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The definition of megalomania indicates that it is the delusion of power, wealth, greatness, importance, etc.

So when talking about malicious dictators, especially those known for mass murder of their citizens, is it correct to refer to them as megalomaniacs? They clearly have some mental issue going on where they don't relate to their fellow man like the majority of the species, but since they do in fact have the power to do what they're doing, would megalomania not apply?

It seems to me this is very context sensitive. If a regular person felt they had the power to call an emergency session of congress, that would be a delusion. If the president felt that, regardless of their ego, they do in fact have that power so it would not be megalomania. If a bloodthirsty dictator were to kill thousands/millions of their people, but had a very clear understanding of what they were and weren't capable of, that wouldn't be megalomania right? However if the same dictator thought they were a god and had the power to create or give life, that would.

Am I interpreting this right?

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Your genocidal dictator might not be megalomaniac in having a "clear understanding of what they were and weren't capable of", as you put it. But that is only true in terms of his immediate methods. That is not where his megalomania lies. You have to look at his objectives. Stalin was rational in thinking that he had millions under his physical control—he did have that power—but irrational in thinking that by murdering or transporting whole populations he could re-shape humanity to fit the image he had in his head. In those terms, he was a megalomaniac: he thought he had powers he didn't have. Pol Pot was an even more extreme example of the same delusion, thinking that by murdering anyone who had even a minimal education he could build a race of ideological robots. That's megalomania on a grand scale.

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