The Archetypical Cycle of Internal Order and Disorder

The Cycle of Internal Order and Disorder & Where We Are in It

Executive Summary

How people are with each other is the primary driver of the outcomes they get. Within countries there are systems or “orders” for governing how people are supposed to behave with each other. These systems and the actual behaviors of people operating within them produce their consequences. In the next two chapters we will explore the timeless and universal cause/effect relationships that shape the internal orders that people have and the behaviors that drive the shifts between periods of order and periods of disorder.   

We are now seeing growing disorder in a number of leading countries around the world, most importantly in the United States. I wanted to put that disorder into context so I did the research I am sharing in these chapters. Because how the US handles its disorder will have profound implications for Americans, others around the world, and most economies and markets, in these two chapters I am focusing more on the US than on other countries, though I will follow these chapters with examinations of other leading countries.  

The following chart shows in a simplified way where the US is within the archetypical Big Cycle as determined by the previously described measures that drive the rise and decline of empires. It is in this stage when there are bad financial conditions and intensifying conflict. Classically this stage comes after periods of great excesses in spending and debt and the widening of wealth and political gaps and before there are revolutions and civil wars. The United States is at a tipping point in which it could go from manageable internal tension to revolution and/or civil war. To be clear, I am not saying that the United States or other countries are inevitably headed that way; however, I am saying that now is an especially important time to know and watch the markers in order to understand the full range of possibilities for the period ahead. In this chapter, I explore those markers by drawing on the lessons from analogous historical cases.  

Because the subject is so important I want it to be complete, which has made it more than 40 pages long, so I put it in two chapters: Chapter 8 is “The Archetypical Cycle of Internal Order and Disorder” and Chapter 9 is “Delving into the Six Stages of the Internal Cycle with a Particular Focus on the US Now” (see Chapter 9 here: https://www.linkedin.com/pulse/delving-six-stages-internal-cycle-particular-focus-us-ray-dalio).  

Remember: if you want to get through this quickly you can just read the highlights, which are in bold. Principles are in bold and italics.  

Background

As you know, I was drawn to do this research by the unique configuration of three big interrelated forces that are now having the biggest effects on who has what wealth and power since the 1930-45 period. They are: 1) the big debt, money, and economic cycle, 2) the big internal cycle of order/disorder (caused by gaps in wealth, values, and politics), and 3) the big external cycle of peace and war (caused by rising powers, most importantly China, challenging the leading world power, the United States).[1]  Since I already covered 1) the big debt/money/economic cycle in Chapters 2 and 3, and 3) the big cycle of external relations (especially between the United States and China) in Chapters 5 through 7, I am now going to focus on 2) the big internal cycle of order/disorder. The big internal order cycle is the most important cycle because how people interact within countries has a much bigger influence on countries’ strengths and well-being than how people and countries interact with each other internationally.

Because I wondered how today’s conditions and policies compare with those in the past, I wanted to see where we are in those cycles and the evolutions that got us there. Obviously the recent movement in the internal order has been toward greater disorder (especially in the United States)—i.e., people and politicians are now at each other’s throats to a degree greater than at any time in my 71 years—and these struggles over wealth and power are becoming more vicious. That led me to study analogous times in history.  

By now you know my approach. It is to learn like a doctor learns—by encountering many cases as a global macro investor over my roughly 50-year career and by studying many historical cases. Studying many cases helps me understand the cause/effect sequences that drive their progressions. I study them qualitatively and quantitatively through my experiences, by speaking with pre-eminent experts, reading great books, and digging into stats and archives. From that learning comes a visualization of an archetypical sequence of how things happen. With that I study deviations from that archetypical cycle to try to explain them. Then I put these mental models into algorithms both to monitor conditions relative to my archetypes and to help me make decisions based on them. I do this continuously and will continue to do it until I die, so what you are reading is a work-in-progress.

To see this picture of continuously evolving systems/orders for controlling wealth and power and the timeless and universal principles governing them, I had to put many bits and pieces together because history is typically presented in chopped-up bits and pieces and the single story of the changing world order is too enormous to study and digest as one whole thing. Because of its enormity, I contained my ambition to trying to understand the last 500 years and China’s dynasties back to the Tang Dynasty around the year 600 pretty well and the eras before then pretty superficially. I focused on the big trends, the most important cause/effect relationships, and the most important principles that will help me most now and in the future. Though I am certainly no expert in all of this history, through my examination of it, the cycles of internal order and disorder and the main reasons for the changes came out loudly and clearly and provided me with a valuable context for seeing where we are and what might happen next.  

