The Basics of Free Market Economics
A free market is an economic system in which prices for goods and services are determined by supply and demand expressed through voluntary exchange. In practice, ‘free’ does not mean ‘institution-less,’ as even market-oriented economies depend on rules and enforcement that create the space in which bargaining and competition can occur. Hanke’s approach sits squarely within that tradition, as he argues that markets allocate resources better than discretionary state management when incentives and rules are allowed to do their coordinating work, enabled by the “invisible hand” of free market economics.
The coordination engine of a market economy is the price mechanism. Prices signal scarcity and opportunity. Prices reward efficient production and they ration limited resources. Hanke repeatedly returns to the idea that distorted prices, especially distorted monetary prices, produce distorted real outcomes (which include situations like misallocation and bubbles). This is why, in his writing and advisory work, ‘getting the rules right’ is the mechanism that allows price signals to be reliable.
Property rights are the second pillar. Economists use ‘property rights’ to describe the rules that determine who can use a resource, how it can be transferred, as well as who receives residual gains or incurs losses. When rights are clear and enforceable, parties can trade, invest, and bargain (including bargaining over harms, where feasible). When rights are unclear, transaction costs rise, and outcomes tend increasingly toward coercion or corruption.
A third pillar is competition. In the idealized “free market” model, low barriers to entry help ensure that firms must serve consumers rather than acting in a self-serving monopoly. Hanke’s policy writing often argues that what gets labelled ‘market failure’ is sometimes better explained as policy-created uncertainty or policy-created privilege, or conditions that blunt competitive pressures and slow investment. A strong emphasis in his philosophy is that more markets work when rules prevent discretionary manipulation and protect open competition.
Hanke’s Interpretation
Hanke’s interpretation, in Making Money Work, is that the free‑market is dependent on a stable unit of account and rules for money and claims. He frames markets as institutional achievements whereby reliable money and enforceable obligations come first; then decentralized exchange can coordinate activity through prices (Making Money Work, 2025 p. 31-40).
A free-market system coordinates largely through prices, but prices only work as reliable signals when they are expressed in a stable unit of account, which is a monetary standard that is steady enough to anchor contracts and allow meaningful comparisons over time. In this framework, the unit-of-account function is conceptually prior to “money as medium of exchange,” as before money can enable trade, it must provide a credible measure for valuation. On this view, common barter-origin stories of money are misleading because they understate the institutional work required to establish and defend a shared monetary standard. (Making Money Work, 2025 p. 31-40.).
A second mechanism is credit creation. In modern economies, “broad money” consists largely of bank deposit money, not physical currency or central bank reserves. The key point is that banks do not simply take a fixed pool of pre-existing deposits and re-lend them in a straightforward “loanable funds” way. When a bank extends a loan, it typically creates a matching deposit on its balance sheet, thereby creating new deposit funding that circulates until the loan is repaid. (Making Money Work, 2025 p. 23-24.)
A third mechanism concerns how credit markets allocate finance. Interest rates are often treated as the price that equilibrates the supply and demand for credit, but this framework stresses that credit markets may not clear in that frictionless way because lending is constrained by underwriting standards, collateral requirements, risk management, and regulatory capital rules. As a result, access to credit is frequently rationed. Projects can be economically attractive in principle yet remain unfunded if they do not meet the institutional criteria for “bankability.” In this sense, decentralization does not imply automatic clearing; it implies that the institutional architecture of finance helps determine which activities become financeable and therefore which sectors expand in the free market. (Making Money Work, 2026 p. 26-27, 107).
Hanke’s free-market economics places “rules” at the centre, but only as a mechanism to enable the free market, as Hanke’s doctrine sits within the minimal intervention philosophy of Austrian Economics. The core institutional claim is that neither markets nor monetary systems are self‑organizing as authoritative standards are essential for reliable money and market exchange. (Making Money Work, 2026 p. 31.)
Money, in this view, is not a pre-existing “thing” but a claim: “Money is not a good … Money is a claim.” (Making Money Work, 2026 p. 34.) When money is created, purchasing power is created, and it is created unevenly across channels. That is why he argues neutrality cannot be assumed, since the diffusion of purchasing power has uneven effects on economic outcomes. (Making Money Work, 2026 p. 38.) He therefore defines “good free‑market performance” partly as a goal of monetary and regulatory design, where the state must build institutions that preserve the informational role of prices by stabilizing the unit of account and minimizing systematic distortions in credit allocation. (Making Money Work, 2026 p. 303–304, 348–352.)
References:
- List, Mitchell, Kurt Schuler, and Caleb Hofmann. 2025. An Interview with Steve H. Hanke on His Life and Work in Economics. Studies in Applied Economics No. 330. Baltimore: Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise. List-Schuler-Hofmann WP 330
- Hanke, Steve H., and Matt Sekerke. 2025. Making Money Work: How to Rewrite the Rules of Our Financial System. Hoboken, NJ: Wiley.
Related Pages
- Intellectual Roots of Hanke's Free Market Economics
- Privatisation and Property Rights
- Money as a Free-Market Institution
- Key Publications
- Home: Free Market Economics — Return to the Free Market Economics overview