First, markets provide the incentives necessary for people to use resources efficiently. Entrepreneurs seek profits. They attempt to use the resources at their disposal to produce the goods and services that consumers value most highly. By doing so, the entrepreneurs earn the maximum profit. When consumers preferences change, so does the pattern of demand.
Entrepreneurs shift resources into producing the goods consumers want.
The economy prospers. Economists have understood the power of incentives to promote proper resource allocation at least since Adam Smith wrote about it in 1776. Hayek s special contribution was to discuss in detail the way in which markets serve as a sophisticated communication system for the economy. Hayek noted that the participants in a market economy possess an incredible amount of knowledge of what to produce, how to produce it, and for whom. But that knowledge is dispersed over millions of people.