Society is complex. There are a host of causal factors at work bringing about any historical result. That’s why we need theory to understand the world. When real economies are a combination of market forces and government forces, we must have sound theory to disentangle the causal factors. The theory of the free or unhampered market economy is essential to doing so. It doesn’t matter whether or not such an economy exists in the real world. We have no other way to disentangle the different causal effects.
The unhampered market economy is an economy in which legal sanction is given to all voluntary exchanges and private property and any involuntary exchange and any aggression against private property are illegal.
Take a look at the lecture on the unhampered market economy for more details.
Your friend is entirely mistaken to claim that any particular set of goods are prerequisites of the market economy. At best, he could merely claim that infrastructure provided by the State is a requisite to some particular goods produced by our interventionist market economy. Of course, in any economy the production of some things depends on the production of other things. But, by his own admission we don’t have a free market economy. So how could he know, except by theorizing, whether or not such an economy requires state-produced goods that our economy has.
The theory of the market economy demonstrates that production decisions made by entrepreneurs economize the use of resources for society at large. Efficient production depends on earning profit and avoiding loss. The state’s production decisions cannot satisfy the profit and loss test of social efficiency and therefore, they are, by nature, inefficient. Contrary to the claim of your friend, entrepreneurs on the market take account of the inter-temporal dimension of profit efficiently through the rate of interest. State officials simply ignore this dimension of profit as they do all its other dimensions.
Take a look at the lectures on economic calculation, profit, and equity.
No conclusions about the operation of the market economy can be drawn merely from claims made by Smith, Hayek, or Friedman. One has to exam their arguments and see. There have been many criticisms of all three of them, pointing out the inconsistencies in their defense of an interventionist system. (They all favored a market economy, but not one of them favored the free market economy.)
The function of a market economy is to satisfy the most valuable preferences of society at large. All economists agree that the market, generally, does so because production decisions are subject to profit and loss. One must demonstrate, not merely assert as your friend does, how the market systematically fails to do so and how the state can intervene to systematically correct the market’s failure.
It’s not a market failure that our society lacks certain conditions that the market is not designed to provide. The market is a production system and so, it succeeds or fails on the basis of whether or not it produces the goods that society at large prefers. Claiming that the market fails because some people are unhappy or obese or have less income than other people is like claiming that a car engine isn’t working right if the driver crashes the car because the breaks fail.
On Public Goods and Market Failure, take a look at Murray Rothbard’s, Power and Market:
Without theorizing, how could your friend discern whether or not the argument that the Fed’s monetary inflation and credit expansion might have had more to do with the financial collapse than the re-regulation of financial markets? In fact, without theorizing, how would he know what the effects of re-regulation were?