It's not like those are the only two options.
Basically I think the GM needs to be pro-active and provide plotlines, clues, missions and outlines which the players can interact with and fill with their ideas. Just stating, "you can do whatever you want, what do you do?" in my experience hardly ever makes for a good game. I enjoy well prepared, focused sessions with 3 dimensional npc's with detailed back stories, awesome sets where battles take place, layered plots, etc. All of which are extremely hard to make up on the spot, not to mention that is also extremely hard to be consistent and remember what you came up with two or three weeks later when your players suddenly revert to something that happened "that one time."
I enjoy giving players a lot of freedom but I do keep the plot moving along at all times and I am always prepared. Heck, for a 4 hour session I spend perhaps the same time preparing the adventure, sometimes even longer.
Edited by DanteRotterdam