All of the points that you make are true, but I don’t think you fully understand my argument.

I agree that government cannot create production out of thin air. Investment in public goods obviously comes at the expense of private investment. And I agree that goods and services that are bought in the free market represent things that people genuinely want.

However, the free market is only effective at producing a certain range of goods and services. People want ipods and cheeseburgers, but they also want clean air, parks and safe streets. The market is incapable of determining the how to allocate resources between these two classes of goods.

The general point that I am arguing is that overall the economy has been investing too heavily in the private sector, while neglecting public investment that would have a higher marginal value. I think careful analysis of relative price trends would show many instances in which markets actually show a strong preference for increased government investment.

I admit that more research needs to be done to test this hypothesis, but I think that compelling evidence exists.

The government does not produce anything and what money it has comes from borrowing or taxing us.

We need to clarify what is funded by what here.

Since there is no coercion to buy anything in the market, goods and services that are bought are things people actually need or want. Every person allocates his or her own money according to their priorities. So collectively, consumers drive the market with their changing buying decisions since no businessman want to produce anything no one would buy. Failure to adapt means liquidation (except for today’s bailout regime).

Roads, bridges, public schools and others you call “public goods” are paid for with taxes and borrowed money from citizens. Allocated by various government bodies,
and guided by political priorities.

Both sides can mis allocate.