Before I get started addressing your major points I would just like to note that I disagree with your view of Locke. Though Nozick may lean on Locke, this only indicates that Nozick is poised for a fall, as, I assure you, Locke is not leaning back (I must note that this statement is predicated upon my limited knowledge of Nozick's arguments). Also, the State of Nature does not characterize human behavior. It is a legal structure: the absence of any formal agreements. I would discuss this further but it probably isn't relevant enough here to justify the time.
I will not properly counter your suggestion that public institutions are good tools for cultural transformation. This is a very complicated issue and I don't think I have the time now to do it justice. I will make a few general statements that may give you some sense as to what points I think are important in this regard.
You point out that there is a relationship between culture and institutions. I can't argue. To do so would be absurd. In fact, there are things which we call institutions that are obviously nothing but culture (here of course I am using a much broader definition of institution than just public institutions). Hell, I could make a pretty decent argument that all institutions are primarily culture (I first began to grasp the potential complexity of this topic when I tried to carefully define culture and its aspects, institutions and their types, got two pages in, and still had not worked out a satisfactory framework). Once these particulars where hashed out I'm pretty sure I could make a good case for my point. But in doing so I would have to elaborate most of my theory of culture; and I know from experience that I can't do that in brief. So I'm not going to try here.
When I think about examples of public institutions that have a strong cultural complement it seems that these are primarily institutions that were created because the cultural 'institution' already existed (an example here would be marriage). So that’s one point. Public institutions often have cultural counterparts, but it is usually the culture that brings about the public institutions rather than vice versa.
Another point would be that public institutions are only good at creating an inferior sort of gross culture. I did indicate, unintentionally, that institutions can create norms. This is true. But a norm in this sense is a very feeble sort of culture. It is a simple expectation. I can modify a rat's behavior by establishing the norm that it will be fed every day at 9AM, but even for rats this is not a very impressive utilization of their brainpower. In the modern use of the word 'culture' such ideas are dominant. You could have a culture that hates blacks, or favors democracy, or values punctuality, etc. This is culture as merely a set of irrational preferences. It is definitely true that such things can be an important part of a culture, and that they can have major impacts on people's behavior. It is also true that there are many examples of public institutions having succeeded in changing these aspects of culture. This is not however a part of what gives a culture 'richness'. You cannot develop a meaningful appreciation for Shakespeare, Hume, or Darwin, with posters and PSAs. These things are deep and thought provoking. They utilize the human mind's capacity for nuance, intuition, and rationality. I think that they are infinitely more powerful as means for improving social outcomes than mere propaganda. I also think that to not use these sorts of culture is to squander the potential of the human mind. This potential is infinite. Propaganda is a cop out. It is what we resort to in order to control people when we can't figure out how to make proper use of them. Human intelligence is a hindrance when you want to manage society from the top down like a block of clay (as, in a non-rich culture, the idle brain power is bound to bring about all manner of wickedness), but it is a great asset when you approach society at the fine structure level and try to change it from the bottom up.
I do not think that I could be said to fetishize an ideal culture. I do talk about a rich culture, a healthy culture, a natural culture, etc. but there are infinitely many cultures which would be worthy of these appellations. These are cultures that are of sufficient complexity to utilize the potential of the human brain, that contain the notions necessary to maintain the well-being of their hosts, and that in other ways resemble the cultures that coevolved with the human body. The methods I suggest for improving culture have less to do with the contents of culture than with how it is transmitted. I certainly believe that the contents of a particular culture have a huge impact on its ability to improve human well-being, but any healthy culture is better than none. In any case, the problem is much less important in modern times. So long as the culture we create includes an understanding of the value of rationality, free information, and self-determination, it will naturally accumulate the best and most valuable ideas (since we have so many available ideas and such facility in the distribution of information).
