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date: 21 September 2017

The Expansion of Economic Freedom and the Capitalist Peace

Summary and Keywords

On the one hand, the idea of a capitalist peace is a set of loosely integrated, but testable propositions. On the other hand it is part of a wider, libertarian philosophy of life. The spirit of this wider conception is best expressed by a quote from a pioneer of quantitative international politics, in 1981 Rummel wrote, “If you want peace, then minimize the power of government.” Although there has been a proliferation of variables assessing capitalism and economic interdependence—from economic freedom via contract intensity to the avoidance of state ownership or protectionism—the most frequently analyzed proposition about the capitalist peace says that trade makes military conflict and war less likely. By and large, the evidence supports this proposition in dyadic designs as well as in monadic designs. This cross-design validity of the proposition is important, because it distinguishes the peace by trade proposition from the democratic peace proposition. Most researchers agree that war is extremely unlikely in dyads where both nations are democracies. But only a minority contends that democracies are less frequently involved in military conflict than other states. The dyadic and the monadic findings are compatible because military conflict looks even more likely between an autocracy and a democracy than between two autocracies. Whereas the democratic peace is limited in application, the pacifying impact of trade or economic interdependence is more general. Moreover, the democratic peace may be embedded in a wider economic or capitalist peace. There is strong evidence that democracy rests on a foundation of capitalism or economic freedom and the prosperity that has been gained only by capitalism or some degree of economic freedom. Moreover, economic freedom and prosperity contribute to the avoidance of civil war. Better still: Economic freedom does not only promote economic growth and prosperity among those nations where people enjoy economic freedom, but the economic freedom of rich countries provides poor countries with the advantages of backwardness and catch-up opportunities.

Capitalist peace theory evolves. It has been suggested that the pacifying impact of trade rests on the expectation that trade, or access to resources and markets, will continue. This suggestion requires a new look at economic sanctions, too. By interfering with trade, sanctions must undermine the expectation of future benefits of trade and globally interconnected markets. Given the rareness of evidence in favor of the effectiveness of economic sanctions in eliminating undesirable policies of other nations, a capitalist peace perspective implies the recommendation to use sanctions much less frequently than politicians do. They are likely to eliminate a pacifying factor when it is most urgently needed.

The wider or visionary perspective on the capitalist peace is useful not only in connecting it with the issue of sanctions, but also in demonstrating the inherent limitations of capitalism as a tool to achieve peace. From a static perspective, capitalism, economic freedom, or trade may exert some pacifying impact, as argued above. But capitalism is a dynamic economic order. It is about “creative destruction”. Capitalism is not egalitarian. Nations grow at different speeds. They rise and decline. Capitalism and unequal economic growth upset pecking orders and contribute to power transitions that are related to risks of war, especially great power war. Whether the contribution of capitalism to power transitions—or its pacifying impact prevails—cannot be judged with much confidence.

Keywords: Capitalism, civil war, economic sanctions, democratic peace, power transitions, trade, war, empirical international relations theory, capitalist peace, economic freedom

Introduction

This paper provides a macroscopic analysis of the relationship between economic freedom or capitalism1 and peace. There are too many definitions of capitalism to discuss them here. There even is a variety of capitalisms literature. As defined by Berger (1986, p. 19), capitalism refers to “production for the market … with the purpose of making a profit.” Implicitly this definition presupposes private property rights in the means of production and limited government. Since Marxists and Austrian economists are farthest apart in their appraisal of capitalism, one should note their agreement on private property rights in the means of production being the crucial characteristic of capitalism. Freedom to trade within and across economies is another defining characteristic of capitalism. That is why “peace by trade” is a component or specific interpretation of the capitalist peace.

This paper is an attempt to answer the question whether capitalism makes peace, or absentia belli, more or less likely, whether directly or indirectly via intervening variables, such as democracy. Micro-foundations of macro-relationships are certainly desirable, but they are not debated here in any detail.2 Much of the quantitative research on conflict and war uses militarized interstate disputes as a substitute for war, in order to mitigate the problems arising in the study of rare events. I shall accept this procedure, unless there is evidence demonstrating that impacts on disputes and wars, defined by lethality or battle-deaths thresholds, differ. Since research on capitalism as well as on conflict and war is evolving, since researchers tend to read even the same evidence somewhat differently, and since a full consensus in the social sciences is rare and likely to be transient, a stock-taking project like this paper can only produce preliminary and provisional findings. But it would make little sense to repeat this caveat again and again. Preempting a major conclusion of the paper, it is argued that economic freedom or capitalism cuts both ways. On the one hand, economic freedom and cooperation and capitalism do promote peace; on the other hand capitalism may undermine it by challenging pecking orders and promoting power transitions.

