Inequality, Foreign Investment, and Imperialism

This paper presents empirical evidence for economic (imperialist) theories of the outbreak of World War I, especially the Hobson thesis, which links domestic inequality to surplus of savings, need for foreign investment and imperialist competition. We find that it stands up reasonably well to scrutiny. The belligerent countries were at the historical income and wealth inequality peaks prior to the War; the holdings of net foreign assets expanded absolutely and relatively to GDP; such assets were held almost entirely by the rich; and foreign assets bore higher average returns than similar classes of domestic assets, even adjusting for risk. We also find evidence that countries that owned more foreign assets kept larger armies.