Which Free Market?

"When Hayek criticized socialism, he was informed by experience. Beginning in the 1920s, Soviet leaders pursued central planning as an alternative to the free market system as a way of allocating resources, and China followed suit when the communists came to power in 1947. Hayek’s critique proved prescient as the failed experiments of communism were swept away with the opening of China to trade in 1972 and the fall of the Berlin Wall in 1989.

Hayek believed that central planning was inferior to free markets and that market capitalism is the best possible form of social and economic organization. He was right to infer that some form of market organization is better than central planning at allocating resources and creating wealth. But, that observation does not help us to decide which form of market organization is to be preferred.

There is no such thing as the free market. All market systems operate within systems of rules that define which property rights will be enforced and which will not. Those rules are themselves determined by the interaction of human beings in a political process that is still evolving. We cannot just decide that goods will be allocated in a free market. We must decide which free market. That is what I mean by institutional design."

Prosperity for All Chapter 1, Pages 7-8.