Academic journal article Independent Review

The Diffusion of Prosperity and Peace by Globalization

Academic journal article Independent Review

The Diffusion of Prosperity and Peace by Globalization

Article excerpt

Capitalism and economic freedom promote peace. Globalization can be understood as a process of market expansion and market integration, as the universalization of capitalism. After a short discussion of the political economy of globalization, I turn to the frequently overlooked security benefits of globalization. The diffusion of prosperity, free trade, and democratization is part of the story. Quantitative studies provide a great deal of evidence for a causal chain running from tree trade via prosperity and democracy to the avoidance of military conflict, as well as for another causal relationship between trade or economic openness and conflict avoidance. After a review of the quantitative literature and a discussion of some methodological issues, I illustrate the capitalist peace by historical examples and contemporary applications. At the end, I consider how the capitalist peace may be "exported" from Western societies to poor and conflict-prone nations and regions.

The Political Economy of Globalization

The process of globalization had already begun in the late nineteenth century. Before World War I, trade and foreign investment were fairly globalized. Because of low political obstacles to international migration, labor markets actually were more globalized at the beginning of the twentieth century than at its end. The two world wars and the Great Depression between them interrupted the process of global market integration for about half a century. Thereafter, the process regained force and speed. Now, inexpensive, fast, and reliable communication and transportation enable producers of goods and some service providers in low-wage countries to challenge high-cost producers in rich countries on their home turf; but technological innovation resulting in falling prices and rising speed of intercontinental communication and transportation is not the only determinant of globalization. Political decisions in rich and poor countries alike contribute strongly to globalization, too. Tariffs and, to a lesser degree, nontariff barriers to trade have been reduced. Many countries try to find and exploit their comparative advantage, to realize economies of scale and gains from trade by looking for buyers and sellers everywhere. If trade between countries is truly free, then it promises to enrich all nations.

Since the publication of Adam Smith's Wealth of Nations ([1776] 1976), we have known that the size of the market limits the division of labor and that the division of labor boosts innovation and productivity. In principle, globalization is the logical endpoint of the economic evolution that began when families switched from subsistence farming and household production to production for the market. As long as globalization is not yet completed--and it certainly is not yet--gains from trade remain to be realized by further market expansion. Because globalization adds to competitive pressure, however, it causes resentment, and because globalization springs from technological innovation and political decisions that promote free trade, these innovations and decisions attract resentment, too. The world is already globalized enough that national resistance does limited damage. Except for the United States, national resistance is more likely to contribute to a country's decline than to derail the process of globalization.

Free trade is vulnerable. If foreigners are perceived as a cause of the need to adjust, then attacking free trade becomes politically attractive. After all, no politician benefits from the affection of foreigners who cannot vote. Of course, economists who insist on the benefits of free trade (even if your trading partner does not practice free trade) are right. Benefits include serving customers better at lower prices, but also faster growth of total factor productivity (Edwards 1998; OECD 2003, 89). The benefits of free trade, however, tend to be dispersed widely, whereas its costs (for example, certain bankruptcies and job losses) tend to be concentrated and more visible. …

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