The Big Cycle
Broadly speaking, we can look at these rises and declines as happening in three phases: 1) the ascent phase, which
is characterized by the gaining of competitive advantages; 2) the top phase, which is characterized by sustaining
the strength but eventually sowing the seeds for the loss of the competitive advantages that were behind the ascent;
and 3) the decline phase, which is characterized by self-reinforcing declines in all of these strengths.
In a nutshell, the ascent phase comes about when there is…
strong enough and capable enough leadership to provide the essential ingredients for success, which
include…
strong education. By strong education I don’t just mean teaching knowledge and skills; I also mean
teaching…
strong character, civility, and a strong work ethic, which are typically taught in the family as well as in school.
These lead to improved civility that is reflected in factors such as…
low corruption and high respect for rules, such as rule of law.
People being able to work well together, united behind a common view of how they should be together and a
common purpose, is also important. When people have knowledge, skills, good character, and the civility to
behave and work well together, and there is…
a good system for allocating resources, which is significantly improved by…
being open to the best global thinking, the country has the most important ingredients in order to succeed.
That lead to them gaining…
greater competitiveness in the global market, which brings in revenues that are greater than expenses, which
leads them to have…
strong income growth, which allows them to make…
increased investments to improve their infrastructures, education systems, and research and development,
which leads them to have…
higher productivity (more valuable output per hour worked). Increasing productivity is what increases wealth
and productive capabilities. When they achieve higher productivity levels, they can become productive
inventors of…
new technologies. These new technologies are valuable for both commerce and the military. As these
countries become more competitive in these ways, naturally they gain…
a significant share of world trade, which requires them to have…
a strong military to protect their trade routes and to influence those who are important to it outside its borders.
In becoming economically pre-eminent they develop the world’s leading…
financial centers for attracting and distributing capital. (For example, Amsterdam was the world’s financial
center when the Dutch empire was pre-eminent, London was it when the British empire was on top, and New
York is now it because the US is on top, but China is beginning to develop its own financial center in
Shanghai.) In expanding their trade globally, these growing empires bring their…
strong equity, currency, and credit markets. Naturally those dominant in trade and capital flows have their
currency used much more as the preferred global medium of exchange and the preferred storehold of wealth,
which leads to their currency becoming a reserve currency. That is how the Dutch guilder became the world’s
reserve currency when the Dutch Empire was pre-eminent, the British pound became the world’s reserve
currency when the British Empire was pre-eminent, and the US dollar became the world’s reserve currency in
1944 when the US was about to win World War II and was clearly pre-eminent economically, financially, and
militarily. Having one’s currency be a reserve currency naturally gives that country greater borrowing and
purchasing power. As shown in the most recent chart, gaining and losing of reserve currency status happens
with a significant lag to the other fundamentals.
It is through the mutually reinforcing and unwavering improvements in these things that countries rise and sustain
their powers. Those who build empires allocate resources well by coordinating their economic, political, and