How do you explain what Charles Dickens called “the best of times, and the worst of times”?

We live today with massive social inequalities: the rich have never had it so good, the middle class has never been so discontented, there have been consecutive years of heatwaves, wars on two continents, stock markets at record highs and bond markets suffering from four-decade-high interest rates.

Are we going through imperial overstretch, or simply witnessing overstretched asset valuations?

Across centuries and civilisations, macro-historians of war and empires have shared a remarkably similar view: societies thrive when their values, economies and institutions remain anchored to physical reality, but decay when elites drift into self-referential systems of paper wealth, prestige and power.

Climate change, fossil fuels, water, food and energy are physically anchored to the laws of thermodynamics, whereas human perception and agency — the willingness to intervene in human affairs and nature — can become detached from reality through ego, hubris and euphoria.

The three laws of thermodynamics, which have proved universal for all physical systems, are, first, the law of energy conservation: energy cannot be created or destroyed, only transformed from one form to another.

Second is the law of entropy and irreversibility: in any spontaneous process, the total entropy (disorder) of the universe always increases.

Third is the law concerning absolute zero: as the temperature of a system approaches absolute zero, the entropy of the system approaches a minimum constant value. This means that absolute zero cannot be reached.

Strictly speaking, the laws of thermodynamics do not apply to human social systems, since human perceptions and valuations can be inflated or understated and somewhat detached from reality, while human agency can change the game.

Just as AI models hallucinate, human perceptions and valuations of assets can move from mild inflation to periodic hallucination, followed by great crashes — the last major example being October 1929, which led to the Great Depression and ultimately the Second World War.

The view that the Soviet system collapsed because it violated the “hard budget constraint” originated with Hungarian economist János Kornai (1928–2021). He observed that firms in a market economy go bankrupt when they consistently lose money, creating a hard budget constraint. This imposes discipline and drives efficiency.

In the Soviet socialist system, state-owned enterprises and governments operated under soft budget constraints because the state would bail out losers until the state itself became bankrupt, defaulted or collapsed. Hard budget constraints are thermodynamic limits on fiscal excesses.

Cambridge political economist Helen Thompson was the first to draw parallels between the geopolitics of war and energy, highlighting that the Ukraine war was really about food, energy and, also, rare minerals. Political, military, monetary and social power all run on energy. When there is no more energy or money, the system stops or declines.

Western macro-historians such as Arnold Toynbee and Harvard’s Paul Kennedy argued that empires rise through creative adaptation and shared purpose, then rot as elites become self-serving, overextend themselves militarily and allow their economic core to hollow out.

As complexity increases, new laws and bigger bureaucracies cost more money, resources and energy than the system can bear. When elites fail to respond to crises and there is no surplus left, the system collapses.

These insights are not uniquely Western. Fourteenth-century Arab scholar Ibn Khaldūn captured the full lifecycle in a single concept: asabiyyah — shared cohesion and purpose. Empires rise lean, grow fat on luxury and bureaucracy, then starve as taxes crush the productive base and elites lose the will to adapt. Ancient India’s Kautilya put it bluntly: wealth is the foundation of power. Surplus comes first; everything else follows. Paper prestige cannot feed an army or sustain an empire.

Chinese traditions, meanwhile, frame the challenge as alignment with nature.

Do not force what cannot succeed — act with reality, not against it. With experience of the numerous rises and falls of dynasties, pragmatism, not ideology, becomes the survival strategy: test small, adjust, scale, and never mistake names for substance.

Across all these traditions, one lesson remains: moral order and physical order are one. Hard budget constraints, justice and shared purpose are not luxuries; they lower enforcement costs, sustain trust and conserve energy.

When the moral anchor fails, thermodynamic collapse follows.

Today, as fund manager Ray Dalio sees it, the global order displays late-stage symptoms. Governments are all running debt burdens faster than real output; financial engineering outpaces productive engineering; reserve-currency privilege allows consumption to run ahead of natural resources. Narratives and memes spread faster than facts; markets value acceleration over substance.

We are not witnessing the “end of history”. We are essentially watching the thermodynamic bill come due. Every financial transaction, every institution and every army runs on real energy and resources. Charles Dickens’ novel David Copperfield (1850) summed it up best: “Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

Humans prosper when we stay grounded in reality. We fall when we believe hubris can rewrite the laws of nature. Markets that are concentrated and overstretched in valuation are fragile, and their bursting will have systemic implications. Facing such reality is not a policy choice, but an acceptance of the hard knocks of life.

(Tan Sri Andrew Sheng is Distinguished Fellow of Asia Global Institute, University of Hong Kong, and Chief Adviser to the China Banking Regulatory Commission. He has written extensively on international finance and monetary economics, financial regulation, and global governance and sits on several international, regional and national boards and advisory panels.)