The Invisible Hand of Peace

Events in the Middle East and concern over the likely impact of democratic change in the region on the prospects for peace with Israel, and beyond, raise important questions about the relationship between democratic institutions and stability on the international stage. Optimistic commentary from democratic enthusiasts suggests that democratic reform is likely to improve prospects for peace and stability. According to this view since democratic governments are accountable to their electorates they are less inclined than autocracies to push for aggressive foreign policy positions which may cost the voters directly in terms of blood and treasure. A similar argument associates increased trade connections between nations as a further pacifying dynamic. Proponents of the ‘trade promotes peace’ thesis maintain that high level commercial contacts and interdependencies between nations raise the costs of military conflicts to unacceptable levels for modern economies.

An important book by Patrick J MacDonald, The Invisible Hand of Peace (2009: Cambridge University Press) challenges the conventional wisdom on each of the above fronts and should be essential reading for academics and policy-makers alike. Through a painstaking empirical history of hundreds of conflicts using both quantitative and qualitative research methods MacDonald shows that neither democracy nor trade are the best predictors of peace. On the contrary, it is the propensity of states to pursue an internal policy of laissez faire that is correlated by a reluctance to resort to war.

The reasoning behind MacDonald’s thesis is as follows. High levels of domestic intervention such as widespread nationalisation and protectionism provide a context in which zero-sum redistribution and unproductive rent seeking dominate. The propensity to engage in war is simply an extension of this zero sum mentality. On the one hand, public ownership of assets such as mineral wealth provides the state with a high degree of fiscal autonomy from the citizenry, such that governments can devote resources to buy the support of key constituencies without needing to tax the people directly. Thus, Nasser in Egypt and more recently Chavez in Venezuela engaged in massive social spending programmes to buy voter support, but also to pursue militaristic grand-standing which increased regional instability.

On the other hand, high levels of intervention empower those actors who seek protection from international competition or who want colonial access to foreign markets on terms that would not be available in a context of open competition. The latter include highly organised coalitions of non-competitive business sectors alongside a military establishment that benefits from an ‘active’ foreign policy. Within this context, the extent of trade between nations is not the best predictor of peace. The volume of trade per se may be affected by all manner of factors such as declines in transport costs, but the pattern of trade that emerges from this context and the political dynamics it gives rise to will be very different if the question of ‘who trades with whom’ is determined by internal rent seeking than if it is allowed to emerge through a free and open market. In classic public choice reasoning, those who gain most from a ‘managed trade’ policy and an aggressive stance towards other nations are better placed to organise collectively because they are relatively small in number and the per capita gains from rent seeking are highly concentrated on each of the actors concerned. Those who lose from such policies meanwhile – the mass of consumers of internationally traded goods who would benefit from access to the cheapest products- find it much more difficult to mobilise politically, precisely because they are so numerous and the benefits from free trade are widely dispersed, representing only a small increment in income to each particular actor. Though the total losses to consumers as a whole may far outweigh the gains that flow to protectionist/militaristic interests, the former are much less likely to mobilise as an effective political force.

According to MacDonald, it is not ‘capitalism’ that leads to war but an interventionist framework which offers ‘rent seeking’ opportunities to corporatist interests. States which pursue a policy of internal laissez faire are much less likely to adopt an aggressive foreign policy stance. Lacking nationalised assets with which to bribe sections of the electorate, war is a less attractive option to such governments. Maintaining open and competitive markets on an internal basis meanwhile strengthens the hand of consumers and competitive sectors of industry that have the most to gain from keeping the peace with potential partners in trade.

If MacDonald is right about this connection between internal classical liberalism and peace on the international stage then recent events in the Middle East and in the wider international arena do not augur well. Most of the economies in the Middle East are characterised by high levels of political interference in economic life, including widespread nationalisation and a morass of protectionist restrictions and regulations. On MacDonald’s thesis, democratisation in these contexts is likely to do little to promote peace. Unless an internal programme of economic liberalisation is secured prior to democratisation then the political apparatus will rapidly be colonised by rent seeking coalitions, and electorates will be especially susceptible to nationalist rhetoric which acts as a cover for protectionist and militaristic interests. More disturbingly perhaps, the process of reform in the Middle East is taking place in an external context where many of the established democracies have moved away from domestically market-oriented policies in the aftermath of the financial crisis. While as yet the commitment to maintain reasonably free trade in Europe and the Americas has not been seriously challenged it is an open question how long this pacifying force will last in the face of increasing domestic pressures to ‘manage capitalism’.