The two major problems with modern liberalism (European meaning) are a lack of
(1) theoretical fortitude to generally deal with the vast fields of contingency and indeterminacy opened up by greater freedom, and more specifically, a lack of
(2) doctrinal maturity to guide it in political participation.
Both deficiencies have a common source. The model of social order underlying modern liberalism is the market. But the market is only a subset within the broader social order.
Hume or Smith were never in danger of reducing the system of liberty to a mechanism that describes free markets. But when Hayek speaks of spontaneous order, he is already propagating the narrower vision.
I do not know when and why it occurred, at any rate, the tragic turn of liberalism looms when sight is increasingly lost of the spontaneous order of society at large.
Why would liberalism suffer such constriction? Maybe because its roots lie in a precapitalist world, and more importantly in a world where government could not possibly be anything but very small by later standards. Maybe because its heyday coincided with the breakthrough of commercial society. Small government and commerce looked like the essence of liberalism. They appeared to offer liberalism's ultimate formula for success.
Now, let me explain what I mean by "the vast fields of contingency and indeterminacy opened up by greater freedom."
(1) Freedom brought about capitalism. (2) Capitalism brought about wealth. (3) Wealth required and enabled mass political participation, and wealth made possible government endowed with unprecedented resources. (4) Mass political participation brought about unheard of demands on the state. (5) Unheard of demands on the state brought about big government.
Freedom brought about big government.
It is useful to think outside the usual box, for a moment, and admit that there are not only silly and objectionable grounds for a larger state to happen. At least from stage (3) on, the delta of implications deriving from mass political participation and unprecedented publicly available wealth becomes much too broad and complicated, too contingent and indeterminate to simply wipe away any consideration of larger government as an expression of base doctrinal dazzlement.
However, this is exactly the error committed by the liberal movement. By its very structure, the liberal doctrine was conditioned, or at least predisposed to heavily underweight political processes and the dynamics of state institutions and government. Liberalism yields to this propensity at a time when these are becoming the most powerful forces in society, next to free markets and civil society, by which latter I mean the growing independence of humans and organisations from the tutelage of the powers-that-be.
The irony, nay, the tragedy is that liberalism becomes a creed of political abstention, just at the time when liberty is taking off in the biggest possible way. This is the dawn of the era of the paradox of freedom. Liberty proliferates and grows all over the world, but liberals hardly participate in shaping her fate. Those among them ready to accompany liberty in the political realm quickly amalgamate with other political schools uninhibited to regard politics as a welcome tool to bring mankind advances that the smaller governments of yesteryear were utterly incapable of. This is the reason why, for instance, the German liberal party has become yet another branch of social democracy a long time ago. A liberal party, a strong liberal force in politics is simply not conceivable under the core paradigm. A liberal must cheat or desert in order to become politically effective.
I must use the word for the third time: it is a tragedy that the audacious vision of perhaps the greatest liberals ever, and the unparalleled success of their political activism have not become the guiding light of modern liberalism. Instead, liberals live estranged from and often embittered by a time characterised by more freedom than has been experienced in any period before ours.
It has been frequently remarked that it seems to have been reserved to the people of this country, by their conduct and example, to decide the important question, whether societies of men are really capable or not of establishing good government from reflection and choice, or whether they are for ever destined to depend for their political constitutions on accident and force.
(Federalist 1, par. 1)
The answer to this puzzle is not a foregone conclusion - it is an ongoing process of political activity producing partial answers.