I have argued before that states are not the antithesis of markets, unlike what many libertarians (and their fellow travelers) believe. Mike Huben directs me to some relevant and useful writings by Stephen Holmes, the NYU political theorist. Here are a few good passages:
It is implausible [...] to view liberal rights as naturally incompatible with political power, as if such rights flourish only when the state withers away. Authority and liberty are interdependent, not simply opposed. As Kant, among others, made dear, rights (including property rights) are defined and enforced by the state. Referring to "natural rights," Emile Durkheim convincingly wrote that "the State creates these rights, gives them an institutional form, and makes them into realities." To violate liberal rights is to disobey the liberal state. In a sovereignless condition, rights can be imagined but not experienced. In a society with a weak state, such as Lebanon for the past decade, rights themselves are weak or underenforced. Statelessness means rightlessness, as the story of migrating Kurds, Vietnamese and Caribbean boat people, and many others should by now have made abundantly clear.
Libertarian rhetoric about "getting the government off our backs" makes the positive correlation between individual rights and state power difficult to comprehend. Better guidance comes from classic liberals, who insisted that, when organized constitutionally, liberty and authority can be mutually reinforcing. Consider David Hume's famous essay, "Of Commerce." In this classic defense of liberal political economy, Hume argues that Britain should deregulate commercial and industrial life and welcome the accumulation of private wealth, because such a system will increase the resources "to which the public may lay claim." An autocratic government, intent upon controlling all economic life, will decrease the stock of private wealth and thereby indirectly undermine its own power.
What can we learn by looking at preliberal arguments for typically liberal political institutions? We can learn, I think, to question the conventional interpretation of classical liberal theory as ardently anti-statist. Liberals were not anarchists. They were opposed to capricious and oppressive authority, not to authority in general. They embraced state power as a means both to prevent anarchy and to enforce impartial laws (against the grain of human partiality). Because they assumed that political rulers will themselves be human, and therefore partial and potentially unjust, they also devised institutional machinery to contain authority within legal channels. The constitutionalizing of authority is anti-authoritarian. But it does not imply a weakening or crippling of the state.
Huben also maintains a web site devote to the critique of libertarianism, where you can arm yourself for any argument you may have with a libertarian.