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

by Ray Dalio

Not knowing what is true because of distortions in the media and propaganda increases as people become more polarized, emotional, and politically motivated.

During times of great wealth gaps and populist thinking, stories that bring down elites are popular and lucrative, especially those that bring down left-leaning elites in right-leaning media outlets and those that bring down right-leaning elites in left-leaning media outlets.

a 2019 Gallup poll found that only 13 percent of Americans surveyed have “a great deal” of trust in the media and only 41 percent of those surveyed have either a “fair” or “great deal” of trust in the media. That compares with 72 percent who trusted the media in 1976. This is not just a fringe media problem; it is a mainstream media problem and a problem for our whole society.

When the causes that people are passionately behind are more important to them than the system for making decisions, the system is in jeopardy. Rules and laws work only when they are crystal clear and most people value working within them enough that they are willing to compromise in order to make them work well. If both of these are less than excellent, the legal system is in jeopardy.

When winning becomes the only thing that matters, unethical fighting becomes progressively more forceful in self-reinforcing ways. When everyone has causes that they are fighting for and no one can agree on anything, the system is on the brink of civil war/revolution.

A classic dilemma arises when demonstrations start to cross over into revolution. Both giving the freedom to protest and suppressing protests are risky paths for leaders, as either path could lead the revolution to get strong enough to topple the system. No system allows people to bring down the system—in most, an attempt to do so is treason, typically punishable by death. Nonetheless, it is the job of revolutionaries to bring down systems, so governments and revolutionaries test each other to see what the limits are. When broad-based discontent bubbles up and those in power allow it to grow, it can boil over to the point that when they try to put a lid on it, it explodes.

Democracy requires consensus decision making and compromise, which requires a lot of people who have opposing views to work well with each other within the system. That ensures that parties that have significant constituencies can be represented, but like all big committees of people who have widely different views (and might even dislike each other), the decision-making system does not lend itself to efficient decision making.

The biggest risk to democracies is that they produce such fragmented and antagonistic decision making that they can be ineffective, which leads to bad results, which leads to revolutions led by populist autocrats who represent large segments of the population who want to have a strong, capable leader get control of the chaos and make the country work well for them.

Civil wars inevitably happen, so rather than assuming “it won’t happen here,” which most people in most countries assume after an extended period of not having them, it is better to be wary of them and look for the markers to indicate how close one is.

In the reform process the leadership provided universal elementary education for both boys and girls, adopted capitalism, and opened the country up to the outside world. They did this with new technologies, which led them to become very competitive and gain wealth.

By the way, as a result of its reformations Japan went on to move through the classic stages of the Big Cycle. It became extremely successful and rich.

Civil wars and revolutions inevitably take place to radically change the internal order. They include total restructurings of wealth and political power that include complete restructurings of debt and financial ownership and political decision making.

These changes are the natural consequence of needing to make big changes that can’t be made within the existing system. Almost all systems encounter them.

Naturally the revolutionaries want to radically change the system, so naturally they are willing to break the laws that those in power demand they adhere to. These revolutionary changes typically happen violently through civil wars, though as previously described, they can come about peacefully without toppling the system.

They typically happened when the existing orders slipped into dysfunctional anarchies and a large percentage of the population yearned for strong leadership, discipline, and productivity.

broad economic prosperity is the biggest reason a new regime succeeds or fails, the long-term trends have been to both greater total wealth and broader distribution of the wealth (i.e., better economic and health outcomes for the average person). That big picture can be easily lost when one is in and experiencing one part of the Big Cycle.

Typically the people who led the civil war/revolution were (and still are) well-educated people from middle-class backgrounds.

scholarly middle-class family of civil servants. These leaders also typically were (and still are) charismatic and able to lead and work well with others to build big, well-run organizations that have the power to bring about the revolutions.

Typically in revolutions the revolutionaries with these different grievances joined together to make revolutionary changes; while they looked united during the revolution, after winning the revolution, they typically fought with each other over issues and for power.

Almost all civil wars have had some foreign powers participating in attempt to influence the outcome to their benefit.

The beginnings of civil wars and revolutions aren’t clear when they are happening, though they are obvious when one is deeply in the middle of them.

As for what types of leaders are best for civil wars and revolutions, they are the “inspirational generals”—people who are strong enough to marshal support and win the various types of battles they have to win. Because the fight is brutal they have to be brutal enough to do whatever is necessary to win.

While civil wars and revolutions are typically extremely painful, they often lead to restructurings that, if done well, can establish the foundation for improved future results. What the future after the civil war/revolution looks like depends on how the next steps are handled.

