Introduction

A recurrent theme in the academic as well as popular literature on war is the claim that the prospect of an economic gain motivates small groups of potential profiteers to unleash political violence. “All wars are fought for money” is the antiwar slogan attributed to Socrates, and George Orwell wrote in a book review that “[war] against a foreign country only happens when the moneyed classes think they are going to profit from it” (Orwell, 1937/1998, p. 75). Research on the origins of civil wars has reinvigorated the hypothesis that economic incentives are a root cause of armed conflict and that rebel leaders are nothing other than profit-seeking quasi-criminals (cf. Collier & Hoeffler, 2004). To illustrate this conjecture, Collier (2007, p. 21) uses the claim attributed to Congolese rebel leader Laurent Kabila that “all you needed was $10,000 and a satellite phone” to instigate a successful military campaign. While the future president of the resource-rich country would use the money to hire a small army, Kabila used the phone to conclude contracts with mining companies: “By the time he reached Kinshasa he reportedly had arranged $500 million worth of deals” (Collier, 2007, p. 21).

Liberal scholars have challenged the conjecture that the pursuit of economic gain by criminal rebel leaders or the capitalist class is a major cause of war and other massive forms of political violence. Their counterhypotheses are frequently built on the expectation that government leaders avoid the use of force because of its anticipated economic costs. This standard opportunity-cost argument is most prominently used in what Nye (1988) has called “commercial liberalism.” Russett and Oneal (2001) and many others have argued that growing economic bonds between states in the form of trade or foreign direct investment pacify interstate relations as the opportunity cost of relying on violence increases in line with strengthening commercial ties between these nations. Similarly, some political economy contributions to the study of civil wars expect that the risk of a rebellion decreases with the growing opportunities that an expanding economy offers to individuals in comparison to a career as a soldier or rebel (Collier & Hoeffler, 2004; Grossman, 1991). The other side of this expected utility argument is the conjecture that political violence, if policy makers are foolish enough to rely on this means at all, is generally destructive and disrupts economic activities.

Classical and modern theories help explain the economic causes and consequences of violent conflict in general and the empirical evidence that has been assembled in support of, or in contradiction to, these conjectures. While opportunity-cost arguments have the potential to explain different manifestations of political violence —be it terrorism, civil or interstate war— they face some analytical challenges (Morrow, 1999; Schneider, 2014; Schneider et al., 2003). To avoid the implicit tautology of the opportunity-cost argument, international relations scholars have mainly proposed informational accounts of commercial liberalism and the Schumpeterian notion (Schumpeter, 1918/1919) of the “capitalist peace” (Mousseau, 2000; Schneider, 2022; Weede, 1995), according to which free markets pacify inter- and intrastate relations. The so-called limited information models of both commercial liberalism and the capitalist peace advance the viewpoint that governments of states that are highly integrated into the world economy are better able to signal their resolve than more protectionist states. As these signaling games have, however, shied away from incorporating economic agents as strategic players, an encompassing theory of the interrelationship between economic incentives and armed conflict has not yet been established despite some recent advances (Davis, 2023; Fearon, 2018). Most international relations contributions still overlook the potential that political economy approaches offer for the exploration of the relationship between economics and conflict.

Improved theories are also needed to deal with the challenges that the empirical studies have unearthed. This article presents the core findings and disputes in the literature and also covers some related areas such as the conflict-related aspects of the “resource curse.” It discusses the possible lessons that the study of the nexus between economic incentives and political violence has for the scientific analysis of international relations.

Economic Incentives and Conflict: Theoretical Perspectives

The liberal double expectation that economic incentives pacify social relationships and that political violence disrupts economic activities has a distinguished intellectual tradition in both political science and economics. In the former field, the peace-through-trade hypothesis, on which commercial liberalism is mainly founded, maintains that economic interdependence in the form of trade or investment between states reduces the risk of conflict between and within states. This optimistic expectation can be traced back to ancient and medieval philosophers, but it is most often associated with the work of Enlightenment philosophers Kant and Montesquieu (Schneider et al., 2003), as well as leading exponents of the 19th-century Manchester school of thought, such as Richard Cobden and John Bright (see Blainey, 1973). In the 20th century, the writings of Nobel Peace Prize laureate Norman Angell (1909) revived the optimistic viewpoint that in times of closely knit economic ties between states, war becomes a futile endeavor or, to quote the title of his main pamphlet, a “Great Illusion.” Angell based this hope on the assumption that military conquest does not pay economically and that rational decision makers therefore have no incentive to wage war. In his memoirs, he defended this rational expectation thesis against attempts to portray it as a deterministic forecast according to which major war is impossible in times of extended economic bonds between nations (Angell, 1951).

