The Leninist Theory of the First World War

12 12 2017

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.


What’s Missing from Noah Smith’s Analysis of the Alt-Right?

1 05 2017

A Trump supporter holding up a sign reading “Deplorables and Alt-Right Unite”. 4 March 2017, 13:28

Image source:  Wikimedia Image Commons Donald_Trump_alt-right_supporter_(32452974604)

The economist and Bloomberg columnist Noah Smith has published a thoughtful, erudite, and nevertheless frustrating piece about ethnic heterogeneity and the Alt-Right. What’s missing from Noah Smith’s analysis of the Alt-Right? A recognition of the important role of business in promoting harmony in divided societies!

For those who don’t know him, Noah (no relation to me) is a rising force in economics more generally and the economic blogosphere more generally. His worldview is centre-left, which is near the centre of gravity in the economics profession nowadays, but he differs from most of his fellow economists and indeed most academics in that he is sympathetic to nationalism and efforts to promote stronger national identities. (He recently advocated the re-introduction of universal military service in the United States on the grounds that the common experience of service in uniform would create a greater sense of social cohesion). My reading of the situation is that Noah is an old-fashioned liberal nationalist of the FDR and JFK school. That makes him stand out, since most economists (and social scientists more generally) are socialised into a very different way of thinking about nations that corresponds to Angus Deaton’s term cosmopolitan prioritarianism. Another ways in which  Noah’s perspective on social and political issues is distinctive in that it is informed by the time he lived in Japan, which gave him a perspective on European and US politics that is quite rare in the academic blogosphere.

Anyway, his recent blog post on diversity is fascinating because Noah, who is a card-carrying social scientist, engages with the arguments of the more intellectual wing of the Alt-Right, the cluster of anti-immigration, anti-liberal movements that contributed to the electoral success of Donald Trump and which is allied with xenophobic, anti-immigrant political parties in Europe. As Noah notes in his post, while many on the Alt-Right are stupid, others construct semi-intellectual arguments to support their content that the United States would be a better society if it were a more racially and religious homogenous society (i.e., a society in which non-whites were a much smaller percentage of the population than they are right now). The Alt-Right have been able to cite some academic studies that purport to show that increased ethnic and racial diversity in a country can create social problems by reducing levels of social trust.


The meta-historical narrative that informs such studies holds that the countries of north-western Europe were able to construct generous welfare-states in the first half of the twentieth century because they then were homogenous. In other words, wealthy taxpayers in Sweden didn’t resent fiscal transfers because the recipients looked and sounded like them, at least in 1950. This reading of history suggests that political support for such welfare states has recently been undermined by immigration, which made these societies more ethnically diverse and thus more like the US, a country with a far weaker welfare state. Some people attribute the low levels of social spending in the US to its diversity and the unwillingness of wealthy people, who are mainly white, to pay for recipients who are disproportionately non-white. (Concerns that too much diversity was incompatible with the welfare state convinced David Goodhart, an erstwhile British social democrat, to embrace the cause of restricting immigration).  Some alt-right people speak of turning the United States into a “white Japan” by which they mean an ethnically and racially homogenous society that is characterized by high rates of trust and social cohesion. This particular variant of the alt-right philosophy doesn’t say that one race is superior to another, merely that the world is a better place when communities are homogenous.  Noah reports that a section of the alt-right

want to live in a place where only white people are allowed. They want the dream of a half-remembered, half-imagined 1950s Southern California – the clean streets, the nice lawns, the dependable white neighbors who tip their hat and say hi to you as they stroll down the lane.

The Alt-Right has latched on to the research that stresses the costs of diversity. Noah methodologically deconstructs this line of argumentation by drawing on a range of social scientific research that seeks to measure the costs and benefits of diversity in terms of social trust and social cohesion indicators. To his credit, Noah looks at research produced by non-economists, including

  1. Arecent study in Southern Californiafound that ethnic diversity is associated with decreased crime and higher home values2. A

    study in Britain showed no relationship between ethnic diversity and trust.3. A

    study in Europe found a positive long-term effect of diversity on trust.4. A

    2014 literature survey finds that “ethnic diversity is not related to less interethnic social cohesion.”5. A

    2008 study in Europe found that ethnic diversity didn’t decrease social capital.6. A

    2007 study in Britain found that the negative effect of diversity on social cohesion disappears after controlling for economic variables.7. There’s also a big literature on

    diversity and group decision-making, most (but not all) of which concludes that ethnic diversity makes groups smarter.

