Any scientist can tell you that all things physical are under a state of decay. Whether it’s as small as an atom or as large as a planet, all matter is in decay. What physicists referred to as entropy or the 2nd Law of Thermodynamics, is in all energy exchanges, if no energy enters or leaves the system, the potential energy of the state will always be less than that of the initial state. A watch spring runs down because the energy in the spring gets converted to mechanical motion and will not continue unless the spring is rewound. A car burns its energy and runs out of gas and will not continue the process unless someone expends the energy to walk to the gas station and fills a gas can. Living systems are also under the 2nd Law of Thermodynamics as food is converted to energy in each and every cell. Without this conversion of carbohydrates into energy, the cells decay and die off. Even human beings are in a state of decay. We generally call this the aging process. A typical human will reach their peak performance in their twenties and then begin the slow decay towards old age and death.
Theologians, philosophers and religious scholars will also describe a culture or spiritual state of a society as being in decay. As Dennis Pollack points out, since 1959 in America, there has been:
• A 560% increase in violent crime.
• A 400% increase in illegitimate births.
• A quadrupling in divorces.
• A tripling of the children in single parent homes.
• A radical increase in the teenage suicide rate.
• A drop of 75 points in the average SAT scores of high school students.
What Dennis Pollack is describing is a state of moral decay. Scripturally, this is known as corruption. All societies have fallen prey to a steady decline in morality. The Roman Empire, in its infancy, was once a place of morality and virtue. Over time it became a culture of promiscuity, violence and laziness.
All cultures, societies and nation states have gone through this 2nd Law of Thermodynamics, sort to speak. The freedoms people enjoy have come and gone through such cycles. The virtues and liberties that came from the Romans declined and fell in to the Dark Ages. It wasn’t until the input of new energy from such things as the printing press that western society began its upward climb into the Renaissance. Philosophers such as John Locke, Anne Robert Jacques Turgot, David Hume and even some of the Founding Fathers were instrumental figures of the Enlightenment. Each new age bringing with it the new energy that led to new freedoms.
Apply this principle to technology. A society advances in efficiency, health care, leisure and comfort with each new idea being transformed into the energy of invention. We’ve come a long way from the cotton gin and steam engine. Those cultures that stifle this process fall behind and stagnate into yet another state of entropy. This was evident in the Soviet bloc countries and even today in North Korea, Cuba and other countries that controls the advancement of knowledge. Nations that exchange ideas and promote the freedom of thought find themselves ever advancing while totalitarian states stagnate.
Decay through Intervention
Economics is no different. When left to develop in a healthy environment, just like any living organism, the economy of a nation can continually give new life and grow. Once negative influences begin to work against the growth of an economy the nation finds itself in a state of economic decay.
There are many factors that work as externalities or pollutants on an economy. One of the major factors is the state of freedom in the given society. Are the people free to exchange goods and services with each other without government intervention? What form does the intervention materialize?
The freedom of a culture directly reflects in how healthy the given economic state is in any nation. One cannot have a free economy without a free people to exchange in it. Any form of control over this process of economic exchange will always lead to a degradation of the economy. It is these externalities of government intervention that begin the slippery slope towards socialism in any of its forms. As Ludwig von Mises pointed out in his essay, Middle of the Road Policy Leads to Socialism,
|A Critique of Interventionism|
“Interventionism cannot be considered as an economic system destined to stay. It is a method for the transformation of capitalism into socialism by a series of successive steps.”
Socialism always yields economic stagnation and even collapse. Socialism always leads to cultural decline as, by nature, it increases dependency on the state. The negative incentives of a government controlled economy lead to stagnation in technological development. Only a free market can give the positive inputs required through the pricing mechanism that signal entrepreneurs what new technology to invest in. Socialism deprives entrepreneurs of this information.
The externalities of government intervention into the economy can be such things as price controls, labor laws, regulations and chiefly monetary policy. Money is 50% of every transaction. When government has a monopolistic control of the medium of exchange then the very life blood of the economy is affected. Just like polluting the drinking water, an economy can accept only so much intervention before it begins to wither and die.
Today’s economic state in America is a stark example of this negative outcome in monetary policy. The Federal Reserve has literally painted itself into a corner. It has printed so much excess reserves and monetized so much debt that any attempt to slow down this process will lead to another bursting of an even bigger bubble. The biggest bubble of them all! Governments sell bonds to the public to finance much of what it spends. It can also raise taxes on its citizens to pay for spending increases, but this develops into social unrest and manifests itself at the polls. Politicians understand this dilemma and turn to the central bank to finance government largess. This inflating of the money supply by the central bank puts a downward pressure on bond interest rates.
Government bonds become less attractive to investors when governments inflate. Bond buyers don’t like spending today on bonds that yield inflated dollars in the future. When the central bank slows this monetary expansion (tightening) the bonds become more attractive to investors and they begin to bid up the price of those bonds. This is how interest rates of bonds are affected by inflation. This new energy of investing through bond purchases is what gives new life into a government. When the central bank becomes the only purchaser of bonds it is a clear sign that a national economy is on the brink of collapse. Think of it as the body feeding off itself due to starvation. Today, the Fed is purchasing some 90% of the government bonds through its various schemes and shell games that Chairman Bernanke calls “tools”. The patient is addicted to the central bank’s infusion of inflated money. If the Fed were ever to tighten then interest rates would rise. This would be good news for savers and investors, especially those who are trying to build up a pension, but its bad news for the interest on the national debt. Any sharp rise, even a natural market rate of interest, would spell disaster for the government. Servicing the debt, (paying only the interest on the debt) is already a major feat with near zero percent rates. The Fed would either have to print like crazy (hyper inflate) or default on the debt. There is no other choice.
The poison of all this intervention into the economy has wrecked serious consequences. Let us be clear, central banking is intervention. Central planning in general, whether in monetary policy, economic policy or the arrangement of civil society is poison to any free people. Given enough poison and the body will die. Intervention is a lethal substitution for the healthy energy of free markets and a free society. This is the Law of Decay in its strongest terms. Rarely do the laws of physics or any hard science pertain to economics, but in this case, the Law of Decay most certainly does.