Through this learning process, I saw how countries, like any other organism, have well-defined life cycles. I saw how changes in internal orders (i.e., countries’ systems for governing internally) and changes in the world order (i.e., the systems for governing power throughout the world) happen continuously and everywhere in similar and increasingly interconnected ways that flow together as one all-encompassing story from the beginning of recorded time up to this moment. My seeing many interlinking cases evolve together helped me to see the patterns that govern them and to imagine the future based on what I’ve learned. Most importantly I saw how the constant struggles for wealth and power produced a continuously evolving 1) internal systems/orders and 2) external systems/orders and saw how these internal and external orders affect each other—with the whole thing (i.e., the world order) working like a perpetual-motion machine that evolves while doing the same things over and over again for basically the same reasons.  

I saw how 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 struggled over other things, most importantly ideology and religion. I saw how these struggles happened in timeless and universal ways throughout time, and how these struggles had huge implications for all aspects of people’s lives, starting with what happened with taxes, the economy, and how people were with each other through periods of boom and bust and peace and war, and how they unfolded in cyclical ways, like the tide coming in and out.

I saw that when these struggles took the form of healthy competition that encouraged human energy to be put into productive activities, they produced productive internal orders and prosperous times and when those energies took the form of destructive internal fighting, they produced internal disorder and painfully difficult times. I saw why the swings between productive order and destructive disorder typically evolved in cycles driven by logical cause/effect relationships and how they happen in all countries for mostly the same reasons. I saw that those who rose to achieve greatness did so because of a confluence of key forces coming together to produce that greatness and those who declined did so because these forces dissipated.  

I also saw that going from one extreme to another in a long cycle has been the norm, not the exception—that it is a very rare country in a very rare century that doesn’t have at least one boom/harmonious/prosperous period and one depression/civil war/revolution, so we should expect both. Yet, I saw how most people thought, and still think, that it is implausible that they will experience a period that is more opposite than similar to that which they have experienced. That is because the really big boom periods and really big depression/revolution periods come along about once in a lifetime, and once-in-a-lifetime experiences are naturally surprising…and because the swings between great and terrible times tend to be far apart, the futures we encounter are more likely to be more opposite than similar to those that we had and expect.   

For example, my dad and most of his peers who went through the Great Depression and World War II (which came about because of the Roaring ’20s debt boom) never imagined the post-World War II economic boom because it was more opposite than similar to what they had experienced. I understand why, given those experiences, they wouldn’t think of borrowing or putting their hard-earned savings into the stock market, so it’s understandable that they missed out on profiting from the boom. Similarly, I understand why, decades later, those who only experienced debt-financed booms and never experienced depression and war would borrow a lot to speculate and would consider depression and war implausible. The same is true with money: money used to be “hard” (i.e., linked to gold) after World War II until governments made money “soft” (i.e., fiat) to accommodate borrowing and prevent entities from going broke in the 1970s. As a result, most people now believe that they should borrow more of it even though borrowing and debt-financed booms have historically led to depressions and civil wars. 

I have come to believe that while the lessons and warnings of history are clear if one looks for them, most people don’t look for them because most people learn from their experiences and a single lifetime is too short to give them those lessons and warnings that they need. In this chapter I will share with you the lessons and warnings that I think I have learned from my experiences and explorations. Remember that while I am doing my best to be as accurate as possible, I am not sure that my perspective is right, so I am simply presenting how I see things for you to evaluate for yourself.  

To do that, in the first part of this chapter I will take you through what I believe are timeless and universal principles of how domestic orders typically change from one set of conditions to the next. The way I see it, at any moment in time there are both 1) the existing set of conditions that include the existing domestic and world orders and 2) timeless and universal forces that cause changes in these conditions. Most people tend to pay too much attention to 1) what exists relative to 2) the timeless and universal forces that produce the changes. I want to do the opposite because understanding the timeless and universal forces that produce changes is most important. I will do this exploration in two parts. In this chapter I will focus on the timeless and universal forces that produce the changes— including the timeless and universal drivers behind them and the six stages of the archetypical cycle—and in Chapter 9 I will delve into these six stages in much greater depth and look at where the US now stands within this context.  

The Timeless and Universal Forces That Produce Changes to the Internal Order

The following four timeless and universal dynamic forces are those that I believe are the most important in driving changes. 

1. The Wealth and Power Class Struggle Dynamic

For as long as there has been recorded history, in almost all societies a very small percentage of the population (the “ruling classes” or “the elites”) controlled most of the wealth and the power (though those percentages have varied).[2] Naturally those who benefit from and control the system by and large like the system and work with each other to maintain it. Because those with wealth can influence those with power and because those with power can influence those with wealth, these ruling classes or elites have alliances between themselves and want to maintain the existing order with everyone following its dictums and laws, even as the system increases the gaps between those with power and wealth and those without them. As a result, all internal orders are run by certain classes of people who have wealth and power and who operate in symbiotic relationships with each other to maintain the order. Though aligned not to disrupt the order that benefits them, throughout time these elites have struggled with each other over wealth and power and also have struggled with non-elites who want wealth and power. When times are good and most people prosper, the struggles are smaller; when times are bad, the struggles are worse. And when things are very bad for a large percentage of the people—e.g., there is an unresolvable debt crisis, a very bad economy, a very bad act of nature —the resulting sufferings, stress, and struggles typically lead to revolutions and/or civil wars.  

