Dalio's Changing World Order and the Rise of China

I worked with Ray Dalio at Bridgewater at the outset of the 2008 crisis. Ray is an iconoclastic thinker, and an even more iconoclastic personality. The most important thing I learned in working for him was to respect history, and apply it as a guide. Not history as in what has happened to the markets over the past few years. Rather, how markets — and people in the markets — have behaved over decades.

I have a philosophy that markets cannot be viewed simply as physical systems. This doesn’t fit well with academic orthodoxy. Finance labors under the physics-inspired structure and assumptions of neoclassical economics, whose root extend back 150 years. I’ve written about the limitations of the neoclassical approach in my book The End of Theory (Princeton, 2017), and in particular four failures that I called the Four Horsemen of the Econopolypse.

With this background, I came to Ray’s approach as a kindred spirit, although I didn’t fully appreciate it at the time. During the financial crisis, Ray had his team do an extensive study going back to the Weimar Republic. In practice, I thought this was a little over the top, but in principle, all good. I look at the markets as a mix, human plus machine, and history is a guide to the human.

But, you can take anything too far. Case in point: Ray’s book, The Changing World Order. At two pounds and almost 600 pages, his book is a big read, but the accompanying video is wonderfully produced and is all you need to know.

Ray’s Big Cycle
And what you need to know in a nutshell is that Ray argues for a pattern, what he calls the Big Cycle, to the rise and fall of empires. He builds this by looking at the ups and downs for two cases, the Dutch and the British.

Deriving a theory from the empirical takes more than two observations, especially when the theory itself has ten degrees of freedom. Two observations are insufficient even if they perfectly meld. But in this case the two observations don’t really jive with the notion of an overarching Big Cycle.

For Britain, the watershed is the Industrial Revolution. If that is not explicit to your calculus, you don’t have the picture.  When it comes to the Industrial Revolution, historians have analyzed it to death. And, needless to say, it is not so simple. But at a minimum, we can say that what led to Britain's dominance is not a repeat of some formula that worked fro the Dutch. For example, two keys for the Industrial Revolution were the freeing up of capital due to the end of primogeniture and the redistribution of labor with the enclosure acts. They were specific to the rise of Britain. They are not a replay of a cycle. of what happened with the Dutch, nor was it a type for what has occurred to date with the U.S.

Ray’s conclusions from the Big Cycle:
Ray’s conclusion is that the Big Cycle is playing out again, with the U.S. on the wane and China on the rise.

Given my critique of the Big Cycles concept and empirical basis, I don’t see the U.S. versus China being part of a recurring cycle. Any more than I would agree with the British versus the Dutch.

Which is not to say it can’t happen. Sure, China could rise to dominance. But not based on a cycle founded on two observations, where even those two observations have clear differences.

But Big Cycles aside, as to China: Ray is a Sinophile with far more experience and insight into China than I can match. But my two cents is that there are headwinds for China now appearing that weaken the case for China’s dominance. Headwinds that are not part of the Big Cycle, anymore than the end of primogeniture or enclosures were part of the Big Cycle. Two dominant ones are, shorter term, deglobalization, that will move much of the developed countries away from China  (which I why I have referred to elsewhere this as de-Chinaization), and longer term, demographics that will erode China from the inside.

Here is a post I did on de-Chinaization.

Here is a post on China’s demographics.

Here is a link to Ray’s book: https://www.amazon.com/Changing-World-Order-Nations-Succeed/dp/1982160276

And to Ray’s video: https://www.youtube.com/watch?v=xguam0TKMw8&t=1392s