The Capitalist Peace

A review of the literature based on four definitions of capitalism

Introduction. Within the liberal tradition, particularly in economic liberalism, the Capitalist Peace emerges as a theory aiming to be an alternative explanation to the Democratic Peace. While the latter states that democracies rarely fight each other, the former claims that capitalism promotes peace. While the finding of democratic peace is probably "the closest thing we have to a law in international politics" (Levy, 1988; Maoz and Russett, 1991; Ray, 1989), the hypothesis of the capitalist peace is a recent theory, still being examined by scholars, that, if verified, it could integrate, incorporate or replace the democratic peace theory.

Although originally formulated by Erich Weede[1] in 1995, the core elements of the Capitalist Peace can be traced back to the reflections of scholars such as Adam Smith (1776), Immanuel Kant (1795), Normann Angell (1909), Joseph Schumpeter (1955) and Karl Polanyi (1957). For instance, Kant stated, among other things, that the spirit of commerce that would have possessed every nation was incompatible with war. In the early XX century, Angell argued that trade interdependence in modern economies makes war unprofitable. Later, Schumpeter noted that, with capitalism's advancement, people internalize "an unwarlike disposition". More recent precursors of the Capitalist Peace can be considered Richard Rosecrance (1986), who reinvigorated the peace-through-trade literature, and John Mueller (1989), who observed that industrialized countries rarely fight each other. On the contrary, the neo-Marxist literature of imperialism proposes an entirely opposite view about capitalism. Rudolf Hilferding (1910), Lenin (1917), other Marxian writers, and modern supporters of critical and dependency theory see in capitalism one of the main factors of crises and war (Packer, 2003).

           The will to examine the Democratic Peace and the Capitalist Peace comes from the same source: the desire to verify the peace-building effect attributed to the twin sisters of liberalism, democracy and capitalism. Studies on democracy as a promoter of peace have so far received much more attention than those on capitalism. Indeed, the conflict research community has only recently given systematic scrutiny to the Capitalist Peace Theory (CPT), as the liberal research agenda was dominated by the Kantian Peace and the Democratic Peace.  As a matter of fact, it was in one of the earliest systematic confirmations of the Democratic Peace that Stuart Bremer (1992) found, inter alia, a positive correlation between capitalism and peace[2]. This literature review employed the paper by Gerald Schneider and Nils Petter Gleditsch (2010) to approach the CPT, and Michael Mousseau's commentary (2010) to classify it.

           The capitalist peace theory is studied and verified with different methods and starting from different definitions of capitalism. Consequently, to most effectively explore it, the literature has been selected and ordered based on the different acceptations given to capitalism (and their various measurement methods):

A.   According to some capitalist peace models, capitalism is another word for free markets and trade.

B.    The second way to measure capitalism is through the level of capital interdependence. Therefore, the indicator of a developed capitalist economy is the capital market openness.

C.    Capitalism is conceptualized based on the intensity of market contracting in a society. The contractive-intensive economies are considered capitalists, while the contract-poor-societies are considered not-capitalists[3].

D.   The predominance of private property in a state economy is considered an institutional indicator of capitalism (Kornai, 2000[4]): low levels of public property are associated with a capitalist state; high levels of public property are associated with a non-capitalist nation.

Another classification of capitalism is Patrick McDonald's one (2007; 2009). He differentiates between two types of capitalism through the internal and external openness of an economy. Accordingly, the first two definitions define capitalism through the economy's external openness, while the last two through its domestic openness.

The following CPT's literature review is organized on the basis of two criteria. The first is the chronological order of capitalist peace researches. The second is the meaning attributed to capitalism. The four acceptations of capitalism are the roots of the four research lines that will be described in the body of the present work. Starting from different aspects of capitalism, each of them will conclude that capitalism promotes peace, even though with different empirical corroboration levels. This classification uses two ordering criteria to reorganize various theses but, like any classification, simplifies the reality: capitalist peace is much more complex since the concept of capitalism itself is multifaceted.

Finally, before entering the CPT, it is essential to state that, in most of the Capitalist Peace's literature, development is tacitly equated with capitalism since economic development has so far taken place thanks to the capitalist model.

           A. The commercial peace theory: free markets and trade interdependence. Erich Weede (2005, pp. 28-41) develops his CPT from four propositions widely accepted by political economy, political sociology and international relations:

1.     The dyadic democratic peace thesis: "democracies rarely fight each other" (Ray 1995; Russett 1993; Russett and Oneal 2001).

2.     Prosperity (high per capita income) promotes democracy (Burkhart and Lewis-Beck 1994; Lipset 1994; Boix and Stokes 2003) or, according to another version, prevents the backward transition from democracy to autocracy (Przeworski et al. 2000).