As Aristotle said a long time ago: “The poor and the rich quarrel with one another, and whichever side gets the better, instead of establishing a just or popular government, regards political supremacy as the prize of victory.”[3]   

Classically, the big cycle transpires with periods of peace and productivity that increase wealth in a disproportionate way, which leads to a very small percentage of the population gaining and controlling exceptionally large percentages of the wealth and power, then becoming overextended, then encountering bad times that hurt those who are the least wealthy and powerful the hardest, which then leads to conflicts that produce revolutions and/or civil wars, which after completed, then lead to the creation of a new order and the cycle beginning again.

What drives these cycles is human nature. Because all people have that in common, people all over the world who face similar circumstances tend to deal with them similarly, which is what gives us the timeless and universal cause/effect relationships that we will explore in this and the next chapters.  

Let’s start by exploring how they affect the changing internal orders.    

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, work with the people who have the power to set and enforce the rules. This has happened similarly across countries and across time. While that has always been the case, the exact form of it has evolved and will continue to evolve.  

For example, for most of the 13th through 19th centuries, when agriculture was the main source of wealth and most people believed that the power to govern was granted to monarchs through the mandate of heaven, the prominent internal order all around the world, even in countries that never had any contact with each other, consisted of the ruling classes or elites being 1) the monarchy, which ruled in conjunction with 2) the nobility, which controlled the means of production (at the time that capital was agricultural land), and/or 3) the military. Workers were viewed as parts of the means of production to make the land productive to produce the wealth for the ruling-class elites; they had little or no say in how the order was run.  

Societies that had little or no contact with each other developed in similar ways because they had similar situations to deal with and because the nature of their decision making was similar. For example, for much of history Europe, China, and most countries had monarchies and nobles as the ruling classes, yet they were a bit different because in Europe the church was also part of the ruling mix. In Japan the monarchy (the emperor and his ministers), the military, and the business community (the merchants and artisans) were the ruling elites. All around the world the monarchs needed people to manage the day-to-day operations for them. The top people were ministers, who oversaw the bureaucracies of people who did the various jobs that needed to be done for governance to work. Across countries there were always, and still are, different levels of governance at the country level, the state/province level, the municipality level, the city level, etc., and there were timeless and universal ways that they operated and interacted with each other that were, and still are, pretty consistent across the world. Such systems of governance (i.e., orders) have existed just about everywhere in the world with relatively modest differences and they were all supported in similar ways by a hierarchy of professional bureaucrats, starting with the ministers who served the rulers and down to the functionaries who did the tasks, and over time they evolved in logical ways via class struggles. What exists today is simply the result of the natural evolutions of these timeless and universal ways of interacting, with their own cultural flavors thrown in. For example, the roles of the ministers who helped the monarchies evolved into the roles of prime ministers and other ministers that now exist in almost all countries (though in the United States they are called “secretaries”). 

Over time, these systems have evolved and varied in logical ways as a result of struggles for wealth and power. For example, in England around 1200 there was a wealth and power struggle that evolved gradually at first and then abruptly into a civil war between the nobility and the monarchy, which is how these shifts tend to evolve—i.e., gradually at first and then abruptly. Like most of these, the fight was over money and the power to determine who got how much money. The monarchy under King John wanted to get more tax money and the nobles wanted to give less tax money. They disagreed over how much say the nobles should have on the matter, so they had a civil war. The nobles won and gained more power to set the rules, which led to what they first called a “council,” which soon became the first parliament, which evolved into the parliament that the English have today. The peace treaty that formalized this deal into law is called the Magna Carta. Like most laws, this one didn’t matter much relative to power so another civil war broke out in which the nobles (one class) and the monarchy (another class) again fought over wealth and power. In 1225 they wrote up a new Magna Carta that those with power got to interpret and enforce. Then the fighting picked up a few decades later. In that war, the nobles cut off tax payments to the monarchy, which forced the monarchy (then Henry III) to give in to the nobles’ demands. These struggles went on constantly, leading the orders to evolve.

Fast forward to the 15th, 16th, and 17th centuries and one can see that there were big changes in the sources of wealth, at first because of global exploration and colonialism (starting with the Portuguese and the Spaniards) and later because of the invention of capitalism (i.e., stocks and bonds) and labor-saving machines that fueled the Industrial Revolutions (particularly helping the Dutch and then the British) that made those who profited from these sources of wealth more powerful—i.e., the shifts in wealth and power over these centuries were from a) land-owning nobles (who then had the wealth) and monarchies (who then had the political power) to b) capitalists (who in the later period had the wealth) and elected representatives or autocratic government leaders (who in the later period had the political power). Almost all countries made these shifts—some peacefully but most painfully.    