The test of any system is simply how well it works in delivering what most of the people want, and this can be objectively measured, which we can do and will continue to do.

To get a rich picture of what makes great leaders great in different types of circumstances, I recommend Henry Kissinger’s forthcoming book on leadership.

Relationships between people and the orders that govern them work in basically the same ways, whether they are internal or external, and they blend together. In fact, it wasn’t long ago that there were no distinctions between internal and external orders because there were no clearly defined and mutually recognized boundaries between countries. For that reason, the six-stage cycle of going between order and disorder that I described in the last chapter about what happens within countries works the same way between countries, with one big exception: international relations are driven much more by raw power dynamics.

if the US, China, or other countries have more power than the United Nations, then the US, China, or other countries will determine how things go rather than the United Nations. That is because power prevails, and wealth and power among equals is rarely given up without a fight.

When powerful countries have disputes, they don’t get their lawyers to plead their cases to judges. Instead, they threaten each other and either reach agreements or fight. The international order follows the law of the jungle much more than it follows international law.

Trade/economic wars: Conflicts over tariffs, import/export restrictions, and other ways of damaging a rival economically

Technology wars: Conflicts over which technologies are shared and which are held as protected aspects of national security

Geopolitical wars: Conflicts over territory and alliances that are resolved through negotiations and explicit or i...

Capital wars: Conflicts imposed through financial tools such as sanctions (e.g., cutting off money and credit by punishing institutions and governments that offer it) ...

Military wars: Conflicts that involve actual shooting and the deploym...

all of the factors that drive internal and external cycles tend to improve and worsen together. When things get bad, there are more things to argue over, which leads to greater inclinations to fight. That’s human nature, and it is why we have the Big Cycle, which oscillates between good times and bad ones.

All-out wars typically occur when existential issues (ones that are so essential to the country’s existence that people are willing to fight and die for them) are at stake and they cannot be resolved by peaceful means. The wars that result from them make it clear which side gets its way and has supremacy in subsequent matters. That clarity over who sets the rules then becomes the basis of a new international order.

after self-interest and self-survival, the quest for wealth and power is what most motivates individuals, families, companies, states, and countries. Because wealth equals power in terms of the ability to build military strength, control trade, and influence other nations, domestic and military strength go hand in hand.

a country must be strong enough financially to give its people both a good living standard and protection from outside enemies. The really successful countries have been able to do that for 200 to 300 years. None has been able to do it forever.

The greatest risk of military war is when both parties have 1) military powers that are roughly comparable and 2) irreconcilable and existential differences.

to get more win-win outcomes one needs to negotiate with consideration given to what is most important to the other party and to oneself, and know how to trade them.

Winning means getting the things that are most important without losing the things that are most important, so wars that cost much more in lives and money than they provide in benefits are stupid. But “stupid” wars still happen all the time for reasons that I will explain.

It is far too easy to slip into stupid wars because of a) the prisoner’s dilemma, b) a tit-for-tat escalation process, c) the perceived costs of backing down for the declining power, and d) misunderstandings existing when decision making has to be fast.

People and empires are more likely to have cooperative relationships during good times and to fight during bad times.

the United States and China are in an economic war that could conceivably evolve into a military war and comparisons between the 1930s and today provide valuable insights into what might happen and how to avoid a terrible war.

To help convey the picture of the 1930s, I will run through the geopolitical highlights leading up to the official start of the war in Europe in 1939 and the bombing of Pearl Harbor in 1941. Then I will quickly move through the war and the start of the new world order in 1945, with the US at the peak of its power.

Consider the following three big choices that a country has to make when selecting its approach to governance: 1) bottom-up (democratic) or top-down (autocratic) decision making, 2) capitalist or communist (with socialist in the middle) ownership of production, and 3) individualistic (which treats the well-being of the individual with paramount importance) or collectivist (which treats the well-being of the whole with paramount importance).

Harmful acts of nature (e.g., droughts, floods, and plagues) often cause periods of great economic hardship that when combined with other adverse conditions lead to periods of great conflict.

From 1933 until the end of 1936 the stock market returned over 200 percent, and the economy grew at a blistering average real rate of about 9 percent.

In 1936, the Federal Reserve tightened money and credit to fight inflation and slow an overheating economy, which caused the fragile US economy to fall back into recession and the other major economies to weaken with it, further raising tensions within and between countries.

interactions between what governments want to happen and what is actually happening are what drive the cycles.

The following table shows the worst cases of investing in major countries in detail. You will note that the US doesn’t appear on this table because it wasn’t among the worst cases. The US, Canada, and Australia were the only countries that didn’t experience sustained periods of losses.