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Game Theory #7: America's Game

Original Transcript

Let us review last class. We discussed the British Empire and how it ultimately triumphed over its main rivals — the French, the Spanish, and the Dutch — because of three major powers. The first is the Bank of England. What made the Bank of England so important is that it could absorb foreign capital from all around the world. At first it absorbed capital from the Dutch Republic, but then French aristocrats, the Catholic Church, and the Habsburgs could all move their capital to England where it would be safe, protected by property law. And when Britain became an empire, this was important because local elites in China, India, and Southeast Asia would help the British — they were incentivized to do so. They could help the British steal from these places and then move their own wealth to England or one of the British colonies for safekeeping. Second is the idea of soft power: we are in school learning English because we want to go study in the west — that's soft power. Shakespeare, the BBC, Oxford and Cambridge are all components of British soft power which still rules the world today. And the third is the British navy, which controlled sea lanes and therefore controlled all trade. For about one hundred years, Britain was able to maintain a global empire — really the first global empire because it spanned the entire world.

But there were three major limitations to the British Empire. The first major limitation is that Britain had an ethnicity. It was the white Anglo-Saxons. So even though Britain was ruling over a vast empire, it was very much racist — it saw itself as superior to everyone else, and that limited its capacity to work with local elites. Eventually India rebelled to establish its independence, and eventually Britain lost its overseas empire. A classic example of course is Brexit in 2016 when the English people decided they no longer wanted to be part of Europe. Even though Britain is an empire, its people are very provincial. They see themselves as better than and separate from everyone else. I've met English people who told me that English people cannot learn a foreign language — that their brains are hardwired to speak English very well and that's it. They refuse to learn French, Spanish, or Chinese. That's just the British attitude.

The second problem is the idea of currency, or wealth standard. Yes, you're stealing wealth from other places, but what is wealth? For the longest time, people understood wealth as gold. The problem with this is that there's a limit to the amount of gold in the world and therefore a limit to how many people can participate in this game and how much money they can win in the end. It's really a game only for the elite. The third problem for Britain is that it's a small island with very few people and very limited resources. It was not sustainable for Britain to control the entire world — there's a limitation to its reach, and ultimately other powers in Europe would arise to challenge British hegemony, including Russia and Germany.

Ultimately the power that would overthrow the British Empire and create its own empire is of course America. What America would do — very importantly — is resolve all three of these limitations and create a world game in which we all play today. Britain basically birthed this game, but there were limitations to how far it could spread. America would then take the concept of this game and spread it all around the world until it conquered the entire world.

So how did they do it? Well, first of all, America is not a small island. It is a continental fortress. It controls the entire western hemisphere. The western hemisphere is very, very wealthy. America is not just the country of America — it's really the western hemisphere, and as such has unlimited population, unlimited resources, and unlimited land. This resolves the issue of resources. Second — currency. What America would do to revolutionize the world is make the US dollar the standard of wealth in the world. Because the US dollar is just a concept, just an idea, everyone can now play this game and wealth can now be infinite. Before, gold was what everyone was playing for, but there's a limit to gold. With US dollars, anyone and everyone in the world can now play. Now the third issue — ethnicity. What America did very cleverly was tell the world: we are not an ethnicity. We're not a land. What we really are is a game. America became a nation-game.

For the longest time there have been problems deciding what a nation ought to be. Traditionally, nations have been ruled politically through a monarchy, an oligarchy, a democracy, or a theocracy. A monarchy is very simple — a king is in charge and everyone obeys the king. An oligarchy is where the nobility are in charge — another name is aristocracy, and that's basically Rome. A democracy is where the people make all the decisions: if a decision is to be made, people get together and give speeches, whoever gives the best speech gets the most votes, and that decision is implemented — the classic example is Athens. And then you have a theocracy, where the priests are in charge and represent the will of God — the classic example is medieval Europe when the Catholic Church was in charge.

