Among Animals
Intraspecies conflict -- conflict between two creatures of the same kind -- is always highly likely owing to the fact that creatures of the same kind compete for the same resources -- the same food, the same dens, the same mates. Such conflict can be bad for the species as a whole, if taken to the point of crippling even the winner of a fight. Hence, species tend to evolve ways of avoiding mutually crippling battles.
The simplest method is status. Instead of actually fighting to the death, the two members of the species fight until one individual has proven its ability to kill the other if the fight continued long enough. The other individual then flees or ritually yields, and is permitted to live by a victor who has not crippled himself in the process. Thus, the victor gets to enjoy the fruits of his victory, and the vanquished gets to live and try again another day. The victor has proven higher status over the vanquished.
This offered the possibility for two other strategies, display and bluffing. Once the issue became one of potential rather than actual outcome of a fight, it was in the interests of all concerned to avoid fighting save when absolutely necessary. Display shows abilities which imply ability to win a fight -- superior size, strength and health -- without necessarily involving fighting (some forms of "display" involve ritual, usually highly non-lethal, combat). Bluffing is a tendency to behave as if one thought oneself a better fighter, or the other a worse fighter, than one would honestly evaluate by observation (*), which can lead to the other fighter backing down because it believes one's bluff.
Now, even for a very simple-minded creature, one has a guide to one's likely fighting capabilities by recalling the example of past confrontations. This can be done hormonally, with no actual neural memories required. In many animals, especially lower ones, winning a confrontation increases hormones which cause one to behave aggressively (display, bluff or fight) while losing a confrontation inhibits these hormones, leading to one behave submissively (avoiding displays, bluffs and fights). This is pro-survival for both animals, because it reduces the likelihood of fights whose winner is already determined by gross differences in physical capabilities.
When animals became sufficiently intelligent to distinguish between individuals of their own species, status became more than the outcome of a single fight. it became the memory of multiple encounters involving that individual. This allows a "pecking order," where animal B submits to animal A but dominates animal C, and thus the evolution of a true dominance hierarchy (which can be more complex than a mere "pecking order"). This is very important for highly social animals, which cannot be constantly fighting each other if they are to cooperate in groups.
Among Humans
Sapient animals, such as humans (**), can evaluate the likely outcome of fights in more complex ways than can non-sapient animals. They can observe fights, and the tactics employed, and simulate them in their minds in advance of actually fighting. Thus a human need not rely on hormonal levels to decide whether to dominate, tolerate, or submit -- he can rationally evaluate the likely outcome of the fight, ahead of time.
However, humans still have the hormonal legacy of their non-sapient ancestors. A human can be cowed by a dominance display even if this display does not accurately reflect fighting potential, and he has the desire to make such displays in confrontations. A human is more likely to beat someone he has already beaten before, and to lose to someone he has already lost to before, even if their fighting capabilties are objectively equal. We call this "morale," and it is a very important factor in human affairs.
At the same time, humans can sometimes overcome their animal legacy, overriding their hormones with their brains to win even when their emotions tell them that they should submit. A human can even make a submission display and then strike an unprepared foe, something of which other great apes, but very few other animals, are capabable. Likewise, a human can consciously bluff -- a trick that we often use, even today, to face down physically far superior predators, when we encounter them in the wild (***).
Humans have status, but we are also capable of reason. And the more that we use reason, and the less status evaluations, in deciding whether to risk a fight or to submit, the more effective fighters are we.
Among States
Just as animals or humans fight, so do states. When states fight, we call it war. And just as do animals or humans, states rely on status (note the similarity in terms) to provide quick evaluations of each others' capabilities, and to avoid fighting hopeless wars.
This is well and good as far as it goes. Modern warfare is so deadly that it is not something we should engage in purely to demonstrate status, if at all avoidable. The danger, however, is when we rely on status rankings instead of rational evaluation of the "correlation of forces" (****).
Excessive reliance on status rankings are bad for the lower-status nations, for obvious reasons -- they are treating themselves as less capable, and are being treated by other countries as less capable, than they actually are. But they are also dangerous for higher-status nations, and here's why:
There is a tendency to invert cause and effect when dealing with the issue of status. Instead of thinking "Nation A has higher status than Nation B because it is successful in war," there is a tendency to think "Nation A must succeed in war against Nation B, because it has higher status."
Now this is understandable, because the causative relationship is to some extent circular. First of all, Nation A acquired its high status through success in war, and Nation B its low status through failure in war; consequently Nation A probably is better at fighting wars than Nation B, consequently Nation A probably would beat Nation B in a war. Secondly, there are morale effects to consider: Nation A will enter the war with confidence and expectation of victory, which will cause its troops to behave more bravely; Nation B will enter with trepdiation and expectation of defeat, which will cause its troops to be less brave in battle.
The problem is that perceptions can be false.
What if Nation A acquired its high reputation in a mode of warfare (say, cavalry charges) which is no longer very militarily important? What if Nation B, by contrast, has invested money and time in learning a mode of warfare (say, machinegun tactics) which is now very militarily important? This was the exact situation between the Allies and Central Powers in the first years of World War I.
What if Nation A has let its standards of training and equipment decline, while Nation B has developed a highly professional, well-equipped army? This was the situation in the Franco-Prussian War of 1870.
What if Nation A has neglected to prepare for defense against a mode of warfare in which Nation B has specialized. Think of the effectiveness of Communist propganda in the Vietnam War.
And the problem is worsened when one takes a static, rather than dynamic, view of the correlation of forces. There is a strong tendency to look at the history of the last generation, and assume that the correlations of forces demonstrated there apply for all time. Think of the Roman Imperial disdain for the Germanic and Hunnic barbarians; the Spanish contempt for the Dutch "sea-beggars"; the French delusions of Napoleonic glory all through the Long Nineteenth Century.
This is highly relevant now, as we face confrontations with the Islamofascist countries in the current Terrorist War. I have heard people tell me, repeatedly, that Iraq never could have developed, and Iran never will develop nuclear weapons, simply because they don't already have them. The basis of this reasoning, pared down is: "If Iran had nuclear weapons, Iran would be a Great Power. Iran does not have the Status to be a Great Power. Hence, Iran cannot develop nuclear weapons," which inverts cause and effect in a fairly obvious way when the argument is put in this form.
Hopefully, we will not make the mistake of relying on our Status to protect us, and will instead view the world in a more practical and rational fashion! The price of the mistake could be our crippling in a dominance fight, one we could have avoided if we paid better attention to the actual antlers of the foe rather than merely its recent status.
======================================================================
(*) Bluffing does not require sapience, though sapience helps. All that bluffing requires is a tendency, even unconscious, to behave as if one evaluated oneself a better fighter than one was.
(**) This certainly applies to other apes, and possibly elephants, parrots, corvids, and ceteceans as well.
(***) This works surprisingly well even against smart predators, such as the big cats.
(****) Thank you, Soviet Army, for this incredibly useful term!