Magic items rust, decay...

>Magic items rust, decay, and fall apart like their non-magical counterparts but the magical energies that suffuse them never diminish.

Of what consequence?

Old magic items are very dangerous. You do NOT want to be around when that much potential magical energy manifests in an uncontrolled manner. Imagine your wand of fireball is a slingshot with the hitting power of a 120mm smoothbore. Now imagine pulling it back and the rubber snaps, hitting you in the face.

Ouch.

far down the line when iron oxide is chemically reduced to pure iron for industrial purposes random machinery becomes magical even after the magical arts are long forgotten.

Ghost sword / Sword ghost

A pile of iron rich compost now does plus 2 damage, all the worms in it are now Veeky Forums as fuck, the early bird is now extinct.

This.

>get sword of +2 cleaving
>bit rusty but whatever magic doesn't rust yo
>hit goblin with it
>sword breaks
>the dungeon is now a crater

Such objects of venerable age inevitably form a soul and become living beings. When held by another living being they siphon on a portion of the wielder's soul and this envigorates the item back into it's true and perfect form. Otherwise the soul persists and can assume any form given to it. The iron of an old blade made into a gun will still hold the soul of the old blade, it's body may have changed but it's purpose remains the same.

I guess you'd get magic item dust like in 4e.

>attempting to instate a magical item economy by making them rust

Conservation of energy still applies. The magic decays into background magic, to be harnessed again by magic wielders elsewhere.