Matt Yglesias talks about the issues regarding opposition to the welfare state:
This is why thoughtful opponents of the welfare state have generally avoided making the argument that capitalism is good because it promotes human well-being. Since capitalism does promote human well-being, "capitalism promotes human well-being" sounds like a good argument in its favor. But it turns out that capitalism plus a large welfare state promotes human well-being even more. So you either need to embrace the welfare state (the correct answer) or come up with another justification of capitalism. One that frequently arises is what Greg Mankiw has referred to as the "just deserts" perspective in which "people should receive compensation congruent with their contributions" and we should aim for a society in which public policy ought to ensure that "every individual would earn the value of his or her own marginal product."
So if, for example, you are blind and inability to see makes it hard for you to earn a living in an unregulated market that's too bad for you. Your vision impairment means your ability to contribute to market production is limited, and therefore it is morally appropriate that your living standards be limited as well. By the same token, if a combination of genetics and childhood living conditions have left you with an IQ that is 2 standard deviations below average (this is about five percent of people) then, again, it's just the case that you deserve to have a much lower standard of living than society could provide for you if it were willing to do more redistribution.
Mankiw's moralized capitalism seems bone-chilling to me but I don't really think I can prove him wrong. It is, however, pretty trivial to see that Mankiwism isn't a Christian worldview.This is really the major challenge of neo-conservative or libertarian thought. You can argue that government is inefficient, but that is an argument for good government and not an argument for trying to create a self-fulfilling prophecy. Proponents of the welfare state can easily argue that the focus should be on improving the role of government -- improving both efficiency and accountability.
The only argument for the just desserts argument that I can think of (as absolute adherence to economic efficiency as the main determinant of human value seems like a dead end) is that it produces more economic efficiency on the long run. The problem is that areas of very low levels of government do not create vast periods of economic growth. You can have growth flourishing despite great conflict (see the American Civil War or the War of the Roses). But when the state actually collapses (see the English Civil War or recent events in Syria), you end up with people like Hobbes arguing for more government.
Nor have experiments with lesser versions of this worked out well. The data is inconclusive with respect to tax cuts for the wealthy, but the trend is not supporting this mechanism. This makes it hard to figure out why this viewpoint is so generally popular. After all, nobody is arguing that we should have a French Revolution or even massive taxes. Instead, the current argument is whether we should redistribute wealth to look a little bit more like other industrialized nations.
Are we all missing an argument?