What "progressives" misunderstand the most about classical liberalism are our views of regulation. People are often too brainwashed by the leftist media to see us either as sociopathic anarchists (hence the label "libertarian") or as reactionary promoters of the interests of the rich and powerful, i.e., the established business and political elite (hence the label "conservative," i.e., in favor of the status quo). It is easy to be manipulated when you are ignorant of the writings and the true ideas of the leaders of the classical liberal movement. Not everyone has enough motivation to set a few hours apart to read from Friedrich Hayek's The Road to Serfdom or his The Constitution of Liberty when you can tune in to the early evening ramblings on MSNBC without employing more than a dozen brain cells.
The fact is that Hayek clearly argued that laissez-faire capitalism couldn't function without a supporting framework. He explained that, for competition to work as beneficially as possible, it requires adequate organization of institutions like "money, markets, and channels of information" as well as "an appropriate legal system" with precise definition of property rights "as applied to different things," with protection from fraud, and freedom of contract. He recognized the problem of externalities (such as deforestation, certain methods of farming, air pollution and noise from nearby factories) and public goods (non-excludable and non-rival in consumption) where it may be practicable to supplement the price mechanism with some form of government regulation.
The real question is not whether markets work more efficiently with or without regulation-the real issue is how to create the necessary institutional framework in support of capitalism without opening the door for bureaucratic abuses. What we need is to gradually replace the existing myriad federal agencies with a reasonably flexible system of general rules within which the people are free to choose their means and ends, "a system," according to Hayek, "in which individual initiative is given the widest possible scope and the best opportunity to bring about effective coordination of individual effort."