Just as World War I has often been held out as the archetypal failure of globalization to prevent war in the nineteenth century, the recent history of confrontation across the Taiwan Strait appears to be a similarly confounding case for claims linking trade and peace. Many contemporary studies of current relations between China and Taiwan begin with an apparent paradox. Just as similar reform initiatives in both China and Taiwan began to unleash a torrent of trade, travel, and investment across the Strait by the end of the 1980s, a brief thawing in cross-Strait relations gave way to the return of substantial political tension between the two by 1995. The visit of Taiwan's president, Lee Teng-hui, to Cornell University in 1995 provoked a military standoff in which the People's Liberation Army test-fired missiles around Taiwan under the guise of multiple military exercises. U.S. President Clinton responded by sending two aircraft carrier groups to the region to deter further military action. Diplomatic crises again broke out after Lee characterized relations between China and Taiwan in 1999 as that between two states and during the campaigns for Taiwanese presidential elections in 2000 and 2004, which were conducted with the threat of independence looming.

Despite a dramatic reorientation in Chinese foreign policy in the era of economic reform whereby Beijing has embraced multilateralism and globalization, settled numerous outstanding territorial disputes, and eschewed support for revolutionary movements around the world, Taiwan appears to have remained relatively exempt from these demonstrations of restraint.

Multiple socialist writers – including Lenin, Hilferding, and Hobson – have linked the ills of capitalism, particularly the concentration of wealth, within countries to relationships of rivalry and military conflict among states in the international system. The same pressures within capitalism that encouraged ruthless competition and the acquisitiveness of wealth by private individuals simultaneously encouraged territorial expansion by governments. By pressing down wages at home, capitalists undermined the purchasing power of the local labor class and contributed to falling profits. These economic losses at home could be offset by securing cheap sources of raw materials and new outlets for manufactured products in the developed world. Once the supply of these new market outlets dried up in the periphery, the developed countries turned against each other in a zero-sum competition to protect existing markets and deprive competing powers of the same imperialist relief. Thus European great powers and the United States first carved up Africa, Asia, the near East, and South America into colonial outlets. The ensuing conflict in these rivalries eventually gave way to both World War I and World War II. Contemporary descendants of such claims (e.g., Williams 1959; LaFeber 1998[1963]; McCormick 1995[1989]; Layne 2006) suggest that the outbreak of peace in Europe after 1945 failed to bring a reprieve from these expansionist tendencies. The United States and Soviet Union continued to vie for political and economic influence in these regions of the world.

The nineteenth century witnessed a profound transformation in the political relationship between the existing and aspiring global superpowers of the era, Britain and the United States. It began with American efforts to remain aloof from European balance-of-power politics so that internal democratic reform could be safely consolidated. The Napoleonic Wars challenged this strategy of withdrawal as Britain and France both pressed for American support in their ongoing continental struggle for political supremacy. The United States quickly found itself at war again with its former imperial power.

The end of the War of 1812 failed to create the foundations for a lasting peace between the erstwhile imperial center and its political scion. Outstanding territorial disputes over the Oregon territory, the northeastern boundary that is present-day Maine, and in the Great Lakes region kept the possibility of war lurking throughout the first half of the century. The outbreak of the Civil War tempted Britain to intervene as the Northern embargo of the Southern cotton economy simultaneously endangered the industrial prowess of Britain. A final cathartic dispute over Venezuela in the 1890s, fueled partly by an American willingness to assume the responsibilities associated with the hemispheric supremacy implied by the Monroe Doctrine, ended with a stark and shared realization that war would be ruinous across both sides of the Atlantic. How were these political hazards continually navigated throughout this dynamic century so that the special relationship marked by conciliation, cooperation, and peace that endures today could emerge from one of rivalry, war, and economic competition?

Dating back to Lenin's intellectually and politically transformative pamphlet Imperialism, the fateful summer of 1914 has been used to challenge any connection between capitalism and peace. This challenge has generally centered on the failure of a sustained period of globalization, beginning with the elimination of the Corn Laws in 1846, to prevent the outbreak of World War I. The dramatic war-induced end to this long era of globalization has also been referenced to question the broader foundations of liberal international relations theory, cast doubt on any claim linking trade and peace in the period following World War II, and assert that the contemporary era of globalization possesses an underlying fragility overlooked by those forgetting the lessons of history (Rowe 2005; Ferguson 2005). Those skeptical about the pacific consequences of commerce, such as Realist and Marxist–Leninist scholars, have long relied on this first era of globalization to claim that commerce either heightens military tensions between states or simply has no effect at all on conflict (Lenin 1993[1916]; Waltz 1979; Buzan 1984; Copeland 1996; Ripsman and Blanchard 1996/97; Rowe 1999, 2005; Mearsheimer 2001; Jervis 2002).

Apart from the example of World War I, these criticisms have remained strong for multiple reasons. Few studies systematically examine the links between trade and conflict during this first era of globalization (Mansfield and Pollins 2003, p. 8).

This chapter begins the empirical evaluation of this book's two key hypotheses linking the predominance of private property and competitive market structures to peace. It draws on well-established practices in the large liberal peace literature to ensure comparability with the findings presented here. For the most part, this research program has drawn on multivariate statistical analysis to evaluate whether democracy and international trade promoted peace during the post–World War II period. This research technique identifies broad relationships among variables that measure such concepts as commercial integration, regime type, military power, and military conflict across multiple countries and over multiple time periods. The statistical analysis presented here thus tests for the presence of any historical association between liberal economic institutions and the outbreak of military conflict between states.