For example, in France for most of the 17th and 18th centuries, the king ruled in a balance of power arrangement with three other classes: 1) the clergy, 2) the nobility, and 3) the commoners. There were representatives of these groups that voted. The first two, which accounted for only 2% of the population, had more votes or eventually the same amount of votes as the commoners, who made up 98% of the population. They called this three-class-based internal order that negotiated for power the ancien régime (which means “old order”). Then practically overnight it changed in a revolutionary way via the French Revolution, which began on May 5, 1789, when the third class—the commoners—had enough of that system, overthrew all the others, and took the power for itself. In most countries around the world at the time, the same basic ruling order prevailed—i.e., the monarchy and nobles, who accounted for a very small percentage of the population and had most of the wealth, ruled until, all of sudden, there was a civil war/revolution that led the old order to be replaced by a very different new ruling order.

Though the ruling orders for managing these class struggles (i.e., the internal orders) were and are different in different countries, they evolved similarly across countries. For example, they evolved both gradually (through reforms) and abruptly (through civil wars/revolutions) and evolved into those orders that now exist in all countries. I expect they will continue to evolve gradually and abruptly to produce new domestic orders. While the classes who have wealth and political power change, the processes that produce these changes have remained pretty much the same through time right up to today. They occur through struggles that lead to both a) peaceful reforms through negotiations and b) violent reforms via civil wars and revolutions. The peaceful reforms tend to come earlier in the cycle and the violent civil wars and revolutionary reforms tend to come later in the cycle for logical reasons that we will delve into later.  

I cannot overstate the importance of class struggles relative to individual struggles. We, especially those in the United States, which is a “melting pot,” tend to think more of individual struggles and not give adequate attention to class struggles. I didn’t fully realize its importance until I did my extensive study of history. My studying of history has led me to see it in a way that I hope I can convey.  

In all countries throughout time (though in varying degrees) people have been typecast and placed within “classes” either because they have chosen to be with people like them or because others outside that group have typecast them, and power has been shared among three or four classes. How people are classed determines who their allies and enemies are. People are put into these classes whether they like it or not because all people stereotype. While 1) rich and poor and 2) right and left are the most common big class distinctions, there are many other distinctions around 3) race, 4) ethnicity, 5) religion, 6) gender, 7) lifestyle (e.g., liberal or conservative), and 8) location (e.g., urban versus rural). Generally speaking, people tend to cluster in these classes, and when times are good early in the cycle there is more harmony between these classes and when things are bad there is more fighting between them. 

While I love that the United States is the country where these class distinctions matter least, people’s classes still matter in the US and they matter a lot more during stressful times when class conflicts intensify.

To help you get the picture in a more intimate way let’s do a simple exercise. Assume that most people who don’t know you well look at you as being of a certain class, because that’s a good assumption. Now, to imagine how you are perceived, look at the list below and ask yourself which class or classes you fall into. After you answer that, ask yourself which of the classes listed below do you feel an affinity for and expect to be your allies. Which classes do you not like or view as your enemies? Which ones are the ruling classes, and which ones are the revolutionary classes who want to topple them? Which ones are on the ascent, and which ones are on the decline? You might consider writing these down and thinking about them because during periods of greater conflict the classes you are in or are assumed to be in will become more important in determining who you will be with and against, what you will do, and where you will end up.  

1. Rich or poor?
2. Right, left, or moderate?
3. Race?
4. Ethnicity?
5. Religion?
6. Gender?
7. Lifestyle (e.g., liberal or conservative)?
8. Location (e.g., urban, suburban, or rural)?

Still today only a small percentage of the population, which comes from only a few of these classes, has most of the wealth and power and rules as “the elites.”   To me it is clear that a) the capitalist class now has the most financial power in most countries and b) political power in democracies lies in the hands of all the people who choose to vote while in autocracies it lies in the hands of the limited number of people selected by whatever process they have to make selections.[4]  So, for the most part today, those are “the ruling classes” and “the elites” that oversee the current domestic orders, though they are now under attack, so perhaps that is shifting. For example, there is now a big movement in the United States to be much more inclusive of members of different classes in both the capitalist money-making world and in the political world. These shifts can be good or bad depending on whether they are handled peacefully or violently and smartly or stupidly. One timeless and universal truth that I saw went back as far as I studied history, since before Confucius around 500 BC, is that those societies that draw on the widest range of people and give them responsibilities based on their merits rather than privileges are the most sustainably successful because they find the best talent to do their jobs well, they have diversity of perspectives, and they are perceived as the most fair, which fosters social stability.  

I presume that the current internal orders of countries, like those of the past, will continue to evolve to become something different through the struggles of different classes with each other over how to divide wealth and political power. Because this wealth and power dynamic is very important, it is worth watching closely to discern which classes are gaining and which ones are losing wealth and power (e.g., AI and information technology developers are now evolving to gain it at the expense of those who are being replaced by such technologies) and also to discern the reactions to these shifts that lead the cycles to change.