3.     Trade between rich and poor countries promotes growth and prosperity, especially where it is needed most, in developing countries (Bhalla 2002; Collier and Dollar 2002; Dollar 1992; Dollar and Kraay 2002; Edwards 1998; Lindert and Williamson 2001, p. 37).

4.     Bilateral trade reduces the risk of war between dyads of nations (Oneal and Russett 1997, 1999; Oneal, Russett and Berbaum 2003; Russett and Oneal 2001).

Weede's commercial peace theory ties free markets and trade (id est his conception of capitalism) to development and peace, proposing that trade interdependence causes peace between states both indirectly and directly.

           First, globalization and free trade significantly contribute to prosperity and growth (according to proposition 3), which in turn promote democracy (proposition 2), which is the prerequisite of the dyadic democratic peace (proposition 1). In short, by directly stimulating democracy, free trade and openness indirectly promote peace. Second, economic cooperation and interdependence reduce the risk of armed conflicts in a direct way, according to proposition 4 (Weede, 2005, p. 76). Hence, high levels of trade are associated with low probabilities of conflict.

The positive direct effect that international trade has on peace is not necessarily correlated to the form of government. The external definition of capitalism could potentially be applied to more cases than the Democratic Peace. Capitalist autocracies, like the People's Republic of China, could be included in the commercial peace theory (Weede, 2010).

           Weede aims to incorporate the accredited dyadic democratic peace thesis[5] in the commercial peace theory: the dyadic democratic peace is a component, although very important, of the capitalist peace proposition (Weede, 2010, p. 211) since the primary cause of democracy is prosperity and well-being, that are promoted by the effects of globalisation on international trade. In Weede's words, "without capitalism and free trade, without economic development and prosperity, democracy is unlikely to be established and to survive" (Weede, 2010, p. 211; Inglehart and Wetzel 2009; Lipset 1994).

           By the author’s own admission, the promising capitalist peace theory is incomplete and needs further study (Weede, 2010, p. 207). For instance, World War I is a significant anomaly. Ultimately, the development of China-USA and China-India relations[6] is determinant for the commercial peace theory. China is a capitalist autocracy that trades intensely with the USA and India, two capitalist democracies. The future will tell us whether the "peace by trade"-effect will overcome the high risk of war between autocracies and democracies, or vice versa.

           B. The (other) Liberal Peace: capital markets openness. Erik Gartzke's studies arise from the liberal economic peace theory. Classical interpretations of capitalist peace argue that economic interdependence between countries raises war costs and thereby lowers the possibility of war (Bliss and Russett 1998; Gasiorowski 1986; Oneal and Russett 1997; Polachek 1980, 1997; Polachek, Robst and Chang 1999). Since Gartzke considers the classical arguments as simplistic and overblown[7], he tries to offer an updated version of the liberal peace theory based on capitalism (defined as capital openness) and common interstate interests. In his work, the author advances and empirically demonstrates two main theses:

1.     "Financial or monetary integration leads dyads to be less likely to experience conflict" (Gartzke, 2007, p. 173).

2.     "Similar state policy interests lead dyads to be less likely to experience conflict" (Gartzke, 2007, p. 173).

           First, to understand the correlation between capital openness and peace, the author examines market behaviour and its effects on the interests of the states involved. Investors lay great store to any information about variations of state safety conditions. A credible threat to the security of a state scares investors leading them to reallocate capital away from risk. Therefore, if a highly capital interdependent country gets involved in a conflict, it will have staggering economical losses. Gartzke's main thesis (2007; 2010) is that since countries with freer capital markets are more dependent on international investors, they are less likely to engage in military conflicts because investors would divest from a nation on the brink of armed conflict. Accordingly, the war threats that come from states with freer capital markets are taken more seriously into account because the leader of that country is more resolved since is willing to sacrifice international capitals to pursue a dispute.

           Second, «markets also bring a level of consensus among capitalist states» (Gartzke and Hewitt, 2010, p. 124) and governments with similar state policy interests lead dyads to be less likely to engage in a conflict (Gartzke, 2007, p. 173). Between developed nations, wars over material resources (land, minerals, labour) are unlikely because they consider it more convenient to solve them with trade agreements. Instead, developed states care more about influence policies. While disputes over resources are intrinsically conflictual, the agenda control may or may not engender frictions depending on how much state core goals are compatible. Countries with similar policy goals are less likely to experience conflicts. To sum up, "Developed states may be more likely to care about policy differences, but they are less likely to have such differences" (Gartzke and Hewitt, 2010, p. 125).

           In the final analyses, Gartzke (2007) considers the Democratic Peace an epiphenomenon of capital openness and free trade and offers evidence suggesting that capitalism and not democracy leads to peace.

