This article is written by the economist Vuk Vukovic via Twitter.
I read Ray Dalio’s new book, “The Changing World Order” in which he claims the US “empire” is in its final stages of decline. Interesting, but with all due respect, he’s wrong. Here’s why…
Dalio’s theory falls in the typical Malthusian fallacy trap: it juxtaposes linear resource production with exponential debt creation (private & public sector overleveraging) and concludes that this cannot last. Just like it failed to last in the past for other Empires.
This, btw, is not a new theory. Many empire-desolation theories claim that Empires reach their zenith when corruption, overleveraging and/or inflation lead to societal decay.
This then sets the stage for decline. The Empire becomes vulnerable to inside & outside shocks.
However, what such Malthusian fallacy theories neglect is the impact of rapid technological innovation (of which the US is a world leader) and entrepreneurial trial and error (another US stronghold) which typically create resource abundance.
Neither of these – tech innovation or trial-&-error – were present in previous Empires to the extent they are present in modern-day United States.
Previous Empires that Dalio analyzes (and many others that he doesn’t) all grew mostly on monopoly power and state conquest.
There’s a reason why the US stock mkt has a positive secular trend. Its firms are attracting investors worldwide, more than any other market in history. Why? Innovation and trial-&-error that create industrial giants (+monopoly power and political protection every now&then)
What’s hurting the US today is not its model of capitalism based on debt, nor its political polarization, class discrimination or inequality. These were present in several other times in their history.
What’s hurting it today is a system of corporate political capture, that’s lowering inter-generational mobility, and exacerbating the inequality problem. But this too happened before at certain points in time. It hurt the system, but it did not destroy it.
Why? Because the US is a politically inclusive open-access society, with strong entrepreneurial dynamism and trial-and-error democracy. And that works better than any top-down system that attempts to kick-start economic growth via massive resource redistribution. It works only until a certain level, after which the lack of inclusiveness and lack of trial&error lead to social decay.
My point is that Dalio, and similar theories, are focusing on the wrong indicators. They are seeing discord and destruction in open democracies, but democracies persist BECAUSE of this discord and instability.
Discord and instability (like discrimination, inequality, lack of mobility, cronyism, corporate capture) are all *temporary* errors which, within open-access societies, attract innovative solutions to solve them.
E.g. Climate change is a hot global issue right now. There are so many powerful initiatives + social pressures, in addition to policies being implemented, that are determined on solving this issue. Never underestimate the innovative capacity of open-access orders.
Top-down, closed-access, centralized systems with bloated bureaucracies, will *never* provide such solutions. Why? Because they lack the creative trial-and-error capacity.
Furthermore, if corruption, cronyism and having an overleveraged financial sector is a problem for a declining Empire like the US, then China, suffering from each of these (hint: Evergrande) will hardly overtake the US as the next globally-dominant “Empire”.
Also, people taking about China seldom understand their drivers – they are not the same as those of the West. For China, during its 5000 year (!) history it was always, ALWAYS, about inward perfection. Inward perfection >> outward conquest.
As a side note, check out Zheng He’s 15th century ship compared to that of Columbus. It was bigger and much more advanced. Yet China never used that tech capacity for conquest and int’l domination. Like the West has. It will remain focused more inward than outward.
We do have a multi-polar world, and Asian countries are finally living up to the standard. And that’s a great thing! Much better than the Cold War era. Trade with Asian countries made everyone – on aggregate – better off.
It’s not about China overpowering the US to become the next global superpower. It already *is* an economic superpower. There doesn’t have to be only one. This is not Game of Thrones!
The world is much more complex than that. Just because the US won’t be the biggest global trade player doesn’t mean it will perish or lose its int’l dominance. Even if it does, it won’t end in revolutions and discord. After all, neither did the British empire!
The British empire dissolved b/c their army strength was overpowered by the Germans. No country is even close to challenging the US in military power or funding. Also, back then you could wage wars if you developed superior technology (like Britain did against Holland or Spain in 16th cent, or Germany against Britain in 20th cent).
But waging war to weaken the US in the nuclear age is inconceivable. Just like the US will never attack another nuclear power – Cold War game theory logic still works.
