Should We Rely on the Price Mechanism to Provide Us with an Indicator of the Relative Scarcity of the Various Factors of Production?

In discussions of war economics it is generally taken for granted that the monetary authorities should always employ all the means at their disposal to keep rates of interest as low as possible. That it is possible to postpone a threatened rise of interest rates for a long time cannot be doubted. The real problem is whether it is desirable to do so. For nearly two hundred years economists fought fairly consistently against the popular argument in favour of such a policy; and until two or three years ago, when these old arguments experienced a sudden recrudescence, it was commonly regarded as highly dangerous. For the time being the prompt rise of the Bank Rate at the outbreak of war has provided a temporary answer. But with the infinitely greater demands for capital during actual warfare the problem is bound to return in much more acute and pressing form. 

Basically, the question at issue is the same as that discussed in the article on pricing versus rationing in the last issue of The Banker. Should we rely on the price mechanism to provide us with an indicator of the relative scarcity of the various factors of production? Or should we deliberately make this price mechanism inoperative and try to substitute for it a detailed regulation of all productive activity by a central authority? And the argument that the rate of interest should be allowed to express the real scarcity of capital is fundamentally the same as that with respect to any other price. But this similarity was never easy to see, since in the case of capital we have not to deal with a single concrete resource but with a somewhat abstract concept. And the more recent discussions, confining themselves entirely to the monetary influences at work, hardly have increased the understanding of this problem.

—F. A. Hayek, “The Economy of Capital,” in The Collected Works of F. A. Hayek, vol. 10, Socialism and War: Essays, Documents, Reviews, ed. Bruce Caldwell (Indianapolis: Liberty Fund, 1997), 157.