Ian references Kevin Phillip's work in The View From There, so I thought I'd try and explain it a bit.

Kevin Phillip's monumental tome Wealth and Democracy talks about, among other things, the lifecycle of an economic empire. He analyzes the Spanish, Dutch, English and American empires in great depth and finds many things in common. The latter three were all industrial empires. The Spanish empire was based on bringing home the spoils of conquest, so it has a slightly different cycle (though it ends the same way), and I'll ignore it here.

Continued after the jump and well worth reading. ~eds.

I'll use the classic economist's technique of oversimplifying to the point of near absurdity. This outlines the pattern. It's far more convincing to study the data, and then draw out the pattern, but if you wanted to do that you'd already have read Weath and Democracy which, I should point out, is a non-trivial effort.

So the pattern starts with a happy confluence of a bunch of bright people, a bit of money and the idea for a brand new process. For the Dutch, this was a bunch of hard working, free thinking Protestants kicked out of their Catholic homes and being welcomed by the disgustingly permissive tulip sniffers. The new process was the idea of a industrial style loom. Now an old style loom was a one person affair. Not easy work, but methodical, slow and hardly dangerous. The new looms were huge machines where the shuttle flew at blinding speeds and levers moved with bone-crushing force. Your typical old style weaver would probably run from the room, terrified of the infernal machine.

So the new process requires a new type of worker - one willing to serve the demands of the machine (you can't just stop to have a drink of water), and one tolerant of a certain degree of risk (not insubstantial, particularly with the first generation of these new machines). Not a big supply of those, so you have to pay them well. The same story a century later, as the Brits had to find workers willing to shovel coal into huge furnaces and sling around vast quantities of molten metal.

Assuming the new process works, and produces something people want, business is going to grow like mad. Which means that you need even more workers willing to risk death feeding the insatiable demands of these demonic machines. The only way to get them is to tempt them into it by paying them well.

So in this first stage of economic empire, labor does very, very well, sharing equally with capital in the increasing proceeds.

The first stage is brought to an end by a couple factors. First, word spreads that you can make good money so people willing to try it come from further and further away. Engineers make improvements in the machines, making them a bit less scary. And a new generation of future labor is born who think these machines are really cool, not scary at all. So labor is not quite so rare, and capital can soak up more of the proceeds. But as long as the essential secret of the machines (held by the capitalists and engineers) remains safe, the industry keeps growing.

So during the second stage, labor's share starts slipping, and capital does just fine, thank you (burp). By the end, capital has convinced itself the sun shines out its ass and labor should be thankful they're getting paid at all and how dare they even think about forming a union.

Now sometime around here, the engineers (who do better than labor, but they're not management, so they're not getting the fat raises anymore, either) come up with an even better way of doing things. They go to management and say, "hey, we think we can be 10x more efficient and produce a much better product - the catch is you'll have to build all new factories, and we won't even know if it really works for a couple years". Management, irritated that his tee time has been rained out, realizes that engineers are nearly as repulsive as labor and need to be taught a lesson, so he tells them he wants 100% ROI in one year and zero risk or drop dead.

So when a man with a foreign accent approaches the engineer on Sunday and promises him all the money and toys he could ever dream of as long as he moves overseas and brings his new design ideas with him, he's probably packed on Monday.

(And it's worth pointing out that here the American empire breaks the pattern. While all kinds of trickery and skullduggery were required to get the industrial secrets out of Holland and Britain, America has lately been delighted to export it.)

Thus begins the 3rd stage, in which foreign competition arises. Management and labor again find a (very uneasy) confluence of interest in lobbying for protectionism. But they are even more at war over wages and jobs, and public sympathy for labor (who, after all, had it just great until they got all uppity with their unions and strikes and ridiculous demands) is at a nadir, so who cares if a few heads get bashed. In the 3rd stage, capital holds steady or loses a bit, and labor loses very, very big.

And the fourth stage begins when capital realizes that producing things is difficult and messy and no fun anymore. Who needs to deal with labor and the humiliation of competing with much better, cheaper products from overseas when you've still got this enormous pile of money leftover from stage 2. I know - let's open an investment bank! And thus the empire ends.

A couple things to note. First, you can extend the cycle. Just listen to the damn engineers back in stage 2. Take the risk, even if you don't have to. (You might listen to labor, too, but that's probably too much to ask.)

The other thing is that an empire in stage 4 will absolutely refuse to acknowledge that they're near the end. They always convince themselves that being the "financial powerhouse" of the world is some kind of nirvanic end state. When it turns out that simply sitting on huge piles of money doesn't keep other countries from amassing their own huge piles of money, they turn to two tricks. They promote "globalization" (which really means our money can own your factories in your countries), and then they put guns in the hands of their otherwise unused and very bitter labor pool and tell them to remind the rest of the world that they're still the greatest power on earth. Hmmm, like that's going to end well.

(I should also make clear that this is just one of the things Kevin Phillips talks about - there's a whole lot more in the book).