Is the existence of a prison system congruent with a free and just society?

Prisons are seen as a kind of "criminal holiday resort" by some and by others as a sort of criminal "training center." Prisons help criminals network, harden their character, and learn new crime skills. In addition, the prison system has grown up as part of an overall trend within society towards what one might call the "management and correction of human beings." Prison is not about punishing people for their actions, but about educating them—about moulding them into "better citizens." It has been argued (mostly notably by Michel Foucault) that prisons are simply part of a general mechanism of government control, that includes institutions such as schools and mental asylums, all of which operate on a similar philosophy of government enforced correction and education. Should then a society based on opposite principles -- on the principles of individualism, small government and personal responsibility -- eschew the prison system? If so, what would it be replaced with, if anything? If not, what justifies the existence of the prison system in a free society?