Gary North provides an historical and theoretical perspective:
The federal government really is headed for default. The numbers don't lie. This fact produces pessimism in some circles. People who look at the numbers conclude, accurately, that the federal government will not muddle through this crisis. All over the world, national governments will not muddle through. They will no longer be able to kick the can.
I have good news and bad news. The bad news first. If you are dependent on the government for your old age security, you have only one hope: an early death. The good news: when Washington's checks bounce, the bureaucrats will have to go into another line of work. Millions of them. All over the world.
I am now going to present a scenario that is not widely shared. The process that undergirds it is not widely recognized. Yet this process is relentless.
If I am correct about it, judgment day is coming. Not the final judgment. A liberating judgment.
There are self-proclaimed optimists who say Medicare will muddle through. Similarly, there are self-proclaimed optimists who say the present Keynesian system will muddle through. These people are in fact pessimists. They argue that moral evil and economic irrationality can be made to work. That is a pessimistic message. Fortunately, they are wrong.
People will muddle through. The Keynesian system won't. Neither will the finances of the people who have bet the farm on the Keynesian system's ability to muddle through.
THE LAW OF EMPIRES
Empires disintegrate. This is a social law. There are no exceptions.
The first well-known social theorist to articulate this law was the prophet Daniel. He announced it to King Nebuchadnezzar. You can read his analysis in Daniel 2. Verses 44 and 45 are the key to understanding the law of empires.
The Roman Empire is the model. But there is a serious problem here. There are at least 210 theories of why it fell. There are so many that even my 1976 Ron Paul office colleague Bruce Bartlett gets credit for one of them – on Wikipedia, no less. He has made the big time!
In any case, Rome did not collapse. It wasted away over several centuries, wasting the treasure of its citizens along with it.
I suppose there were highly educated people who came to the voters in the late Roman republic and said something like this: "Unless decisive action is taken now, Rome will go bankrupt." If so, they were right. But it took a lot longer than they thought.
These days, it does not take nearly so long.
An empire grows at first almost unconsciously. No one goes to the powers that be and says, "Hey! Why don't we create an empire?" It is more like the person who says this: "I'm not greedy. All I want is to control the land contiguous to mine."
In military affairs, there are economies of scale. An army of warriors makes conquest cost-effective. There are also taxation advantages. An army of tax collectors makes tax collection cost-effective. "Hand over your money" is more effective. Pretty soon, you've got an empire.
But there is a law of bureaucracy that applies to empire. At some point, it costs more to administer the bureaucracy than the bureaucracy can generate through coercion. Then the empire begins to crack. It cannot enforce its claims.
So, the growth of empire has economics at its center: economies of scale. The fall of empire also has economics at its center: economies of scale.
I think this process is an application of the law of increasing returns. In the initial phase of the process, adding more of one factor increases total output. But, as more of it is added, another law takes over: the law of decreasing returns.
Example: water and land. Add some water to a desert, and you can grow more food. Add more water, and you can grow a lot more food. There is an accelerating rate of returns. The joint output is of greater value than the cost of adding water. But if you keep adding water, you will get a swamp. The law of decelerating returns takes over. Add more water, and the land is underwater. You might as well have a desert.
This law applies to power. Add power, and you generate more income. But if you keep adding power, expenses of the bureaucracy will begin to eat up revenues. Resistance will also increase: internal and external. The system either implodes or withers away.
With only one exception in history – the Soviet Union in 1991 – empires have not gone out of business without bloodshed.
In the case of the Soviet Union, the senior politicians privatized the whole system in December 1991. They handed over the assets to what immediately became the ultimate system of crony capitalism. They divvied up the Communist Party's money and deposited it in individual Swiss bank accounts. The suicide of the USSR was "Vladimir Lenin meets David Copperfield." Now you see it; now you don't. In the history of Marxism, no event better illustrates Marx's principle of the cash nexus. It seduced Lenin's vanguard of the proletariat.
Notice the pattern of empire. It begins slowly, building over centuries: the Roman Empire, the Russian Empire, the French Empire. Then the empire either erodes or else it is captured by revolutionaries, as was the case in France (1789-94) and Russia (1917). But this only delays the reversal. It does not overcome it.
THE MODERN NATION-STATE
Economies of scale shaped the development of the modern nation-state. In 1450, the governments of Western Europe were small. They controlled little territory. They were remnants of the medieval world, which had been far more decentralized.
By 1550, this had begun to change. The beginnings of the modern nation-state were visible.
Tax revenues flowed into the centralizing kingships. Trade was growing. Revenues were increasing. Weaponry was advancing. All of this had been going on for half a millennium. But, like an exponential curve, the line began to move upward visibly around 1500.
Maritime empires grew: Spain, Portugal, England. They challenged each other on the seas. Then came the Netherlands and France. The fusion of naval power and trade monopolies lured nations into competition for trade zones. The idea of free trade was centuries away, except in the academic enclave of the school of Salamanca.
The law of increasing returns was evident in this process. It paid rulers to tax more and extend the jurisdiction of the nation-state at the expense of local governments internally and foreign governments externally. The benefits accrued mostly to the political hierarchy and its system of connected families.