Polachek (1980) offers the first formalization of this opportunity-cost argument. In his words, “The implicit price of being hostile is the diminution of welfare associated with potential trade losses” (Polachek, 1980, p. 60). Thus, economic bonds, which will be destroyed by war, offer an indirect deterrence mechanism. This mechanism also prevails in a strategic setting, as Polachek and Xiang (2010, p. 134) show in a critique of a signaling game Gartzke et al. (2001) had developed to move beyond standard interpretations of commercial liberalism: “Opportunity costs arising from economic interdependence can either deter war or reduce the equilibrium probability of war in an incomplete information model.” Spaniel and Malone (2019) contend that this conjecture is only valid as long as one side is uncertain about the military costs of conflict but not if the uncertainty is about the prize to be obtained through a successful military campaign. The reported positive effect of interdependence on conflict is, however, only observable for intermediate trade bonds and disappears for pairs of states that are highly integrated.

Opportunity-cost arguments have been developed in economics since the pathbreaking contributions of Haavelmo (1954) and Boulding (1962). In an influential model of civil war onset, Grossman (1991) shows, for instance, how government tax policy influences the risk of civil war: “Too high a tax rate would be bad for the ruler both because it would depress the tax rate . . . and because it would increase the probability of a successful insurrection” (p. 920). This reasoning has been taken up by Collier and Hoeffler (1998, p. 565), in whose initial contribution “the probability of the occurrence of war” is a decreasing function of per capita income. This means, at the personal level, that the risk that an individual joins a militia or government troops grows with the deterioration of their prospects to succeed in the productive sectors of the economy. Collier and Hoeffler (2004) extended this thesis with the argument that the presence of easily exploitable natural resources attracts the interest of quasi-criminal rebels who ignite a war to reap the rents that they could not garner peacefully. The “resource curse,” which entices commodity-rich states to make bad investment decisions and to underprovide their population with public goods, therefore translates into an increased risk of civil war.

According to these and similar expected utility arguments, policies that strengthen the development prospect of a country should reduce its internal instability and, by extension, its external aggressiveness. One key success formula for development is economic integration (e.g., Sachs & Warner, 1995). Most of the empirical studies that have explored the impact of economic forms of what is called “globalization” since the early 1990s have implicitly or explicitly relied on an expected utility argument that builds on this link between economic interdependence, growth, and peace. A statement by Oneal and Russett (1999) illustrates this tendency: “Fearful of the domestic political consequences of losing the benefits of trade, policymakers avoid the use of force against states with which they engage in economically important trade” (p. 5). In other words, intensive economic interactions are implicitly supposed to work like a deterrent mechanism that prevents governments from using force externally and, by extension, internally (Hegre et al., 2003). The major problem with simple opportunity-cost arguments is that they assume the use of political violence away by modeling it as an “irrational act.” This renders especially the peace-through-economic-integration thesis tautological. Postulating that globalization or capitalism reduces the benefits of political violence, choosing a more aggressive stance becomes a policy option rational governments (or rebel leaders) would never pursue (Schneider, 2014). The liberal expectation that free trade and its correlates help bring about peace remains therefore a recurring theme in the history of ideas in international relations despite the weaknesses of the unqualified baseline hypothesis (Schneider et al., 2003). Marxists were the most radical critics of this hope, which becomes apparent in the “theory of imperialism” that Austro-German Marxist Rudolf Hilferding developed and that two leading politicians, Rosa Luxemburg (1913) and Vladimir Ilyich Lenin (1917), later refined. Hilferding’s early antiglobalization study Das Finanzkapital (Finance Capital) warned of the dangers of “limitless” profit seeking. He states that “capital becomes the emperor of the world, and it conquers with every new country the new boundary that has to be transcended” (Hilferding, 1910/1947, p. 464, author’s translation).

As no global class conflict took place in the 20th century, neo-Marxists and dependencia theorists started to revise the theory of imperialism. The most notable contribution is Galtung’s (1971) structuralist interpretation of imperialism. He argued, in line with dependencia theorists, that the division of labor between the industrialized countries and the developing world creates a conflict between the workers in the North and those residing in the South, while capitalists of the center and the periphery of the world economy support each other. This constellation prevents, in his view, a global class conflict. Unsurprisingly, this all-encompassing conjecture did not animate empirical researchers beyond the heyday of neo-Marxian thinking in political science in the 1970s.