Free Trade and War Avoidance

Arguing that great power politics remains a tragedy (Mearsheimer, 2001) is not attractive in the nuclear age. A rival school of thought, sometimes called liberalism, is more optimistic. In contrast to realism, it provides some hope for avoiding great power war, including a clash of declining Western civilization and ascendant Chinese civilization. Either economic interdependence or democratization or both may significantly reduce the risk of war. From this perspective, the expansion of economic freedom by globalization is useful by spreading interdependence and prosperity first and, possibly, democratization3 and international cooperation in global organizations4 later. Armed conflict becomes less likely if the constituent nations of a dyad trade frequently with each other (Dorussen, 2006; Gartzke, 2005, 2007; Gartzke & Li, 2003; Gleditsch, 2010; Goenner, 2011; Hegre, Oneal, & Russett, 2010; Lu & Thies, 2010; Oneal, 2003; Oneal & Russett, 1997, 2003a, 2003b; Oneal, Russett, & Berbaum, 2004; Russett & Oneal, 2001; Xiang, Xu, & Keteku, 2007). One may label this effect “peace by free trade.”5 Some studies that call the peace by trade proposition into question (e.g., Barbieri, 2002; Gelpi & Grieco, 2008; or Li & Reuveny, 2011) suffer from at least one of the following defects. Either they do not adequately control for conditions that raise the risk of war in a dyad, such as contiguity, distance, power balance, or one of them being a big power. In my view, it does not make much sense to study the effect of pacifying conditions, if one does not sufficiently control for variables that increase the risk of conflict and thereby implicitly comes close to the assumption that war is as likely between Bolivia and South Africa as it is between Russia and Ukraine or India and Pakistan. Sometimes it is useful to distinguish between those military conflicts that remain at the level of exchanging threats and those that lead to fatalities. In case of divergent findings, I prefer conflict involvement rather than initiation as the dependent variable. In my view, coding “initiation” is nearly as difficult as coding “war guilt.” If one compares conflict escalation to climbing a ladder, then initiation rarely justifies a 0 or 100% attribution to one party while absolving the other one. That is why reference to guilt or initiation should be avoided in large N studies. In addition, dyadic trade should not be standardized by foreign trade instead of GDP. If all of these shortcomings are avoided, then almost all studies support the proposition “peace by free trade.”6 There is a rather strong case for a commercial peace or peace by trade. Moreover, even Barbieri (2002, p. 104) endorses the monadic version of the “peace by trade” proposition and affirms “that states that are heavily dependent on foreign trade have lower rates of conflict involvement than those who are less dependent.”

The Evolution of the Research Program

Until about a decade ago, much of the debate among researchers was whether the commercial or capitalist peace is as strong as the democratic peace.7 Now, trade to GDP ratios are no longer the only or necessarily the best ways to document the pacifying effects of economic freedom or the invisible hand. The ground is shifting toward the question of which aspects of a capitalist order promote the avoidance of war most effectively: Is it trade? Or, is it the avoidance of protectionism?8 Or is it the avoidance of state ownership of the means of production, of state-owned enterprises (McDonald, 2007, 2009)? Or, is it the contract intensity of economies (Mousseau, 2005, 2009, 2013)? Foreign investment has some beneficial impact, too (Bussmann, 2010; Souva & Prins, 2006). Moreover, economic freedom in general reduces involvement in military conflict, and financial market openness reduces the risk of war (Gartzke, 2005, 2007, 2009).9 All of these specific interpretations of the general idea of a capitalist or commercial peace seem to justify some optimism about the effects of a global expansion of economic freedom. As admitted by Russett (2009, p. 19) who defends the idea of a democratic peace against the idea of subordinating it to a more encompassing capitalist peace, “peace by trade” is supported by dyadic and monadic research designs, that is, pacifying effects are not restricted to relationships between free traders on both sides of a dispute.10 This is an important issue. If the risk of disputes and war between democracies and autocracies is even higher than the risk of war between autocracies, then one may argue that the democratic peace merely shifts the risk of war from the borders between democracies to the borders between them and autocracies.11

Capitalist peace theory asserts that economic freedom or capitalism promotes peace. Although he never used the label, nor made economic interdependence the focus of his investigations, Rummel (1981, p. 266) preempted the spirit and main policy implication of capitalist peace theory quite well: “If you want peace, then minimize the power of government.”12 Although Rummel (1995) later expressed the hope that democracies are more peaceful than other regimes, his earlier writing explains why we should not be optimistic about relations between autocratic and democratic states. According to Rummel (1979, p. 292), “Libertarian systems are the natural enemies of authoritarian and totalitarian states. By their example and the products of freedom they are naturally subversive of authoritarian and totalitarian systems; and these freedoms seem to make libertarian states defenseless against unilateral changes in the status quo.” The idea of a capitalist peace asserts that economic freedom or capitalism, contract intensity, international trade, foreign investment, financial openness, or the avoidance of protectionism and state property ownership promotes peace.

