Capitalism requires that we believe human beings are rational and act in their own self interests. This is one of the fundamental assumptions of mainstream economic theory; individuals will analyse different choices objectively and will always choose the option which produces the greatest net utility.
This is the theory that underlies most of contemporary economic philosophy and it is not supposed to be accepted as a fact. Economic models which rely on this principle are just that: models, intended to represent a particular idea of how the economy might function. They are not infallible descriptions of human behaviour.
Libertarianism, as a ‘hard-line’ branch of contemporary liberal democratic belief, accepts the assumptions of micro-economics at face value; that individuals are rational and will always make the best choices for themselves when left alone. Therefore, government's interference in the economy represents interference in the individual’s freedom to make their own choices.
The government is unable to know what the best (or utility maximising) choice would be and so the individuals should be allowed to make as many decisions for themselves as possible. Hence, dependence on the free market is the ideal form for a society because it represents an unbounded space in which individuals can select whichever bundle of products they desire to maximise their own utility.
Unfortunately, this is the point where theory and reality diverge. Individuals who describe themselves as ‘libertarians’ believe that a libertarian government is rationally the best choice; it is the utility maximising option. If this is true and all individuals act rationally, why libertarian candidates not win every election? If libertarianism is objectively the best choice and individuals are rational, then every election should result in a libertarian victory and yet this consistently fails to occur.
There are two solutions to this apparent paradox. Either, individuals are not rational and do not act in a utility maximising manner; in which case they cannot successfully participate in a free market and require assistance from an effective government. Or, individuals do act rationally and the majority have come to the rational conclusion that libertarianism is not the best solution for society’s problems; they prefer to have government interference in the economy.
However we attempt to resolve the problem, it would seem clear that the libertarian philosophy is intellectually inconsistent. In truth, libertarianism is a response to oppression; rather than challenge the capitalist system which oppresses us; libertarians have simply developed an ideology which idolises the oppressors.
Public policy cannot be based solely on the theoretical models of micro-economics. Within their own sealed world, economic models are perfectly internally consistent (more or less) but in reality the plethora of exogenous factors severely curtails their predictive power.
Certainly those theories should be used to inform policy but they should only ever be part of any eventual solution. Individual opinion is heavily influenced and controlled and it is unreasonable to expect every human being to always make the best possible choice by themselves. In certain circumstances, we must allow governments to make choices on our behalf.