Hirschman’s (1945/1980) classic treatise on National Power and the Structure of Foreign Trade, on which some dependencia theorists relied, seemed to be a more promising avenue for critical research on the nexus between the economy and war. Perceiving economic interactions as implicit bargaining games, Hirschman proposed that asymmetric trading relationships establish dependencies that the more powerful state in a bilateral situation could use to maximize its influence. As Hirschman (1945/1980) wrote, “Superior bargaining power enables one monopolist . . . to increase his gain at the expense of that of his partner” (p. 45). The interpretation that unequal exchange affects the opportunity costs of the trading states and fuels political tensions did not, however, escape criticism at the theoretical level. Wagner (1988) showed that asymmetries do not easily translate into bargaining advantages: “Asymmetrical economic interdependence does not imply that one bargainer will be able to exercise political influence over another” (p. 462). Moreover, it is not clear why the privileged side in an asymmetric relationship should consider the use of force at all (Barbieri, 2002, p. 31). Coercion seems to be the cheaper and therefore more convincing policy choice for the privileged side. While its handicapped partner might have a lower inhibition to use force, it also faces reduced capabilities to fight as a consequence of the unequal trade relationship and the limited gains from trade. The empirical study of economic sanctions shows in line with this conjecture that the threats to impose coercive measures by the United States, the militarily strongest state in the world, are often sufficient to convince a target to accept the demands from the liberal superpower, whereas imposed sanctions frequently end in failure (Weber & Schneider, 2020).

Thus, liberal hopes need not be abandoned completely, even in Hirschman’s footsteps and even if models trade interactions as a bargaining game between asymmetric partners. Martin et al. (2008b) show formally and empirically that the deterrent mechanism that liberals attach to trade works for bilateral relationships on which the asymmetry argument has mainly focused. Pairs of trading states, conversely, that are not economically well integrated face a higher risk of conflict as their indirect economic costs of conflict become smaller. The same mechanism is present for states that entertain intensive multilateral trade ties. The more benefits a state can reap from globalization in this way, the less the costs matter that a conflict with one specific trade partner creates. A reexamination of this double finding and of an empirical refutation (Lee & Pyun, 2016) demonstrates that the positive impact of multilateral trade ties depends crucially on the model specification in the econometric tests (Yakovlev & Spleen, 2022). Although multilateral trade ties therefore do not necessarily create dangerous substitution possibilities for states with aggressive intentions, intensive economic bonds are not the universal blueprint for peace that early versions of commercial liberalism have made us believe.

The differentiation between bilateralism and multilateralism moves the skepticism that globalization has positive security externalities beyond the encompassing relative gains argument that structural realists have advanced to ridicule commercial liberalism. As Waltz (1979) says, “The myth of interdependence both obscures the realities of international politics and asserts a false belief about the conditions that promote peace” (p. 158). The realist antidote to the liberal optimism builds on the assumption, first propagated by German historicism in the 19th century, that “politics prevails, as usual, over economics” (Waltz, 1999, p. 700). In the expectation of structural liberals, the fear of arming one’s own enemy prevents lasting cooperation between states across contending alliances. Gowa (1994) offered the most precise formulation of the thesis that the security externalities of economic exchange can be used to arm against trading partners. However, Morrow (1997) showed, against this revisionist backdrop, within a completely realist analytical framework, that states can continue to trade even in times of war. Economic exchange is thus not completely endogenous to politics or, as structural realism implies, to the polarity of the world system.

The realist failure to refute commercial liberalism theoretically did not alter the need within this school of thought at least to refine the foundations of this key proposition. Gartzke et al. (2001) contend, based on a signaling model, that the opportunity costs that increased trade between states creates do not lift the uncertainty that is traditionally seen as a key impediment to the peaceful resolution of military crises. They believe, rather, and show empirically that movements on financial markets are a much more helpful signaling device for governments in this regard. Their model, however, does not explicitly analyze how these economic incentives affect the behavior of the economic agents and, by extension, the government that might at least partly respond to the warning of the financial community to not escalate a confrontation with another state. Schneider and Schulze (2003) disaggregate the domestic economic interests that disagree over the trade and military policies of their country. While the import competing sector is against increased military involvement by their government, the export sector accepts such adventures up to the point where the costs of conflict start to outweigh the gains that a simultaneous liberalization of the economy brings about. They argue that opportunistic governments of states in which military interests play a considerable role will opt for both economic liberalization and low-level military involvements. The empirical tests support the argument that multilateral economic interdependence can go hand in hand with increased hostility in the world system but that the costs of war soon outweigh its benefits.