So, as I see it, everything is changing in classic ways driven by a tried-and-true perpetual-motion machine. This machine has produced, and is producing, different systems, such as communism, fascism, autocracies, democracies, and evolutionary descendants and hybrids of these such as “state capitalism” in China. It will produce new forms of internal orders to divide wealth and allocate political power that will affect our lives greatly, all based on how people choose to be with each other and how human nature enters into how they make their choices.  

To explain what I mean by that I’d now like to show you a few more timeless and universal drivers of changes in internal orders. I explained a couple of these in my exploration of international relations, especially those between the US and China, so I apologize if they are redundant for you.  

As mentioned, the most important thing that drives changes in domestic conditions is how people are with each other, which is primarily a function of human nature. These interactions have logical cause/effect relationships that drive them. The following are a few more of the most important ones.

2) The Balance of Power Dynamic

It is up to the parties of any relationship to choose what kind of relationship they will have, but they have to mutually agree. For example, they can choose whether to have a win-win cooperative-competitive relationship or a lose-lose mutually threatening relationship, and to be allies or to be enemies, though it takes actions by both of them to determine what type of relationship they will have and then be smart to make it work well. If they choose to have a primarily win-win cooperative-competitive relationship, they must take into consideration what is really important to the other and try to give it to them in exchange for them reciprocating. In that type of win-win relationship, they can have tough negotiations done with respect and consideration, competing like two friendly merchants at a bazaar or two friendly teams at the Olympics. If they choose to have a lose-lose mutually threatening relationship they will primarily think about how they can hurt the other in the hope of forcing the other into a position of fear in order to get what they want. In that type of lose-lose relationship they will have more destructive wars than productive exchanges. Having win-win relationships is obviously better than having lose-lose relationships, but they are often very difficult to have, which brings me to the prisoner’s dilemma dynamic.  

When two competing entities have comparable powers that include the power to destroy the other, the risks of a fight to the death are high unless both parties have extremely high trust that they won’t be unacceptably harmed or killed by the other. That is true in affecting domestic orders as well as world orders.  

Imagine that you are dealing with someone who can either cooperate with you or destroy you and that you can either cooperate with them or destroy them, and neither of you can be certain what the other will do. What would you do? Even though the best thing for you and your opponent to do is cooperate, the logical thing for each of you to do is to destroy the other before being destroyed by the other. That is because survival is of paramount importance and you don’t know if they will destroy you, though you do know that it is in their interest to destroy you before you destroy them. In game theory being in this position is called the “prisoner’s dilemma.” It is why establishing mutually assured protections against existential harms that the opponents can inflict on each other is necessary to avoid deadly wars. Establishing exchanges of benefits and dependencies that would be intolerable to lose further reinforces good relations. Because a) most wars occur when it isn’t clear which side is most powerful so the outcomes are uncertain, b) the costs of wars are enormous, and c) losing wars is ruinous, they are extremely dangerous and must only be entered into if there is confidence that you will not have unacceptable losses, so you must think hard about what you will really fight to the death for. Sometimes the existential issues for the two sides can’t be resolved and a war (internal or external) is unavoidable.  

The odds of having peace rather than war depends on the willingness of people to abide by the rules that exist, the willingness to be mutually agreeable in adapting them when circumstances require adaptation to avoid war, and the threat of mutually assured destruction—i.e., the more these things exist the greater the chance for peace, and the less they exist the greater the chance for war. That is true both internationally and domestically. For example, the rules of the game in many systems (e.g., the current established democracies) limit how much harm one side can inflict on the opponent and how they can inflict it, so if the rules are adhered to, the fights between them are like two teams who are allowed to beat but not destroy the other. As a result it is possible for the defeated team to regain strength and come back fighting. However, in some societies now and in many cases in history, the domestic order fights were fights to the death because the winner wanted to make sure the loser was down for good. History also shows us that we can’t necessarily rely on systems and people who have rules and abide by them not to surprisingly throw them out and fight brutally. Many who assumed that the rules and civility would continue and that they would be safe suffered from surprisingly quick changes that cost them their freedoms or their lives (e.g., the 1933-45 change in the domestic order in Germany as it affected the Jews, the 1949 change in China as it affected capitalists, and the 1959 change in Cuba as it affected most people). As for adhering to agreements, they also can’t be relied on because circumstances change in ways that can’t be anticipated so parties that want the best outcomes have to be willing to change them in mutually acceptable ways. Ideally 1) good rules and agreements and 2) the determinations and flexibilities to continuously have them exist so good relations that result from them can exist. However, if these don’t exist, there is always the threat of mutually assured destruction that can keep the peace. It is a powerful force for peace because self-survival is the basic need that is more important than anything else.

These cases lead me to my next principle that is based on the realities of how humans interact.  