           C. The economic peace theory: economic norms theory. According to Michael Mousseau (2009), the economic peace theory succeeds to replace the democratic peace theory, because he considers the causal relationship between democracy and peace to be spurious. A third variable, the contract-intensive economy (CIE), causes both democracy and peace.

           An economy is contract-intensive when goods, services, and labour are highly commodified and therefore exchangeable. This kind of economy, sometimes called "advanced capitalism", is made of a high rate of ware exchanges between strangers: the bigger is the market, the greater the opportunities for exchange (contracting opportunities), the easier it is to allocate goods. Therefore, most high-income societies have a contract-intensive economy. This theory about the Capitalist Peace draws on the economic norms theory and is formulated starting from two long-standing findings in social science:

§ Bounded rationalism: In the decision-making process, individuals unconsciously apply cognitive shortcuts (heuristics). In other words, people tend to behave the same (cognitive habits) when they are in a situation they repeatedly encountered.

§ Divergent decision-making heuristics between clientelism and contract-intensive economies.

On the matter of the second principle, it is useful to first distinguish between clientelist economies and contract-intensive economies.

           In contract-poor-societies, individuals are dependent for their economic needs on social ties in small groups (family, clans and religious/ethnic groups). Clientelism is associated with lower income societies characterized by weak rule of law and corruption. The group leader, called "patron", is the guarantor of the exchanges within the group ensuring security. He fosters loyalty and maintains his power over the group by promoting fear of outsiders. In this way, people are wary of strangers out of their group and tend to develop trust only in the group and its leader.

           On the other hand, in contract-intensive societies, people entertain economic relations - contracts - with strangers and the state acts as guarantor enforcing these contracts by impartially applying the rule of law. According to the economic norms theory, the sustained presence of a social market economy leads citizens to increase the propensity to make contracts. «When contracting in a market becomes the way of life, people begin to think of it as natural» (Mousseau, 2009, p. 62): people interiorize the contract norms, and by doing so they become more prone to respect the preferences and rights of strangers.

           To recap, bounded rationalism applied to low-contract societies brings people to have trust only in their patron and their group, while high-contract societies tend to develop trust in the state and strangers. Indeed, Mousseau (2009, p. 61) demonstrated that individuals in contract-intensive societies are highly prone to assume that strangers will fulfill their contractual commitments. 

           In social markets economies, individuals routinely dependent on trusting strangers in contracts will develop the impersonal trust. Additionally, they will prefer universal rights, impartial law, and liberal democratic government to arbitrary and unconstitutional law, and non-liberal regimes. Indeed, according to this vision, liberal ideology (and so liberal values) originates in high-contract societies (Mousseau, 2009, p. 64), and liberal democracy is consolidated by CIE (Mousseau, 2009, p. 71).

           Finally, citizens ensure votes to politicians that respect liberal values in foreign affairs, namely the Westphalian order of sovereign states and the respect of international law over Machtpolitik. In Mousseau's words (2009, p. 53), citizens in CIE «learn to prefer free choice and the equal application of law internally and expect their government to behave accordingly in foreign affairs». As a consequence, contract-intensive states not only avoid war with each other but also cooperate intensively in order to increase each other's material welfare.

           The quantitative analyses (Mousseau, 2009, pp. 64-76) confirmed the economic peace theory: from 1961 to 2001 not a single fatal conflict occurred among nations with CIE. However, since most democracies are CIE, the Democratic Peace scholars identified democracy as the leading factor for peace. Instead, it is not democracy the cause of peace among nations, but the domestic economic conditions. Furthermore, by causing the liberal ideology, the social market economy causes democracy. In conclusion, it is the CIE that causes both peace and democracy and the democratic peace effect is supplanted by the economic peace thesis.

           D. The structure of ownership inside the domestic economy. Drawing on the selectorate theory (Bueno de Mesquita et al., 1999, 2003, 2004) and the comparative political economy, McDonald's explanation for the CPT "focuses on the internal institutional attributes of states, namely the relative distribution of public and private property in an economy" (McDonald, 2010, pp. 146-147) and, according to Kiser (1986/87), this distribution is the pivotal factor in determining state autonomy.

           This theory examines how large amounts of public property could increase government discretion in foreign policy by creating fiscal autonomy. Public properties are a substantial source of revenue for a government to achieve their goals, keep their office and maintain a large degree of political autonomy. Indeed, governments with state-owned firms in key sectors are insulated from internal political opposition and can take military action more easily, without having to renegotiate the basic tax contract with the society (private sector).

           Conversely, the prevalence of private property within an economy fosters peace because governments are constrained to renegotiate the basic tax contract with society. In fact, before engaging in a conflict, a capitalist government must shift resources from the civilian economy to the security sector to ensure national defense. Moreover, war commitment of capitalist nations is more credible since they will mobilize more resources.