To understand the impact of economic openness on the decision to invest in conflict, one needs furthermore to consider the price of contested resources and the security implications that the gains from free trade have. Neoclassical models typically assume away that actors contest a specific resource such as land, oil, or diamonds and that this competition creates security costs. While free trade outperforms autarky in many instances due to the gains from trade, increasing exports of a land-intensive product by both parties involved increases the costs of conflict despite gains from trade. This renders autarky preferable in such a constellation (Garfinkel et al., 2015). Fearon (2018) similarly shows, through an extension of a crisis bargaining model, the workhorse approach to study conflict escalation, that free trade has contradicting effects in an anarchic world where states arm themselves to reduce insecurity. In line with the opportunity-cost argument, increased gains from trade make a peaceful status quo more valuable and reduce in this way military investments. Yet, the growing prosperity also increases the “bounty” that states might hope to capture through an intensive military campaign. The danger of such an all-out confrontation increases armament levels and thus the costs to maintain peace. Davis’s (2023) two-level game of the redistributive effects of war and peace offers a partial answer to whether the pacifying or the conflict-enhancing effect of trade is larger. War becomes in this model a viable option for an opportunistic government despite the welfare losses associated with it when the losers in the domestic struggle over a country’s foreign policy cannot be compensated without frictions and when the political clout of the war profiteers exceeds the influence of those who will economically suffer under the fighting. Although the inclusion of economic actors in Davis’s model moves the understanding of conflict forward, it does not conceive of the crucial actors as agents with specific economic interests. While governments can create the economic incentives for war and peace through tariffs or taxes, the domestic counterparts have to include the costs of both foreign and economic policy making into their calculus. Such micro-foundations of commercial liberalism could come from the classical political economy models of trade (Schneider, 2014) and their recent extensions by Melitz (2003) and others.

Refinements of the opportunity-cost argument have also appeared in the literature on civil wars. Most of the explicit theoretical models of civil war build on the rent-seeking models that have been introduced into the analytical literature by Tullock (1974, 1980), as well as Hirshleifer (1989), and have been generalized by Skaperdas (1996). In a model inspired by work on the resource curse (e.g., Ross, 2012; Sachs & Warner, 2001), Garfinkel et al. (2008) demonstrate that globalization can decrease social welfare if a government cannot enforce property rights and if two groups fight violently over the possession of an exportable resource like oil. This is especially the case for exporters for whom the welfare-enhancing effect of free trade might be offset by the growing costs of conflict that the opening of borders and the increased exportability of the good bring about. Nevertheless, exporters of natural resources might, depending on the world price of their product, invest more in conflict in times of growing globalization: “Although for importers of oil and other natural resources opening up the economy brings the regular benefits of trade and reductions in conflict, for exporters of the same resources opening the economy to trade can very well induce increased conflict costs that more than offset the familiar gains from trade” (Garfinkel et al., 2008, p. 307).

Another possibility for modeling social conflict follows the tradition in Heckscher–Ohlin models of international trade of separating societies according to the factor endowment of the various relevant groups. This perspective assumes that globalization will benefit the abundant factor within an economy that is, by and large, capital in the developed and labor in the developing world. However, rising tensions between capital owners and workers over the foreign economic policy of a country do not necessarily translate into an increased risk of social conflict. On the basis of their groundbreaking work on polarization and conflict, Esteban and Ray (2008, 2011) model the interactions within a society that falls victim to both a class and an ethnic conflict. These authors show that increased class conflict within the contending ethnicities fuels the intensity of ethnic conflict. The empirical implication of this formal result is that more ethnic than class conflict should be observed, a finding that has its counterpart in Azam’s (2002, 2006) studies on the strategic use of looting. If one side suffers under plundering and its complement, one-sided violence against civilians, it will be more likely to engage in these activities as the destruction of production possibilities makes the use of force and raiding more attractive. Moreover, some war leaders will attack their own civilian support base to turn farmers into soldiers by destroying the incentives to work in the civilian sector.

The theoretical recognition that group poverty is an important indirect source of conflict can be seen as an antidote to the polemic assertion of Collier (2007) that economic deprivation of certain groups is not systematically linked to the risk of civil war. At the empirical level, Østby (2008) and Cederman et al. (2013) add support to the general hypothesis of Esteban and Ray (1999) that the risk of conflict is largest in societies that are extremely polarized or in which strong horizontal inequalities exist. While polarization considers the within-group variation of income and the intergroup differences between the mean income, horizontal equality only takes the latter component into account. As Huber and Mayoral (2019) demonstrate along these lines and in confirmation of Esteban and Ray’s (2008) extended model, that intragroup inequality rather than horizontal inequality is a major prerequisite of intrastate war. The theoretical backbone of this result expects that an increasing class struggle between capital and labor within a group lowers the opportunity costs of fighting in two dimensions—first, by making financial contributions to the cause more likely and, second, by rendering soldering more attractive. These recent empirical results show in all their diversity that the refutation by empirical studies of the thesis that inequality is a major source of conflict (e.g., Collier & Hoeffler, 2004; Fearon & Laitin, 2003) has been accepted too prematurely in the literature on civil war.

