Monday, 25 August 2008

Want world peace? Support free trade

Just today I came across this 2006 piece by Donald J. Boudreaux from The Christian Science Monitor entitled Want world peace? Support free trade.

Boudreaux writes
During the past 30 years, Solomon Polachek, an economist at the State University of New York at Binghamton, has researched the relationship between trade and peace. In his most recent paper on the topic, he and co-author Carlos Seiglie of Rutgers University review the massive amount of research on trade, war, and peace.

They find that "the overwhelming evidence indicates that trade reduces conflict." Likewise for foreign investment. The greater the amounts that foreigners invest in the United States, or the more that Americans invest abroad, the lower is the likelihood of war between America and those countries with which it has investment relationships.

Professors Polachek and Seiglie conclude that, "The policy implication of our finding is that further international cooperation in reducing barriers to both trade and capital flows can promote a more peaceful world."
He goes on to add
Columbia University political scientist Erik Gartzke reaches a similar but more general conclusion: Peace is fostered by economic freedom. Economic freedom certainly includes, but is broader than, the freedom of ordinary people to trade internationally. It includes also low and transparent rates of taxation, the easy ability of entrepreneurs to start new businesses, the lightness of regulations on labor, product, and credit markets, ready access to sound money, and other factors that encourage the allocation of resources by markets rather than by government officials.

Professor Gartzke ranks countries on an economic-freedom index from 1 to 10, with 1 being very unfree and 10 being very free. He then examines military conflicts from 1816 through 2000. His findings are powerful: Countries that rank lowest on an economic-freedom index - with scores of 2 or less - are 14 times more likely to be involved in military conflicts than are countries whose people enjoy significant economic freedom (that is, countries with scores of 8 or higher).

Also important, the findings of Polachek and Gartzke improve our understanding of the long-recognized reluctance of democratic nations to wage war against one another. These scholars argue that the so-called democratic peace is really the capitalist peace.

Democratic institutions are heavily concentrated in countries that also have strong protections for private property rights, openness to foreign commerce, and other features broadly consistent with capitalism. That's why the observation that any two democracies are quite unlikely to go to war against each other might reflect the consequences of capitalism more than democracy.

And that's just what the data show. Polachek and Seiglie find that openness to trade is much more effective at encouraging peace than is democracy per se. Similarly, Gartzke discovered that, "When measures of both economic freedom and democracy are included in a statistical study, economic freedom is about 50 times more effective than democracy in diminishing violent conflict."
Such results do make sense. By supporting polices that promote prosperity, economic freedom gives people (voters) a large stake in maintaining peace. This prosperity is threatened during wartime. War by its very nature gives governments increased control over the resources of the economy and imposes extra burdens in the form of higher government spending and thus higher taxes followed by higher inflation, and other disruptions caused by the increase government control of the economy, all of which hamper the working of the basic commercial relationships that underlie prosperity. Boudreaux ends by making the point that
When commerce reaches across political borders, the peace-promoting effects of economic freedom intensify. Why? It's bad for the bottom line to shoot your customers or your suppliers, so the more you trade with foreigners the less likely you are to seek, or even to tolerate, harm to these foreigners.
So lets see all the peace activists get out there and start supporting free trade!

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