This analysis is comprised of two parts. Each part focuses on whether one of the two domestic institutions alters the likelihood that governments utilize military force to settle their political disputes with each other. If these hypotheses are correct, the following relationships should be observed. First, governments possessing high quantities of public property should utilize military force to settle political disputes with other governments at a higher rate than governments with more privatized economies. Second, governments adopting free-trade policies should enter military disputes at a lower rate than those adopting more mercantilist or autarkic commercial policies.

The United States has a long history of responding to strategic challenges and opportunities by promoting the spread of its own political and economic institutions abroad. Rooted firmly in a political culture defined by its attachment to individual freedom, this penchant often manifests itself in foreign policies supporting democratic transitions and economic liberalization around the world. Democracy and trade are trumpeted for two key reasons: states that possess liberal political and economic institutions do not go to war with each other, and they also tend to share common national interests. As democracy and commerce proliferate around the world, the United States should face fewer enemies while cultivating more political allies.

Many American political leaders over the past two centuries have reaffirmed these principles. Outlining the benefits of annexing Texas in his inaugural address, President Polk (1845) noted, “Foreign Powers do not seem to appreciate the true character of our Government … To enlarge its limits is to extend the dominions of peace over additional territories and increasing millions … While the Chief Magistrate and the popular branch of Congress are elected for short terms by the suffrages of those millions who must in their own persons bear all the burdens and miseries of war, our Government can not be otherwise than pacific.” At the Paris Peace Conference of 1919, Woodrow Wilson launched a bold and revolutionary plan to end balance-of-power politics that seemed to lead to war by creating a democratic global political order.

Hayek's observation sets up an important question for international relations theory and contemporary debates over American grand strategy. A wide range of liberal thought and contemporary research claims that the emergence of democratic institutions depends on the presence of such factors as a robust middle class, economic development, market-based exchange, and international institutions that expose domestic economic actors to global competition. All of these possibilities suggest that democracy may be rooted in the emergence of capitalism. If this is true, then the tendency for democratic states to avoid military conflict with each other may be caused not by electoral restraints, but by competitive markets and the predominance of private ownership instead.

On top of the theoretical implications posed by the possibility that the democratic peace is nested in a larger capitalist peace, the relative role of markets versus elections in constraining war also carries important implications for contemporary American grand strategy. The United States has a long history of promoting democracy abroad to facilitate its foreign-policy goals, including peace in the international system.

The expansion of individual liberty promotes peace between states by limiting governmental abuses of political authority, particularly manipulations of external threat for domestic political gain. This classical insight has served as the foundation for liberal international relations theory, including the contemporary democratic peace research program. According to this line of reasoning, governments often wage war for particularistic or selfish reasons that undermine the broader welfare of society while simultaneously fortifying the domestic political status of the governing elite. To prevent war, society needs mechanisms such as elections to constrain and punish political leaders who would pursue these selfish goals. For example, the limited fear of domestic punishment allows autocratic regimes to enter into more wars because they can do so while holding onto power at home. The presence of democratic elections limits war by empowering citizens, who bear its real costs, to replace political leaders that pursue aggressive foreign policies.

This chapter builds on this central insight in two ways. First, it examines why an expanded range of domestic institutions capable of promoting liberty should be integrated in the liberal peace research program. Political scientists have traditionally focused on “political” institutions as critical sources of individual liberty. Although competitive elections expand political participation and force governments to be more responsive to the demands of its citizens, state and society interact in multiple institutional settings outside of elections. The domestic institutions shaping the allocation of resources within an economy also shape the capacity of governments to control individual choice.

The national security challenges facing the United States in the aftermath of September 11 have again exposed the historic struggle for the heart of American foreign policy. In Diplomacy, Henry Kissinger (1994) used the presidencies of Theodore Roosevelt and Woodrow Wilson to embody two sets of competing principles that have often pulled American foreign policy in opposite directions. On the one hand, America, since its independence, has drawn on and remained committed to a broad base of liberal ideas in its political, social, economic, and cultural life that have shaped its relationship with the world. Perhaps most dramatically, they guided Wilson's vision launched at the Versailles peace talks for a democratic global political order that would help the world to escape the plague of war. Both in practice and rhetoric, his legacy indelibly shaped the American century and guided the United States in its sustained political and military campaigns against fascism, communism, and now Islamic fundamentalism.

However, the pursuit of this liberal vision has often been reigned in by the competing conservatism of a cold-blooded realpolitik that Kissinger argued characterized the Theodore Roosevelt administration. This tradition would allow Franklin Roosevelt to overlook the tyranny of Stalin's communist regime to achieve victory in the larger struggle against Nazi Germany. Nixon could similarly exploit the split within the communist bloc and enlist China in the struggle against the Soviet Union.

Despite thousands of monographs, governmental inquiries, and nearly a century of intense research, scholarly controversy still surrounds the outbreak of World War I. This body of work has generated literally hundreds of explanations for those ominous political decisions made in July 1914. It is not difficult to look at the enormity of this literature, conclude that the outbreak of this war was overdetermined, and decide that any further research offers little intellectual leverage in understanding both this particular conflict and its place in the broader study of war. European leaders had been sitting on a powder keg and narrowly sidestepping war for nearly a decade. Even if some political compromise, like the kaiser's “Halt in Belgrade” solution, had been reached at the end of July, an incredibly unstable political situation on the continent in which leaders increasingly viewed war as inevitable made it unlikely that the diplomats would repeatedly be able to steer peacefully out of each new crisis.

The tendency to point to this case as the most glaring weakness of liberal international relations theory necessitates revisiting its origins in light of the arguments raised here. Rather than asking why globalization failed to prevent war, I build on the discussion from prior chapters that illustrated how the dramatic expansion in international trade during this period occurred despite extensive government constraints on private economic activity.