Ray Dalio: More on the Determinants of How the Perpetual Motion Machine Works

In the “Determinants of How the Perpetual Motion Machine Works” chapter from my book “Principles for Dealing with The Changing World Order,” I laid out a number of dynamics that repeatedly drove changes behind the rises and declines of empires and explained that I would embellish on some of them in subsequent posts as they pertain to what is now happening in the world. The first one that I am passing along to you here is about class struggles.

Class Struggles

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”) have controlled most of the wealth and power (though those percentages have varied).[1] Naturally those who benefit from and control the system by and large like the system and seek 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 among 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 have also 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 suffering, 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.”

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, which leads to 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 then lead to the creation of a new order and the cycle beginning again.

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. While that has always been the case, the exact form of it has evolved and will continue to evolve.

For example, as explained in Chapter 1, for most of the 13th through 19th centuries, the prominent internal order all around the world 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 part of the means of production and had essentially no say in how the order was run.

Even 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.[2] Across countries there always were, and still are, different levels of governance at the country level, the state/province level, the municipality level, etc., and there are timeless and universal ways that they operate and interact with each other that have been pretty consistent across 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 government to work. What exists today is simply the result of the natural evolutions of these timeless and universal ways of interacting, with different countries’ own cultural flavors thrown in. For example, the roles of the ministers who helped the monarchs 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 in varied but 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, which is how these shifts tend to evolve, between the nobility and the monarchy. Like most of these struggles, 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 what exists in England today. The peace treaty that formalized this deal into law in 1215 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 and the monarchy again fought over wealth and power. In 1225 they wrote up a new Magna Carta under Henry III (King John’s son), which those with power got to interpret and enforce. A few decades later, the fighting picked up again. In that war, the nobles cut off tax payments to the monarchy, which forced 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 Spanish) and later because of the invention of capitalism (stocks and bonds) and labor-saving machines that fueled the Industrial Revolutions (particularly helping the Dutch and then the British), which 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 who voted. The first two classes, who accounted for only 2 percent of the population, had more votes than—or eventually the same number of votes as—the commoners, who made up 98 percent of the population. They called this internal order based on three classes 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 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 a sudden there was a civil war/revolution that led the old order to be replaced with a very different new ruling order.

Continue reading here.