First of all, Austrians who make this argument are utopians. They tend to view the world in terms of how they imagine it could be, rather than as it is. The fact is that capitalist economies are inherently unstable and unemployment and deflation are always lurking around the corner. Capitalists don’t generally step in to fill in the gap. In fact – bipolar creatures that they are – they tend to run at the first signs of trouble and cause crises (Keynesian uncertainty again). The 19th century, when government intervention was limited, was a time of great instability and myriad financial crises. We have, thankfully, left this world behind us and, to be frank, we would not be able to return to it even if we wanted to.
Hmm. Capitalist economies will be unstable because of progress in the form of creative destruction. The new drives out the old and there is no master plan. Lots of businesses fail: they invest in the wrong things at the wrong time. There’s a lot of trial and error involved. Profits go to the people that invested correctly; improvements flow to the rest of us in the form of better and cheaper products and services. There is no mystery here: our improving standard of living is the direct result of the desire for profits in a capitalist economy.
You hear a lot about the need for government intervention due to the instability of free markets – never mind that governments cause a great deal of this instability. But still, the point is fair: the faster we improve, the more unstable the system becomes. There is a choice to be made between stability and prosperity. More government means more stability; less government means more prosperity.