Why do things look smaller and smaller with distance? And what law of physics dictates how much smaller it?

Physics "laws" don't get "repealed." Smaller objects 'appear" to get smaller as the observer moves away because the eye has more to take in in comparison to the object. If the eye would be so close to the object that nothing else would be visible, the object could appear to be enormous. But if we know (say, from having examined the object previously) what the "real" size of the object is, we would understand that it was simply bcause the object was up close. If we were unaware of the real dimensions of an object that suddenly appears in front of our eyes, we couldn't tell how far away it is, simply from our view. We also judge distance using our binocular vision, which gives us depth perception. All animals eyes work basically the same way - light rays coming into the lens are focused onto the retina through the activity of the eye's convex lens. Many animals have eyes on each side of their head and can never have binocular vision and, so, judge distance the same way we do, through experience with (or lack thereof) the object.