QOTD: The Missing Entrepreneur

There is no place for entrepreneurship in the market model of mainstream economics. Consider Kirzner in his How Markets Work:

The theory of entrepreneurial discovery sees the explanation of market phenomena in the way entrepreneurial decisions, taken under disequilibrium conditions, bring about changes in prices and quantities. The market process so initiated consists of continual entrepreneurial competition, made possible by an institutional framework which permits unimpeded entrepreneurial entry into both new and old markets. The success which capitalist market economies display is the result of a powerful tendency for less efficient, less imaginative courses of productive action to be replaced by newly discovered ways of serving consumers -- by producing better goods and/or by taking advantage of hitherto unknown but available, sources of resource supply. The theory focuses on the concept of discovery in contrast to the notion of the individual decision in mainstream theory. (p. 31)

 The mainstream economic view of the world relies on the idea of equilibrium. Every point in the diagram of the market model, including every point on the demand and supply curves, is an equilibrium point. So, the role of entrepreneurship is missing, and if you want to know more about the real economic world, this book by Kirzner is a good one to study.

Not Capitalism

Let's consider the following from Jerry Mander's The Capitalism Papers: 

In the popular movie Avatar. . .a gigantic mining corporation travels
to a fictional distant planet where the valuable mineral “unobtanium” has been discovered in large supply. Alas, however, the mineral is located on the traditional lands of the Na’vi people, who live in a magnificent, wild, ancient forest. The corporate armada arrives in spaceships and includes immense military forces, fully equipped to invade and overpower these innocent and remarkable people if they don’t agree to move off their lands and yield control of these resources to the corporation. In the real world today, this scenario is entirely routine and has been played out literally thousands of times on every continent, without big Hollywood movies to illuminate the struggles. (43)

It seems Mander believes this fiction depicts important aspects of capitalism. But why is this capitalism? The story here involves the use of force because the corporate armada includes "immense military forces." This story seems to be a story that fits the history of imperialism by countries like Great Britain, Holland, Belgium, and Spain. It seems like the typical story told in textbooks of world history by which our kids learn about conquests and more conquests. Capitalism is the opposite of conquest. It is not predation. If this were capitalism, the corporate armada would not threaten force but offers deals for "their" lands instead. 

Of course, I know there are some who include imperialism in capitalism, but I say this is mistaken because doing so does not aid understanding. We cannot understand social interactions if we decide to say that taking and dealing characterize the same system of political economy. Predation and cooperation as fundamental aspects of the same system of political economy makes no sense to me. The human actions and interactions are different when predatory and when they are cooperative. Capitalism is cooperative. It involves voluntary exchange and making deals.

Professor Davies has a short video on this point that I think is worth watching.

Laissez-Faire Capitalism

I've done quite a bit of reading lately concerning what different people have to say about capitalism. One thing to notice is that capitalism seems to have hundreds of different meanings. Long ago, I memorized the definition as "private property ownership of the means of production." This definition was also specifically contrasted with socialism, which was defined as "government ownership of the means of production." As you can guess, I tell the students in my courses this is how we should define capitalism and socialism.

I have also tended to see capitalism as Adam Smith's "simple system of liberty." With my recent readings I've encountered authors who call capitalism: Financial Capitalism, or Global Capitalism, or Corporate Capitalism, or Free-Market Corporate Capitalism, or Consumerist Capitalism, or Neoliberal Capitalism, or Disaster Capitalism. Not one of these capitalisms corresponds with my thinking of capitalism as Smith's simple system of liberty.  My concern is that when I use the word capitalism I am thinking about liberty while often my listener is thinking I mean one of these capitalisms.

To make these matters worse in my opinion, many people, perhaps most people, say that our system of political economy in the United States is capitalism. Certainly our system of political economy is characterized by private property ownership of the means of production, but our system of political economy is not Smith's simple system of liberty.  Confusion seems to characterize the analysis of capitalism.

What to do? I've recently read a number of people, who see capitalism much as I do, discussing whether or not to stop using capitalism as the word for "that simple system of liberty." Because capitalism has come to have so many different meanings, I am tempted to try to stop using the word. 

