Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail

by Ray Dalio

Jesus, Confucius, Mohammed, Buddha, Mahavira, Guru Nanak, Plato, Socrates, Marx, and many others, have conveyed approaches to life that were captured in books such as the Hebrew Bible and the New Testament, the Talmud, the Quran, the I Ching, the Five Books and Four Classics, the Analects, the Upanishads, the Bhagavad Gita, the Brama Sutras, Meditations, Republic, Metaphysics, The Wealth of Nations, and Das Kapital.

Think about it. What are you seeing happen? Are you seeing coalescing or dissolving? From what level to what other level? What implications do these changes have for you and where you want to be?

Throughout time and in all countries the people who have the wealth are the people who own the means of wealth production and, in order to maintain it, they work with the people who have the power to set and enforce the rules.

LOP

The typical perspective of the rightist/capitalist is that self-sufficiency, hard work, productivity, limited government interference, allowing people to keep what they make, and individual choice are morally good and good for society. They also believe that the private sector works better than the public sector, that capitalism works best for most people, and that self-made billionaires are the biggest contributors to society. Capitalists are typically driven crazy by financial supports for people who lack productivity and profitability. To them, making money = being productive = getting what one deserves. They don’t pay much attention to whether the economic machine is producing opportunity and prosperity for most people.

the ability to make money, save it, and put it into capital (i.e., capitalism) is an effective motivator of people and allocator of resources that raises people’s living standards. But capitalism is also a source of wealth and opportunity gaps that are unfair, can be counterproductive, are highly cyclical, and can be destabilizing. In my opinion, the greatest challenge for policy makers is to engineer a capitalist economic system that raises productivity and living standards without worsening inequities and instabilities.

The short-term debt cycles of ups and downs typically last about eight years, give or take a few.

The biggest thing affecting most people in most countries through time is how people struggle to make, take, and distribute wealth and power, though they also struggle over other things, most importantly ideology and religion.

These cycles have taken place for as long as there has been recorded history (and probably before), so many cycles are linked together, and they are upward-sloping because of evolutionary gains that are made over time.

the two things about war that one can be most confident in are 1) that it won’t go as planned and 2) that it will be far worse than imagined

Naturally the most severe cases of wealth confiscation came during periods in which there were large wealth gaps and internal conflict over wealth when economic conditions got bad and/or there was a war.

Europeans were dazzled by the quality of Chinese porcelain, silk, and other goods, which became highly sought after, but the Chinese weren’t interested in buying European goods, which they considered inferior. However they eagerly accepted silver, which was money in China as well as in Europe, as payment.

and instituted respect for those boundaries so that no longer would borderless, free-flowing power grabs occur (without, of course, the understanding that you’d be starting a major war).

Whether they are interested or not, 300 years seems like a very long time ago to Americans, but for the Chinese, it isn’t long at all. While the prospect of a revolution or a war that will overturn the US system is unimaginable to most Americans, both seem inevitable to the Chinese because they have seen those things happen again and again and have studied the patterns that inevitably precede them. While most Americans focus on particular events, especially those that are happening now, most Chinese leaders view current events in the context of larger, more evolutionary patterns.

The third phase of building on these accomplishments and moving China toward where it has set out to be on the 100th anniversary of the People’s Republic of China in 2049—which is to be a “modern socialist country that is prosperous, strong, democratic, culturally advanced, and harmonious”—is occurring under Xi and his successors. Its ultimate goal is to make the Chinese economy about twice the size of the US’s and to have the benefits of its growth broadly shared.

History has taught us that there are five major types of wars: 1) trade/economic wars, 2) technology wars, 3) geopolitical wars, 4) capital wars, and 5) military wars. To these I would add 6) culture wars and 7) the war with ourselves.

throughout history, as we’ve seen, the most powerful country is typically taken down by alliances of countries that are less powerful but collectively stronger.

because Russia is militarily strong it would be a good military ally.

Is it really?

In addition to the international political risks and opportunities, there are of course big domestic political risks and opportunities in both countries. That is because there are different factions who are fighting for control of both governments and there will inevitably be changes in leadership that will produce changes in policies.

Russia and China, which both are encountering these sanctions and are at great risk of encountering more of them in the future, are each now developing and cooperating with the other to develop an alternative payment system.

cultural inclinations influenced how Americans and the Chinese reacted to being told that they had to wear masks in response to COVID-19, which led to second-order consequences because the Chinese followed the instructions and Americans often didn’t, affecting the numbers of cases and deaths and the economic impact.

that democracies are prone to slip into dysfunctional anarchies during very bad times when people fight over what should be done rather than support a strong, capable leader.

For these reasons these “left” versus “right” inclinations appear to be more big cycle swings around revolutionary trends than evolving core values.

THE WAR WITH OURSELVES: THE ENEMY IS US Our greatest war is with ourselves because we have the most control over how strong or weak we are. Because it is pretty clear what makes countries strong and weak, and because these strengths and weaknesses are measurable, it is easy to see how each country is doing. These factors were laid out in the first and second chapters and measured by 18 determinants. I will briefly review them here, and in the next and final part, I will show these determinants for most countries and will explore the leading indicators of them so that we can make projections of what’s to come. Before we do that, let’s review the specific items that help make a great empire. They are… … leadership that is strong enough and capable enough to provide the essential ingredients for success, which include… … strong education. By strong education I don’t just mean teaching knowledge and skills; I also mean teaching… … strong character, civility, and a strong work ethic, which are typically taught in the family as well as in school. These lead to improved civility that is reflected in factors such as… … low corruption and high respect for rules, such as the rule of law. … People being able to work well together, united behind a common view of how they should be together, is also important. When people have knowledge, skills, good character, and the civility to behave and work well together, and there is… … a good system for allocating resources, which is significan...

But we can see that a picture drawn from pure extrapolation is not good enough. For example, standing in 1750, it would have been reasonable to believe that it was a timeless and universal truth that monarchies and landowning nobles overseeing peasants with the help of soldiers would be the governance system in the future, that agricultural land would continue to be the most important money-earning asset, that per capita incomes would grow at only around half a percent per year, and that life expectancy would remain steady at about 30 years. That was how it had always been. You would not have imagined capitalism and democracy as we now know it, let alone that there would be a United States and that it would be the leading world power.

while extrapolating the past is generally a reasonable thing to do, also be prepared to be surprised because the future will be much different than you expect it to be.

in the markets and in life, to be successful one should bet on the upside that comes from a) evolution that leads to productivity improvements, but not so aggressively that b) cycles and bumps along the way knock you out of the game.

the abilities of both computers and humans will improve at an increasing pace. Perhaps most importantly, advances in and the wider use of quantum computing with AI will lead to unimaginable advances in rates of learning and improvement and changes in global wealth and power. These changes will occur in varying degrees in the next five to 20 years, but I believe they will add up to the greatest shift in wealth and power that the world has ever seen. Quantum computing with AI will be to traditional computing what the computer was to the abacus, providing humanity with vastly more power to see, understand, and shape things. That makes me long-term very optimistic and eager to bet on great new discoveries.

Luo Guanzhong’s classic book Romance of the Three Kingdoms begins: “The empire long divided must unite and long united must divide. Thus it has ever been.”

While I think that the odds of the US devolving into a Stage 6 (civil-war-type) dynamic within the next 10 years are only around 30 percent, that is a dangerously high risk that must be protected against and watched closely via my coincident and leading indicators.

I tag along with the smartest people I can find, so I can stress test my thinking and learn from them.