Nevertheless, the theory is still evolving. In earlier research the idea was that trade or economic freedom or some other directly measurable aspect of dyadic relationships promotes peace. Copeland (2015) has recently suggested that we should better focus on expectations of future trade rather than on past trade as such. Why should trade pacify interstate relations, if it is not accompanied by the expectation of future trade and future benefits from trade? Copeland (2015, ch. 2) reads the quantitative literature somewhat differently from me. But he agrees with me on the fact that most researchers see economic interdependence as a pacifying condition and even that the democratic peace is anchored in economic cooperation. He focuses on interactions that permit interdependence to increase or decrease conflict contingent on conditioning variables. As one can easily grasp if one thinks of binary independent variables, conditional effects are supported by contrasts between much smaller sets of cases (for example, democratic trading states) with the residual set than unconditional effects (for example, all trading states). In my view, empirical support for conditional effects necessarily rests on a weaker basis. This does not deny their existence, but the robustness issue becomes even more urgent with conditional effects than it is elsewhere. I doubt whether previously applied interactions between trade and other variables suffice to model expectations. Possibly, we need entirely new research designs to test the expectations idea. The subjective assessment of trade expectations and analysis by “conjectural causality” (Snyder, 2015–2016) looks more like an unavoidable first step than like a lasting solution to the research problem.13 One even has to raise the issue whether expectations about and within dyad trade can be affected by what happens in other dyads.

World War I is the standard argument against the effectiveness of peace by trade because there was substantial economic interdependence between the opponents on both sides in the war. Certainly, it is a useful reminder that the capitalist peace is a probabilistic instead of a deterministic theory. But World War I is not as bad a problem for capitalist peace theory as frequently assumed. Following Gartzke and Lupu (2012), one may point out that World War I did not begin among the most interdependent powers but between much less interdependent countries in the European periphery: Austria-Hungary and Serbia. There was little democratic contribution to pacification because the Central European powers were, at best, imperfect democracies.14 By contemporary standards, even the democratic character of the United Kingdom was not beyond suspicion because of franchise limitations. As far as trade linkages were concerned they were strongest where least needed. According to Russett and Oneal (2001, p. 175), “it (trade, E.W.) had been dropping since a peak in 1906. Nor was it so great between most of the big 1914 adversaries … Germany’s trade with France was much below its trade with Austria-Hungary and barely above that with the Netherlands, which had a much smaller economy than France’s. French trade with Germany was only 75% of that with the United Kingdom and not much greater than with Belgium—a state far smaller than Germany. Austria-Hungary’s biggest trading partner was its ally Germany, which accounted for more than five times as much of its commerce as did France, Russia, or the United Kingdom. Of the six warring dyads (of major powers, E.W.), only two show high levels of interdependence. Russia and Britain were essentially tied as Germany’s closest trading partners, while Germany was the largest trading partner of both Russia and, among the European states, Britain. But Britain’s trade with the United States was about 40% greater than its trade with Germany …” Thus trade ties were weak in the Franco-German dyad. Without the long-lasting hostility between France and Germany, World War I would have been inconceivable.

According to McDonald (2009), critics of capitalist peace theory overlook that trade volumes rose in spite of mounting protectionism. Trade increased because of falling transportation costs, but in spite of protectionist politicians.15 Finally, one has to remember that capitalist peace theory is an incomplete theory. It says only how risks of war may be reduced, but it says nothing about what generates “dangerous dyads” (Bremer, 1992) in the first place. Since international trade did not flourish during the interwar decades, and even less after the onset of the great depression, capitalist peace theory is easily compatible with World War II, which was even bloodier than the previous world war. There was little trade between the Western powers and the Axis powers. Since none of the Axis powers were democracies, the democratic peace could also not apply between the Axis and the West. Capitalist peace theory also fits with the later reconciliation between the former Axis powers and the West.

The different effects of the settlements of both world wars should be explained by differences in policies toward the losers of the wars. After World War I, France determined the settlement more than other nations. A capitalist peace strategy never crossed French minds. As Keynes (1919/1988, p. 268) already recognized in the immediate aftermath of World War I, “If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp.” Misery and desperation within Germany contributed to Hitler’s empowerment and indirectly to World War II in which France was saved only by its Anglo-American allies. But the Americans pursued a capitalist peace strategy toward the vanquished after World War II. They promoted global free trade and subsidized even the recovery for the losers of the war. Germany and Japan became prosperous allies of the United States, Britain, and France.

