What Is an Economy, and What Is It For, Part 1

Engines of Control or Arenas of Choice?

I started my last essay with a definition, using a dictionary from 1985 to make sure the definition I was using wasn’t politicized by what I call the War on Words.

This time, I’ll start with a question: what is an economy, and what is it for?

I could use the definition of “economy,” but I’m afraid I’ve never seen a particularly good one. Dictionaries will say something like, “the state of a country or region in terms of the production and consumption of goods and services and the supply of money.” That definition isn’t wrong (and it actually comes from my 1985 American Heritage), but it fails to actually say anything.

There’s a tendency to think of an economy as some kind of engine we can run to power the nation, or as a thing with a purpose and a mission that can be used with intent. We picture stock tickers, quarterly earnings, inflation graphs, and government forecasts. We confuse economics with finance, and we confuse both with policy.

Here’s a hard truth: an economy is not a machine to be tuned. It isn’t even a “thing” at all. It’s the sum of everything we do.

There is no ‘purpose’ to the economy. It is, rather, the sum of all of the purposes of everything everyone in the economy does.

We ARE the economy, and we all have our own purposes.

We don’t often think of our actions in economic terms, but the truth is that even when we sleep, we’re wearing down sheets, mattresses, and pajamas, all of which will eventually need to be replaced.

The economy is the sum of human activity, at whatever level we measure it, be that a city, a state, a country, or the world, and when we talk about leveraging an economy “for the good of the people,” what we’re really talking about is controlling human activity, such that people do what the people in charge want them to.

This essay isn’t going to compare economic theories in terms of GDP growth or unemployment rates. Those are effects. I want to do what most economic texts carefully avoid: I want to look at causes.

I’m going to examine what each system really is in terms of what it demands of people, and how it actually functions when exposed to real human nature.

Some of these systems are genuine frameworks for channeling human energy into productive outcomes. Others are not economic at all, but are ideologies, moral systems, or fantasies pretending to be economic theories.

To separate the real from the counterfeit, I’ll judge each system across six dimensions:

1. Foundational Nature: Is it actually economic in purpose, or something else: political, religious, moral, or aesthetic?
   
   

2. Human Compatibility: Does it align with what people are actually like, or does it demand perfection or obedience?
   
   

3. Power and Control: Does it rely on voluntary interaction, or does it require coercion to function?
   
   

4. Knowledge and Calculation: Does it work with dispersed knowledge and local information, or does it presume centralized omniscience?
   
   

5. Production and Resource Use: Does it incentivize productivity and efficient use of resources, or does it generate waste and scarcity?
   
   

6. Debt, Time, and Sustainability: Does it respect time, capital, and intergenerational stability, or does it borrow from the future to buy illusion in the present?
   
   

I’ll also group related systems together, since many are just variations on a core impulse. And through it all, we’ll return to one underlying question: the eternal tension between freedom and control.

Most people want to be free, but many, if they’re honest, want their neighbors controlled.

I’m going to look at Free Market Capitalism, State-Managed Capitalism, Socialism (in all forms), Marxism, Communism, Fascism, Corporatism, and various fringe systems. This is a lot to cover in one essay, so I will focus on the first three this week, and will follow up next week with the rest.

Free Market Capitalism

Let’s start with a system that is not built around control.

Free market capitalism starts without premise. It is simply what emerges when the government leaves people alone. That is the foundation. It does not assume people are good, or even rational. It assumes only that people should be free to live their lives as they see fit, provided that they allow others to do the same, and that this personal freedom should extend to their personal working and buying decisions.

Every decision involves tradeoffs, and free market capitalism is the only system that treats those tradeoffs as real. Prices communicate information. Profits and losses keep people honest. Bad decisions are punished. That is more than can be said for any centrally managed system.

Classical and neoclassical economists laid the groundwork. Smith, Ricardo, Jevons, and Marshall gave us ideas like comparative advantage and marginal utility, which became foundational, even as later schools used them selectively or stretched them beyond recognition.

The Austrian School is the most philosophically consistent free market group.