The US will therefore NOT be weaker. Its importance may drop relative to other ascending countries, but it’s innovation and trial-and-error mentality combined with its state-of-the-art universities will ensure that it remains the global leader in innovation.
What Dalio’s theory and all other Malthusian-based theories predicting the decline of the US empire are missing is the fact that success of a nation is driven by:
1) An open-access order (North-Wallis-Weingast argument)
2) A politically inclusive society (Acemoglu-Robinson argument)
3) A disruptively innovative society (Schumpeterian argument)
4) A trial-and-error democracy
An Empire’s true strength is measured by its robustness to shocks like military or terrorist attacks, or economic crises. The US withheld these shocks quite successfully thus far.
The Great Depression and the Great Recession were the biggest threats to Western model of capitalist democracy. Both produced alternatives: the first gave rise to national-socialism and communism. The second gave rise to state capitalism.
None of these alternatives have what it takes to overthrow a capitalist democracy: persistent innovation through trial and error. Trial-and-error helps a falling empire (or society) consolidate and fix itself from within. Like it did in late 19th century US.
The same with worker rights, or women’s rights, or black rights, or gay rights. They were all fought for and achieved within an open and inclusive democracy. Greater human rights have almost never been achieved under autocratic or semi-autocratic regimes.
If you wanna read more about this, here’s a few scholars who spent their entire careers on this fascinating issue:
– Acemoglu & Robinson (2019): Narrow Corridor
– Acemoglu & Robinson (2012): Why Nations Fail
– North, Wallis, Weingast (2009): Violence and Social Orders
– Olson (1982) Rise and Decline of Nations
– Olson (2000) Power and Prosperity
– Clark (2007) A Farewell to Alms
– Mokyr (2016) A Culture of Growth
– McCloskey (2009) Bourgeois Dignity
Or, arguments similar to Dalio’s but with more scientific vigor:
– Ferguson (2011) Civilization (+his books Empire and Colossus) @nfergus
– Gordon (2020) The Rise and Fall of American Growth
– Morris (2015) Why the West Rules – For Now
– Frankopan (2012) Silk Roads @peterfrankopan
Or read Nassim Taleb’s Incerto, to get an idea what works (decentralization + freedom) and what doesn’t (centralization + suppression).
The main problem when you use history and macro theory to make inferences/predictions about the future is that both are falsifiable. You cannot prove many causal relationships in macro or in history.
You can use natural experiments in history to make causal inferences about specific situations. But you can seldom generalize them, e.g., a natural experiment in history was when Napoleon was conquering Europe, specifically German city states.
Areas where Napoleon implemented his reforms (Code Civil, abolishing guilds, lowering the power of the Church, etc.) had much better economic outcomes 100 years later compared to similar neighboring areas where Napoleon didn’t implement these reforms. That’s a natural experiment of history.
Another example was the African slave trade. Areas with more coastal exposure have worse economic outcomes than similar areas without coastal exposure. Why? Western expropriators enslaved more people from areas where it was easier to transfer them to a boat.
Any grand conclusions made by comparing relative levels of GDP through time, cross-country are likely to be dead wrong. An interesting story, that’s all.
In conclusion, Dalio gives a very interesting historical overview of many past and current empires. But does NOT provide a working theory on why nations fail.
His theory carries zero causal implications, what he sees in the US today is exactly what we’ve seen there in the late 19th century (robber barons), the 1920s or the 1960s, periods after which the US underwent massive economic expansion.
Driven by debt, yes, but debt that was financing innovation and entrepreneurial spirit. Also, the same overleveraging issues he sees in the US are present in China. They’re just hidden a bit better. Which doesn’t mean China will fail.
Nor does it imply it will become the dominant single global superpower (like the US overtaking the British Empire). China will continue its ascent and increase its importance. But it’s downfall, if it happens, will not be due to debt-induced cycles.
It will be due to internal political pressures. If they become more open – not a democracy, but more like a Singapore-based inclusive political system (which tends to work well in Asia) – they are more likely to paper the cracks in their debt-driven economic model.
Do you agree that Ray Dalio and others predicting the final stage decline of the US “empire” are wrong?
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