Economic Sanctions

Even if one regards capitalist peace theory as an unfinished project, one policy implication is already clear. If expectations about future trade and cooperation matter more than the status quo, then the issue of economic sanctions becomes crucial. The point of sanctions is to influence or coerce the target state to change its behavior. By interrupting trade or economic cooperation, sanctions necessarily undermine positive expectations about future benefits. Since sanctions are usually applied either by great powers, or multilaterally by groups of nations, they are highly visible and should undermine expectations about the benefits of economic interdependence even among bystanders. Without claiming solid evidence for the proposition, I suspect that the use of economic sanctions as such undermines the capitalist peace. Immediately, they interfere with trade and economic cooperation whenever there is some risk of conflict escalations. Otherwise no one would even think of sanctions. They reduce the impact of what looks like a pacifying factor in previous studies. In the long run they undermine expectations about future benefits of economic cooperation and free trade. Moreover sanctions cannot avoid what has been called the boomerang effect (Coyne & Hall, 2014), that is, some negative impact on economic freedom within sanction-imposing nations. Unavoidably, sanctions expand government power at the expense of private enterprise.

If economic sanctions and the capitalist peace tend to be incompatible, then one should look at the effectiveness of economic sanctions. According to the empirical literature (Early, 2012; Hufbauer, Schott, Elliott, & Oegg, 1997; Morgan & Schwebach, 1997, p. 46; Morgan, Bapat, & Krustev, 2009; Pape, 1997; Whang, 2010; Whang & Kim, 2015) contentions about their effectiveness vary, but include some devastating comments, such as these: “In most cases a state imposing sanctions on its opponent can expect an outcome that is just about the same as would be obtained without sanctions.” Moreover, even Hufbauer et al. who do assert that economic sanctions sometimes work, admit that they tend to be least effective against strong, stable, autocratic, and hostile targets.16 As Simes (2014, p. 11) pointed out, even resolute sanctions against Cuba, North Korea, or Iraq did not produce the desired result. One should expect Russia to be somewhat less vulnerable to Western sanctions than these much smaller countries. It is unlikely that Russians shall give up the Crimea, or even interfering in the Russian-speaking East of the Ukraine.17 Although the Western powers attained a capitalist peace with the losers of World War II, Western efforts to achieve a capitalist peace with the Russian successor state of the Soviet Union have been weak and insufficient.

Capitalism and Democracy

Capitalism and economic cooperation among nations provide an opportunity for poor countries to coexist with each other as well as to benefit from each other. Since democracy depends on capitalism or economic freedom as well as the prosperity generated by it, the democratic peace becomes a mere component of the capitalist peace. Capitalism and economic interdependence promote peace by two or even three routes: directly and indirectly; via democracy; and, possibly, by common memberships in intergovernmental organizations, too.18 Admittedly, the argument relies on compiling lots of diverse evidence, some of which is still debated in the scientific community.

The idea that capitalism might be more important as well as more beneficial for peace than democracy may be defended in four ways. First, one may contend that the relationship between democracy and peace is either weaker than the impact of economic freedom or trade on peace or even be spurious (Gartzke, 2005, 2007, 2009; Gartzke & Hewitt, 2010; Gibler, 2007, 2014; Mousseau, 2013; Rasler & Thompson, 2011). But the debate continues. Some researchers reaffirm democratic peace effects (Dafoe, Oneal, & Russett, 2013; Hegre, 2014; Teorell, 2015). Second, one may argue that democracy is not viable without capitalism or the prosperity it promotes (Bhagwati, 1993; Boix, 2011; Burkhart & Lewis-Beck, 1994; Gassebner, Lamla, & Vreeland, 2013; Inglehart & Welzel, 2009; Lipset, 1994; Przeworski et al., 2000).19 Under capitalism, nations may enjoy prosperity and peace together. Better still, poor nations benefit from advantages of backwardness or the existence of more advanced ones that are sources of technology, models for emulation, and markets for labor-intensive products (Barro & Sala-i-Martin, 1995; Levine & Renelt, 1992; Olson, 1996; Sala-i-Martin, Doppelhofer, & Miller, 2004; Weede, 2006). Although not all backward economies do converge, although not all of them exploit the potential “advantages of backwardness”, in principle the followers of the global development process enjoy some advantages over the pioneers.20 They may borrow technologies. They easily find opportunities for productive investment and are less likely to run into the problem of decreasing returns. They can reallocate labor from less productive employment in agriculture to more productive employment in industry and, later, in services. In the long run, economic growth implies prosperity or high average incomes, which are a prerequisite of democracy.

