Monday, June 23, 2014

Conflict and Capitalism

This week, Pope Francis was quoted by the Economist to have said this in an interview with the Spanish newspaper La Vanguardia (translation in the National Catholic Register):
We are discarding an entire generation to maintain an economic system that can't hold up any more, a system that to survive, must make war, as all great empires have done. But as a third world war can't be waged, they make regional wars...they produce and sell weapons, and with this, the balance sheets of the idolatrous economies, the great world economies that sacrifice man at the feet of the idol of money, are resolved...
The Economist takes an philosophical approach in expressing its doubt towards the Pope's assertion of a link between capitalism and conflict, citing Shumpeter and Popper as having argued that capitalism can "consolidate peace, by offering non-violent ways to satisfy human needs."

On the one hand, there is a theoretical basis for the Pope's argument. Early studies of conflict posited that the rapid transition from traditional economic and social institutions to more modern (capitalistic) ones would alienate those who could not assimilate quickly, and thus foment conflict. These reasons include the unequal distribution of benefits, both between elites and non-elites of the same ethnic group, and among different ethnic groups.

On the other hand, empirical support for such an argument is weak. In particular, Collier and Hoeffler (2004) find little support for the hypothesis that either income or wealth inequality does in fact increase a society's propensity for conflict. These results are affirmed by Fearon and Laitin (2003). Moreover, a my own working paper with Atin Basu and William Shughart suggests that more open, more prosperous, and more capital-abundant societies are less likely to devolve into civil war. In fact, the positive impact of openness and wealth seem to be the greatest for countries with institutional arrangements that otherwise put them at risk of tipping into the abyss of state failure.

Yet, there is one last caveat in favor of the Pope's position: Greed does lead to conflict. The same studies cited above that discount the role of inequality and capital accumulation in stoking conflict almost unanimously find some role for competition over resources as a significant determinant of conflict. However, in most societies where greed and competition for resources significantly contribute to conflict it is the state that controls access to such resources, not the market. It is precisely this state control over resource rents that makes violence attractive (or necessary) for insurgent groups.

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