Or perhaps I can follow the lead of Deirdre McCloskey and say that I'm cool with just about any definition so long as the definition does not tautologically mean capitalism is bad:

I don't much care how "capitalism" is defined, so long as it is not defined a priori to mean vice incarnate.  The prejudging definition was favored by Rousseau -- though he did not literally use the word "capitalism," still to be coined -- and by Proudhon, Marx, Bakunin, Kropotkin, Luxemburg, Veblen, Goldman, and Sartre.  Less obviously, the same definition was used by their opponents Bentham, Ricardo, Rand, Friedman, and Becker.  All of them, left and right, have defined commercial society at the outset to be bad by any standard higher than successful greed.

Such a definition makes pointless an inquiry into the good and bad of modern commercial society.  If modern capitalism is defined to be the same thing as Greed -- "the restless never-ending process of profit-making alone. . . ., this boundless greed after riches," as Marx put it . . . -- then that settles it, before looking at the evidence. 

Still, since capitalism is a word that has been in use for so long by both proponents and opponents, I don't think it is going to work to try to stop using the word.  I suspect that the list of capitalisms above is not so much the consequence of prejudging capitalism as it is the consequence of mistakenly thinking each of these as invariably what becomes of capitalism over time.  Why mistakenly?  Because it seems the authors using each of these capitalisms has neglected to see that it is a system of political economy they are criticizing, and that means their concerns involve government as much as the private property ownership of the means of production.

As I think about each of the capitalisms I've read about lately, it seems to me there is nothing inherent in private property ownership of the means of production that requires capitalism to become Disaster Capitalism or Neoliberal Capitalism or any of these capitalisms.  Nor does it mean we cannot say any of these capitalisms is not truly capitalism when we define capitalism merely as the private property ownership of the means of production.  After all, there is private property ownership of the means of production in the US today, and each of the authors using these types of capitalism are criticizing aspects of the US system of political economy today.

In the past I have not wanted to give in to the idea that there could be different versions of capitalism.  I've wanted to say, "Now, look here, capitalism means Smith's simple system of liberty.  It cannot mean what people call Disaster Capitalism, or Consumerist Capitalism."  But, perhaps I've been wrong in this regard.  Perhaps I should accept the approach of saying there can be different versions of capitalism, and then make very clear the version of capitalism I'm writing and talking about.  I think it might be good to follow the lead of George Reisman and make clear that I'm writing and talking about Laissez-Faire Capitalism:

Laissez-Faire Capitalism is a politico-economic system based on private ownership of the means of production and in which the powers of the state are limited to the protection of the individual's rights against the initiation of physical force.  This protection applies to the initiation of physical force by other private individuals, by foreign governments, and, most importantly, by the individual's own government.

I might want to modify this definition just a bit, but it pretty much expresses what I mean by capitalism.  So, my intuition is that the best way to try to reduce confusion is to explicitly say that there are different versions of capitalism, and therefore the task is not to learn about capitalism but to learn about Laissez-Faire Capitalism, and perhaps the other versions as well.

Enemies Into Friends

SHELDON RICHMAN:

Mises, Hayek, and Buchanan were onto something important. In the popular mind, economics is a cold, detached study of the Economy, almost as though it were a machine that acts on society. In contrast, the catallaxy is where people who disagree about the value of things peacefully exchange goods and services in a never-ending cooperative effort to improve their lives. It is indeed a community where enemies may be changed into friends.

Capitalism

Deirdre McCloskey:

Capitalism has triumphed in our time, which I claim is a good thing, though boring.  The coming of bourgeois society to northwestern Europe was good.  So was the theorizing of bourgeois virtues in Holland and Scotland and France.  So were the early successes of bourgeois society in England and Belgium and the United States.  So was the enlargement of the clerisy.  So was the global triumph of capitalism from 1848 to 1914 and again from 1945 to the present in its spread to the second world and to more and more of the third.  It has allowed the escape from deadly poverty by hundreds of millions in the late twentieth century, the defeat of Fascism and then of Communism, the revolts against the tyrants from Marcos to the House of Saud, the liberal hegemony of the early twenty-first century.  All of these, I say, are good things.  One can think of the calamities of the twentieth century as caused by the sins of capitalism.  The left does.  Capital was born, wrote Marx, 'dripping from head to foot, from every pore, with blood and dirt.'  I think on the contrary that most of the calamities were a consequence of the attacks on capitalism." [Bourgeois Virtues]

