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           By James Freeman

How do you build the world's largest hedge fund? Bridgewater Associates founder Ray Dalio says he did it by creating a culture of "radical truth and radical transparency." Mr. Dalio's perhaps radical belief is that "everything is a machine"—including organizations and even the individual people within them. At his firm's Westport, Conn., headquarters, we are discussing the human machines at Bridgewater and the equally fascinating machine known as the U.S. economy.

As for the people at his firm, the idea is to encourage everyone to accept unvarnished criticism as a treasured opportunity to learn and to solve problems. This is intended to allow constant refinement of business processes—also known as machines within the firm—from how Bridgewater buys office furniture to how it evaluates the world oil market.

But human machines don't always welcome complete candor. And at Bridgewater they have to get used to internal software that conducts a non-stop evaluation of their performance based on daily entries from colleagues and even rates their credibility on particular issues. This doesn't mean the software makes all decisions. When the system recently reported that the company's head receptionist was underperforming, executives decided that it was a case of the software not being calibrated to effectively measure her work.

If an employee is willing to accept this unique culture, the company promises a rigorous search for the truth with a minimum of politics and subjective decision-making. Mr. Dalio says that anybody in the company can get up in front of a crowd and say that something doesn't make sense. At other firms, he says, "most people keep that to themselves." But at Bridgewater "you have a right and an obligation to say I think this is terrible and explore whether or not that's true." He adds that there's no reason it should not happen at other organizations but that it doesn't happen "because of that emotional ego barrier."

For most new Bridgewater employees, "it's a little bit like entering the Navy SEALs," says Mr. Dalio. "There's a period—usually about 18 months—of sort of adaptation to this. And some make it and some don't make it. And so we call it 'getting to the other side.'" He adds that "the other side looks like: They can't work anywhere else and the reason they can't work anywhere else is they don't know what anybody's thinking anywhere else. They don't have an ability to speak their mind anywhere else. They don't have the guardrails of their weaknesses. Everybody's got weaknesses. They can't candidly address weaknesses.

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Zina Saunders

"We describe it as: there's the upper-level you and the lower-level you. The human brain is part thoughtful man," he explains, "and part animal. And you have to drag yourself. And we see the struggle as between the upper-level them and the lower-level them." In other words the brain wants honest feedback but the emotions aren't always ready to handle it. "It's not a struggle between us and them typically. It's a struggle between what do they want" and "what happens in their emotional reactions to that."

He believes that the Bridgewater culture has been critical to the growth of the firm, because in financial markets "if you can't have independent thinking" and "you can't know what your weaknesses are, and sort those things out, you're not going to be successful."

How does he implement this culture? "I tape everything so everybody can listen to every conversation, except if there's a very personal matter" or "if we're going to execute a trade or something proprietary." Otherwise "everything is taped so everybody can see it and we go through a process of valuing critical feedback to try to together discover what the patterns are" and how improvements can be made.

Created in Mr. Dalio's New York City apartment in 1975, Bridgewater now manages $160 billion in assets. A "global macro" investor that focuses on understanding national economies, the firm has a history of reporting market-beating returns to clients—and even made money during the financial crisis—but posted disappointing results in 2012 and 2013. Bridgewater appears to trade less with some of Wall Street's giant banks than some large funds do, but Mr. Dalio says that it's not a policy of his firm to avoid Wall Street. "We just go wherever the transaction costs are cheapest."

Just as he sees individuals and business processes as machines, Mr. Dalio also sees an economy the same way. And that "means that there are cause-effect relationships" and this allows one to understand that "most things happen over and over and over again." Mr. Dalio says that, "In order to really understand the machine I believe that I have to have timeless and universal rules" across all time and all countries.

The emphasis on transparency within the company doesn't mean that Mr. Dalio is seeking media attention. "No, I hate it," he says. But he has consented to this interview, and has published papers and a video online at EconomicPrinciples.org, because he wants everyone, including Washington policy makers, to look at the economy in a new way—to understand the machine.

