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The most devastating critique of expanded government economic power—whether advanced by the woke left or the postliberal right—rests not on the familiar warning that today’s weapon will be turned against us tomorrow, but on a deeper and more fundamental truth: government is constitutionally incapable of generating sustained abundance because it is always and everywhere a third-person economic actor. James Lindsay, building on Milton Friedman and Bob McEwen, distinguishes three categories of economic decision-making. First-person transactions occur when individuals spend their own money on their own needs; second-person transactions arise when either the money or the consumption belongs to someone else; third-person transactions, the exclusive domain of government, occur when an agent spends other people’s money on still other people’s needs. This final category produces a catastrophic double detachment from both cost and quality, rendering genuine wealth creation impossible no matter how noble the intention.

In first-person economics, the actor faces unrelenting pressure to balance cost against quality, efficiency against adequacy, and innovation against economy. Because the problem is his own and the resources are his own, he has every incentive to discover superior solutions and—under private property and profit—to scale those solutions for strangers whose problems he may not personally care about. The profit motive performs the miraculous feat of aligning naked self-interest with the systematic solving of dispersed human problems. Markets thus become discovery machines that generate exactly the surpluses society demands—no more, no less—while constantly punishing waste and rewarding improvement. Abundance emerges not from altruism but from an incentive structure that makes indifference compatible with service.

Government, by contrast, enters every economic arena as a pure third-person participant. Taxpayer funds are not its own, the services or goods it procures are not for its own consumption, and the bureaucrats or politicians who allocate resources face no personal bankruptcy for failure nor personal enrichment for success. Policy directives may demand “efficiency” or “innovation,” but these remain precatory slogans without the lash of loss or the lure of gain. The result is systemic waste, misallocation, and eventual stagnation. Historical episodes of apparent state-led productivity—Soviet industrialisation, Nazi rearmament, contemporary Chinese growth—prove the rule: they rely on forced mobilisation, suppressed consumption, and often plunder, and they collapse once the coercive surplus is exhausted and the misallocations compound.¹

The Chinese case, far from refuting the argument, illustrates its prescience. Beijing’s hybrid system permits profit only after political quotas are met and party loyalty is demonstrated. The resulting economy can indeed produce impressive physical output, yet it does so at the cost of collapsing total-factor productivity, ghost cities, and a property sector larger than the 1929 American bubble. Private entrepreneurs now husband cash and flee rather than invest, precisely because the third-person political actor can expropriate gains at will. What appears as hyperproductivity is in reality a sugar rush of debt and coercion, already giving way to the predictable hangover of a middle-income trap.²

The American founders understood that liberty and prosperity require strict limits on state economic power not merely to prevent tyranny but to preserve the only known incentive structure capable of producing general abundance. Proposals from Zohran Mkwana’s “no problem too small for government” socialism to JD Vance’s calls for state-directed “right-wing ends” share the same fatal flaw: they seek to achieve through third-person coercion what only first-person discovery coordinated by profit and price can deliver.³ Until the right grasps that government cannot be made to possess the correct incentives—any more than a square can be made circular—the allure of “using the state for our side” will continue to seduce and ultimately impoverish. True prosperity demands not a more muscular manager of the economy but the humbling recognition that no such manager can ever exist.

Endnotes

1. Historical state-led cases: China, the USSR, and Nazi Germany achieved output spikes through coercion and consumption suppression, not sustainable productivity; each encountered severe misallocation and stagnation once coercive inputs were exhausted.
2. China’s slowdown: China’s growth was driven by market liberalization (1978–2010) and reversed when political control tightened; falling TFP, capital flight, and overbuilding confirm the limits of state-led productivity.
3. Incentive failure is structural: No ideological orientation can turn a bureaucracy into a profit-and-loss–disciplined discovery process; industrial policy without market discipline becomes third-person misallocation.

Glossary

First-person transaction: A situation where individuals spend their own money on their own needs.
Second-person transaction: A transaction where either the money or the consumption belongs to someone else.
Third-person transaction: When an agent (e.g., government) spends other people’s money on other people’s needs, lacking direct incentives for efficiency or quality.
Total-factor productivity (TFP): A measure of how efficiently an economy turns labor and capital into output.
Middle-income trap: When a developing country’s growth stalls after reaching middle-income status due to declining productivity and misallocation.

References 

Foundational Economics & Productivity

• Solow, Robert. “Technical Change and the Aggregate Production Function.” Review of Economics and Statistics (1957).
  https://doi.org/10.2307/1926047
• Baumol, William. The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t. Yale University Press (2012).
  https://yalebooks.yale.edu/book/9780300179286/the-cost-disease/
• Gordon, Robert. The Rise and Fall of American Growth. Princeton University Press (2016).
  https://press.princeton.edu/books/hardcover/9780691147727/the-rise-and-fall-of-american-growth

State Capacity, Bureaucracy, and Incentives

• Tullock, Gordon. The Politics of Bureaucracy. Public Affairs Press (1965).
  https://oll.libertyfund.org/title/tullock-bureaucracy
• Niskanen, William. Bureaucracy and Representative Government. Aldine-Atherton (1971).
  https://www.cato.org/books/bureaucracy-representative-government
• Hayek, F.A. “The Use of Knowledge in Society.” American Economic Review (1945).
  https://www.econlib.org/library/Essays/hykKnw.html

Industrial Policy & Development Economics

• Rodrik, Dani. “Industrial Policy for the Twenty-First Century.” Harvard University (2004).
  https://drodrik.scholar.harvard.edu/files/dani-rodrik/files/industrial-policy-twenty-first-century.pdf
• Amsden, Alice. Asia’s Next Giant: South Korea and Late Industrialization. Oxford University Press (1989).
  https://global.oup.com/academic/product/asias-next-giant-9780195076035
• Wade, Robert. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization. Princeton University Press (2003).
  https://press.princeton.edu/books/paperback/9780691117294/governing-the-market

China’s Growth and Slowdown

• Brandt, Loren; Van Biesebroeck, Johannes; Zhang, Yifan. “Creative Accounting or Creative Destruction? Firm-Level Productivity Growth in Chinese Manufacturing.” Journal of Development Economics (2012).
  https://doi.org/10.1016/j.jdeveco.2012.02.001
• Pritchett, Lant & Summers, Lawrence. “Asiaphoria Meets Regression to the Mean.” NBER Working Paper No. 20573 (2014).
  https://www.nber.org/papers/w20573

Nordic Economies & Welfare States

• Bergh, Andreas & Henrekson, Magnus. Government Size and Implications for Economic Growth. AEI Press (2011).
  https://www.aei.org/research-products/book/government-size-and-implications-for-economic-growth/
• OECD Data on Nordic Economies.
  https://data.oecd.org/

Market Failure, Government Failure, Incentives

• Coase, Ronald. “The Problem of Social Cost.” Journal of Law and Economics (1960).
  https://www.jstor.org/stable/724810
• Kirzner, Israel. Competition and Entrepreneurship. University of Chicago Press (1973).
  https://press.uchicago.edu/ucp/books/book/chicago/C/bo5972460.html

Technology, Innovation & Productivity Slowdown

• Bloom, Nicholas et al. “Are Ideas Getting Harder to Find?” American Economic Review (2020).
  https://www.aeaweb.org/articles?id=10.1257/aer.20180338