As I have explained in the past, what constitutes a “bubble” can be understood as the result of perpetuated myths or distortions of the truth. When one believes something to be true, they behave in accordance with that belief; when that belief becomes exposed as fraudulent, whatever effort they had put forward up to that point is lost and any effort they had planned on putting forth in the future needs to be redirected to some new project. The example I had previously used was a child writing letters to Santa and then finding out Santa is not real. After such information comes to light the behavior of the child changes and he no longer writes wish lists to Santa.
In the Austrian Theory of the Business Cycle, distortions in the interest rate result in misallocations of capital towards less productive ends. When those ends are discovered to not be as productive as alternatives, the structure of production needs to be realigned. But as I’ve described it, the theory can be applied to a broader social context beyond just basic production.
The State is such a bubble: it is perpetuated primarily by faith in its unique legitimacy. Bubbles burst; in the case of the State, how does that occur?
States destroy community
Speaking very simplistically, there are two types of economic goods, private goods and public goods. Private goods are those that are rival and excludable, that can only be used by a limited number of people at the same time and that can be protected from use by others, respectively. A bike is a good example of a private good since, reasonably speaking, only one person can ride it and, assuming the bike can be defended, others can be excluded from its use. Public goods are those which are non-rival and non-excludable, that can be used by an unlimited number of people and cannot be defended against use, respectively. Radio waves, the quality of which do not degrade with use and which no one with a radio at the correct frequency can be deprived of, are a good examples of public goods. Information is another good example. Of course, since both private and public goods are purely concepts, perfect versions of each do not exist in the physical world and there are varying degrees of both. Also, goods can start off as private and shift to become public. For example, an idea starts in my head and then is disseminated until it becomes “public knowledge.” Education, roads, and a variety of other goods can evolve in a similar way.
The definitions of each type of good imply that a different [finance] method is necessary for their production. Collective action -- mutual aid, charity, pure democracy -- is more fitting for public goods because they do not accommodate an incentive structure conducive to individualistic entrepreneurship.
Those goods provided by the “public” can usually be seen as the “essentials:” the legal system, social safety nets, education, money, etc. Each of these can be seen as having a positive externality where their existence provides for long term social stability. As people tend to operate within groups, they perceive a benefit to contributing to them in one form or another. You might have noticed, however, that these are usually the programs provided by the State. But it’s not as if the source of these programs is the State; instead, the State co-opts them as it becomes able. One need not look too far back through history to see mutual aid societies that did provide some of the essentials such as health insurance/care or communities that provided non-State, non-compulsory public schooling.
The State finances itself initially through the rent (taxes) it demands on its expansive land claim. But the State attracts those who would want to be part of it -- who want to live off the production of others -- and, despite its barriers to entry, it grows. If it were to not expand its scope while its size grew, people would likely become angry and revolt as a result of its increased tax burden. Therefore, to accommodate its growing size, it must expand its scope of control into other realms of the economy, perhaps by “nationalizing” education or welfare services. In other words, the State removes control of the public goods from the public. The ultimate result is that over time, the most essential aspects of the socio-economic stability are controlled by the State. Once the essential goods are “taken care of,” each person can focus more attention on other matters; the links that previously connected people within their community, be it through neighborhood or place of employment, are severed. This is further exacerbated by the war between the controlled classes who blame each other, not the State, as the cause of the resulting problems of Statism...
States are not efficient
In The State is a Glass Ceiling it was explained that the purpose of the State is to insulate, via indoctrination and force at the margins, a monopoly from the balance and security provided by the ability of others to compete with it. States form as monopolies over certain small segments of the economy and, as explained above, the scope of that monopoly is expanded. A decentralized or anarchist society utilizes the tacit information of the individuals in that society to efficiently allocate resources to the most urgent wants of those same individuals. However, because a State is irrationally hierarchical and operates from the top down, those that make up and dominate the actions of the State do not possess that same information which is necessary for the efficient allocation of resources. As more and more control is given to the State, the quality of the service degrades, becoming more bureaucratic and more top heavy. Because of the poor performance, the role of the State is demanded as a remedy, thus creating a vicious cycle of failure and more intervention.
But not only those things directly supported by the State are actually supported by the State. Various private organizations seek State privileges to prevent their own competition from having a fighting chance. Organizations that are able to procure such privileges can then function inefficiently but survive nonetheless -- populating the economy with various mini-states.
One of the major advantages of a free and decentralized society is the dynamism that results. When one industry loses its edge, is out competed by a foreign company, or a new technology renders the old technology obsolete, the individuals working within the decentralized economy can leave the failing industry and devote resources to what makes more sense at that moment. But with companies protected from competition and propped up in the case of failure, there are fewer incentives and fewer possibilities for that dynamism to flourish. As a result, industry and innovation stagnate until they are no longer tenable. Combine this with an industry dependent social insurance system and the future is heading toward disaster.
The USA is replete with examples of cities decimated by industry failures and State usurpation of social programs. Detroit and Flint, Michigan and Cleveland, Ohio come to mind.
The more an organization becomes vertically integrated, the greater the tendency is for those organizations to falter at the hands of their more efficient competitors. When those smaller, more agile, and more decentralized counterparts are forced into obscurity, then the bubble begins to grow until it has nothing to expand into. There’s no way of telling exactly when such a “State bubble” will burst in the USA or in Germany or China or anywhere else, but the prospect of such event occurring is quite ominous.