Third, democratic peace theory has invited the dangerous idea that one might or even should promote democracy by war (Russett, 2006). Going to war now in order to make it less likely in future is obviously a dangerous idea. After all, the pacific benefits of democracy did not convince the Taliban or Saddam Hussein that they should retire. By contrast, capitalism expands by the power of successful examples. The Chinese and Vietnamese communist parties accepted creeping capitalism because they were no longer satisfied by equality in poverty, nor by the limited power potential of poor nations. The best thing about economic freedom or capitalism is that it does not only benefit those who enjoy it, but even those where the government still obstructs it (Hayek, 1960). As outlined above, the level of economic development is the most robust determinant of economic growth. Potential advantages of backwardness may be understood as an external benefit of economic freedom or a benefit of the economic freedom in more advanced economies (Weede, 2006). Since the war that one initiates is a certainty, whereas later wars possibly prevented by democratization are at best a mere probability, caution is mandatory. Too many caveats apply. It has to be kept in mind that the prospects for the establishment of a democracy depend on the level of economic development or prosperity. Moreover, some political theorists (Dahl, 1971; Huntington, 1968; Nordlinger, 1968; Rustow, 1970) argue that establishing national identity first, the rule of law and accountable government second, and the mass franchise last is the best sequence if a peaceful and stable democracy is to be established. Even if the target country of military intervention is sufficiently developed and prosperous—in contrast to, say, Afghanistan or Iraq or Libya—one has to raise the question whether the insertion of a democratic country in a region where autocratic government is the rule makes peace more or less likely. After all we are much closer to a general consent that war is quite unlikely among democracies, but we still debate whether democracies in general are more pacific, even if their neighbors or rivals are ruled by autocrats. On top of this there are doubts whether emergent democracies as pacific as more established ones (Mansfield & Snyder, 2005).21

Fourth, one might even look back at earlier findings of quantitative research. Whereas much of the research in the first decade of the 21st century debated the relative impact of democracy on the one hand, or trade and other measures of economic freedom or interdependence on the other hand, on disputes and war, earlier research (Bremer, 1992; Russett, 1993, pp. 86–87) frequently controlled for the effects of the level of economic development or wealth. Then Russett asserted that rich and rapidly growing countries were less likely to be involved in conflict, even after controlling for the beneficial effect of democracy, which was his major research concern. Thus, not all of the impact of prosperity on conflict avoidance is mediated by democracy. More recently, Ekmekci (2014) applied per capita income as an indicator of capitalism in the third world in order to demonstrate the superiority of the capitalist peace over the democratic peace there. According to Inglehart, Puranen, and Welzel (2015) and their analysis of survey data, prosperity or material well-being are related to a “declining willingness to fight for one’s country.” Since democracy and trade are related to the level of economic development, the focus on intermediary variables has distracted us from remembering that richer countries tend to be more pacific than poorer ones, and dyads of richer countries get less often involved in conflict than others.

Capitalism and the Avoidance of Civil War

Even if one is ready to accept either that the direct impact of trade or economic freedom or capitalism on the avoidance of conflict is stronger than the direct impact of democracy on the avoidance of war, or that the simultaneity of monadic and dyadic pacifying effects of trade or economic freedom gives an edge to capitalism over democracy, or that democracy is necessarily grounded in prosperity and economic development, one might still call the pacific impact of capitalism in question. Whereas some optimists believe that interstate war is going out of fashion, rebellions and civil wars undoubtedly remain contemporary problems. According to the numbers published by Collier (2009, pp. 4–5), there have been 26 civil wars exceeding the 1000 battle-related death threshold per year in the 1946 to 2007 period, or 73 civil wars exceeding the much lower 25 fatalities per year threshold. The bigger civil wars tend to be protracted affairs. Typically, they last for 7 years; worse still, countries that recently suffered from civil war are likely to suffer again: After a civil war had been concluded, 40% relapsed to civil war within a decade (Collier, 2009, pp. 75, 133). The consequences of civil war have been aptly summarized as “development in reverse” (Collier, 2009, p. 140).

This raises the issue of the relationships between capitalism, or the prosperity that it frequently results in, on the one hand and the avoidance of civil war on the other hand. One also might look at the impact of democracy on civil war. The latter relationship is not straightforward and linear. Instead it might be that semi-democratic regimes are more at risk of civil war or political instability than either long-established democracies or tightly ruled autocracies (Hegre, Ellingsen, Gates, & Gleditsch, 2001; Muller & Weede, 1990).22 Alternatively, it has been argued (Collier, 2009, p. 21), that democracy amplifies the risk of civil war in poor countries. Since autocracies, in particular poor ones, are likely to pass through some period of semi-democracy before benefiting from democratic stability, the impact of democracy on peace looks ambivalent again.

