievements.” These include the rule of law, stable institutions, economic freedom, and a civil society that protects minority rights as much as it respects majority rule.

There is also an application here for international relations. Just as the spread of economic freedom creates incentives for cooperation within nation-states and disincentives for conflict between sub-state groups, it lessens the likelihood of war between nation-states by raising the costs of war. As political scientist Erik Gartzke noted in 2005, “For six decades, developed nations have not fought each other.” This “capitalist peace” is historically unusual given that “powerful nations are the most war prone.” However, nations that embrace economic freedom — even those with different approaches to governance, politics, and religion — are learning to “capitalize on the capitalist peace … through expanding markets, development, and a common sense of international purpose.”

Thus, the likelihood of conflict between the United States and China would seem to be lower than it was between the United States and the Soviet Union. After all, China needs the U.S. market, and the United States needs China’s cash — and wants China’s goods. Beijing owns $1.3 trillion in U.S. government debt. Annual U.S.-China trade is $562 billion. There was no such connective tissue between the United States and the USSR.

Of course, there is no is failsafe inoculation against conflict. Nation-states, like individuals, are unpredictable and sometimes irrational. Miscalculations and misunderstandings can touch off unexpected, unintended conflict. Even strong commercial ties cannot always overcome this — something we should keep in mind 100 years after the cascade of calamities that triggered World War I. It pays to recall that European nations enjoyed deep commercial connections before the war. Britain accounted for more than 14 percent of Germany’s exports in 1913 — then came the summer of 1914. “The United States and China,” the Brookings Institution’s Robert Kagan cautions, “are no more dependent on each other’s economies today than were Great Britain and Germany before World War I.”

Beijing owns $1.3 trillion in U.S. government debt.

Even so, the vast economic and commercial ties between China and the United States do help to mitigate the possibility of war. If such economic linkages are something less than an inoculation against conflict, perhaps we can think of them — along with transparent (rather than secret) treaty commitments and credible expressions of deterrence — as preventive medicine.

The solution to the problems posed by the rise of strong states like China and the instability of failing states like Iraq, Afghanistan, and Pakistan is not to shrink U.S. foreign policy back to some 19th-century version of itself, or to have “less soldiers stationed overseas” (from Germany, Japan, and Jordan to Korea, Kuwait, and Kosovo, the presence of U.S. troops solves far more problems than it creates) or “to focus on nation-building here at home” (a phrase devoid of much meaning, aside from trying to repackage isolationism).

Americans may like the sound of those applause lines, but they don’t like the consequences. Perhaps that’s because we feel compelled to do more than simply defend narrow self-interest. This is not a new phenomenon. As Kagan observes inDangerous Nation, by the end of the 19th century, “The fact that many [Americans] believed they could do something to aid the Cubans helped convince them they should do something, that intervention was the only honorable course.”

At least part of the solution to these new/old problems is to spend more time and energy nurturing free-market institutions that encourage commerce between nations and planting free-market institutions that address the root cause of conflict within nations. So, the next time the United States is compelled to try to rescue and rehabilitate a broken nation — and it seems likely there will be a next time — Washington needs to pay as much attention to building free markets as to holding free elections.

Alan W. Dowd is a senior fellow with the Fraser Institute. 

FURTHER READING: Dowd also writes "Bordering on Chaos," "Measuring Freedom around the World," and "Retiring the World’s Policeman." Michael Rubin considers "Is Talking the Shortest Path to War?" Arnold Kling contributes "The Recipe for Good Government." James K. Glassman adds "U.S. Leadership Rating Rises. Huh?" Paul Wolfowitz discusses "A Good Half-Century and a Bad One: What Will the Next 50 Years Be Like?"