This paper explores the relationship between economic freedom, political institutions, and conflict. We use a relatively new measure of peace that offers the unique advantage of capturing both internal and external conflicts, and we use a Freedom House measure of civil liberties for political liberties. According to our findings, countries with higher levels of economic freedom, other things equal, also have lower levels of external and internal conflict. In addition, we find a statistically significant relationship between the degree of civil liberty protection in a country and conflict. Our preliminary findings provide further evidence of the negative relationship between economic freedom and conflict (or positive relationship between economic freedom and peace).
In pre-modern times, engaging in war and conflict with other nations was frequently viewed as a possible way to improve the economic well-being of a country. Thus it was sometimes viewed as being lucrative to engage in conflict, in particular when one was the aggressor, if the expected benefits of the conflict were greater than the expected costs. In the modern world, however, engaging in violent conflict is more appropriately viewed as something to be avoided. Yet, violent conflict continues to persist, both within countries as well as between countries. Determining the causes of violent conflict as well as possible solutions is one of the most important social science questions of our time.
In the academic literature, there are two primary factors that have been suggested as contributing to a reduction in conflict or an increase in peace, which can be viewed as both sides of the same question. First, free trade is said to reduce conflict between nations. According to the 19th century French economist, Frederic Bastiat, if goods don't cross borders, armies will (Boudreaux, 2007). Bastiat's basic message is something that can be traced to Enlightenment philosophers of the 18th century and classical liberals of the 19th century. Immanuel Kant (1795), for example, argued that one of the keys to "perpetual peace" was economic interdependence. In his farewell address to the nation, President George Washington spoke positively of economic interdependence and warned against political interdependence. More recently, the economic interdependence hypothesis of the classical liberals has been more formally developed into the "trade-peace" hypothesis of international relations and trade theory (Mansfield and Pollins, 2001; Polachek, 2007; Schnabel, 2007).
According to another prominent line of inquiry, democracy and representative government lead to peace (Brawley 1993; Ray 1998; Russett and Oneal 2001). Russett and Oneal, in particular, have performed numerous tests on what they call "the Kantian tripod," and they have found that all three legs of Kant's tripod - democracy, economic interdependence, and affiliations with international organizations - matter. Among other things, the so-called 'democratic peace' observed in the data comes from democratic institutions, which make political leaders accountable for the costs of war.
Recently, the primacy of both theories has been challenged, in part, by empirical work showing the relationship between free-market capitalism and peace (Gartzke, 2007; Weede, 2007). In much of the empirical work, the degree to which a country's economic institutions are consistent with laissez-faire capitalism is measure by the Economic Freedom of the World index, produced annually by the Fraser Institute. While the freedom to trade is certainly a part of economic freedom, it is only a part, and other parts of economic freedom might contribute to both international and domestic peace (Hall and Lawson, 2009). For example, the ability to freely work in labor markets without belonging to a particular ethnic or racial group might lessen reasons for domestic conflict. Additionally, when governments consume a smaller share of overall output, they reduce opportunities for internal conflict over the distribution of public resources. …