Jim Henley has an excellent post on whatever happened to small government conservativism which takes off from one of Glenn Reynolds recent idiocies.
Briefly and less eloquently, he concludes that self proclaimed libertarians (or whatever) like Reynolds have abandoned everything they believed about the state and the market for three reasons. War caused them to suspend their critical abilities, they are obsessed wtih criticizing the left and are too busy looking for inconsistencies in the claims of the left to notice the logical inconsistencies in their own statements and that they got infected by American triumphalism by the neocons. All true and to the point but perhaps a bit too lapsarian.
I think part of the reason small government conservativism bowed before Bush is that there wasn't much to it to begin with. Libertarianism has always been a fringe movement found mainly on universities and on the web (roughly at places which owe their existence to the state). Hayek Nozick et al provided a few arguments and slogans that the really existing Republicans found useful, but never were powerful.
Consider another vanished movement States Rights conservativism. Quite different from small government conservativism and once genuinely powerful, it has vanished. I think it is clear what happened. No one really believed in States rights as a principle, but people in the South, the South West and the mountain states found it a useful slogan because they didn't like which states were imposing federal policies. As soon as the red states took over, they forgot about federalism. Similarly, I think, when big government meant big bucks for big business instead of social welfare spending and health safety and environmental regulation, K-street stopped pretending to believe in the market. More importantly, when Reagan showed the deficits didn't matter so people decided they could get both low taxes and big government the pseudo libertarians who only cared about their own tax bill lost interest.
Small government conservativism vanished because it was composed of liars, useful idiots and Jim Henley. Now he's all alone, David fighting Goliath *and* the army of Davids.
Update: Note I said it was composed of three groups. Three not two.