Government is necessary for the same exact reason that socialism/communism are stupid concepts and always fail - people are self-interested and it is not possible to legislate altruism.
Government's proper role is to ensure that society remains a meritocracy, and to protect each individual’s right to prosper on the basis of their own efforts and creativity. That's why we have patents, for example.
As an economist, it is self-serving for Stockman to propose that the economy is more complicated than market forces make it.
Not conceptually difficult, perhaps, but not particularly realistic, either.
What you're talking about is essentially a pre-industrial economy, defined primarily by local craftspeople whose main customers are also local.
I'm not so sure that economic model is viable in a world where huge corporations dominate the means of supply and production.
Just as an example, demand from McDonald's and other fast-food giants basically controls the US beef industry. Ranchers have a hard time surviving unless they either dance to the McDonald's tune, or can tie into a local co-op arrangement that occupies the margins of the beef market.
What sorts of innovation are you looking at? Clothing manufacture? Tool fabrication? Consumer electronics? Machinery? You generally can't even find American-made versions of this stuff anymore, much less something that's the product of some local craftsman.
It might go back to local craftsmanship once things crash... but we're certainly not there now.
“basis of their innovation, creativity,”
This only works for those that produce real things. WS has managed to put us in a mell of a hess with their innovation and creativity in producing figments of the imagination.