Your argument against the idea that government is increasing is an empirical one. Facts require a lot more effort to generate than ideas. So I'm not going to argue this thoroughly. I don't have the time. Here's my gut reaction (and there are more nerve ending in my gut than in my brain you know). You address the issue from a legal perspective. You certainly are in a better position to make this judgment than I. And from what I do know about the actions of the courts your assessment seems justified. This is encouraging. I'm tempted to vote republican just to get more Chicago school libertarians onto the Supreme Court. But I think this is really an elite movement. It is an ideological battle being waged by a group of intellectuals (and hooray for them). But I think its pretty crazy to argue that the trend in government over the last century is not decidedly up. Government spending as a percentage of GDP has certainly increased dramatically. I don't have any hard figures, but I bet that the quantity of legislation has increased (both in aggregate and in pages issued annually). I'm pretty sure the size of the federal register has grown over the period. What is more difficult to measure, but perhaps more meaningful is the change in people's attitude toward government. Whenever there is a problem today it is automatically assumed that we should turn to government for the solution. When government regulates and prohibits, modern Americans see this as natural and unsurprising. I think we have a much more submissive attitude toward government than we did a century ago.
Your closing paragraph addresses what is probably the core of the difference between the understanding of the modern liberal and the classical liberal. I will use a few different approaches to describe how libertarianism is an appropriate model for guiding social policy working from your comments.
Rawls derives his principles of justice from what he calls the Original Position. Where we assume that we are choosing the structure of rules of the world into which we are going to be born prior to having any knowledge as to what our initial physical or social condition will be. In this way we will not be biased by any particular class assumptions. I think this is a fine way to assess social welfare. It appears to be roughly equivalent to a judgment based on utilitarianism, if by that term we mean the greatest satisfaction to the most people. Another way of stating this principle would then be to maximize the happiness of the average person. This seems to fit the Rawlsian problem. In the Original Position my expectation is that I will be the average person (in statistics that is the very definition of 'expectation') and so I seek, by arranging the rules of society, to maximize my expected happiness as such. That's all fine. Where I would disagree with Rawls is in the supposition that using the redistributive and regulatory powers of government will enhance the common welfare. From the Original Position I would choose a libertarian structure. Let me give a couple of examples.
Would I choose a rule structure that supports the existence of unions? Certainly not. I must consider what impact it would have on me as a random member of society. The only circumstance in which I would be benefited would be if I happened to be a member of a union during the first generation or so of that union's existence. If I am a member after the union has been long established, the economic inefficiencies of the union's existence will have already eroded my well being sufficiently to negate any benefits it might provide. If I am not a member of a particular union, it harms me in at least two ways and quite possibly more. The union harms me because I, as a consumer, must pay more for, and hence consume less of, the product that the unionized industry produces. In the long run the inefficiencies of the unionized labor market further harm everyone by reducing overall economic output. If I am an unemployed laborer in the unionized industry, I am harmed because the union impairs my opportunity to find employment by offering my services at a more competitive rate. If I have invested in an industry prior to its unionization, the value of my fixed capitol will be reduced by the appearance of the union. So, since a union only benefits a small group of people for a short period of time it would be irrational to create rules supporting unionization from the Original Position.
Would I support government-financed distributions of wealth to the poor? No. Admittedly, in the first generation or so this policy will enhance my well being if I happen to be poor, but if I should be born at some later date I would be better off without it. The policy will reduce capitol investment by removing wealth from the people who have a sufficient quantity to invest (and who largely have such sums because they are skilled at allocating capitol efficiently). It will imply annual structural costs involved in administering the taxation and distribution system. It will dramatically reduce the incentive of my parents and their parents to strive to improve their economic standing. As the allocation of a dollar is a production order, it will, in essence, transfer the direction of the economy from those who have established economic prowess to those who have demonstrated economic incompetence. These forces will both further degrade my relative economic standing and will put a drag on the development of the economy as a whole. A five percent increase in my share of the total wealth of the economy at the cost of a half percent reduction in economic growth is not a good long-term trade off. Rationally, I would prefer the situation where I have more real wealth, even if inequality is higher.
Those are the sorts of arguments I would make against Rawls's principles of justice. I don't think his principles follow from his idea of the Original Position. Superficially policies of economic equalization seem like a good idea, but in the long run they are detrimental even to those they are intended to benefit.
