If recent events have taught us anything, it’s that the United States government spends an eye-wateringly large amount of money every year, and it’s not always clear where exactly all that money goes or why.

Leaving aside the printing and borrowing of money (for the time being), the main way these gargantuan budgets get funded is through extracting money from other people—that is, taxes. Taxes come in a variety of forms, from income taxes to tariffs and everything in between. Some are baked into consumer pricing (like tariffs), some get automatically drawn from every paycheck (like Social Security withholding), and some are actively billed (like annual or quarterly income taxes).

Regardless of their form or reasoning, that money ultimately comes from everyday people and is put into government coffers, where it’s counted, allocated, and spent on a wide variety of things. Some of those government spending items—like the fine arts, scientific research, social safety nets, and even education—are things that private individuals can “buy” from private organizations and companies. There’s no shortage of nonprofit organizations, private individuals, and even corporate behemoths that can, and do, fund these activities.

But there are some items and services that only the government buys. These generally fall into the broad category of military spending or law enforcement. Interestingly, economists have a word for this second category. We all know the term “monopoly”—when there’s basically only one seller but multiple buyers. But this word has a counterpart that describes a situation in which there are multiple sellers of a certain product or service, but basically only one buyer. That word is “monopsony,” and we’ll get more into that in our next installment in this series.

What I most want to talk about today is a much more common word: trade-offs.

Among the tidiest bits of fatherly advice I received was, “You can have anything you want. But you can’t have everything you want.” Perhaps you heard it as something along the lines of, “You can’t have your cake and eat it, too.” Or, as the legendary economist and political philosopher Thomas Sowell once succinctly stated, “There are no solutions. There are only trade-offs.”

Here’s the thing. We live in a world defined by scarcity. Scarcity, in economic terms, doesn’t mean poverty or deprivation but rather that resources, from raw materials to money to time itself, are finite in nature. When an individual chooses to use a resource in one way, that means they cannot also use that same resource in another way. Because of these facts of reality, we will never be able to do, make, or achieve everything that everybody wants.

This is where trade-offs come in.

You’ve certainly felt, at some point, that there are not enough hours in the day. Maybe you’re busy running a business and raising kids and trying to keep up with the housework and taking care of your personal health. That’s a lot to do. And no matter how efficient you are, no matter how rigorously you optimize your schedule, there’s always something else you could have done that day if only you’d found the time for it.

If I really want to go to bed so I can get eight hours of sleep, but I also really want to finish reading my book tonight, I have to make a choice. I cannot spend those eight hours doing both. And nobody else can, either.

Likewise, the same tomatoes cannot be used to make both salsa and spaghetti sauce. I have to choose. Of course, unlike my time, I can always buy more tomatoes so that I can make both, but the same money I spent on the tomatoes can’t also go into my savings account.

That’s what scarcity means, and that’s why we have trade-offs. If we have this, we can’t have that. We can use our resources for anything, but we cannot use them for everything.

And this principle scales up, too. For all that it can feel like governments spend money on everything, they don’t. They simply can’t. It’s not possible.

But likewise, the money they do spend is money that individual taxpayers can’t spend because the taxpayers no longer have access to it. This ties back to the same principles we covered when we discussed whether or not the market is rigged and if capitalism causes inequality.

Trade-offs are universal, both on the buying side and on the selling side. If producers are making goods and services that a government buys, private individuals cannot also buy those same goods and services. This reduces the supply available in private markets, increasing their relative scarcity and driving up the price for private consumers. After all, all things being equal, why would a business sell at a lower price when they don’t have to?

Consider what happens when the government decides to fund a major infrastructure project. The steel, concrete, construction workers, and engineers dedicated to that project aren’t available for private construction projects. This doesn’t just affect the government project itself. It affects the entire construction industry. Private developers face higher material costs and longer wait times for skilled workers. Home builders pass these increased costs on to buyers. The ripple effects spread throughout the economy.

The same dynamic applies to skilled professionals. When the government hires thousands of doctors to work in Veterans Affairs hospitals, those doctors aren’t available to work in private practice. When the Pentagon recruits the brightest computer scientists and engineers, those talents aren’t available to tech companies or startups that might have used their skills to develop the next breakthrough innovation.

None of this is inherently good or bad—it’s simply the reality of resource allocation in a world of scarcity. Every choice involves an opportunity cost, which economists define as the value of the best alternative that must be given up when making a decision.

Understanding scarcity and trade-offs is critical to understanding what people are actually asking for when suggesting that the government should be paying for a good or service. Technically, it means that some government employee is signing the check, and the money is withdrawn from a government account. But in reality, that’s money that came from a taxpayer who can’t now spend that money in some other way. And what the money bought is a good or service that now no one else can buy.

This all comes together to ultimately shrink the economic pool that everybody has access to, a form of market intervention that distorts the usual incentives and price signals that both entrepreneurs and consumers use to make decisions.

When governments spend money, they’re not just deciding what to fund. They’re also deciding what not to fund. Every dollar spent on one program is a dollar that taxpayers can’t spend on their own priorities. Every engineer working on a government project is an engineer who isn’t developing private sector innovations. Every ton of steel used for a government building is steel that can’t be used for private construction.

The questions we should ask about any government expenditure aren’t just “Is this a good thing?” or “Will this help people?” The questions should be: “Is this the best use of these resources?” and “What else could these resources accomplish if used differently?”

Because in the end, there really are no solutions, only trade-offs. Government spending doesn’t eliminate scarcity; it just shifts decisions about resource allocation from millions of individual consumers and entrepreneurs to a much smaller group of politicians and bureaucrats.

So what does this have to do with capitalism? The short answer is: nothing. Government spending, and the market interventions it represents, are not capitalism. It’s a form of economic activity that exists outside of a capitalist framework, distorting the signals and incentives that capitalism would otherwise allow to emerge.

In a fully capitalist system, resources flow toward their most valued uses through the voluntary choices of millions of individuals. Government spending overrides these choices, substituting the preferences of politicians for the preferences of the people whose money is being spent. Whether this produces better or worse outcomes depends entirely on whether you trust centralized decision-makers more than decentralized markets to allocate scarce resources efficiently.

But either way, the trade-offs remain. There’s no escape from scarcity, no matter who’s making the spending decisions.Learn more about capitalism here.