Capitalism, Democracy and the Prevention of War and Poverty

Peter Graeff, Guido Mehlkop, Peter Graeff, Guido Mehlkop

• Publisher: Routledge
• Year: 2008
• ISBN:
  9781134034826
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

For a very large part of the world's population, poverty and war are still part of everyday life. Drawing on insights from several disciplines, this book attempts to find scientific answers to explain the relationship between conflict and poverty.

This interdisciplinary volume brings together a range of arguments that synthesize both democratic and capitalist peace theory. Supported by a large body of research, contributors contend that nations with institutions that maximize individual political and civil rights minimize the probability of fighting each other. The volume includes:

• contributors from leading and award winning scholars in the field, including Bruce Russett and Erik Gartzke

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• topics such as democratization and economic development, situated within the broader contexts of globalization and modernization

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• contributions supported by empirical analyses, systematizing democratic and capitalist peace theories

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This book will be vital reading for students and scholars of International Relations and globalization, and also for a broader range of subjects including sociology, political science and economics.

1 Introduction

Guido Mehlkop and Peter Graeff

Features of capitalistic and democratic institutions

For a very large part of the world’s population, poverty and violence remain part of everyday life. According to the latest statistics published by the Working Group on Causes of War of Hamburg University (Arbeitsgemeinschaft Kriegsursachenforschung AKUF), there were 44 interstate wars and armed conflicts in 2006. The United Nations reports that 2.6 billion people must survive on less than US $2 per day (United Nations Development Program, 2008).

Even if scientific answers to the question of this causal relationship between conflict and poverty are complex and must be considered from within an interdisciplinary framework, most scholars agree that solutions will depend on the political and economic institutions (World Bank 2002).

The term “institution” might be interpreted as a set of norms that are linked to the core values of societies (Calvert 1995; Platteau 2000). Since there are many different definitions of this term in sociology, political science, and economics, a discussion of all of these concepts lies beyond the scope of this book. The present volume takes as its starting point a broad definition of institutions that combines key insights of the three disciplines.

In his economic theory of institutions and institutional change, Douglass C. North (1990, 1991) describes institutions as humanly devised constraints that structure political, economic, and social interaction (North 1991: 97). Institutions contain both formal rules (laws, individual rights) and informal codes of conduct and customs. Institutions create social order by reducing uncertainty and defining the set of choices for individual action. They structure the incentives within an economy by establishing transaction costs and in this way determine the profitability of individual actors’ economic activities. Political institutions affect the extent to which people can participate in decision-making.

A coherent scientific approach to institutions must explore the creation and evolution of macro-level norms, the mechanisms by which they work (and the unintended incentives they may produce), and the micro-level actions of individuals in response to these norms (Coleman 2000). The social effects of institutions require further consideration, however, as institutions appear to be both collective “goods” (providing incentives for peaceful conflict resolution and facilitating efficient resource allocation) and collective “bads” (when they encourage the exercise of violence or benefit only special interest groups [Hardin 1999]).

Among the most important political institutions are those that maintain authority structures. As individual action may generate positive or negative externalities (Weede 1990: 101) for other individuals, every interaction between multiple actors also implies interdependence between them. Individuals may therefore take an interest in authority structures that regulate actions and externalities (see Maurer, in this volume). Compliance by individual actors with authority relies on a number of factors such as tradition, the use of force, or legitimacy through participation (Weede 1990: 102; Tyler 1997). Institutional authorities vary to the extent to which citizens are able to participate. Democratic institutions guarantee participation by providing political rights (competitive multiparty systems; a general franchise; contested elections; pluralism; and transparent government) and civil liberties (freedoms of religion, association, assembly, education, and expression; rule of law; and individual human rights). Ideally, democratic institutions also take citizens’ preferences into account (Beetham 1994). A minimal criterion of democracy is the capacity of citizens to replace the government nonviolently by means of election (Schumpeter 1950; Downs 1957; Lipset 1962). Democratic authority is always an authority with limits – errors or bad politics may be corrected (or, at least, sanctioned) by voting decision-makers out (Weede 1990: 109). The possibility of being replaced creates incentives for politicians to take majority preferences into account. In contrast to democratic institutions are autocratic authority systems perceived as instruments of the ruling groups – as Andreski (1968) puts it – kleptocracies.