Starting with the Enlightenment, when God was no longer considered that important, philosophers debated what a nation ought to be, what society ought to be. The most popular idea at this time was social contract theory. There are two major theorists. The first is John Locke, who was of course English. For him, government is very simple: human beings have three fundamental rights that God gave us, which are inalienable — meaning no one can take them away. The first is life. The second is liberty — the right to say whatever we want, the right to do whatever we want. The third is the pursuit of property and wealth, meaning private property. In other words, government exists in order to protect the wealth that we generate through our hard work. And if we steal it, that's okay as well. If we kill people in India, China, or France to get it, that's also okay because it happened elsewhere. So — private property. And as you can imagine, if you have wealth, you like this system a lot. And not only that, but you are encouraged and incentivized to work really hard. That's what actually allowed England to overtake the French, the Dutch, and the Spanish.

Then you have another theorist named Jean-Jacques Rousseau. His theory is also social contract theory but a different idea: we are born in a state of nature, we have complete freedom, we can do whatever we want. So why do we choose to give up this freedom and come into society? The reason is that when we do so, we create a social contract that creates the general will. The general will is a substitute for God — it is the expression of the best of who we are. By ourselves we're fine. When we come together, we create a new concept that allows us to be truly and fully human. The general will.

The German philosopher Immanuel Kant explained that the very basis of humanity — what we should all try to achieve — is something called the categorical imperative, which is the highest moral law. There are three components. The first is the idea of universality: whatever you do, everyone else around you will automatically do the same. If you want to go drink alcohol, everyone's going to drink alcohol. If you cheat on a test, everyone is going to cheat as well. If you read books, everyone else is going to read books. So imagine that whatever you do will be replicated by everyone else immediately. The second is the idea of free will: I know that eating ice cream is bad for me, but I cannot be forced to eat chicken even though it's better for me. I have to choose it myself. We cannot coerce people to do what they don't want to do. And number three: the human being is an end unto itself. You cannot use a human being to achieve a higher purpose because humans are the ultimate purpose. A king cannot say: I'm going to go to war to make a lot of money for everyone, and I'll sacrifice fifty percent of my people, but the other fifty percent who survive will live in paradise. You can't do that because you cannot sacrifice anyone's life to achieve a higher end. The ultimate end is the human life. That's the categorical imperative, and this becomes the theoretical basis for the general will.

In practical terms, the general will gives rise to government, and the government gives rise to laws. The legitimacy of the government comes from the consensus of the people — which is the general will. The general will is not democracy — it's an abstract idea which represents the best of who we can be. Just because everyone votes to kill a person because they don't like him — that's not the general will. The general will says everyone is important, do unto others as you would want others to do unto you.

This becomes the basis of the French Revolution. And in the French Revolution, the entire European continent — Britain, Prussia, Austria, Russia — everyone got together and attacked France. France was poor. France had no monarchy. But France defeated everyone. Why? Because people were energized to fight for their nation. They believed they were now part of a greater good, of equity in this game. Therefore they would defend this nation with their life. France for the longest time was unbeatable on the battlefield, which ultimately led to the French Empire under Napoleon. That is the French conception of a nation: a social contract which guarantees rights to its citizens, and in return its citizens must be willing to sacrifice their lives for the nation.

Now there's another conception of the nation-state — the Prussians, or the Germans. The idea is iron and blood. A nation is not something that you choose to get into, not something that you sign a contract with. A nation is in your blood. It's language, heritage, land, and you prove that you are worthy by sacrificing yourself in battle. In the Franco-Prussian War of 1870, these two conceptions of the nation-state came into battle. France was a social contract — you fight for us because you agree to be a citizen of this nation which guarantees you certain rights. Prussia said: no, you fight because it is your duty, because it is in your blood, in your language, in your culture, in your family. When these two cultures clashed, it was the Prussians who won. And that created modern Germany — founded in 1870 when Prussia defeated France in the Franco-Prussian War.

