Chapter 5: Institutions and entrepreneurship
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A recent scholarly literature notes that the institutions of economic freedom lay at the foundation of the capitalist system that generates economic progress and prosperity. Two broad lessons come from this literature. One is that there are specific institutional requirements that must be met for a market economy to function well. The second lesson is that a well-functioning market economy does more than just find equilibrium prices and quantities – it coordinates the decentralized decision-making of all individuals in an economy so that the economy as a whole can make best use of that decentralized knowledge held by each individual. This freedom to make decisions based on their own best judgment, given the information that is available to them, enables the entrepreneurship that generates economic progress. An institutional approach to economic analysis implies a change in the way economists look at what a well-functioning economy accomplishes.

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