           In conclusion, McDonald's thesis is that "governments possessing large quantities of public property are more likely to engage in military conflict than those overseeing more privatized economies" (McDonald, 2007, p. 569).  Given the fourth definition of capitalism, this thesis supports the broader claim that capitalism promotes peace. Ultimately, this thesis extends and enriches the Capitalist Peace literature by analysing how the structure of the domestic economy shapes a government's decision to provoke a war.

           Conclusion. Capitalism, to a certain extent, seems to promote peace. Several authors have formulated plausible hypotheses and theories to positively correlate capitalism to peace. First, Weede’s commercial peace theory tries to do it directly by the “pace-by-trade”-effect and indirectly by fostering democracy. Then, Gartzke proposes his other liberal peace theory: capital interdependence and the necessary compatibility of foreign policy preferences between developed states can replace the pacifying effect of democracy. At the same time, Mousseau’s economic peace theory takes into account an internal feature of capitalist economies, namely the intensity of market contracting, and links it not only to peace but also to a higher level of cooperation between capitalist states. Lastly, McDonald considers the relative distribution of resources between the private and the public sector and concludes that states that hold large amounts of public property (such as rentier states) come into conflict much more easily than those in which private property is widespread.

           To conclude, the CPT is a theory that has the potential to pose a real challenge to the Democratic Peace. Furthermore, the capitalist model is more exportable than democracy and is exportable peacefully (Gartzke and Hewitt, 2010). However, to make progress the various theories of the Capitalist Peace need to be compared between each other integrating updated empirical tests that take into account all different variables (Mousseau, 2010, p. 188). As all authors agree, more research and studies are needed.

Notes:

[1] Weede did not invent the term "capitalist peace", which in other acceptions was used in 1915 and 1941. However, he was the first to define the capitalist peace as a theory.

[2] In particular, he established that joint development strongly reduces the likelihood of conflict and that advanced economies were less likely than other to fight each other.

[3] According to this definition, contracts must be free and voluntary, this, however, does not mean that contracts cannot be regulated by the state. Indeed, contract-intensive economies are not necessarily based on laissez-faire. The social market economy sustained both by low-state regulation and heavy-state regulation are considered capitalists.

[4] More precisely, Kornai indicates three indicators of the level of capitalism: -the presence of a government with the willingness to respect private property; - the preponderance of private property within an economy; -the allocation of scarce resources through competitive markets, instead of bureaucratic authorities.

[5] Weede believes in the dyadic version of the democratic peace, but he is skeptical about the monadic interpretation (2005, pp. 30-31; 2010, p. 207, 211). His scepticism relies on four main reasons: -The high frequencies of wars between autocratically ruled minor states and democracies, especially if major powers; -The inclination of the democracies, especially if major powers, to consider and occasionally wage preventive or preemptive wars; -The absence in most democratic peace quantitative studies of an analysis of colonial wars; -The fact that the less perfect or mature the democracies are, the weaker the democratic peace is.

[6] And all Chinese relation with democracies that trade massively with China (for instance Japan and South Korea).

[7] The choice of whether to engage in a conflict or not is not based on the cost projections. War costs may influence how long a fight lasts or who wins, but not whether a war occurs (Levy and Morgan, 1984).

Literature review references:

-         Gartzke, E. "The Capitalist Peace". American Journal of Political Science, Vol. 51, No. 1, Jan., 2007, pp. 166-191.

-         Gartzke, E. and Hewitt, J.J. "International Crises and the Capitalist Peace". International Interactions, vol. 36, 2010, pp. 115-145.

-         McDonald, P. J. "Capitalism, Commitment, and Peace". International Interactions, vol. 36, 2010, pp. 146–168.

-         McDonald, P. J. "The Purse Strings of Peace". American Journal of Political Science, vol. 51, 2007, pp. 569-582.

-         Mousseau, M. "Coming to Terms with the Capitalist Peace". International Interactions, vol. 36, May 18, 2010, pp. 185-192.

-         Mousseau, M. "Market Civilization and its Clash with Terror". International Security, vol. 27, Winter 2002-2003, pp. 5-29.

-         Mousseau, M. "The Social Market Roots of Democratic Peace". International Security, vol. 33, Spring 2009, pp. 52-86.

-         Schneider, G. and Gleditsch, N. P. "The Capitalist Peace. The Origins and Prospects of a Liberal Idea". International Interactions, vol. 36, 2010, pp. 107-114.

-         Weede, E. "Balance of Power, Globalization and the Capitalist Peace". Liberal Verlag, January, 2005.

-         Weede, E. "Economic Development, Social Order, and World Politics". Lynne Rienner, 1996.

-         Weede, E. "The Capitalist Peace and the Rise of China: Establishing Global Harmony by Economic Interdependence". International Interactions, Taylor & Francis Journals, vol. 36, May 18, 2010, pp. 206-213.

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