By contrast, the impact of economic development or prosperity on the avoidance of civil war seems to be the most robust finding in research on civil war (Braithwaite, Dasandi, & Hudson, 2016; Collier et al., 2003, pp. 58, 102; Fearon & Laitin, 2003; Holtermann, 2012; Jakobson, de Soysa, & Jakobson, 2013). Few observers doubt that poor or less developed countries are more prone to civil war than rich and highly developed countries.23 Unfortunately, however, truly robust findings are rare in macro-social research. There is a way to get rid of what seems to be the most frequently reported finding in quantitative research on civil wars: the link between poverty and rebellions. Once one controls the effects of economic freedom or capitalism (de Soysa & Fjelde, 2010; de Soysa & Vadlamannati, 2014; Mousseau, 2012), then links not only between democracy and civil war, but also between poverty or per capita income and civil war disappear.24 A finding related to the pacifying impact of economic freedom has been reported by Hegre, Gissinger, and Gleditsch (2003): Open economies are less prone to civil violence than closed economies There seems to be a capitalist civil peace, just as there is a capitalist peace between states, as argued above.25 After more than three decades of research, it seems that Rummel’s (1981, p. 266) hunch was right: “If you want peace, then minimize the power of government.”

Limitations of the Capitalist Peace

Since the capitalist peace requires capitalism to enjoy rude health, and since current account imbalances and the monetary policies to overcome them have recently destabilized the global economy, overcoming global imbalances might be as necessary from a geopolitical point of view as from a geo-economic perspective. From a Keynesian perspective, as argued by King (2016), Pettis (2013), or Summers (2016), demand is the most important economic resource that is lacking. The Chinese growth model, like the German and Japanese one, depended on importing demand in order to neutralize underconsumption at home. The American consumer delivered the demand. But American overconsumption and underconsumption elsewhere cannot coexist forever.26 But the stability of capitalism is a much wider topic than the capitalist peace.

In spite of assembling a lot of evidence demonstrating a pacific impact of capitalism or economic freedom, this is not yet the end of the story. According to Schumpeter (1942), the main characteristic of capitalism is creative destruction. Although Schumpeter applied this idea to technologies and enterprises, it applies to power hierarchies, too. In the long run, different economic growth rates determine the rise and decline of nations, which affects power balances, power transitions, and the risk of war (Organski & Kugler, 1980; Rasler & Thompson, 1994; Kugler & Lemke, 1996).27 According to the theory, power transitions are most dangerous, if rising challengers are dissatisfied.28 Although this is not the place to attempt to analyze the two world wars and the subsequent cold war of the 20th century, it is obvious that the world wars could not have happened without rapid German economic growth before 1914 and the Anglo-German power transition (Organski, 1958), that the Asian-Pacific part of the second world war could not have happened without Japan’s successful industrialization after the Meiji restoration, and that the Soviet Union could not have resisted the German Wehrmacht in World War II and challenged American primacy during the Cold War without its establishment of a huge military-industrial complex. So, different degrees of economic freedom or even the opportunities provided by catch-up growth and the advantages of backwardness may result in conflict. The dynamism of global capitalist development tends to generate power transitions and to challenge previously established pecking orders that produce international tensions and possibly war.29

Any future power transition must threaten American hegemony. Rachman (2016, p. 20) points out why some power transition is conceivable by asking: “How long can a country that represents less than 5 percent of the world’s population and 22 percent of the world economy continue to be the dominant power in every significant region of the world?” Since neither the Russian, nor the Indian economy come even close to half the size of the Chinese economy, since graying Japan and Europe are allied with the United States as well as still disinclined to remilitarize, the only conceivable challenger of U.S. hegemony on the horizon is the People’s Republic of China.30 For adherents of the realist school of thought in international relations, the two strongest powers in the world are likely to become enemies because of what they are capable of doing against each other. Realists tend to combine capabilities with worst-case assumptions about intentions. According to Mearsheimer (2001, p. 14), “China and the United States are destined to become adversaries as China’s power grows.” It is still a matter of debate whether China is close to a power transition or not. According to its economic size and its growth rate, it is already capable of challenging the United States. But its technological expertise lags. Therefore, becoming a military challenger might be decades in the future (Brooks & Wohlforth, 2016).

