My approach to the free market economy is probably closer to the political economy of Friedrich Hayek than to anyone else who had written during the twentieth century (other than the incomparable Henry Clay). Let me therefore draw your attention to this article, just published at the Claremont Review of Books, HAYEK’S TRAGIC CAPITALISM. The opening paras:
Best known for his anti-socialist polemic The Road to Serfdom (1944), the economist and political philosopher Friedrich A. Hayek is often thought by foe and friend alike to have offered a plain and striking argument for capitalism: the least deviation from laissez-faire is the first falling domino that will inevitably lead to totalitarianism. The foes and friends draw different lessons from the fact that decades of regulation and welfare policy have never actually had this result. For the foes, it shows that Hayek was obviously wrong and his analysis unserious. For the friends, it shows that the dreaded socialist dictatorship must now be imminent rather than far-off—no doubt finally to arrive with whoever the next Democratic president turns out to be.
But in fact, Hayek never gave so silly an argument. Nor will one find in his work the chirpy optimism with which many libertarians and Reaganite conservatives ritualistically defend the market economy. Hayek’s case for free enterprise doesn’t fit any of the usual simplistic stereotypes. He not only explicitly and persistently rejected laissez-faire, but could write as eloquently about the moral downside of capitalism and the emotional attractions of socialism as any left-winger. In an era in which—young socialist chic notwithstanding—global capitalism appears to have swept all before it, it is the triumphalist defenders of the free market rather than its critics who have the most to learn from Hayek’s cautious, nuanced apologia.
Classical economists were not laissez-faire. Economies must be meliorated by political judgement. Knowing how to do it right is the issue, not acting as if doing nothing at all is optimal. It is acting as if the free market is all one needs that plays into the hands of socialists and will ensure the end of free market economies. Read my text for a modern discussion not only about how a market economy works, but also the role of government policy in keeping an economy on course. It also explains what governments should never do as well, but that is only one part of the story, and not necessarily the most important part of the story.