Simple System of Natural Liberty

DEIRDRE MCCLOSKEY at Cato Unbound:

"I claim that a true liberalism, what Adam Smith called “the obvious and simple system of natural liberty,” contrary to both the socialist and conservative ideologues, has the historical evidence on its side. Despite the elements of regulation and corporatism defacing it (and the welfare programs improving it), it has worked pretty well for the poor and for the people for two centuries. I reckon we should keep it — though tending better to its ethics."

I think her opening essay is from the introduction to her new book BOURGEOIS DIGNITY. She concludes that the fundamental reason why we prosper is because of certain ideas. Ideas such as "the obvious and simple system of natural liberty." It is well worth the time to check out her essay and the interaction that follows at Cato Unbound. If you have the time and the interest Bourgeois Dignity and her earlier BOURGEOIS VIRTUES are important books if you want to understand why we prosper today.

Of Entrepreneurs & Philosophers

LUDWIG VON MISES:

It is not the business of the entrepreneurs to make people substitute sound ideologies for unsound. It rests with the philosophers to change people's ideas and ideals. The entrepreneur serves the consumers as they are today, however wicked and ignorant. [Human Action, p. 297]

Consumers Captain Economic Ship

LUDWIG VON MISES:

The direction of all economics affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain's orders. The captain is the consumer. Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him." [Human Action, p. 270]

The Age of Liberalism

LUDWIG VON MISES:

It is a purposeful distortion of facts to blame the age of liberalism for an alleged materialism. The nineteenth century was not only a century of unprecedented improvement in technical methods of production and in the material well being of the masses. It did much more than extend the average length of human life. Its scientific and artistic accomplishments are imperishable. It was an age of immortal musicians, writers, poets, painters, and sculptors; it revolutionized philosophy, economics, mathematics, physics, chemistry, and biology. And, for the first time in history, it made the great works and the great thoughts accessible to the common man. (p. 155)

Presidential Confidence?

I've recently heard quite a number of talking heads discussing what has happened with the stock market indexes since the election of President Obama. I found this chart in A WSJ COMMENTARY today. Perhaps this suggests a lack of confidence in the new President. Then again, it could also reflect a lack of confidence in a Congress which already seems adamantly partisan and Democrat.

In any case, it seems the more Washington says it will fix the economy and this recession, the more it looks like the recession will continue. It seems to me that an increasingly interventionist Washington is making matters worse, not better.

Reflections in the Times of Hysteria

VICTOR DAVIS HANSON'S insights on post-modern poverty in this time of recession:

"And for the less fortunate? Here is southern Fresno County, at ground zero of the illegal immigration explosion, where unemployment reaches 14%, agriculture is in the doldrums and construction and manufacturing fare worse, the depression among the poor is still ambiguous, at least in historical terms.

I went into the local Food 4-Less again the other day, a cut-rate, bulk-buy chain food store. The parking lot was full of late model trucks and cars—not the sort I prefer, but those V-8 monsters, loaded up with high-priced rims, wide tires, custom paint, tinted windows, oversized trailer hitches, the whole American shebang so to speak that tops out at around $40,000. The customers may have been out of work, but I counted nine, just nine, of some 100 (this was a research trip for this blog posting), who did not have one of the following four appurtencies visible—cell phone, Bluetooth, blackberry-like device, I-pod. On the way out of the parking lot, the car radio was blaring with three sorts of ads: get out of credit card debt, get out of mortgage debt, get out of back IRS payments—now! Easy! Little cash upfront! This is not Bleak House as we are led to believe.

We are hurting, but not in 1933 fashion, due both to expanded government entitlements; Chinese-made cheap consumer goods; the fumes of past easy credit; black market, untaxed temporary cash and carry jobs (a vastly underestimated source of enormous income); and a culture that absolves one of the shame of reneging on debt (or perhaps even admires the possibility of a phoenix-like resurgence from loser to winner, and has a grudging admiration for the machinations involved in such rebirth).

