Economics is the study of human action. Using economics, we can understand how social orders can create different results based on how they allocate resources.

In a market economy, production is guided by enterprises seeking profit and innovation. In a crony economy, the government influences market outcomes by interference and intervention. A third economic system rejects markets entirely in favor of central planning.

This is socialism.

In this system, central planners set the stage and drive the economy while individuals serve less innovative roles in society in exchange for goods, services, and security. While a market economy rewards those who best serve customers, the promise of a socialist economy is that everyone's needs are taken care of equally.

This is a command economy, where central planners decide what is produced, in what quantity, and who should produce it. Instead of people being allowed to choose what goods and services they prefer to spend their money on, they are provided only with what goods and services the central planners have chosen for them.

Since some individuals prefer thinking for themselves and wish to pursue their own course of action and reject central planning, socialist countries tend to be politically authoritarian.

The economic consequences of central planning are just as bad.

For example, profits serve to reward and encourage innovation and efficiency. If you are the first to create a new product or find a cheaper way to provide a service, the individual that risks capital is financially rewarded. Under socialism, there is no incentive to innovate because the rewards go back to the planners.

Additionally, central planners only operate on their own knowledge and agenda, which is always less than the collective knowledge of society. Think of the difference between a published encyclopedia, which is static and unchanging, and a decentralized alternative—like Wikipedia, which is constantly evolving and growing.

One vital piece of knowledge is that markets coordinate prices.

Since many resources—such as steel—have a variety of different end uses, prices signal whether the use of a specific resource satisfies the top priority of the community. Should a factory produce car parts, or manufacture nails? In a market economy, prices indicate if there is a greater need for one product over another, that is for car parts or nails. In a command economy, it is the government that makes the decision.

The socialist goal of redistribution of wealth makes the basic mistake of not understanding how wealth is created. An economic system that does not reward innovation, savings, and production will see the quality of life for everyone decline.

For example, remember when everyone had a telephone in their home, but
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