The Investment Scientist

Thucydides and Stock Market Volatility

Posted on: December 6, 2018

lead_720_405.jpgThe recent market volatility reminds me of an ancient Greek historian, Thucydides. He wrote “The History of Peloponnesian War,” about the war between the then reigning power Sparta and rising power Athen. He famously wrote: “What made war inevitable was the growth of Athenian power and the fear which this caused in Sparta.”

Fast forward to two thousand five hundred years later. A Harvard University political scientist, Professor Graham Allison coins the term “The Thucydides Trap” to describe the power dynamic between the reigning power and the rising power. Through an extensive study of historical precedents, he found there are sixteen cases where a major nation’s rise has disrupted a dominant one. Twelve of these ended in wars. For example, the rapid industrialization of Germany rattled Great Britain’s established position at the top of the pecking order, leading to the first World War.

In his book “Destined For War: Can America and China Escape the Thucydides Trap?” Allison argues that this historical metaphor is the best lens through which to observe the US-China relationship.

In October of 2013, I attended a talk by Professor John Mearsheimer of University of Chicago at the Carnegie Endowment for International Peace. Professor Mearsheimer is a leading thinker in a school of international politics called the realist. In the talk, he boldly proclaimed that if China should keep up its growth trajectory for another ten years, there is a 75% chance of war between China and the US. (At the time, I was puzzled by the preciseness of his prediction, but now I know he was referring to Professor Graham Allison’s Thucydides study.)

Professor Mearsheimer laid out the historical strategy successive American leaders since the country’s founding pursued to make the US the current #1 power in the world and he was convinced that China would follow the US’s path by establishing an insurmountable power gap between itself and its neighbors (in his term “regional hegemony”,) and thus become able to compete with the US on global stage.

Professor Mearsheimer did not worry about China’s present intention, he worried about China’s future capability. He said the currently crop of Chinese leadership would not dare to challenge the US’s pre-eminence, but wait until the per-capita income of China reaches Hong Kong’s level. At that time, China’s economy will be roughly four times the size of the US’s. He couldn’t envision the next crop of Chinese leadership would settle for being #2.

Professor Mearsheimer’s worry is broadly shared by the Trump administration’s current trade adviser Peter Navarro, and maybe to a lesser extent, by Trump himself. You can read Peter Navarro’s article “Crouching Tigers: John Mearsheimer on Strangling China and The Inevitability of War.” So for Peter Navarro, the strategic imperative to to roll back China’s economic development, making sure it will never rise to Hong Kong’s level of wealth. If the US has to pay a huge price for it, so be it. (My observation is that Trump himself shares Navarro’s goal, but he doesn’t want to pay a huge price for it.)

So what do you think? Do you think the Trade War will be resolved soon? Do you think market volatility will end soon?

(Feel free to share if you find it insightful.)

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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