First Post - State or Market?

I post a lot on forums, and have finally decided to combine the posts into a blog, as to see them all collected into one place i an appealing though. Here's one I wrote earlier (I'll expand on areas like education in later posts, this s just a basic intro to my way of thinking):

Hypothesis: - The existence of state interference in an economy is a sign of inefficiency in said economy, because if optimal allocation of resources existed then there would be no need for it.
Therefore the maintenence and expansion of state spending can only serve to perpetuate said inefficiencies, leading to an eventual correction, which will be more painful the higher state spending is.

Even if the cause of the initial misallocation of resources was in some cases market failure and not state spending, the evidence of market failure is not in itself enough to garauntee government success at solving the problem, and in fact the market would eventually provide the answer to its own failure better than the state could, considering that state spending in itself is both an indicator and a cause of inefficiency.

An example of market failure is "assysmetrical information". Let's use the example of the credit market; lenders cannot know the intentions of the borrower in advance, however the they do understand that they can't raise interest rates without limit to compensate for the risk of default. Therefore, they may find it more profitable to keep interest rates below the market-clearing level and refuse loans to small or unproven borrowers about whom they have little information. In this way, small but efficient business may be discriminated against while large, less efficient ones may benefit. I accept this.

However, can government intervention solve this problem effectively, and if so, how? Is it better to not intervene, to let the "invisible hand" work, and wait for the smart lender to come along who will spot the opportunity that his rivals are missing, and take the risk of lending money to these sectors of society which previously were denied credit? After all, is capitalism not constantly expanding, are lenders not in constant competition to outdo each other, and would an opportunity for potential profit be ignored for long in a genuinely free market?

Structuralists may see the market as rigid and inflexible, but this is not the case. Free markets are not rigid and inflexible, because people, acting as either employers or producers constantly strive to meet demand in order to survive. The more you centralise the decision making process, the less this can happen (or the more demand is ditrorted by govt. subsidizing the production of goods which no-one wants and therefore diverting resources away from those which people do) and the more inert the market becomes. Continuing the example of the credit market, once one lender had made a profit from lending to these previously excluded groups, would other lenders not then compete with them to give these people a better offer in order to shore up a larger section of the market for themselves?

In light of this, is state intervention in the economy justified, and if so, how? In my experience the answer is yes - in a few select areas. For example I believe that the state should pay for a country's infrastructure, law and order and military on the grounds that govt. has a comparative advantage in these areas, as these are resources that it would be unworkable to regulate who uses them, so a monopoly is inevitable as otherwise people could refuse to pay for a service but would still benefit from it. You could also advocate education and health being the domains of the state and being paid for by taxes on individuals on the grounds that private companies benefit from an educated and healthy workforce (as do individuals, ie we all need doctors and teachers), but you cold not regulate which companies get to employ these individuals, and maybe it would undesirable to exclude certain individuals from enjoying these services for various reasons, eg humanitarian reasons and economic reasons - a healthy, educated workforce is good for the economy after all. Therefore individuals and companies could benefit without paying.

However, I don't see where else this reasoning applies, and, furthermore, when the government intervenes in other areas of the economy, the administration cost leads to resources being diverted from these areas where the govt. does have a comparative advantage.