One might argue that there is a threshold of poverty below which one experiences such an acute level of suffering that its intensity would weigh down the average well being so much that we must do something to alleviate it. Sure; of course. But it seems ridiculous to me to suppose that we need government to provide this support. Honestly, people aren't monsters. Even in the presence of extensive government support systems Americans contribute hundreds of billions of dollars to charity every year. I have to imagine that if people kept a much larger portion of their income, and if they did not expect that the government would take care of every problem under the sun, they would probably be even more generous. Even if they weren't, I sincerely believe that, had our government not become so interventionist over the past century, our current output would be several times what it is today, so that even if people only contributed the same amount that they currently do, as a percent of GDP, it would at least equal, in real terms, what is currently provided to the poor through government programs and private charity (and the want this money would serve would be less intense).
I think the fear that, if the government did not provide all of its supports and regulations, we would experience a humanitarian disaster is just a scare tactic used by people with a relatively extreme class warfare agenda. Kids may have to work in sweatshops in the third world out of economic necessity, but this would never happen in modern America. Nobody, anywhere in the world, would accept such a situation if they had the economic wherewithal to avoid it. There is a stage in economic development when atrocious conditions are common. But it replaces a preexisting state in which atrocious conditions are universal. Dickens may have been miserable when he was a boy, but he grew up to be a famous author. That could never have happened before the industrial revolution. Had he been born two hundred years before, no one today would ever have heard of him. He would have been just another miserable boy, just like every other boy in the world. The point is that liberal policies had been so successful by his time that people finally realized that it was actually possible for many people to not be miserable. We like to think that we're very superior. We imagine that people in the past thought it was wonderful to work a hundred hours a week and to live in piss reeking hovels. But I think that in this we are mistaken. We think that we wised up, passed laws against living like that, and moved on. But perhaps the economic development that followed naturally from the adoption of liberalized policies had already largely done away with those things and all we did was ban the vestigial remains of ways of life that had once been universal. I believe that this is the case. I believe that the most rapid way to eliminate terrible living conditions is to allow the market to operate unhindered.
That is a very important point. Liberal institutions did not create child labor. They did not cause people to have long working hours or low wages. Liberal institutions were the very force that made these things so uncommon that what remained of such practices began to appear abominable. It is a wonderful thing that the wealth that liberalism had created made people's moral sentiments more gentle and sensitive. If this should cause them to aid and succor those who still must suffer this is a very good thing. But if this should cause them to destroy the very system which is creating the wealth necessary to lift others out of poverty, then it is a genuine tragedy.
It goes without saying today that people work fewer hours, for greater wages, and under better conditions than they did in the past because we have passed regulatory laws to make it so. This belief is nonsensical. These laws would have no effect if the physical wealth that make this standard of living possible had not already been brought into existence by liberal policy. We could go and pass such laws in Afghanistan or North Korea but that would not make people better off. Laws do not improve living standards, wealth does. It is an indisputable fact that prior to the time when we began passing laws to constrain working conditions, wages had been going up, hours worked had been going down, and working conditions had been getting better for centuries. There can be no reasonable doubt that this trend would have continued on its own throughout the twentieth century in the absence of any interference. From my perspective, it is obvious that, in each of these regards, the average worker today would be better off had no paternalist regulations been created.
I could go on in this vein indefinitely. I guess the point is that the argument between liberals and statists is not what ends we should aim towards but what means will best achieve our ends. Liberals do not believe that poverty is good. They do not loathe children. I might like to bring down the welfare state, but in doing so I would intend to promote social welfare. I have come to despise communism, but this does not mean that I do not value community. I once thought that Jesus was a communist. After all, he said that everyone should give their wealth to those less fortunate than themselves. But this is not equivalent to communism. There is a vast gulf between suggesting that charitable action is righteous and emptying people's wallets into the basket at gunpoint. I don't recall Jesus saying anything about 'overthrow thy neighbor'. I guess that's a diversion. What I'm trying to say is that I believe in libertarianism for entirely pragmatic reasons. It may happen to be true that freedom is a pleasure in itself. That liberty is an ennobling and dignifying status. But I did not come to embrace liberalism for such reasons. I honestly believe that it is the best system for enhancing the well being of every person in society.