China’s economic miracle would not have been possible without the preceding replacement of socialism by creeping capitalism (Coase & Wang, 2014; Huang, 2008; Lin, Cai, & Li, 2003; Montinola, Qian, & Weingast, 1995; Weede, 2000, 2012). Moreover, China benefits not only from the still precarious economic freedom conceded by its ruling communist party, but as much or more from the economic freedom in the West and globalization. Capitalism and economic freedom cut both ways. They make a power transition between China and the United States possible and thereby increase the risk of war. Simultaneously, the economic cooperation and trade between the United States and China may mitigate tensions. Who dares to say which effect will ultimately prevail? If Shambaugh’s (2016) view about the choice that China’s communist leadership faces and its effects were true, then China’s economic prospects and power potential depend on political liberalization at least to what he calls semi-democracy, that is, full economic freedom, the rule of law, and a lot of individual liberty, but without necessarily full political participation rights. Without semi-democracy, he cannot imagine the continuation of the rise of China. If this analysis were true, then power transition either becomes unlikely or much less dangerous.

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Notes:

(1.) Economic freedom scales have been produced by the Fraser Institute and its collaborators, or the Heritage Foundation together with the Wall Street Journal. For them (and for me) capitalism and economic freedom are synonyms (see also Gartzke, 2005).

(2.) Kim (2014), Lipson (2003), Mandelbaum (2007), Maoz and Russett (1993), Maoz (1998), Russett and Oneal (2001) also look at conceivable micro-foundations of the macro-relationships discussed here. Although there can be no doubt that macro-theories with a micro-foundation are preferable to those without it, in contrast to Schneider (2014), I am not convinced that working on the micro-foundations of the capitalist peace is the most urgent or most promising thing to do.

(3.) Unfortunately, some studies reaffirm the democratic peace without controlling for the effects of trade or other economic variables (Park, 2013).

(4.) The effect of international organizations on the avoidance of international conflict is not analyzed here. But there is some evidence that globalization as such promotes peace (Choi, 2010).

(5.) According to Dorussen (2006), the kind of trade might matter, too.

(6.) Admittedly, this conclusion relies on empirical studies that build on a questionable database. For a discussion of the shortcomings of our trade data, see Barbieri, Keshk, and Pollins (2009) and Gleditsch (2010). If one assumes that trade to GDP data are more reliable than dyadic trade data, as I do, then a monadic finding becomes very important: Trading states tend to be less frequently involved in military disputes or war than more autarkic states. Then there is endogeneity issue. Keshk, Reuveny, and Pollins (2010) argue that conflict reduces trade, but trade does not affect conflict. Of course, everything depends on the choice of instrumental variables. See Hegre, Oneal, and Russett (2010) and Goenner (2011) for a reaffirmation of the pacifying impact of trade on conflict.

(7.) See Ray (1995) or Russett (1993) for classical defenses of the democratic peace, and Rosato (2011) for an attack on it.

(8.) Trade depends not only on political barriers, but also on distance and transportation costs, even on the size and complementarity of economies. Therefore, measures of trade and measures of the avoidance of protectionism need not have the same impact on peace. See McDonald and Sweeney (2007).

(9.) Simultaneously, economic freedom and globalization do not weaken human rights. Instead they exert some positive impact on physical integrity rights (Dreher, Gassebner, & Siemers, 2012).

(10.) It has to be admitted, however, that there still are some defenders of the monadic democratic peace proposition (Benoit, 1996; Boehmer, 2008; Rummel, 1995; Souva & Prins, 2006). The most forceful criticism of the idea that democracies might be more peaceful in general has been expressed by Waltz (2003–2004): “The weaker can hardly threaten the stronger, yet democratic countries go to war against them. If this is true, it tells us something frightening about the behavior of democratic countries; namely, that they excel at fighting and winning unnecessary wars.”

(11.) The findings reported by Russett and Oneal vary over time. On the one hand, Russett and Oneal (2001, p 116) find no special risk of war between autocracies and democracies in their great book. On the other hand, a higher risk is reported in some of their earlier and later work (Oneal & Russett, 1997, 2005; Russett & Oneal, 2006; Russett, 1993, 78–79, 2009, p. 13). The pessimistic view about autocracies and democracies is also forcefully confirmed by Bennett (2006), Quackenbush and Rudy (2009), and Gartzke and Weisiger (2013). The latter authors also point to the possibility that the impact of regime dissimilarity might be conditional and depend on the relative frequencies of democracies and autocracies. According to Gartzke and Weisiger (2014, p. 130), “increased systemic democracy has no consistent impact on interstate conflict.”

(12.) More recently, Mandelbaum (2007, p. 176) made a similar argument.