"Because I've watched repeatedly so many misunderstandings [that] have bad consequences. And I think that rather than trying to discuss what should be done that we have to start with the basics of saying: how do things work?" He adds, "If we can agree on how it works, then that's a foundation for what should be done and also what will prevent problems. So an example of that would be printing money. Is printing money inflationary? Well let's just go back to basics and look at that question."

While people debate whether the Federal Reserve's money creation will or will not cause inflation, Mr. Dalio says it's first necessary to get a clear view of the monetary machine. Stated simply, he says, all purchases in the economy must come from money or credit. He therefore sees a role for central banks in helping to prevent a steep downturn when the availability of credit plunges during a financial crisis. "The printing of money offsets the contraction in credit," he says, "and relieves the liquidity problem."

The Fed has been creating a lot of money since the crisis. Mr. Dalio says his team at Bridgewater has studied 67 historical periods of deleveraging, when countries or economies had to reduce debts after a credit boom. He pronounces the current U.S phenomenon "a beautiful deleveraging"—with the Fed adding money to the economy to maintain overall spending. And as people in the economy extend more credit, he says, the Fed should in turn reduce its money printing.

Still, he says, "I worry about the effectiveness of monetary policy in the next downturn." That's because the first tool the Fed can use to goose the economy is to lower interest rates. But since rates were already very low during the crisis, the Fed decided to employ a second tool: creating money as it purchased Treasury and mortgage bonds through a program known as quantitative easing. But such purchases are less effective than lowering rates, says Mr. Dalio, because while interest rates directly affect nearly everyone as they buy houses and cars and shop with credit cards, the people who own financial assets and who benefit from QE don't necessarily buy more things as a result. QE works best when not much money is in the system and asset prices are low. With lots of money now in the system and the prices of financial assets having soared since the depths of the crisis, such policies will likely be less effective.

"There will have to be a monetary policy number three," says Mr. Dalio. "This is an issue I haven't yet figured out." He adds that "every cyclical peak and trough in interest rates was lower than the one before it since 1980." One therefore wonders what firepower the Fed will have if it is again called upon to prop up the economy. "We'll probably find a way to manage through that," he says. But for now we are in "neither boom nor bust" and Mr. Dalio doesn't expect much volatility over the next few years.

A lot of readers will no doubt think that we need activity in other parts of the American economic machine, rather than just Fed money printing, to return to robust growth. Mr. Dalio makes it his business to study national economies around the world and of course he has a machine to evaluate them.

Surveying the rise and fall of economies over time, Mr. Dalio and his colleagues have developed a model intended to predict national economic growth rates over 10 years. The model is based 35% on the country's level of indebtedness and 65% on competitiveness and "by that I mean what you get for what you pay," he says. The single "most important factor is what it costs to have an educated person."

For this reason, Mr. Dalio can see significant unrealized potential in Russia because of its very low level of indebtedness, which means "they have the power to buy," and due to its highly educated and cheap labor force. But culture matters, too. Another key to growth "is the notion of self-sufficiency," he says. "Economies in which a greater percentage of the population feels the rewards and penalties of their actions tends to grow faster than those that don't."

In Russia, he notes, "there's no inventiveness, there's no entrepreneurship, there's no small business development." International indexes note high corruption and limited property rights. Mr. Dalio sums up the results for economic growth when few people have ownership opportunities: "Nobody ever washes a rental car."

Such factors are why he still sees a bright future for the U.S., even with lots of debt and moderately expensive educated workers. The U.S. has "a very high rate of innovation," and technology development "in my opinion is going to produce and is in the early stages of producing productivity miracles." He compares America's "connectivity revolution" to Gutenberg's invention of the printing press, and he also notes that the U.S. is becoming energy self-sufficient. "Plus we have rule of law, we have property rights."

One area where the U.S. "could make a lot of progress" is in improving public education. "That's a high-potential area," he adds. It's unclear whether anyone can understand the machine known as the U.S. public-school system, but it's safe to say that it doesn't operate much like Bridgewater.

As for the U.S. economy as a whole—as well as all the people within this great machine—Mr. Dalio offers a simple rule to help avoid the next credit crisis: Don't allow debts to grow faster than income.

Mr. Freeman is assistant editor of the Journal's editorial page