This is an advance summary of a forthcoming article in the Oxford Research Encyclopedia of Politics. Please check back later for the full article.
“Capitalist peace” stands for the idea that free markets pacify intra- and interstate relations. The notion has attracted scholarly attention since the end of the Cold War and has reinvigorated the study of the nexus between economics and conflict. Controversial claims about the final triumph of capitalism over its alternatives have nurtured the hope that the economic freedom that many see as the core feature of capitalism would liberate societies from the specter of political violence.
The core conjecture of capitalist peace theory builds on opportunity cost reasoning. According to this adage, business people abhor of the losses that war, terrorism, and other forms of violence generate. Political leaders who are thought to be sensitive to these fears refrain as a consequence from escalating internal or external conflicts to a stage where the usage of force becomes unavoidable. These costs should grow the freer individuals are to maximize their economic gain. Yet, capitalism takes many forms, ranging from exploitive Manchester capitalism to social democratic welfare states, which add to the freedom of economic interaction a safety net for the less skilled and privileged. These “varieties of capitalism” make it hard to establish which particular feature of the economic organization of a state appeases political relationships by rendering them less important. Prominent explanations stress a) that capitalist states are better able to signal their resolve than closed economies in case of a conflict, and b) that economic freedom builds trust within and between societies so that disputes can be resolved without violence.
Critics of capitalist peace theory contend that these competing explanations are not sufficiently different from competing theories such as commercial liberalism or the democratic peace. Extant theories indeed do not sufficiently explore how the wealth possibly created through a capitalist organization makes leaders reluctant to use force. The lack of proper micro-foundations of the approach is all the more severe as these riches can also be used for military purposes. A second and related criticism focuses on the incomplete nature of the approach. Proponents of capitalist peace theory do often not differentiate between the level of economic freedom and changes towards it. This has the consequence that capitalist peace theories shy away from addressing the distributional effects that transitions to economic openness create.
The topic of fiscal politics includes taxation and spending, budget balances and debt levels, and crises and the politics of austerity. The discussion often focuses on how some variable—such as the international environment, or political institutions—constrains “politics” in this realm. Almost omnipresent concerns about endogeneity run through this research. While this is a “big” policy area that deserves study, tracing causation is difficult.