Empire(s) of the 21st Century

This post is part of a series. This is Part 2.

Part 1 – “The Coming Economic (R)Evolution” discusses the rise of technology and the creation of digital businesses that no longer need labor or capital…and why understanding their impact on the economy is necessary to navigate the shifting investment landscape in the coming decades.

Part 2 – “Empire(s) of the 21st Century” discusses how technology has eclipsed geography as the most important factor in geopolitics…and why this could potentially shift geopolitical competition from “country vs country” to “country vs tech”.

Part 3 – “A Physical World Under Siege” discusses how geography ensured US global supremacy…and why technology is destroying that geographic advantage.

Part 4 – “Democracy and the Fragmentation of the Internet” discusses how technology is undermining democracy by creating divisions within our governing system in ways that it was never designed to handle…and how investors should approach technology in a fragmenting world.

Part 5 – “Reshuffling the Geopolitical Deck / How Technology Resets the World” discusses how technology reshuffles the global geopolitical deck, potentially freeing lagging countries from poor geopolitical and economic cards…and why this creates opportunities for tech investors in developing markets (while complicating geopolitical affairs).

---

This post follows up on The Coming Economic (R)Evolution. In that post, I argue how the world evolved from one dominated by labor, to one dominated by the struggle between labor and capital, and now likely entering a new phase where increasingly neither labor nor capital is necessary.

As investors, our ultimate preference may be to focus on businesses and business models, but geopolitics is like tidal waves that rise and fall. We may prefer to ignore it, but when geopolitics dominates, the rise and fall of our stocks will be determined as much by geopolitical tidal waves than any insights we may have into the businesses we own. (And also keep in mind that the concept of business ownership has a fairly short history and should not be taken for granted…for example, as peoples of formerly Communist nations can confirm, your ability to own any business can be taken away at any time.) Therefore, Capital Flywheels believes it is not only important but necessary to understand the geopolitical forces that drive the world, especially when geopolitical forces are enlisting businesses as pawns in the greater game of kings. Make no mistake – Companies like Bytedance / TikTok, Alibaba, Tencent, Facebook, TSMC, Intel, Apple, and many more are now pawns in the greater game of kings. If we are to be pawns in the greater game of kings whether directly or indirectly, it only makes sense to start to try to understand the rules and goals of the game…

Returning to the evolution of the world from labor to capital outlined above, each of these phases led to the creation (and destruction) of empires. The labor era saw the dominance of China and India. For several thousand years, China and India were and still are the world’s most populous countries. This allowed them to excel in the single vector that matter in that era – labor.

However, with the formalization of the scientific process in the 15th Century, the world entered a new era defined by the interactions of labor and machinery, capital, and creation. This forced labor to share power with machinery and capital. Not only did this materially weaken the labor-driven empires of China and India starting in the 15th Century, it created new, even larger empires out of formerly small kingdoms. The peoples that made up the British, Dutch, Spanish, and French kingdoms were incredibly small, not even 1/5th the populations of the Chinese and Indian empires they would displace. Yet the creation of machinery and capital allowed them to forge even greater empires than China and India combined.

By the beginning of the 20th Century, the world had largely been carved up and consolidated down to just a few large empires, almost entirely enabled by machinery and capital.

And by the middle of the 20th Century after two destructive world wars, the world had largely been carved up and consolidated down to just, effectively, two large empires – the US and USSR / Communism bloc.

And by the end of the 20th Century, the world had consolidated down to one large empire – the US.

While the US currently commands attention across the world much like the empires of old, the US sought to do something very different from the empires of old. Unlike the empires of old, the US did not seek to take things (at least nowhere on the scale of what the British, Dutch, Spanish, French, and Russian empires did; Most of the “taking” in US history occurred in the 19th Century, mostly at the expense of the British, French, Mexican, and Indigenous Indians / Natives). The US sought to neither directly rule nor directly command the economies of the countries now solidly under its orbit. In fact, after the establishment of Pax Americana, the world now has more countries than ever in history through American encouragement for all peoples of the world to govern themselves and not to be governed by others (unless they so wish). The US, instead, sought to integrate the peoples of the world into a network of common markets, common ideology (whether cultural or political), and, hopefully, common prosperity and peace. The ultimate outcome is that the US not only didn’t take things, it gave things to many countries that they could never have obtained otherwise – free markets / trade, mostly geopolitical security as long as they respected the rules, financial capital for economic development, and the most valuable assets of all – education and technology.

Whereas the US already pioneered a grand experiment in domestic governance, the US essentially pioneered a grand experiment in international governance as well, based on the singular assumptions that peoples of growing prosperity all want the same things – liberty and peace.

However, increasingly the experiment looks to be failing. Not because peoples of growing prosperity don’t mostly want the same things, but because it turns out that many Americans would end up losing their own prosperity in the process.

Maybe all the world needs is a course-correction, but the peoples of the world need to brace for the unfortunate potential that perhaps peace under a single, mostly benign empire was always an unstable rather than stable equilibrium.

If you think that statement is alarming, this next one is going to be even more horrifying: In response, the US will have to make a hard choice whether to take a more direct approach in order to make the Pax Americana model work, and in the process, potentially make the US look more like the empires of old (which I would argue is what Trump has pursued whether he knows it or not)…or to completely withdraw back into the North American sphere as it was largely before World War I, and let the rest of the world return to the imperial games of ages past (which is what the American people generally seem to want ever since the disastrous Iraq war / War on Terror). (This 2nd choice is also what many of the US’ largest peers want…because whether we acknowledge it or not, they were the former imperial empires that currently have to play second fiddle to the US. The Russians, Chinese, and to some extent, even the Europeans no longer remember the dangers of the former multi-polar world. They can only see the dangers of an uncontrollable US.)

What I am arguing may seem radical, but the evidence is already all around us. And any commercial-minded person that chooses to ignore these signs do so at their own peril.

I am far from the first one to suggest such a possibility – One of the most fascinating books I read recently is Peter Zeihan’s The Accidental Superpower. The book was published in 2014, yet, seemingly accurately predicted the rise of American dis-interest in protecting the American-established global order that prevailed since the end of World War II. Zeihan contends that the global order is going to collapse in the coming years because it is simultaneously very expensive for the US to maintain (for example, the US navy solely shoulders the global burden of keeping shipping lanes open and safe), and the US has gotten very little out of it in the past two decades. And more importantly, Zeihan argues that the US is different from the rest of the world since it has its own continent-sized market separated from the rest of the world with two vast oceans that protect it from the wars that have ravaged the Old World for thousands of years and hence does not need the global order at all other than through a sense of obligation. For Zeihan, the most important factor is the US’ superior geography.

In my next follow-up post, I plan to explore that angle. However, I will also argue that while geography has been the dominant factor determining geopolitics (as the term suggests) for thousands of years, geography has already been replaced by technology as the single most important factor determining the outcomes of the global game of kings. And more importantly, I will argue that the empire(s) of the 21st Century is no longer the US (or China or Russia or any of the European countries), but rather the empires of technology…the empires of Amazon, Alibaba, Apple, Bytedance, Facebook, Google, Tencent, etc. The current global struggle is as much a struggle of the empires of old vs the US as a struggle of geopolitical empires as a whole (including the US) vs the newly emergent technological empires. And in this greater game of kings, the geopolitical empires are in the midst of a great struggle to ensure that the emergent technological empires built on their soil will be pawns rather than kings of their greater geopolitical game of kings.

As an investor in technology, understanding these dynamics will be paramount in the years to come. Because geopolitical struggles often lead to both the creation of great fortunes and the destruction of great fortunes, depending on whether one is a victor or not.