A Capitalist Peace With China - by David R. Henderson

Many people, including many of my students at the Naval Postgraduate School, worry that economic growth in China will make China a formidable competitor to the United States. My students typically raise this concern when we talk about free trade, and they worry about people in China "taking our jobs." I manage to assuage this fear by going through the economic analysis of "comparative advantage." I show them, with simple numerical examples, that when countries with lower productivity per unit of labor, such as China, trade with countries that have more-productive labor, such as the United States, both sides gain from trade. People in the United States gain by specializing in producing the goods in which they have a comparative advantage and then trading them for goods from China in which the Chinese have a comparative advantage. This analysis, dating back to the famous early 19th-century economist, David Ricardo, still stands up almost 200 years since its discovery. Economists across the political spectrum still accept it. Left-wing New York Times columnist Paul Krugman, for example, wrote an excellent piece defending the idea of comparative advantage. And conservative-libertarian economist Arnold Kling gives a simple numerical illustration here.

Once their fears are addressed, many of my students still worry that China will become a formidable economic power and will use this power to threaten people in the United States. It is true that China is likely to become an even more formidable economic power than it is now. But is it likely to use this power to threaten the United States? The answer is no. And the basis for that answer is a burgeoning academic literature, written mainly by political scientists, that finds that the more free-market countries become, the more peaceable they become. It's not a sure thing, which is why I said only that China is not likely to threaten the United States, not that it won't. But all other things being equal, the more capitalist China becomes, the less of a threat it will be.

The most recent evidence for this conclusion comes from an article by Eric Gartzke, a political-science professor at Columbia University. In "The Capitalist Peace," published in the American Journal of Political Science (January 2007), Gartzke starts with the fact, well established by other political scientists, that democracies tend not to make war on each other. He digs beneath this result to ask whether it is being democratic per se that matters for peace or whether what matters is the economic institutions that often go with democracy. He finds the latter. Gartzke writes, "Peace can result from at least three aspects of mature capitalist economies." What are the three? First is the "rising importance of intellectual and financial capital, factors that are more expediently enticed than conquered." One hundred years ago, when raw natural resources were more important factors in a nation's wealth, it was common for one country's government to attack another country in order to grab those resources. But it's hard to grab financial capital and even harder to grab intellectual capital. The second factor Gartzke cites is the "substantial overlap in the foreign policy goals of developed nations since World War II." He notes that it is an open question whether this "affinity among liberal states will persist." Certainly, the U.S. government under George W. Bush and the UK government under Tony Blair, with their unprovoked attack on, and occupation of, Iraq, have done much to fray this consensus. But, more to the point, the Chinese government hasn't. The third factor behind peace that Gartzke cites is "the rise of global capital markets," which "creates a new mechanism for competition and communication for states that might otherwise be forced to fight."

The idea that countries can do better by cooperating rather than fighting is not new. Gartzke points out that Montesquieu, Thomas Paine, Frederic Bastiat, John Stuart Mill, Richard Cobden, and Norman Angell had all argued this decades or centuries before. They didn't argue that economic freedom and prosperity made war impossible: rather, they argued that it made war unprofitable for both sides. Gartzke takes the next step and argues that it will make war less likely.

Gartzke makes his case with a huge data set on conflicts between various countries' governments between 1950 and 1992. He finds the standard result that the degree of democracy affects the probability of war in the now-accepted way: democracies go to war with each other rarely. But as he adds variables for degree of economic freedom, he finds that democracy has little independent effect. Instead, as economic freedom increases, the amount of conflict decreases. In short, the apparent effect of democracy on peace is really the effect of economic freedom on peace: capitalism leads to peace.

How does this relate to China? China is becoming more capitalist. The Chinese government recently recognized the right to private property. It also now allows foreign investment in China. So, to the extent that Gartzke's empirical relationship holds, China should be less threatening than it has been in the past.