Menger, Mises, and Hayek opposed central planning and explained in detail why it does not, and frankly cannot, work. Hayek pointed out the problem clearly: the information needed to centrally plan an economy is dispersed, living in the minds of millions of people, all making real-time decisions based on constantly changing circumstances and personal preferences. No one can coordinate all of that. Every attempt to do so fails.

The Austrian concept of praxeology, or the logic of human action, treats economics as a behaviorally grounded discipline rather than a mathematical one. People act with purpose. Markets are organic systems that emerge when people are free to interact.

The Chicago School shares many of these assumptions but takes a more empirical approach.

Chicago economists, like Milton Friedman, trust markets but also try to measure and model them. The Austrians are skeptical that human behavior even can be modeled. If a model stops working the moment people start responding to it, the Austrians would argue that the model was flawed from the beginning.

Libertarianism, while not a school of economics in itself, is the political extension of free market thought, viewing voluntary exchange as the moral baseline for all human interaction. That position is internally consistent, but like every ideology, libertarianism breaks down when taken to its logical extreme.

It’s not the logic that fails, but the people. Human nature is not perfect, and as a result some people lie, cheat, steal, and manipulate. For liberty to exist, it must be protected and enforced.

That’s not a knock on libertarianism either. Any ideology breaks down, thanks to human imperfection, when taken to its logical extreme.

Free market capitalism, particularly in its Austrian form, is the only system that consistently treats economics as a reflection of human behavior rather than as a moral or political program. It does not pretend to fix people, and does not assign them roles or manage their outcomes. It allows them to act, trusting that over time, millions of decisions made in pursuit of individual needs will produce better results than any master plan ever could.

Let us rate free markets across our six criteria.

1. Foundational Nature:
Free market capitalism is an economic system in the truest sense. It is not built to fulfill a moral vision or impose a political order. Instead, it exists to facilitate voluntary exchange between individuals, allowing supply and demand to determine value. It neither promises justice nor equity, focusing on process over outcome. That neutrality is often misinterpreted as indifference, but it is precisely this refusal to engineer society from above that allows a free economy to remain responsive and adaptive.

2. Human Compatibility:
Free markets do not demand virtue or obedience. They assume that individuals are self-interested, fallible, and varied in their talents and desires. Rather than fight against these traits, the system channels them into productive cooperation. A free market assumes people will act in their own interest, and it succeeds precisely because it aligns incentives with reality rather than idealism. It does not pretend that people are better than they are; it simply trusts them to make choices that serve their needs, and to bear the consequences.

3. Power and Control:
This system is built on voluntary interaction. No one is forced to buy or sell, and no central planner determines what is produced, in what quantity, or for whom. Government has a limited role: to enforce contracts, protect property rights, maintain rule of law, and defend the nation. When functioning properly, coercion is minimized, and transactions occur only when both parties believe they will be better off. That is a radical concept: a system where people are not told what to do, but left free to choose.

4. Knowledge and Calculation:
Free markets are distributed information systems. Prices convey knowledge far more efficiently than any central authority could. No single mind knows how to make a pencil, but the market enables coordination between countless producers, suppliers, and consumers without a master plan. This bottom-up coordination is what makes complex economies possible. Rather than presuming centralized omniscience, capitalism thrives on dispersed intelligence and local decision-making.

5. Production and Resource Use:
Because prices reflect scarcity and demand, the free market incentivizes efficient allocation of resources. Waste is punished through loss; efficiency is rewarded through profit. Innovation emerges naturally when individuals seek better ways to serve others while improving their own position. No system has done more to eliminate poverty, expand choice, and increase the standards of living. Its critics often confuse inequity with inefficiency, but the reality is that capitalism succeeds precisely because it puts resources where they are most valued.

6. Debt, Time, and Sustainability:
When not distorted by government manipulation of interest rates, the free market respects time, capital, and intergenerational stability. Investors defer consumption to fund future productivity. Savers earn returns by supplying capital to those with productive ideas. Long-term thinking is rewarded, not penalized. Debt has a cost, and that cost disciplines both borrowers and lenders. Inflationary policies and deficit spending, while often attributed to capitalism, are in fact intrusions upon it. Left to its own devices, the free market fosters sustainability by aligning short-term decisions with long-term consequences.