I’m not sure this is even the 1979-83 recession where finally we got 10%-plus unemployment, 18% interest, and 12% inflation—a topic I once devoted a book to, Fields Without Dreams. Then I remember seeing Cryolite bags go up 10% every six months. I remember raisin prices going down from $1400 a ton to about $450. I remember vineyard prices falling from $15,000 an acre to $3500. I remember taking out Federal Land Bank loans at 13%, and short-term Bank of America crop loans at 15%. And I remember pickers getting 22 cents a grape tray in 1980—and 11 cents in 1983. I bought a used Pontiac Grand Prix (a fixer-upper that had been totaled) for 12% interest. So, I am sorry. This is not quite yet the early eighties recession, and I am not yet convinced that the baby-boomer generation that has come of age cannot ride this out without adopting European-socialism as a cure."

Let's certainly hope there is enough good sense left in this republic to steer clear of European-socialism, because if not, our past prosperity will become a remembrance rather than a prelude to our future prosperity.

But, alas, the recent election of a President-as-savior for so many, combined with the rationally ignorant and the rationally irrational, may well mean there is not enough good sense left in this republic.

Are Bailouts Regulation?

CHRISTOPHER COX:

"When the Securities and Exchange Commission was created in 1934, its purpose was to serve as an independent regulator of the unbridled profit-seeking activity of self-interested individuals and firms in the securities markets. It was not intended to supplant the market or directly participate in it. Instead, it marked a deliberate effort to clearly define and separate the role of the national government, on the one hand, and the capital markets, on the other."

Henceforth, fraud and unfair dealing in the stock and bond markets would be subjected to external discipline by the federal government. Minimum standards would be enforced, such as requiring that investors be told the essential details about securities in which they were investing. Registration of securities and licensing of broker-dealers would be required. It was, in short, arms-length regulation of an unabashedly private market.

Over the years, the agency has acquired three explicit goals: protecting investors; maintaining fair and orderly markets; and promoting capital formation. These three complementary missions are logically consistent with the original premise of the securities laws, which was that government is an auxiliary to the market, not a substitute for it or a participant in it. Virtually every aspect of the 1933 and 1934 Acts, and the regulations implementing them, follows from the notion that markets should be efficient, competitive, transparent and free of fraud.

I think this puts in perspective an issue that ought to be raised: Is it constitutional for our national government to make efforts to "bail out" industries and businesses? And, is it constitutional for our national government to become a participant in financial markets by becoming a shareholder and therefore an owner in financial businesses? It seems to me the answer should be no.

The Constitution grants Congress the enumerated power to regulate interstate commerce. It seems to me this means Congress has the power to write a set of rules by which financial businesses will operate. Mr. Cox describes these sorts of rules in the quotation above.

But "regulation" does not mean offering loans to businesses to keep them from bankruptcy. And, I can't find in Artcile 1 Section 8 of the Constitution that Congress has the enumerated power to essentially be in the business of loaning money, whether for mortgages or for saving businesses and industries.

It seems to me "regulation" does not include use of a government official as a car czar, as I understand the auto industry "bail-out" bill does, who will approve or disapprove specific aspects of efforts by auto industry businesses to restructure in an effort to be more competitive in the future.

And, surely, the power to regulate interstate commerce does not include the power to own the very businesses Congress has the power to regulate.

Unfortunately, as Hayek wrote, "the basic principles on which this civilization was built have been falling into increasing disregard and oblivion."

Economics Of Corners

SANDY IKEDA:

"Jacobs stresses the importance of corners for overall economic development in a city, or more precisely, she argues that, ceteris paribus, short blocks are preferable to long blocks (which translates to more corners). Having shorter blocks and more corners multiplies the ways of getting from point A to point B, which enables pedestrians (and drivers) to experience more diversity of use at street level, and offers vendors more good locations to supply that diversity, than otherwise. Because roughly twice as many people will pass by a corner property per hour than locations at mid-block, the former naturally tend to be pricier than the latter.

A rule of thumb for the success of an urban center is that about 1000 persons need to pass through every hour (see Joel Garreaus’s Edge City). Short blocks and multiple corners make this more likely, as people who find streetscapes interesting tend to attract still more people, and more business."

