Introduction

This post gives a description of the cause-effect relationships behind the rise and decline of the most powerful empires.  It is the author’s distillation of the dynamics he saw in studying

• the 3 reserve currency empires (the Dutch, the British, and the American),
• the 6 other significant empires (Germany, France, Russia, India, Japan, and China), and
• all of the major Chinese dynasties back to the Tang Dynasty. 

We’ll see shifts in

• wealth and power, and
• all dimensions of life, including technology, culture, and the arts.  

By going back and forth, we will be able to see

• how the individual cases fit the archetype, and
• how well the archetype describes the individual cases.

How Their Wealth and Power Was Obtained – The big picture basics

Throughout recorded history, various forms of groups of people (e.g., tribes, kingdoms, countries) have gained wealth and power by building it themselves and/or taking it from others.  

• When they gathered more of it, they became the leading world power and then determined the world order.  
• When they lost that power, the wealth, power, and world order changed in very big ways that had big effects on economies, markets, and all aspects of life.

We will examine how a number of forces come together to determine the ebbs and flows of this cycle. 

Productivity

Productivity is the force that causes the world’s total wealth, power, and living standards to rise over time as people learn how to do things better. Productivity is upward trending, though it rises at different rates for different people.  While significant, these learnings and productivity improvements are evolutionary so they are not what cause big shifts in who has what wealth and power. 

Money and credit cycles

The most important thing that causes wealth and power is money and credit cycles, which tend to be ups and downs throughout history.  This big archetypical cycle governs the rising and declining of empires, which influences everything about them including their currencies and markets. In this writing, we are seeing 17 forces in play, most importantly the debt cycle, the wealth gap cycle, and the global geopolitical cycle.

For reasons that will be explained in this study, the author believes that we are now seeing the archetypical big shift in relative wealth and power, which would cause a profound shift in the world order that will affect all countries.  This big shift is not obvious because, while it is evolving at a fast pace, it is not happening in an abrupt way and because most people haven’t paid attention to the patterns in history.

The Evolution and the Cycles Around It

Over long periods of time, we evolve because we learn to do things better, which raises our productivity.

• Over the long run, learning produces productivity gains and that is the most important force,
• Though over the short run the swings around this uptrend are most important. 

As shown, output per person appears to be steadily improving though very slowly in the early years and faster after around 1800 when the slope up becomes much steeper, reflecting the faster productivity gains.  This shift from the slower productivity gains to faster productivity gains was primarily due to the improvements in broad learning and converting that faster learning into faster increases in productivity.  

That was brought about by a number of factors going as far back as the invention of the printing press in Europe in the mid-15th century, which increased the knowledge and education available to many more people.  That broader-based learning also shifted wealth and power away from an agriculture-based economy, to an industrial-based economy.

In other words, we have been operating in a system in which wealth and power have primarily come more from the combination of education, inventiveness, and capitalism.  While there have been deviations away from capitalism to communism and socialism, the process of having educated people come up with innovations and own the means has been the formula for success.

While the first charts are for the whole world, the next one shows the shifts through the relative wealth and power of the 11 leading empires over the last 500 years. As can be seen, nearly all of these empires saw periods of ascendancy followed by periods of decline. The chart shows:

• China was dominant for centuries, though it entered a steep decline starting in the 1800s.  While going back to the year 600, where China was almost always the most powerful.
• The Netherlands became one of the world’s great empires in the 1600s. 
• The UK followed a very similar path, peaking in the 1800s. 
• The US rose to become the world’s superpower over the last 150 years and is now in relative decline while China is catching up once again.

Measures of Wealth and Power 

The single measure of wealth and power that was showed is made up of 8 measures of strength:

• 1) education,
• 2) competitiveness,
• 3) technology,
• 4) economic output,
• 5) share of world trade,
• 6) military strength,
• 7) financial center strength, and
• 8) reserve currency.  

The chart below shows the average of each of these measures of strength of the US, the UK, and the Dutch.

Before beginning it’s worth noting that all of these measures of strength rose and declined because they are mutually reinforcing, which is called cyclical interrelated move up and down the Big Cycle. 

The Big Cycle

Broadly speaking, we can look at these rises and declines as happening in 3 phases:

• 1) the ascent phase, characterized by the gaining of competitive advantages,
• 2) the top phase, characterized by sustaining the strength but eventually sowing the seeds for losing the competitive advantages, and
• 3) the decline phase, characterized by the self-reinforcing declines in these strengths.  

To summarize, around the upward trend of productivity gains producing wealth and living standards, there are cycles that produce

Periods of building (the ascent phase)

in which the country is fundamentally strong because there are

• a) relatively low levels of indebtedness,
• b) relatively small wealth, values, and political gaps,
• c) people working effectively together to produce prosperity within countries,
• d) good education and infrastructure,
• e) strong and capable leadership, and
• f) a peaceful world order that is guided by one or more dominant world powers.  

These are the prosperous and enjoyable periods.  When they are taken to excess, which they always are, the excesses lead to

Periods of destroying and restructuring (the top and decline phase)

in which the country’s fundamental weaknesses of

• a) high levels of indebtedness,
• b) large wealth, values, and political gaps,
• c) different factions of people unable to work well together,
• d) poor education and poor infrastructure, and
• e) the struggle to maintain an overextended empire under the challenge of emerging powerful rivals lead to a painful period of fighting, destroying, and restructuring that establishes the new order that sets the stage for the new period of building. 

The 17 main forces

Looked at even more simply, the items shown below are the 17 main forces that drive the rises and declines of countries.  Countries that make it to the top acquire the characteristics on the left, but with time they move to the right, which makes them more prone to decline, while new competitive countries acquire the ones to the left until they are stronger, at which time the shift occurs.

Because all of these factors, both ascending and descending, tend to be mutually reinforcing, it is not a coincidence that large wealth gaps, debt crises, revolutions, wars, and changes in the world order have tended to come together. 

Content source: Dalio. R. (2020) Chapter 1: The Big Picture in a Tiny Nutshell. Available at: https://www.linkedin.com/pulse/chapter-1-big-picture-tiny-nutshell-ray-dalio/?fbclid=IwAR2qoBexKpRxbKKrMu_Oh4PxOhNEBDRA_6AbSVv1AMW1gTK_A6-b1iaZS_s [Accessed on 10 Apr, 2020]