State-Managed Capitalism

State-managed capitalism accepts markets, but insists they need to be guided. Its systems are economic in structure but often aesthetic or political in motivation.

The most famous version is Keynesianism, which emerged during the Great Depression. John Maynard Keynes argued that the depression was caused, not by a problem with production or incentives, but by a simple lack of confidence. When confidence drops, demand drops. When demand drops, people stop spending, and the economy stalls.

Keynes’ answer was simple: inject spending. It did not matter to Keynes what kind of spending government injected. The government could pay people to dig holes and fill them back in if necessary, as long as money moved around.

This was a vision grounded in perception, or as Keynes put it, in aesthetic confidence.

Keynes was, in fact, not an economist. He considered himself a professional aestheticist. Keynes never even read about economics, considering the work of others to be beneath him. He set out, rather, to reinvent the entire profession, from the ground up, based solely on his own intellect.

Keynes did not approach economics as a study of how real people behave, or how societies naturally function. He approached it as a set of tools to engineer the kind of civilization he found desirable, where intellectual elites could plan society to be rational, refined, and pleasing, based on their (not your) standards of taste.

His arrogance did not pay off, but it did inject a desire for European-style state control into the American consciousness.

His ideas seemed to work in the short term, but the long-term consequence was a global addiction to debt and stimulus through policy manipulation. Keynes’ view did not create organic growth, but a series of bubbles, all of which eventually burst.

The housing crisis was a bubble caused by Neo-Keynesian, which is really just a rebranding of Keynesian, modified to make bubbles last longer. Such bubbles continue to this day, driving up the cost of everything from medical care to college tuition, both of which are expensive based solely on governments trying to build economies around them, rather than relying on actual consumer demand.

Supply-Side economics, often seen as the “conservative” alternative (and often called ‘Trickle-Down Economics’ by liberals), fits this same mold. It tweaks the levers in the opposite direction, lowering taxes instead of raising spending.

Both Keynesian economics and Supply-Side are managerial in nature. Supply-Side is actually still Keynesian, just from a different ideological base.

Developmental economics, especially in post-colonial contexts, adopt similar assumptions. Anti-colonial economists often tie this to historical grievances, justifying economic control as a form of reparation, but as with Keynesianism, the result is activity without productivity, creating bubbles instead of organic growth.

Institutions cannot create prosperity on their own. They shape incentives, but they cannot replace them. These systems all suffer from the same fundamental flaw: treating the economy as something governments create, rather than something people do.

Let us rate State-Managed Capitalism against our criteria:

1. Foundational Nature:
State-managed capitalism presents itself as an economic system, but it is fundamentally political in nature. Its defining feature is not voluntary exchange but selective intervention. While markets exist and private ownership is preserved, the state actively shapes outcomes through regulation, subsidies, industrial policy, monetary manipulation, and preferential treatment. In this system, economics is subordinate to policy, and outcomes are often judged by political metrics rather than economic performance.

2. Human Compatibility:
State-managed capitalism offers a halfway view of human nature. It acknowledges that people act in their own interests but assumes that without oversight, those interests will harm the collective. Some even claim that much of the public is not capable of supporting itself without state guidance. Citizens are trusted to work, spend, and invest, but not to govern themselves economically. The result is a paternalistic model where the government attempts to correct what it sees as the irrational or immoral impulses of the public.

3. Power and Control:
Though not outright coercive in the way socialism or communism are, state-managed capitalism relies heavily on soft control. Licensing, zoning, monetary policy, fiscal manipulation, tax incentives, and regulatory agencies are all tools used to shape behavior without direct command. The boundaries of choice are limited by the state’s strategic goals. Those who align with government priorities may be subsidized or protected; those who do not may be penalized or ignored. The marketplace still exists, but it is increasingly fenced in by bureaucratic scaffolding. Note too that those in power can use their power to effectively buy votes, or do other things to circumvent democracy.