Have power, respect power, and use power wisely, or leave rather than fight. Having power is good because power will win out over agreements, rules, and laws all the time. That’s because, when push comes to shove, those who have the power either to enforce their interpretation of the rules and laws or to overturn the rules and laws will get what they want. The sequence of using power is as follows. When there are disagreements, the parties disagreeing will first try to resolve them without going to rules/laws by trying to agree on what to do by themselves. If that doesn’t work, they will try using the agreements/rules/laws that they agreed to abide by. If that doesn’t work, those who want to get what they want more than they respect the rules will resort to using their power. When one party resorts to using its power and the other side in the dispute isn’t sufficiently intimidated to knuckle under, there will be a testing of relative power, typically in the form of a war. Using power wisely doesn’t necessarily mean forcing others to give you what you want—i.e., bullying them. It includes recognizing that generosity and trust are powerful forces for producing win-win relationships, which are fabulously more rewarding than lose-lose relationships, though they’re not always attainable. When wars—civil or external—happen you will have to decide whether you want to be in them or get out of them. When in doubt get out. You can always get back in, but you might not be able to get out.  

Let’s now look at how allies, enemies, and wars develop and are gotten past and how periods of peace and prosperity develop, over and over again.  

In studying a lot of history and personally experiencing a tiny sliver of it myself I have seen how the balance of power dynamic drives virtually all struggles for power—e.g., office politics within organizations, local politics, national politics in shaping the domestic order and international politics in shaping the world order. The balance of power dynamic of forming allies and enemies and having wars transpires in a series of steps in which 1) those on opposing sides form alliances so both sides have roughly equal amounts of power, 2) then the two sides struggle with each other and eventually fight to clearly establish who the winners and losers are, 3) then those on the winning side fight among themselves for control of the winning side until one wins and consolidates power, 4) then with power clearly established and no one wanting to fight the clearly dominant power there is a period of peace and prosperity, which typically produces greater wealth and power gaps until 5) wealth and power gaps occur, the dominant power weakens, and for one reason or another there is a new wealth and power struggle that leads to the process happening all over again. More precisely, the process unfolds as follows, though how exactly it unfolds depends on the order and people at the time these stages unfold: 

A)  There will be the formation of alliances

When there isn’t roughly equal power (e.g., if in the US the Democrats have much more power than the Republicans, or vice versa), the more powerful party will likely take advantage of and control the less powerful party. To neutralize the stronger party, the weaker party naturally finds other parties to join them in opposing the stronger party so they collectively can have the same or more power as the opposition. If the formerly weaker party collectively gains more power than the formerly stronger party, the formerly stronger party will cut deals with other parties to ally with them to eliminate the superiority of the opposition. As a result, allies that have very different vested interests unite in opposing the common enemy—as the saying goes, “the enemy of my enemy is my friend”—and this dynamic naturally leads to the different sides having roughly equal power. The fact that these parties are bound together in the shared fight against the common enemy should not be misconstrued to mean that they are aligned. For example, one could see this balance of power dynamic at work in the recent election. It is why the Republican Party and the Democratic Party gained roughly equal numbers of supporters and became roughly equally powerful in a fight against the other, while at the same time the differences within the parties are so great that some segments want to destroy the other segments in order to gain control of their party. This alliance- and enemy-forming dynamic happens at all different levels of relationships from the most important international alliances that define the most important elements of the world order down to the most important alliances within countries that define the internal orders, down to those within states, within cities, within organizations, and among individuals. The most important evolutionary shift to affect these has been the shrinking of the world to make them more global. In the old days they were less global (e.g., European countries formed alliances to fight other European countries, Asian countries did the same, etc.), but as the world has shrunk because of improved transportation and communications it has become more interconnected and bigger and more global alliances developed. That is why there were two big sides in World Wars I and II and will be going forward.    

B)  Then there will be the struggle to determine winners and loser

Big fights typically happen between the sides when both sides have roughly equal powers and existential differences between them. Big fights don’t occur when there are big asymmetries in power because it would be stupid for obviously weaker entities to fight obviously stronger ones, and if they did fight, the fights would be small ones. However sometimes, when there are roughly equal levels of power on both sides, stalemates/gridlocks rather than big fights might occur when the existential threat of harming oneself in the process of trying to beat the other side is greater than the gains that would come from having a fight to the death. For example, when there is mutually assured destruction—e.g., as the US and the Soviet Union faced, which prevented them from having a fight to the death—there is likely to be a stand-off rather than a fight. Periods of peace typically happen when there are unequal levels of power and the stronger power generously subordinates the weaker entities so that all are happy.  

While these big fights are typically violent, they can be nonviolent only if the entities have nonviolent rules of engagement that they adhere to that allow the resolution of disputes, most importantly the existential ones. For example, in the last US election the two political parties had roughly equal amounts of power and irreconcilable differences so they had a big fight for political control that will lead to the peaceful transfer of political power executed in accordance with the rules set out in the Constitution. However, when there are not clear rules and/or when the parties don’t abide by them, the fighting will be far more brutal, often quite literally to the death.

