The party you are referring to exists - it's called the libertarian party - and it is mostly (but not entirely) ex-Republicans who think responsible adults should be treated like responsible adults -- e.g. left alone until they hurt somebody.
There _should_ be more liberals and democrats joining the libertarian cause, because the LP is much better than the dems on key issues dems claim to care about: anti-war, pro-civil liberties, anti-racism in law enforcement (especially the drug war), anti-corporatism..
So, I cannot tell you why there aren't more democrats who break ranks and join the libertarians.
One reason for that, I suspect, is that I simply cannot relate to democrats or understand how they came to be democrats in the first place. There are plenty of intelligent people who are democrats, but I've never been able to figure out how any of them "tick".
In any case, there are principled libertarians -- and that's how they've traditionally billed themselves. Principled in the sense that they think government morally/ethically should not do certain things.
Then there are pragmatic libertarians -- folks who figure government is _ineffective_ or even malicious at doing certain things, and therefore shouldn't do them. An example would be Gary Johnson.
The bottom line is that, if America were actually incredibly hungry for a fiscally conservative, socially permissive party -- that party has existed for decades. It has been getting more popular lately, but it's still basically a rounding error in most elections.