Economies of scale drove the process. The division of labor favored centralization. Local units of civil government could not compete.
Let me give an example from the field of historiography. The historian of colonial America can write about lots of topics: immigration, technology, family structure, town planting, economic development, intellectual trends, and so forth. He writes about the issues of life that affected people's daily lives. He cannot write about national politics until after May of 1754: the "battle" of Jumonville Glen.
The Battle of Jumonville Glen is unknown to all historians except specialists in colonial America. This is a pity, because that battle was the most important military event in the history of the modern world. It literally launched the modern world. It led to (1) the French & Indian War (Seven Years' War), (2) the Stamp Act crisis, (3) the American Revolution, (4) the French Revolution, (5) Napoleon, (6) nationalism, (7) modern revolutionism, (8) Communism, (9) Fascism, and (10) the American Empire. It was started by Virginia militia Major George Washington, age 22.
Before the ratification of the U.S. Constitution, it is both possible and wise to write about America without tying the narrative to politics. After 1788, every textbook writer is drawn like a moth to the flame: Presidential elections. He cannot narrate the text without hinging everything on the outcome in the four-year system of national covenant renewal-ratification.
We are fast approaching a day of judgment. It has to do with economies of scale. It has to do with the law of decreasing returns.
The best account of this process is a book by Israeli military historian Martin van Creveld: The Rise and Decline of the State (Cambridge University Press, 1999). He traces the history of the Western nation-state from the late Renaissance until the late twentieth century. He argues that there will be a break-up of nation states and a return of decentralization. I have discussed this here...
Another manifestation of the economies of scale is the development of the factory system. In 1750, most production was home-based. Most people lived on farms. Most farms were close to self-sufficient.
Cities were few and far between. They were located on the coasts or along great waterways. They were based on trade. Perhaps 10% of the West's population lived in cities.
This began to change around 1800 in Great Britain. It may have been in 1780. It may have been in 1820. But the economy began to change. No one has a plausible explanation for why it happened, but it changed the history of man's lifestyle as nothing else ever has. The economy began to grow at 2% per annum, compounded.
This process soon spread to the United States. The world began to be overwhelmed by a wave of gadgets.
This process was driven by price competition. A few business owners got rich by serving the needs of the masses. The masses got richer. They got more productive.
The feature most hated by the older producers was capitalism's relentless service of the poorer buying public. The division of labor is limited by the extent of the market, Adam Smith had correctly observed, and in order to use the newer, more specialized techniques of production, capitalists had to broaden their markets. The most efficient means of gaining access to new markets was price competition.
All of the British troops who marched off to India and the Far East in a quest for new markets in the day of England's "glory" never matched the market-broadening effects of a 25% discount at home. The producer who could not match this discount steadily was forced out of the market, that is, was forced to give up control of scarce economic resources that could better be used to satisfy the demands of the public in the hands of more efficient producers.
How could poor, uneducated buyers compete against the entrenched wealth of the English landed aristocracy? How could their meager purchases compete against the wealthy man's competition for the services of producers? How could some dust-covered miner hope to bid scarce economic resources away from the men of wealth? Simply because there were so many of them!
As capitalist techniques of production steadily increased the output of the laboring classes, the poor became slightly but steadily less poor. A few pennies here, a few yards of cloth there, multiplied a million times over: no aristocracy on earth was rich enough to withstand this relentless economic pressure of slightly less poor men, when so many of those men were being created by the labor markets of England.
As individuals they were poor, especially before 1840, but they were not so poor as they had been in 1780, and here was the new fact of life for producers using the older methods of production.
Men who could not afford fine wool suits could now afford a cheap cotton one, and very rapidly it became obvious to English entrepreneurs that it would pay more dividends to start producing hundreds of thousands of cotton garments than a few thousand high-priced wool or silk ones.
What served as the economic liberation of a whole class of people, anti-free market aristocrats saw as a form of bondage, the grinding servitude of the factory, with its time schedules, long hours, routinized production, and child labor. What they resolutely refused to see was what would have been the fate of these masses under the old system of production: famine and death. It was Ireland, not England and Scotland, that suffered the famine of 1848-50, and it was Ireland which had not seen the "plague" of factory production....
Those who did appreciate the new clothes, better housing, and preferable working conditions seldom wrote tracts; they simply went to work and spent their money. Undoubtedly, there was a standardization of production. However, as the productivity of laborers increased, and as their wages increased, this standardization was left behind for those coming up – Irish immigrants, for example – and variety began to be an economic possibility.
This indicates the nature of capitalism's powers of social transformation. At first, price competition expands the market. New groups gain access to goods not previously available to them, either because prices were too high before, or because the products did not even exist...
I could apply this analysis to the history of urbanization: from villages to towns to huge cities to the suburbs. Urban historian Jack Lessinger has chronicled this in a series of books.
The economies of scale no longer favor centralization. They favor decentralization: in manufacturing, in education, in urban development, in finance, in politics, and even in military affairs. Non-state resistance movements hold the advantage today.