Now we go to America. America has a different conception of the nation-state. At this time in history, America is a very small place — thirteen colonies — and the continent is controlled by indigenous people. The French are there, the Spanish are there. But the Americans are very ambitious and expanding really fast. Britain, the home country, actually becomes afraid of America, because by about the 1700s America has more people, is wealthier, and is welcoming people from all around Europe. So Britain tries to limit the expansion of America — it tries to say you can't cross the Appalachian Mountains. America says: screw you, we're going to revolt. This creates the American Revolution. In 1789, America creates the Constitution, which becomes the highest law in the land.

At this point in history, the American founding fathers look around the world. They know about the British system, they know about the French system. They're trying to grow the country as fast as possible while fighting the Spanish, the French, the British, and the indigenous people. They're trying to welcome as many people as possible. So they decide that the nation will become a game — a game where the citizen is a player trying to maximize his wealth. Through this process of maximizing his wealth, he will be energetic, he will work hard, and this energy will contribute to the overall wealth of the nation, which will allow America to grow very, very fast.

For this to work, they have to construct a game with three major characteristics. The first is that it has to be open — meaning anyone can come and play. But that also means limiting the role of history and ethnicity. The concept that America creates is the idea of the melting pot: we welcome anyone who comes to America, regardless of your race, regardless of your history, regardless of your wealth, as long as you're willing to assimilate. The second is fairness. And the third is clarity.

People are willing to play a game and work really hard to win if, first of all, they can play — they're allowed to play, they're not discriminated against. Also if the rules are really clear: in America, the rules are very simple. You go to America, you follow the law, you work really hard, you get rich. It's called the American dream. And the third thing is that the game is fair — meaning the only criterion to generate wealth is how hard you work, how much talent you have, how much merit you have. The idea of merit. And look, this is actually true. When you go to America, if you work really hard, if you're really talented, if you're really smart, they will respect that. I've been to a lot of countries and I can tell you that in America this is true — but it's not true in Canada. I grew up in Canada and they don't really care if you're ambitious, smart, or if you work hard. They expect you to follow the rules and conform. You go to China — no one cares if you work hard, no one cares if you're smart. It's all about your guanxi — about where your family is. This is actually true for most of the world. The idea of merit is really only true for two places. America is the most obvious example. I've been to meetings where Americans were initially dismissive because I'm Chinese, assumed I probably don't speak English well. But the moment I spoke, the moment I made my case, they were won over by my logic, my arguments, my creativity, and they welcomed me into the club. That's just the American attitude — open-minded, generous, appreciating talent above everything else. The British are similar in that way: maybe they're racist, but if you can make a good argument in front of them they will accept it. But nowhere else is this really true. America is a place that really does appreciate and reward merit. That's why everyone wants to go to America.

So the question then is: how did America create this system? Well, it did so through the Constitution. The idea of the Constitution is to create a game and make this game above power. How they did that is by creating a system of government that checks and balances each other: the president, the Congress, and the Supreme Court. The Supreme Court interprets the Constitution, which is the highest law in the land. The powers of the government are divided equally among these branches. Congress creates laws and controls spending — what's called the purse. The president has war powers — the sword. But if the president wants to declare war, he needs Congress to approve it because Congress controls the money. And the idea that the Constitution is the highest law means it's really rule of law. You also have a parallel system called the judiciary — the court system — which protects property rights in the same way as in Britain.

The very idea is that this is a game, and the government is a system to maintain the openness, clarity, and fairness of the game. Because of this, America was very quickly able to dominate the world. The thing about this game that's very important for us to understand is that it is expansionist.

In its history, America faced certain challenges to this game and the game won out every single time. The first major challenge is the American Civil War. From 1861 to 1864, the Civil War was fought between the North and the South — a clash of economic systems. The North played the game and believed in free labor. The South was its own independent economic system focused on agriculture, using slave labor. For many Americans in the North, slave labor was offensive because it corrupted the game. America started on the idea of openness, fairness, and clarity. But if you're a slave, that's not fair — you were born a slave and you can never participate in this game. So they fought a civil war to decide who would triumph. The North won because the North focused on free labor — more people in the North, wealthier because of manufacturing, more energetic.

