Why Capitalism Can’t Be State Free

A 10-Person Country and the Myth of “State-Free” Capitalism

Image credit: Wikimedia Commons

I keep coming back to a simple thought experiment whenever someone tells me “real capitalism” would work fine if the state just disappeared.

Imagine a tiny country with 10 people.

Two of them own the productive assets: one has a wheat farm, the other has a livestock farm. They trade with each other, they sell a bit to the remaining eight people, and occasionally they borrow money from a government institution that basically does one thing: issues loans and collects some taxes. The other eight mostly sell labor when needed, buy essentials when they can, and otherwise just… exist.

The result isn’t some vibrant, self-correcting free-market paradise. It’s a stagnant loop.

Most transactions happen between the two farm owners. The eight others don’t have capital assets, so they don’t meaningfully participate in production beyond being hired hands. Money barely circulates among them. There’s no factory, no new industry, no experimentation. The whole economy sits there like a pond with no fresh water coming in.

That’s the first point: capitalism without broad access to capital tends to freeze, not flourish.

Why the Rich Don’t Automatically Innovate

People love this story where the owner class is naturally entrepreneurial—constantly reinventing, constantly risking, constantly building new things. But in this 10-person country, the farmers aren’t incentivized to gamble.

Over generations, the psychology changes:

• The farm becomes an inheritance, not a project.
• Protecting assets becomes more important than expanding them.
• The “smart” move is preservation, not risk.

If you already own the only real productive resources in the country, why would you endanger them chasing some uncertain new idea? Especially when the rest of the population has no purchasing power to create a serious new market anyway.

So “capitalism” in this small, concentrated form doesn’t trend toward innovation. It trends toward rentier behavior: hold what you’ve got, extract what you can, and avoid surprises.

This is the point where people say: fine, then the government should intervene.

And yes—something has to intervene. The interesting question is how, because not all intervention breaks the stagnation. Some versions just create a different kind of stagnation.

The Temptation: Just Hand People Money

Let’s say the government introduces a scheme: every citizen gets free money or free credit every month.

On paper, this looks like it should kickstart the economy. The eight people can finally buy more. Demand rises.

But what actually changes about production? Nothing. The wheat farm is still the wheat farm. The livestock farm is still the livestock farm. The productive base hasn’t expanded—only the ability to bid for the same limited supply has expanded.

So what happens?

• Demand goes up quickly.
• Supply doesn’t rise at the same pace.
• Prices rise.
• The two asset owners capture the upside.

You’ve basically created a system where public money flows into private asset holders through the price mechanism. The “stimulus” becomes a transfer upward.

Image credit: Wikimedia Commons

Even worse, the eight people might feel richer on paper, but they still don’t own anything productive. They’re still dependent on the same two producers for essentials. You’ve increased heat in the system without adding engines.

Education Helps—But It Still Doesn’t Create Production

Okay, next step: the government also provides services—education, training, higher skills. Now the population is “better,” more capable, maybe able to offer each other higher-quality services.

That’s good, but it still doesn’t fix the core issue if there’s no pathway to productive ownership.

If educated people have no capital access, no tools, no land, no machinery, no way to form firms that can actually compete, then education becomes its own kind of trap: smarter people stuck in the same powerless structure.

You get people who can describe the problem in eloquent terms… while still being unable to change it.

So if the goal is a dynamic economy, the state can’t stop at redistribution and education. It has to do something harder and more controversial.

The State’s Real Job: Creating New Domains of Capital

This is where I think the “state-free capitalism” fantasy collapses.

In the 10-person country, the missing ingredient isn’t simply “more money” or “better people.” It’s new productive capacity—new capital formation that doesn’t rely on the existing asset owners deciding to be generous or adventurous.

The state, at minimum, becomes a capital-creator in practice, not just a referee.

That doesn’t only mean giving cash. It means doing things like:

• Building shared infrastructure that expands what’s economically possible.
• Creating systems that let new producers exist (standards, courts, enforcement—boring but necessary).
• Taking on long-horizon risks private actors won’t rationally take.
• Using procurement and institutional demand to make certain industries viable.

Without something like that, markets don’t “discover” a future. They just optimize the present.

And if the present is “two farms and eight poor people,” then congratulations: you’ll optimize that forever.

Why Military Power Keeps Showing Up (Even When You Don’t Want It To)

Historically, the biggest lever states pulled to break stagnation was military buildup. Not because governments are morally enlightened chess players, but because military spending justifies scale:

• Centralization of resources
• Large projects
• Rapid experimentation
• Urgency that overrides “it might fail”

It also creates a nasty side effect: heightened risk of war. That’s the trade. You can’t talk honestly about the state driving capability without admitting that states often do it through force.

But military isn’t the only driver. It’s just the traditional one because it’s the easiest story for a state to sell internally: we must do this to survive.

Today, states can chase other forms of power projection, like:

• Scientific advancement (including abstract research that has no immediate market value)
• Technological leadership
• Industrial capacity
• Soft power

The specific channel changes; the underlying logic doesn’t. The state needs a mission larger than “collect taxes and manage decline.”

Soft Power Is Still Power (And It’s Not Neutral)

Soft power is just another way a state advances its interests—cultural influence, narratives, “brand,” whatever you want to call it.

And soft power isn’t some innocent byproduct. It usually tracks material incentives. If a country’s geography and resources push it toward certain exports or industries, it will also push stories and identities that make those industries feel natural, desirable, even inevitable.

Sometimes that’s subtle. Sometimes it’s crude. Either way, it’s strategic.

The point isn’t that culture is fake; the point is that states don’t float above economics. They shape the environment people think and live inside, and they often do it in ways aligned with what the state needs to sustain itself.

So Why Can’t Capitalism Be State-Free?

Because the “natural endpoint” of capital accumulation isn’t endless innovation. It’s ownership consolidation, risk aversion, and stagnation.

If you remove the state entirely, you don’t get perpetual competitive dynamism. You get a hardened structure where those who own productive assets become the economy, and everyone else becomes background labor.

If the state exists but only redistributes cash, you can get price inflation and asset enrichment without new production.

If the state exists and invests in expanding capability—through infrastructure, science, long-horizon risk-taking, and institution-building—you get something closer to development: the economic frontier moves forward instead of circling the same two farms.

Billionaires Aren’t Just “Chosen by the Market”

This is the part people get emotional about, but I don’t see how you avoid it: billionaires at scale are not just the result of consumers deciding to reward value.

Yes, markets matter. Yes, customers matter. But the conditions that allow someone to compound into billionaire territory are deeply entangled with:

• government-created markets,
• state-backed legal structures,
• the banking system,
• and central-bank liquidity.

That ecosystem decides who gets cheap capital, who gets runway, who gets rescued, who gets to scale, who gets to monopolize, and who stays stuck selling labor.

So when someone says “they earned it all in a free market,” I hear a fairy tale. The “free market” is sitting on top of a massive state-and-bank foundation, and pretending otherwise is just ideology.

Conclusion

The 10-person country isn’t a perfect model, but it exposes something real: capitalism doesn’t automatically generate broad-based dynamism, especially once assets concentrate. Money handouts and education can improve lives, but they don’t solve the productive ownership problem by themselves. If an economy is going to evolve, something has to create new capacity and absorb risks that private owners won’t touch. In practice, that “something” has always looked a lot like the state, whether people admit it or not.