Is the hidden hand an iron fist? Capitalism and civil peace,1970-2005

Abstract

There is surprisingly little empirical scholarship on the spread of capitalistic economic policies under the rubric of ‘globalization’ and domestic peace. While the classical liberals saw free markets leading to social harmony because of self-interest of individuals, who cooperate for profit, Marxists and others viewed markets as anarchical, requiring state intervention for obtaining justice and peace. The authors argue from an opportunity-cost perspective that the payoffs to rebellion are structured by how an economy is governed. Closed economies are likelier than more open ones to accumulate ‘rebellion specific capital’ because of high payoffs to organization in the shadows. Using an index of economic freedom that measures how free people are to transact in an economy, the authors find that countries more favorable to free enterprise have a reduced risk of civil war onsets, a result that is robust to the inclusion of institutional quality, per capita wealth, and sundry controls. The results hold up despite a battery of specification changes, alternative data, and testing methods. The findings do not suggest that states under conditions of capitalism lose their autonomy to provide the public good of peace, as skeptics of globalization claim. Peacemakers will do well to build institutions that reward productive investment over rent-seeking, alongside democratic institutions that ultimately gain their legitimacy on the back of good economic performance and well-functioning markets.