4. Knowledge and Calculation:
This system suffers from a partial knowledge problem. While markets continue to generate price signals, those signals are distorted by government interference. Subsidies mute scarcity. Price controls dampen demand signals. Regulatory burdens shift business decisions away from consumer preference and toward compliance. The state lacks the real-time, ground-level information that decentralized markets provide, yet it continues to intervene based on political goals or outdated models. The result is a hybrid: a market that wants to be efficient, run by a state that does not.

5. Production and Resource Use:
State-managed capitalism can still generate growth and productivity, but often at lower efficiency than free markets. Government priorities frequently displace consumer priorities, leading to misallocation of resources. Political favoritism may direct capital to projects that are less productive but more ideologically aligned. The system rewards compliance over competition and risk aversion over innovation. Waste arises not from lack of effort, but from planning that substitutes political desire for market reality. Rather than creating actual, organic growth, we tend to get bubbles.

6. Debt, Time, and Sustainability:
This is one of the greatest weaknesses of state-managed capitalism. Because political actors face short-term election cycles, the system favors present consumption over long-term responsibility. Deficits are used to buy popularity, and debt is rationalized as stimulus. Central banks manipulate interest rates to prevent correction, kicking economic pain down the road. In theory, this system could balance discipline and investment, but in practice, it borrows from the future to pacify the present, mortgaging long-term stability for short-term calm.

Socialist Economics

Socialism is a word without a definition, pandered around as whatever is based on government control that has not failed yet. Venezuela was socialist until it failed. Now it is something else. The Soviet Union was socialist until it failed. Now it was something else.

Actual Socialism, in the sense of the government owning the means of production, is the economic engine of Communism and will be covered next week. This week we will look at economic forms often referred to as ‘Socialism,’ that fall short of this.

Some claim that the Scandinavian countries are socialist, but the truth is that they got rich on laissez-faire free markets before taking a hard turn into actual socialism in the 1970s, and then by 1990, on the verge of economic collapse, returning to free markets.

Welfare is politically hard to get rid of, so the Scandinavian countries still have very generous welfare systems. Migration, mixed with welfare, is slowly grinding those countries down, and when they collapse we will be told that they were not socialist after all, but something else.

Socialist systems keep markets around but chain them to moral or ideological goals, beginning with a moral narrative, such as inequity, injustice, environmental degradation, or some such thing, and then proposing economic systems to remedy those perceived moral failings.

Social democracy is the mildest form. It doesn’t abolish capitalism, but it taxes the outcomes to redistribute wealth. In practice, it relies on productive sectors to sustain unproductive ones. The model can work for a while, so long as the base of workers and entrepreneurs is large, the bureaucracy is efficient, and cultural homogeneity keeps the public aligned. When the productive class shrinks, or when incentives shift too far toward entitlements, the system weakens.

This is the system in which Margaret Thatcher said, “the problem with socialism is that you eventually run out of other people’s money.”

Democratic socialism goes further, shifting ownership of industries to the public, or at least subjecting them to more democratic control. There’s a major problem though: democracy is a method of choosing leaders, and not a system of managing production.

In a marketplace, prices coordinate production and consumption. Democratic socialism seeks to replace price signals with whatever elected officials consider to be ‘fair.’

Consumption occurs primarily in cities, where population densities are highest, whereas production tends to migrate outward, where land is less expensive. Politicians are pressured in population centers to subsidize consumption. Production is of course taxed to pay for those subsidies, and once production is no longer profitable, these systems collapse.

Winston Churchill described the inner workings of Democratic Socialism by saying it is “like a man standing in a bucket and trying to lift himself up by the handle.”

Once leaders of such systems are faced with people starving in the streets, they tend to round the people up, sending them into the farms and factories against their will to produce the goods and services people need to survive.

Eco-Socialism has become an increasingly popular strain. It combines traditional redistribution goals with environmental mandates, not just to constrain capitalism, but to shrink the entire economy into something ‘sustainable.’

Growth is seen as greed, consumption as sin, and prosperity as theft from future generations.

Let’s look at Socialism against our criteria:

1. Foundational Nature:
   Socialism is not primarily an economic system, but a moral and political framework that uses economics as a tool to enforce ideological goals. Its stated purpose is equity, not efficiency. Economic structures under socialism are designed to redistribute wealth rather than to generate it. It seeks to organize human activity according to collective need rather than individual preference, with production largely taken for granted.
   