C)  Then there will be fights among the winners

History shows us that after the fight for power in which the common enemy is defeated, those who united against the common enemy typically fight among themselves for power and those in the losing party do the same as they plan their next attack. I call that the “purge” state of the balance of power dynamic. It has happened in all cases, with the French and Russian civil wars and revolutions being the most well-known. Understanding this typical dynamic, one should look out for it right after one regime takes power from another. For example, since the US is now past the political fight stage (i.e., the election) and is now operating with the regime change in US political leadership (i.e., a new president), we should now turn our attention to how the factions of the Democratic Party fight each other for control. We should also watch for how the factions of the Republican Party fight each other for control of their party. Most importantly we should see whether the most extreme elements within their parties win, which would pull the two parties further apart and set the stage for a much greater conflict between the two more polarized sides (the Democrats and the Republicans), or if the moderates in the two parties win, which would bring the two parties closer together. When new regimes (i.e., the winning powers) come to power they have to decide what to do with the enemies that they beat knowing that, if they aren’t killed or neutered, there is a good chance they will regain strength and continue the fight. What they do depends on the system and the leaders in the system. In the US system and generally in democracies, the rules allow the losers to remain unharmed and unconstrained and allowed to try to regain power and fight again. In most others they are eliminated in one way or another.

D)  Then there will be a time of peace and prosperity that will lead to wealth gaps and excesses

History shows us that because of this dynamic the best of times—i.e., when there is peace and prosperity—typically happens after a war, when the leadership and power structure are clearly established so there isn’t big fighting for power within the country or with other countries—because there is an obviously more powerful entity that enables the less powerful entities to have a good life.  

E)  Then there will be increasing conflict

For as long as there is peace and prosperity for the majority of the people, which will be the case only if the people remain self-disciplined and productive, the peace and prosperity are likely to continue; however, as previously explained, periods of peace and prosperity tend to cause big wealth gaps that lead to conflicts when prosperity fades and there are other things to fight over. 

As mentioned, these dynamics reflect human nature, which is why they are timeless and universal. What follows are a few other important timeless and universal dynamics of human nature that drive the cycle. 

3)   The Dynamic of Favoring Short-Term Enjoyment over Long-Term Health 

There is a strong pull in most people to favor short-term enjoyment over long-term well-being. That plays a big role in driving these cycles. Favoring short-term enjoyments over long-term health naturally exaggerates the highs and the lows of the cycle. That happens in many ways, most obviously by creating debt boom and bust cycles.  

While most people and organizations favor short-term rewards over long-term health, which hurts them, this is especially true for governments because of how the political dynamic works. More specifically a) politicians have been and continue to be motivated to prioritize the near term over the long term, b) they don’t like to face limitations and difficult financial trade-offs (e.g., to spend on the military for “defense” or to spend on social programs), and c) it is politically threatening to take money away from people by taxing them. For those reasons it is politically desirable to borrow and spend because a) that allows politicians to provide more without having to raise taxes and b) lenders will readily make loans to the central government regardless of how much debt it has if it has the printing press to assure repayment. As a result, governments progressively borrow and spend until they can’t do that anymore at which time the process works in reverse. When they reach their debt limits, if money is “hard” (i.e., they can’t print as much of it as they need), spending has to contract to the level of income, so budgets need to be cut and/or taxes have to rise. This leads to political problems and a host of other problems. Most importantly the place becomes less desirable to be in for those who are taxed and for those who rely on services that have to be cut in the necessary cost-cutting. Those who have more money and more choices leave and that produces a self-reinforcing hollowing out process in which tax revenues fall even as taxes are raised, and this self-reinforcing downward spiral continues until there is a revolutionary restructuring. One can easily monitor this process happening, and it’s valuable to do so.  

The biggest difference in how this shortage of money plays out has to do with whether or not money can be printed and used to fill the hole. In either case people suffer—they just suffer differently. When the money can’t be printed to service the debt (e.g., the debt is denominated in a foreign currency), austerity and debt problems arise. However, when the money can be printed to service the debt, more than enough money to service the debt will be printed and the value of the money will go down. It is also a very “hidden tax” way of getting money so nobody complains, which makes it much more politically palatable. Even in those places in which the money is hard they will print money by abandoning the hard money in the ways comprehensively explained in Chapter 3. However, as the saying goes, “there is no free lunch.”  All else being equal, increases in the supply of debt and money devalue debt and money. While there is a lot of talk now about how one can produce debt and money to spend more without suffering adverse consequences, don’t believe it. Understand the mechanics of how that works, which are covered in Chapters 2 and 3.

In any case when the time of paying back comes, people suffer, which intensifies the consequences of the already-large wealth gaps, conflicts increase, and the cycle typically ends in some form of revolutionary restructuring. Because the long term eventually becomes the present, the day of reckoning eventually comes and presents everyone with a less favorable range of options. For example, as far as where things now stand, we in the United States are facing circumstances that leave us with a less favorable range of options than we could have had if we and those who made decisions before us had put long-term health ahead of short-term desires. 

