The fastest-growing economies in the past generation have mixed some level of planning into their market economies. For example, the WSJ has dubbed Japan "the most successful communist economy."
Especially in countries that are catching up, government can keep businesses at the forefront of technology. There are actions beneficial to an economy that private firms don't see. For example, in industrial organization (a branch of micro) there's a concept called "clusters." A tech company would benefit from having other tech firms around it. In this case, the government can build a science park to encourage firms to set up shop. The firm then has the assurance that there will be others firms near him which he can feed off of.
As for government workers being idiots, we've created a culture of depicting bureaucrats as Dept. of Commerce idiots who waste taxpayer dollars posting on Cougarguard. In some cultures, there is historical prestige associated with bureacrats, as men who passed tough civil service examinations. Hence governments attract the best minds. Duty is enough to motivate him. John McCain appears to want to foster this kind of attitude, as he summoned the CEO of Sun to head to DC to help solve our problems.
Things that benefit more than the person engaging in it, like health, R&D, are always underfunded by the private sector. It takes a social planner to get the country get closer to the optimal level. The government has recognized this and established the NSF, NIH, created the discipline of computer science, etc.
There are some things the private sector just won't do.
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