Scholars do not only debate the ways in which political institutions determine micro-level interactions within national borders. There has also been ongoing discussion about whether or not domestic political institutions influence the likelihood of violence and wars between countries (Weede 2005).

In the economic sector, institutional settings appear in economies that can be located on a continuum between state-driven and free. The scientific debate about which institutions work best has proceeded in both theoretical and empirical lines.

In state-driven or centrally planned economies, institutions are designed to realize a certain (political) goal that is seen as being favorable for society in general – but not necessarily for specific individuals or even for the majority of the citizens. Societies with such an institutional setting are usually not able to make full use of the knowledge and productivity of their individual members, because most of these actors must follow the decisions of others rather than deciding for themselves what to consume or what to produce (Hayek 1945; Weede 2000).

In market economies, institutions provide little more than the framework for the production and consumption decisions of people and firms. Actors can decide freely and can exchange goods or services voluntarily according to their preferences. This presupposes a legal structure (such as a government) that sets the limits of individual actions. In such a setting, it is necessary to protect both legally acquired property and the free exchanges made by people and firms as long as these do not infringe upon the freedoms of others. Such protections are indispensable to functioning market economies. Numerous econometric studies have shown that when these minimal conditions are met, economic growth and physical quality of life increases (e.g., De Haan and Sturm in this volume). Wealth and physical quality of life, in turn, are not only goals in themselves but also prerequisites of democracy (Lipset 1962) and trade (Weede 2000).

When defining and measuring such economic institutions, social scientists tend to apply a special theoretical perspective, which usually implies that absence of obstacles to participation in economic affairs by people or firms in economic affairs constitutes a market economy (Hayek 1982; Berlin 2002). On the one hand, economic institutions should provide opportunities for trade and exchange; on the other hand, governmental structures should not interfere with this. Trading partners are at liberty to exchange goods and services to the extent that economic activity is not prevented.¹

This philosophical and theoretical background underlying the concept of such economic institutions comprises ideas of such well-known economists and philosophers as René Descartes, Adam Smith and Jeremy Bentham. There is no necessary theoretic connection between economic institutions and any other political or social conditions. Empirically, however, there is some evidence of a correlation between the liberty to exchange goods and services and other political conditions such as a democratic system (Carter 1999; Weede 2000; critically: Scholing and Pipes 1999; Timmermann 2000).

This volume includes contributions from 12 scholars in three disciplines of the social sciences – sociology, political science, and economics – who have contributed to the study of institutional frameworks that promote democracy and economic development. Proceeding within different disciplines, they have developed their own research programs or paradigms and have arrived, separately, at remarkable results. While sociologists, political scientists, and economists are all interested in these topics, their disciplines approach them from different perspectives. Sociology provides insights about basic principles of human interaction on both the micro- and macro-levels. Political science seeks to understand the mechanisms and constitutions of governmental institutions that enable binding decisions. Economics illuminates the efficiency with which institutional frameworks produce and distribute scarce goods. The scope and explanatory power of all three approaches is broadened by systematically combining their results.

An interdisciplinary approach implies that readers will be open to different styles of argumentation and multiple formats for presenting ideas. This volume presents two primary modes of reasoning: theoretic concepts that highlight the general links between institutions, wealth, and conflict; and empirical analysis that provides evidence for assumed theoretical relationships. The aim of this volume is to amalgamate these ideas to outline an interdisciplinary picture, to uncover comparable results, and to offer some hints for a fruitful integration that will stimulate future research.

Synopsis of the contributions

This volume begins with a contribution about the theory of democratic peace that exemplifies one of the most prominent contemporary approaches to the study of military conflicts and war between states. Bruce Russett explores this theory by analyzing two classic and important contributions to our understanding of international relations: Thucydides’ History (written ca. 400 bc) and Immanuel Kant’s Perpetual Peace (written in 1795). Kant put forward the argument that states with republican constitutions, commercial exchange, and institutional ties do not fight each other. Thucydides witnessed a time of international anarchy. He can be seen as an early theorist of realism exploring “the tragedy of human action in a world of powerful forces beyond control” (see Russett, in this volume). Although ancient Greece included some democratic polities, its interstate system was not marked by support for the democratic peace. In his chapter, Russett explains why the theory of the democratic peace did not apply in ancient Greece. His explanation yields important insights for modern societies.

In ancient Greece, trust or affinity between democratic states was always overshadowed by competing alliances, past injury, or the possibility that another democracy might become an enemy if the power relations were to become unbalanced. Trade, the second element of the Kantian proposition, was rather underdeveloped or absent in the Greek system.

