The Past Speaks

Did increasing inequality in the capitalist powers cause the First World War? That was the argument the Lenin famously advanced in Imperialism: the Highest Stage of Capitalism. Subsequent academic research has not been kind to the Leninist theory that greedy bankers pushed their respective governments to war in the summer of 1914. Painstaking archival research by fellow business historians helped to show that pretty much the exact opposite was closer to the truth– the bankers, far from wanting war, sought to restrain bellicose governments — for a survey of this literature, see Jonathan Kirshner, Appeasing bankers: Financial caution on the road to war. Princeton University Press, 2007.

Since I tend to believe in Capitalist Peace Theory and have applied in my business-historical research on Anglo-American relations in the 1860s, I am generally inclined to accept the view that Kirschner’s theory is much more accurate than the Leninist one.  However, I have approached the newly-released working paper by Thomas Hauner, Branko Milanovic, and Suresh Naidu on the origins of the First World War with an open mind. Their paper, Inequality, Foreign Investment, and Imperialism, revives a modified form of the Lenininst theory of the origins of the war. The paper expands upon a short comment that Branko Milanovic made in his justly famous book on trends in global inequality, where he had suggested that rising inequality c. 1900 had caused the First World War.  In that book, Milanovic wrote:

I argue that the outbreak of World War I and thus the reduction of inequality subsequent to that war are to be “endogenized” in the economic conditions predating the war, by which I mean that domestic inequalities played an important role in the run-up to the war. In making this argument I go back to an older, and in my opinion, most persuasive, interpretation of the outbreak of World War I. According to this interpretation the war was caused by imperialist competition, embedded in the domestic economic conditions of the time: very high income and wealth inequality, high savings of the upper classes, insufficient domestic aggregate demand, and the need of capitalists to find profitable uses for surplus savings outside their own country.

Here is the Abstract of the new paper:

We present an empirical restatement of the classical economic theory of imperialism and
the origins of World War I. Using recent data, we show 1) inequality was at historical highs in all the advanced belligerent countries at the turn of the century, 2) rich wealth holders invested more of their assets abroad, 3) risk-adjusted foreign returns were higher than riskadjusted domestic returns, 4) establishing direct political control decreased the riskiness of foreign assets, 5) increased inequality was associated with higher share of foreign assets in GDP, and 6) increased share of foreign assets was correlated with higher levels of military mobilization. Together, these facts suggest that the classic theory of imperialism may have some empirical support.

My reaction to the paper is that it contains a great deal of evidence of correlation without much proof of causation. I think that a mixed methods paper that included qualitative material taken from the archives of Europe’s largest banks and its foreign ministries might have produced a more convincing case for the author’s thesis.

On more theoretical grounds, I’m not at all convinced that so-called “surplus savings” and capital exports are associated with colonialism, militarism, and imperialism? In the 1980s and 1990s, Japan, which was then a famously pacific country with strict constitutional limits of military expenditure, exported lots of capital to the USA. These capital exports were due, ultimately, by the thrifty nature of many Japanese housewives. Was Japan militarist then? Or did it just focus on exports cars and VCRs? The United States of the Trump era, is a net capital importer and the adults in the room in the Oval Office know that much of this money is coming from China. In the nineteenth century, Spain, Portugal, Turkey,  and, famously, Russia, were all capital importers. (I will concede that Russia’s close ties to the Paris Bourse, and thus the savings of many French families, did indeed influence diplomacy in the years leading up to assasination of the Archduke).

I’m certainly not denying that too much economic inequality, particular economic inequality of the source type documented in  the new book by Lindsey and Teles on The Captured Economy can indeed be a very bad thing. Rising inequality can be linked to many objectively bad phenomena. However, I don’t think it is fair to associate market-created economic inequality with the chain of events that led to the First World War. Indeed, while many of the named individuals whose decisions collectively led to the First World War were indeed very wealthy and certainly within the top 1% of their societies, few of them enjoyed wealth that stemmed from the operation of the market economy. They were hereditary aristocrats, not LeBron James or Bill Gates.