Now the game is spreading. It spreads across America and then stops because America can't expand anymore — it basically conquers the west and the borders are now set. But the game has an inherent problem: the nature of money means that the longer you play this game, at the end of the game one person controls all the money. That's a problem with capitalism. That's a problem with this game. Now that the frontier has been settled, a few people are controlling all the money, which leads to the Great Depression.

The solution is America has to go and conquer the world, which it does. In World War II, America conquers the world. And so America needs to spread this game throughout the world. It does that by creating the US dollar. In 1945, America wins the war. A year before, in July 1944, for one month, America organizes something called the Bretton Woods Conference in New Hampshire. The idea of the Bretton Woods Conference is to establish the world game. Before, America's game was limited to America — now America wants to scale its game to the entire world.

How does it do that? Well, the first thing is to make the US dollar the reserve currency of the world. That means every other currency has to derive its value from the US dollar. If you have Canadian dollars, you can change them for US dollars — the Canadian dollar itself is not what's valuable. They also agreed on exchange rates. The global reserve currency is the US dollar. The renminbi derives its value from its relationship with the US dollar — not by itself.

But then you might ask: wait a minute — if this is true, the Americans can just print as much money as they want. So to solve this problem, the Americans said the US dollar will be pegged to gold. Meaning you can always take your dollars and exchange them for gold. Because there's a limit to gold, there has to be a limit to US dollars, which keeps the system stable.

Number two: America needs to expand this game because it is in competition with the Soviet Union, which is against this game. So it creates two new organizations to spread the game throughout the world: the World Bank and the International Monetary Fund, or IMF. The World Bank's job is to give you loans. Let's say you're China and you're poor and you need to build dams — the World Bank gives you money and allows you to start playing this game. What always happens is eventually the countries borrow so much that they can't pay off the money. Then the IMF comes in and changes your government and policies to make them conform more to the game. Its main mechanism is called privatization: the IMF says you're inefficient, and you're inefficient because the public should not be in control of infrastructure, water, electricity, land — private companies should be. The goal of the World Bank and IMF is to spread the game throughout the world.

Then in 1947 they create something called the GATT — the General Agreement on Tariffs and Trade — which becomes the WTO in 1995. It's basically an agreement on free trade. In 1973, SWIFT is an agreement among different banks in the world on how to transfer money. If you want to transfer money from China to a bank account in America to go to university, it goes through SWIFT. This allows more cooperation among banks in the world to use US dollars. And how do these countries get together and decide on how to cooperate economically? The answer is the Bank for International Settlements — the central banks of different countries get together and agree on certain policies. All done privately, in secret. No one knows about them.

So this is the game that America creates. Now let's talk about how the dollar conquers the world. For the longest time this system works well. The United States is in competition with the Soviet Union. But over time, the Americans start to abuse this system. They pay for things they can't really pay for — the war in Vietnam, the space race, something called the Great Society. They're just spending too much money. Other countries start to freak out — France basically withdraws all its gold from the United States. So in 1971, what Nixon does is say: you know what, here's the secret — we actually don't have enough gold to pay off everyone. So we're no longer going to peg the dollar to gold. You can no longer redeem your US dollars for gold. It's done.

So now the US dollar becomes a Ponzi scheme. What is a Ponzi scheme? The US dollar is valuable because people want to use it. It has no value in itself. It's only valuable because people want to use it. So now Nixon has to create demand for the US dollar. The first thing he does is go to Saudi Arabia and create something called the petrodollar. The idea is very simple: Saudi Arabia, the largest oil exporter in the world, will only accept payment in US dollars. Therefore if you want oil, you have to have US dollars.