   

2. Human Compatibility:
   Socialism demands an idealized version of humanity that is selfless, obedient, and uniformly motivated by the common good. It assumes that people will work as hard for others as they would for themselves and their families, despite no direct link between effort and reward. It ignores natural variation in ambition, creativity, and capability, and it punishes those who seek personal gain. Over time, this leads to apathy, disillusionment, and resentment.
   
   

3. Power and Control:
   At its core, socialism is a system of control. It replaces voluntary exchange with central allocation. Government bureaucrats decide what is produced, how it is distributed, and what constitutes a fair share. There is no room for dissent or alternative arrangements under state-enforced equity, and the apparatus required to maintain this control necessarily becomes authoritarian over time.
   
   

4. Knowledge and Calculation:
   Socialism fails catastrophically on the knowledge problem. By abolishing markets and price signals, it removes the most efficient tool for aggregating dispersed information. Central planners are forced to make decisions with incomplete or outdated data, and without prices to measure scarcity or value, there is no rational way to allocate resources. This leads to shortages, surpluses, and widespread inefficiency.
   
   

5. Production and Resource Use:
   Socialism may claim to produce for need, but in practice it destroys productivity. Without competition, there is no innovation. Without profit, there is no incentive. Resources are used according to plan rather than demand, and political loyalty often determines allocation. The result is systemic waste, even as production falters.
   
   

6. Debt, Time, and Sustainability:
   While socialism often begins with the promise of long-term equity and sustainability, it quickly becomes dependent on external inputs, including borrowed money, confiscated wealth, and, most importantly, foreign aid. Because production lags behind consumption, the system eats through reserves and future capacity just to meet present needs. Long-term planning is subordinated to short-term political survival.

Conclusion

We began with a question: What is an economy, and what is it for?

The answer is deceptively simple. An economy is the sum of human action. It is everything people do, including what we choose to produce or consume.

Because the economy is human activity, it has no singular “purpose.” People have purposes - systems do not. When people are free, the economy is an arena in which they pursue their own purposes, as they see them, and when people are not free, the economy becomes a tool of control.

The real battle lies not in a contest between models or metrics. This is not a debate about which school of economic thought has the most accurate forecast or the most elegant equations.

The central conflict in all of economic history is between freedom and control. Do we trust people to direct their own lives, or do we believe that others must make decisions for them? Do we build systems that assume people are capable of self-governance, or do we treat individuals as things to manage?

Most so-called economic systems are not actually economic in nature. What they really offer is authority, usually in the form of a centralized planner, a bureaucratic elite, or a ruling class that claims to know what is best for the rest of us.

Even the systems that are genuinely economic in nature, and that begin with a proper understanding of human action, can falter when pushed beyond reason. Every ideology, no matter how elegant, will eventually collapse if taken to its logical extreme.

We are limited, self-interested, easily tempted, often short-sighted, and rarely consistent. No system survives a population that refuses to temper its worst instincts, and no framework can replace the need for character. Systems have no morals, and will reflect the morality (or lack thereof) of the people within them, and that is true no matter what system is used.

The most sustainable system is not the one that promises utopia, but the one that makes peace with reality. It seeks to, as much as possible, leave us alone.

A good society needs government to secure the conditions in which people can flourish. It must protect against violence, enforce contracts, safeguard property, and defend the nation. Beyond that, it should get out of the way.

At its core, a free economy is not an experiment in efficiency, but a declaration of trust that says the people have the right to chart their own course and the responsibility to live with the consequences.

If we want an economy that works, we must first decide what we believe about the people who compose it. The freer they are to pursue their own goals, the more honest the system becomes, and the more it reflects who we really are.

In the Marine Corps we had a saying: if you treat a boy like a man and he’ll act like a man, and if you treat a man like a boy he’ll act like a boy. At the end of the day, what we need is an economy that treats us like adults. We’ll act accordingly.

Next week we will complete our analysis by looking at Marxism, Communism, Fascism, Corporatism, and various fringe systems. As we did this week, we will group similar systems together, explaining both how they are similar and how they are different, and then rating them across our six criteria.