Greek democracies such as Athens had only a small electorate compared with modern democracies; they had virtually no separation of powers, and only weak institutions. In sum, it was difficult to throw politicians – even unsuccessful ones – out of office, which decreased the incentives of all politicians to act pacifically. Russett not only writes a history of ancient times, but also introduces readers to the theory of democratic peace in general using the fruitful example of an important period in history.

While Bruce Russett is a proponent of the dyadic version of democratic peace theory, Rudolph Rummel favors the monadic version of the theory: democracies are more peaceful in general. His brief contribution is a comment on both the propositions advanced by Russett and the essential insights of his own work on violence and war. Rummel comes to the conclusion that democracies not only refrain from making war on each other but also seek to minimize the severity of foreign violence and war, limit violence at home, and refrain from killing their own people. Beginning with operationalization of war and conflict different from those employed by other authors, Rummel concludes that democracies are less violent in general (and not only as members of democratic dyads).

In his chapter, Erik Gartzke offers a theory of capitalist peace inspired by Weede’s work, and by the insights of the tradition of liberal political economists. After reviewing both the literature on democratic and capitalistic peace theory, Gartzke comes to the conclusion that even if free states and free markets are closely related, it is prosperity that brings international peace. This view contrasts with approaches, which place joint democracy at the center of the liberal peace. To test his argument, he compares measures of economic development, market orientation, state preference similarity, and political democracy using a standard statistical model of the democratic peace. His results appear to show that, free market capitalism and economic prosperity are key contributors to world peace.

Brigitte Weiffen tackles the question of whether or not international institutions promote peace. Following Kant, Russett treats international institutions as one of the three basic conditions for democratic peace. Weiffen goes beyond those classic outlines by suggesting a more precise measurement of democracy than a simple democracy/autocracy dichotomy. The dyadic democratic peace proposition also cannot be regarded as robust unless interstate collaboration is integrated into the causal model. Weiffen’s theoretical model assumes interaction effects between international institutions and the level of democracy of their members. The model integrates Weede’s notion (2005, 2007) that trade interdependencies and international division of labor promote peace because economic openness, and especially trade, fosters economic growth, which in turn promotes democracy (the famous Lipset [1962] thesis). The interaction mechanisms between democracy and international institutions that Weiffen outlines are, first, that international institutions promote peace by increasing the level of democracy in (potential) member states and second, that international institutions function more efficiently once their member states begin to democratize. Finally, Weiffen develops a detailed roadmap for future empirical testing of the interaction effects between states’ levels of democracy and their membership in international institutions.

In their chapter, Indra De Soysa and Jo Jakobsen find a tight positive link between democracy and capitalism. Some critics and skeptics of globalization argue that, when the level of protection of property rights in a given state is taken into account, democracy deters inflow of foreign direct investment (FDI). De Soysa and Jakobsen argue that democracies should receive higher inflows of FDI. Since labor is the abundant factor in poor countries, and labor stands to benefit from capital importation, democratic rulers will encourage FDI. In autocracies, foreign and domestic monopolists will seek to block competition, thus diminishing the inflow of FDI. Multinational corporations will assess investment risks based on the underlying structural factors that inform state preferences for FDI. De Soysa and Jakobsen demonstrate that pessimistic empirical findings in the literature on the relationship between democracy and investment depend entirely on the use of a skewed response variable and the inclusion of China in a small sample. By adjusting for these shortcomings, they find that democracies actually receive greater inflows of FDI.

Jakob de Haan and Jan-Egbert Sturm provide arguments for the empirical link between economic freedom and economic growth. Increase in indicators of economic freedom, they assert, is a good proxy for market-oriented reform. De Haan and Sturm show that the list of recommendations for market-oriented reform usually applied by the International Monetary Fund or the World Bank (the so-called “Washington Consensus”) resembles the theoretic concept of the economic freedom index published by the Fraser Institute. By including IMF recommendations for reform, the index also conveys democratic ideas because “Washington Consensus” proposals are advanced with the intention to propel democratic processes in a country (Williamson 1993).

Economic freedom can be operationalized in more than one way, and even authors applying the same approach may construct indices in different ways over time. This implies that even authors referring to the same index may receive different results when they apply different versions of the same index. De Haan and Sturm apply the Fraser index to analyze the influence of economi...