Governments can reduce the risk of civil war through economic power-sharing or, more prosaically, through offers to the opposition to share the spoils that the control of the state brings about. Dal Bó and Powell (2009) show in a formal model that such co-option tactics are more likely to fail if these rents are small. The prospect of reaping parts of the spoils of war, conversely, is often described as a key motivation for individuals who join an armed group (Collier, 2007). This tendency is especially linked to higher levels of violence when armed groups can secure the exploitation of profitable natural resources through insecurity. Asal et al. (2016), for instance, find a strong association between the presence of oil and conflict in those areas where excluded ethnic groups live. Drawing on the literature on industrial organization in economics, civil war researchers also explore the incentive schemes that political and military leaders have to offer to their troops to reach their goals through a violent campaign (cf. Beber & Blattman, 2013). For example, a microlevel study of sexual violence in the Democratic Republic of Congo shows how “incentives” like access to drugs and “disincentives” like the threat to punish noncompliers are needed for the organization of one-sided violence (Schneider et al., 2015).

Empirics I: Interstate War

Empirics II: Civil War, Terrorism, and State Repression

Conclusion

The literature on the nexus between economic factors and violent forms of conflict has been influenced for a long time by the opportunity-cost argument that can be derived from classical economics. Many empirical studies support the claim that the growing incentives derived from productive economic activities lessen the usefulness of using force to achieve a particular goal. By extension, policy measures such as foreign economic liberalization that stimulate growth act, according to this liberal worldview, as an important deterrence mechanism. In this perspective, war, be it domestic or interstate, becomes increasingly costly the better integrated the contending parties are into the world economy.

In line with Schneider (2014), the theoretical and empirical merits of this key proposition need to be seriously refined. Several conceptual and methodological challenges in the literature on the interrelationship between economic incentives and political violence must be seriously considered. First, the analytical literature needs to develop models that include economic agents and their special incentives. Admittedly, economic models of conflict, which build largely on the rent-seeking tradition, include only unproductive armament decisions, but not the steps toward conflict, like the crisis bargaining literature does. However, to simply rely on the extant economy free models in political science to explain the interactions between politicians and economic agents is not a fruitful way to go; these models shy away from endogenizing the economic motives of conflict. Fearon (2018) is a first step to bring political economy reasoning systematically back into the conflict literature.

Second, models that take these incentives seriously might help us to deal conceptually with the related problems of endogeneity and simultaneity that empirically oriented studies face. A sensible economic model could start out with actors who have different endowments and who can decide how much they would like to invest in economic and conflict activities. It would then become clear that the outcomes of these decisions in the form of economic integration, development, and economic inequality are righthand-side variables and should be modeled as such in studies of economics and conflicts. Many of these current empirical studies rely on the appropriate methods to deal with the challenge in estimating the impact of economic incentives and processes on the risk of political violence. Similar problems loom for the study of how political violence affects economic activities and notably the chance of individuals and societies to escape the “conflict trap” in which violence breeds violence.

Third, a particularly promising approach is to move to lower levels of aggregation. This is particularly the case for studies of civil war where the contending social interests of a country are represented through aggregate diversity measures. It seems more promising to identify dyads of contending social groups within countries and to collect information at this level to understand how much some of the conflicts around the world are really influenced by economic variables, a lack of sound institutions, or the ethnic identity of the combatants. Fortunately, conflict research, especially in the domain of intrastate politics, has started to take the micro-foundations of social contestations seriously, showing how subnational grievances (cf. Cederman et al., 2013) and intragroup tension (Huber & Mayoral, 2019) affect the risk of violence.

Fourth, some of the economic indicators that are used to study the economic causes of violence are only slowly changing over time. To attribute economic factors to the quick escalation of a conflict, one needs to include indicators that change at least as fast as the military action unfolds. Economic variables such as trade that remains constant during the escalatory process cannot explain why certain crises lead to war and others do not (cf. Morrow, 1999). In terms of quickly changing economic variables, financial markets are the most promising but still underutilized resource (cf. Guidolin & La Ferrara, 2007; Schneider & Troeger, 2006).

Many scholars take these challenges seriously. The next generation of studies on the nexus between economic incentives and conflict will surely be based on sounder analytical footings, will be empirically disaggregated to more appropriate levels of analysis, and will be conducted with more adequate econometric tools and detailed comparative data.