Noah blows the Alt-Right out of the water here, in my view. Noah concedes that while, yes, in certain cases a rapid and poorly-managed increase in diversity can indeed result in falling levels of generalised trust, high levels of ethno-racial diversity in a community can, in fact, be consistent with high trust.  In his view, the key variable is how well diversity is managed and the nature of the institutions in newly diverse societies. (I totally agree with this viewpoint). He then begins to discuss what these institutions might be.

It’s at this point that I start to disagree with what Noah is saying since it he appears to be ignoring the research in many disciplines, including IR, politics, and now management, on how capitalism can allow different groups to cooperate and live in in peace. There is a vast literature on the capitalist peace or commercial peace. Some of this literature is on inter-state conflict, while others papers are on intrastate conflict. I’ve contributed to this literature in a modest way (see here). I’ve also blogged about new research, especially in management, that has documented ways in which capitalism helps to promote peace and inter-ethnic cohesion. (see here, here, and here). I’m currently working on a paper on this subject that uses data from Canadian business history. I’ll be presenting this paper at a conference in Toronto in September that will mark the 150th anniversary of the Canadian Confederation.

Noah writes:

as time goes on, the previous inhabitants and the newcomers get used to each other. This process is accelerated by integrating institutions like public schools, colleges, and the military, and is complete once intermarriage is widespread. 


Notice what is missing from Noah’s list—business corporations and the other institutions associated with the market economy! Noah’s list is about public-sector and non-profit institutions. Of course, these institutions do promote cohesion (think of the role of the IDF in integrating Ashkenazi and Sephardic Jews), but public-sector organizations can’t be the whole story. The old Soviet Union had public schools, colleges, and army units where people of different ethnicities mixed, and were indoctrinated with rhetoric about the unity of the world’s workers, but ethnic animosities nevertheless persisted. Noah’s list of integrating, pacifying institutions is sadly incomplete. I’m inclined to think that Noah’s decision to omit business institutions from this list of integrating factors may be related to his centre-left political views. There were certainly many US economists, particularly those of the generation taught by Milton Friedman, who went to great lengths to note the benefits of all things related to the market and to denigrate the state.  I suspect that Noah Smith, who is reacting the excesses of libertarian market-worship, may be committing the opposite error in failing to note in this paragraph the very important role that commercial activity and a vibrant private sector play in promoting peace.

I would call on Noah Smith and other progressives to reflect more about the positive role of business in promoting ethnic harmony. Thinking about the potential role of business in combating xenophobia and ethnic animosity is the first step towards having a conversation about the social responsibilities of business leaders in the face of the Alt-Right.



Capitalist Peace Theory and the Iran Deal

21 07 2015

Jeff Sachs

One of my research interests is capitalist peace theory, the view that cross-border economic interdependence reduces the probability, frequency, and intensity of war (see here, here, and here). I was, therefore, struck by how Jeffrey Sachs closed his recent op-ed piece on the Iran nuclear deal.

The new treaty will verifiably prevent Iran from developing a nuclear weapon for at least a decade — and keep it bound to nuclear non-proliferation thereafter. This is the time to begin a broader U.S.-Iran rapprochement and build a new security regime in the Middle East and the world that leads toward full global nuclear disarmament. To get there requires, above all, replacing war (including the CIA’s secret wars) with commerce and other forms of peaceful exchange.

P.S. Adam Tooze has published an interesting essay assessing capitalist peace theory in light of the First World War.  “Capitalist peace or capitalist war? The July Crisis revisited.”Cataclysm 1914: The First World War and the Making of Modern World Politics(2015): 66. I’ll post about Tooze’s essay soon.