… is from page 153 of F.A. Hayek’s 1939 essay “Prices versus Rationing,” which is reprinted as chapter five of the 1997 collection, edited by Bruce Caldwell, Socialism and War (footnote excluded):
Where it is a question, not of a momentary emergency, but of obtaining the largest supplies over a period and at the least sacrifice of other production, the price mechanism is infinitely superior to any other method. A rise of prices not only forces people to use the commodity sparingly in every possible use, including myriads of uses which the cleverest planner could scarcely think of. It also encourages the use of substitutes wherever such can be found, gives people an incentive to draw on their stocks and utilize scrap, and thus draws supplies from every nook and corner, engaging the ingenuity of all who have anything to do with the commodity to find means of economizing it with a thoroughness which no central regulation could possibly imitate.
Indeed. This quotation is a lovely summary of some of the important, useful, yet too-often-neglected roles that market-determined prices play in society.
But I pick a tiny nit with Hayek’s wording: a rise of prices doesn’t force “people to use the commodity sparingly.” Instead, a rise of prices encourages people to use the commodity sparingly. Rising prices of, say, steel are not guns to the head of steel consumers, demanding that consumers cut back on their consumption of steel. Instead, rising steel prices are incentives that encourage consumers to cut back on their consumption of steel. And precisely because each individual is free to respond or not, and free to respond however strongly or weakly, to such an incentive, the consumers who will be least reluctant to cut back on their consumption are the consumers whose demands for the now-higher-priced commodity are least intense.