(13.) Although not addressing the issue of trade expectations, Rosato (2014–2015) argues that great power intentions are inscrutable. If they are, no one should ever hold firm expectations about future trade.

(14.) Below I shall argue why the democratic peace should best be regarded as a component of the capitalist peace.

(15.) As Lindsey (2002, p. 282, n. 19) observed: “Until the 1870s, the clear trend had been toward progressive liberalization; afterwards, the overall trend was in the opposite direction. It was therefore plausible to extrapolate that barriers to trade would continue to grow, and indeed that extrapolation became the conventional wisdom throughout Europe. The simultaneous rush for colonies by all the major powers made for a convincing case that the emerging world order was one of rival autarchic blocs.”

(16.) Claiming that economic sanction rarely lead to policy reversals does not deny that they can do a lot of damage, for example, to food availability or the public health of targeted populations (Allen & Lektzian, 2013).

(17.) The American oil embargo against Japan before World War II may even have contributed to subsequent war.

(18.) Russett and Oneal (2001) are the strongest advocates of the view that interstate trade, democracy, and common memberships in intergovernmental organizations (IGOs) reduce the likelihood of conflict and war. I shall neglect the third leg of their triad for two reasons. First, IGOs are a very mixed bag. Some of them concern minor technical issues, while others impact on power relationships between states. Second, the relationship between IGOs and economic freedom is less clear—and likely to vary from IGO to IGO—than the relationships between trade or democracy and economic freedom. For further research on IGOs, see Boehmer and Nordstrom (2008).

(19.) For criticism of this until recently widely accepted link, see Acemoglu et al. (2008) where the relationship disappeared after controlling for country fixed effects. In my interpretation of Acemoglu’s views, capitalist institutions made prosperity as well as democracy possible. Moreover, Benhabib, Corvalan, and Spiegel (2011) have reestablished the link between prosperity and democracy by using improved data sets and estimators even when controlling for country fixed effects.

(20.) Whether or not poor or backward countries do converge seems to depend on two other determinants, human capital endowment and economic freedom (Weede, 2006, Hanushek & Woessmann, 2015). Since advantages of backwardness or catch-up opportunities presuppose the existence of rich countries, since one may argue that rich countries became rich because of a greater degree of economic freedom than elsewhere (Jones, 1981; Landes, 1998; McCloskey, 2010; Weede, 2000, 2012), one may regard the advantages of backwardness as an external benefit of economic freedom.

(21.) Brancati and Snyder (2011) have issued a similar warning against the expectation of benefits from fast democratization after civil wars end. The doubts about the impact of immature democracies on interstate war have been questioned by Narang and Nelson (2009). According to Joshi, Maloy, and Peterson (2015), democracies differ in their readiness to go to war. Some of them are peaceful toward everyone, others only toward democracies.

(22.) This is not a solid finding because violence and civil war affect the coding of a political system. It is hard to imagine how a civil war affected nation may be coded as a full democracy (Vreeland, 2008).

(23.) By contrast, Jacobsen and de Soysa (2010, p. 137) even arrive at the conclusion: “State policies that dis-empower people under conditions of high fractionalisation actually reduce the risk of civil war.”

(24.) Since globalization is related to the expansion of economic freedom, it is noteworthy that globalization reduces political violence more effectively than even per capita income (Flaten & de Soysa, 2012). The impact of sudden and dramatic increases of globalization on civil war may be different from the level of globalization effects (Nieman, 2011).

(25.) I have made the same argument previously (Weede, 2011).

(26.) The Chinese economy suffers from some other problems as well. First, there is the low fertility level and the growing burden of the elderly (England, 2006). Second, there is the public debt burden. Although the central government likes to claim fiscal rectitude, local governments and state owned enterprises are heavily indebted. The Economist (2015, p. 54) has recently estimated public debt to be about 250% of GDP.

(27.) The grand topic of economic development and growth cannot be discussed here. I have done it elsewhere (Weede, 2014)

(28.) Unfortunately, there is little agreement about how to measure dissatisfaction (Debs & Monteiro, 2014, p. 4).

(29.) By and large, differential growth rates are most dangerous, if they generate parity where previously preponderance existed. Most research supports that preponderance pacifies, whereas parity raises the risk of conflict and war (Gilpin, 1981; Geller & Singer, 1998, ch. 4; Kim, 1992; Kugler & Lemke, 1996; Lemke, 2002; Modelski & Thompson, 1993, p. 37; Moul, 2003, 2013; Rasler & Thompson, 1994; Russett & Oneal, 2001).

(30.) The most extreme optimism about China’s economic future is represented by Fogel (2010).