There is one more common important aspect of human nature that contributes to these cycles being more extreme and painful than they need to be. That is…

4)  The Failure to Learn from History 

Most people are equipped with just the lessons they learned from the experiences they have had, which are very different from the ones they will have; learning from one’s experiences is not adequate, and learning from history is essential. As I explained earlier, because the big cycle lasts for as long as or longer than a lifetime, what people will encounter will be new to them. In fact, because at the opposite ends of this long cycle the circumstances and environments are more opposite than similar—e.g., the peaceful/boom periods are opposite to the war/bust periods—the periods people face later in their lives are likely to be more opposite than similar to the ones they encountered earlier in their lives. As a result, they are typically ill-equipped for them unless they can learn the lessons of history. That causes them to handle the cycles poorly, which makes the downs in the cycles deeper and the ups more overdone, hence the boom-bust nature of them.     

Together these four forces interacting with the circumstances that we inherited are the main drivers of the changes in our internal orders and our behaviors and the outcomes we get. 

How the Circumstances That Exist and the Forces of Change Work Together to Produce Changes in Domestic Orders—i.e., How the Machine Works

I have found that seeing what is now happening as just the current episode of the constantly unfolding story in which a) current circumstances and b) the big forces that impinge on these circumstances together produce changes in what exists and what will exist, with reference to analogous periods in history, is the best perspective to have. One can then see that each order and each group of people operating within that order will change things based on what they are like; it is very helpful to see that the different orders and different people in countries that face different circumstances will determine what comes next.

For example, while each country has its own way of choosing new leaders, in all cases leaders are chosen by both the existing system (i.e., the existing order) and the people operating within the system, so the outcomes depend on what they are like—and what they are like is due to the previously existing system and the previously existing people who shaped them. For example, in the US system the president is chosen by both 1) the democratic system set out in the Constitution and 2) today’s people operating within the system, so how well the system works depends on what both the system and the people operating within the system are like, which came about from their prior determinants. Because the people now dealing with the system are different from those in prior generations who dealt with the same system, we should expect different outcomes than those in the past based on how the people are different. Not recognizing such differences and not having historical perspectives are bad handicaps.  

PS: A Bit of Advice[5]  

I’d like to pass along the following two suggestions about how to produce the best results given your circumstances: 

• You individually, and those who are leading, need to have a realistic understanding of the circumstances you are in, the range of possibilities that exist given these circumstances, and how to make decisions to produce the best possible outcomes given these circumstances. Because the circumstances that you will face will be unlike those you encountered before, you need to learn the lessons of history and imagine how they might apply to the handling of the circumstances you face. You also need to be very adaptable in order to do the things you might need to do that are outside your current range of possibilities. 
• You can have a better future if you put deferred gratification ahead of immediate gratification.    

Where do things stand now?

The following charts, which I showed before, are just a few that help to paint a picture of where the US is now in relation to where it has been in terms of its debt and money, its wealth and income gaps, its political gaps, and its power in the world. I won’t again digress into these and what they mean other than to say that the first charts convey that the debt/money problem is the greatest since the 1930s, the two charts after them show how the wealth and income gaps are the greatest since the 1930s, the one following them on the left reflects that the size of the political gaps is the greatest since around 1900, and the one on the right conveys that the United States is still the leading power but is declining and that China is a rapidly rising comparable power. I’m showing these charts just to convey that the circumstances that now exist and have to be dealt with are not the same as those that existed before so that it would be foolish to think that anything is possible without considering these and other circumstances. It would be preferable to put where we now are in a historical context with reference to analogous past periods. That is what the next section is about. In it I will describe what I believe are the six stages that all countries go through that lead to their ups and downs. By knowing what stages different countries are in—which can be ascertained by looking at their symptoms—one can know the range of possibilities that exist.

Disclosures

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[1] While acts of nature (especially diseases and climate events) and changes in technologies are the two other big forces that have always had big impacts—and promise to have even bigger impacts in the future—they will have less-immediate impacts and I don’t have the bandwidth to delve into them right now.  

[2] For example, in the last century, the wealth share of the top 1% in the US ranged from close to 50% in the 1920s to a bit over 20% in the late 1970s; in the UK, it ranged from over 70% in 1900 to around 15% in the 1980s and is around 35% currently (figures from World Inequality Database). These shifts in inequality can be seen at least as far back as the Roman Republic and Empire, as Walter Scheidel describes in The Great Leveler.

[3] Aristotle, Politics, IV.11 (translated by Stephen Everson)

[4] That doesn’t mean that those who run autocracies don’t ultimately report to the people, because the people could ultimately overthrow the government.

[5] Actually I’m writing this advice for my grandchildren so that they can get it when they are older and I’m not here.

[6] Source: World Inequality Database

[7] Source: World Inequality Database

[8] Based on data from voteview.com