The second thing Nixon does is actually even more important: he visits China. Not only does he visit China, but he establishes a framework in which America will give China everything. In the 1980s, America gives China market access — US consumers can now buy goods from China. That's a huge deal. Number two is America gives China foreign direct investment, technology, and education. America gives capital to China, gives technology to China — even military secrets — for free. And not only that, but America educates the Chinese elite: in the 1980s, Chinese students go to America for graduate school to learn American technology. And the third thing — the most important — is military protection. All these conflicts that China has with Southeast Asia, with Japan, with Vietnam, America will now protect China. When Chinese ships export goods to Europe, Africa, and the United States, the US Navy will protect those Chinese ships.

You're like: oh my god, America gave China everything. America made China rich. Why would America do that? There's one answer and only one answer: to make China use US dollars. Now when China trades with the world, it gets US dollars in return. The entire idea is to make the world addicted to US dollars. And now that the world is addicted to US dollars, now that the world depends on US dollars, America can control the global economy.

In 1991, the Soviet Union collapses. Now America is the only game in town — there's no one who can challenge American supremacy. So now America creates something called the New World Order, based on global trade. Because the United States controls the US dollar, it can now control something called pricing — the Americans can decide the value of everything. So what America does is create a price hierarchy. At the very bottom are resources. Above that is manufacturing. Then knowledge. Then finance. And it divides the world into a division of labor. Resources: Russia, Africa, South America. Manufacturing: China. Knowledge: Europe. Finance: America.

What's going to happen is that America takes its manufacturing and transfers it to China, because it's cheaper for China to do it. And all America has to do is finance. Finance is just the creation of money for the purpose of creating more money. At first it sounds great because everyone's making money. But there are inherent instabilities in this system.

What happens when you focus on finance is that you become a speculative economy. You focus on gambling, basically. And this leads to something called the 2008 Great Financial Crisis when the American economy collapsed. At that time the entire world economy should have collapsed. So what happened was all these central banks from around the world came together at the Bank for International Settlements in Basel, Switzerland — the secretive body in which all economic policies are made — and they decided the only way to save the world was if China spent money. Why do we have all these skyscrapers, airports, high-speed railways? Because China, to save the global economy, decided to invest massively in infrastructure. And that saved the global economy.

Now after China did this, China developed a lot of debt. And China basically said to the world: listen, we saved the global economy, so we deserve a seat at the table. We deserve to be equals with America. So we're going to sell our products — our Huawei phones — around the world. We're going to compete with America for global dominance. And America said: screw you. And that led, of course, to Donald Trump in 2016. The first thing Donald Trump did was initiate the US-China trade war. China wants to be an equal to America. America says: no, we're going to destroy you. America tried to sanction China, tried to blockade China.

Then in 2022, Russia invades Ukraine. What Russia is saying is: you know this price hierarchy? Screw this. Because if you don't have any resources, this entire system doesn't work. Try manufacturing without resources. Try having knowledge without resources. Try finance without resources. When Russia invades Ukraine, it's trying to control the resources of Ukraine. Russia and Ukraine together control one-third of the world's carbohydrates. Africa and the Middle East starve without Russian and Ukrainian grain. So now this entire system is in jeopardy. What's happening today is America is fighting to save its game, to save the US dollar, to save its hegemony. And Russia and China are trying to assert themselves. We are in a time of game reset. This is the world we live in today.

A student asked: America produces a service for China — letting them use US dollars — just to make everyone play the game. But why doesn't China do the same thing? Why doesn't China create its own game?

Remember that the United States wanted China to play this game, but they can't really say to the world: we're doing this because we're greedy and we want China to be subservient to us. So they said: we want China to play the game because this game will allow the middle class to rise and make China more democratic. But that was just fraud, a lie, hypocrisy. Now that China is in this game, what it's trying to do is restructure the game so that it's more independent. Because the problem for China is this: to play this game you take resources, you create manufacturing, and you export. And America controls the entire game — America can say: we don't like you, so you can't trade anymore. They can limit resources and limit market access. What China needs to do to survive is diversify — create markets outside of the United States, find resources that are not dependent on the US. That's the game China is playing. That's the idea of BRICS. Before, America was trying to impose its game on everyone. Now China is just trying to create a system that is not so dominated by the Americans. That's the Chinese mentality.