The Story of the Schechter Brothers

For students in my Constitution & the Economy course, you might be interested in learning more of the story behind the Schechter opinion. STEVE HORWITZ tells about this story, and he suggests an interesting economic story is involved as well:

". . . there’s a terrific dissertation waiting to be written that explores the Laws of Kashrut as a set of informal institutions that serve as a non-governmental health code. It would be a project complementary to Lisa Bernstein’s work on the informal norms of the diamond industry. That story is only made better by the role the NRA played in overriding the, arguably superior, private sector arrangements within the Jewish community. The NRA’s attempt at cartelizing and planning all of these industries destroyed the indigenous institutions that functioned better."

When Good Decisions Make You Rich

The WSJ has an interesting piece on the VIEWS OF ANNA SCHWARTZ regarding the government's policy response to the financial crisis:

"To understand why, one first has to understand the nature of the current 'credit market disturbance,' as Ms. Schwartz delicately calls it. We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates. Credit spreads -- the difference between what it costs the government to borrow and what private-sector borrowers must pay -- are at historic highs.

This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. 'The Fed,' she argues, 'has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible.'

So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is 'the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue.'"

The government's policy is off the mark because it seems to misunderstand the nature of the problem. In other words, it is like the government is treating symptoms and not causes.

If the government wanted to treat the causes, what would the policy look like?

. . . In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. "They should not be recapitalizing firms that should be shut down."

Rather, "firms that made wrong decisions should fail," she says bluntly. "You shouldn't rescue them. And once that's established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich." The trouble is, "that's not the way the world has been going in recent years."

If the bottom line for this financial crisis is that lenders cannot get the information they need so they can figure out who is sound and who is likely to fail, then it seems to me the policy should be to let the troubled businesses fail because this is likely to be the most effective, maybe the only, way to figure out who is safe to lend to, i.e., the businesses left standing were not the troubled businesses.

There is a very sound principle, or perhaps moral to the story, found in the quote just above:

EVERYTHING WORKS MUCH BETTER WHEN WRONG DECISIONS ARE PUNISHED AND GOOD DECISIONS MAKE YOU RICH.

Of course, this is the way of capitalism and free markets. It most certainly is not the way of governments and public policy. For quite some time now government policy has intervened in mortgage markets, and the policies amounted to subsidizing risk taking in mortgage lending.

If we want to live by this principle, then shouldn't we also want to see those who were involved in making the bad policy decisions that "socialized" the risk "punished" as well? Congress bears responsibility for the bad policy decisions, and it seems there are specific leaders in Congress who were leading the charge to so many bad mortgages. How can these members of Congress bear the responsibility for their bad policies unless they are removed from Congress? Of course, it looks like this will not happen, and it also looks like we are likely to elect a new Congress and a new President in November, and relatively few of the newly elected will understand the wisdom of this principle.

Obama-McCain: Capitalism's Friend or Foe

I watched the debate last night. At one point I think I sank into a mild despair. At that point both candidates were promising more government, and neither seemed to understand the importance of a limited (and significantly constrained) government.

So, this morning I decided to give some thought to whether either candidate would be a friend of capitalism. There might be several things to consider in attempting an answer to this question, but I only have time to consider a few.

The National Journal vote rankings pick Senator Obama as the most liberal Senator in 2007 (running mate Biden is #3 most liberal). Senator McCain was not ranked because he had too few votes cast.

The Cato Institute calls Senator McCain a FREE TRADER, while it finds that Senator Obama's voting record makes him pretty much an INTERVENTIONIST. Last night Senator McCain called himself a free trader, and he was critical of Senator Obama for failing to support free trade efforts in the Senate. Senator Obama seemed to admit McCain's view of his position because he suggested there were more important concerns than free trade.

Citizens Against Government Waste ties Senator McCain for 2008 with $0 in pork and it ties Senator Obama with $89,784,790 in pork.

Then of course, Senator Obama recently told plumber Joe that he wanted to spread the wealth around, and last night Senator McCain made it clear he did not subscribe to the same policy ideas. I'm thinking that Senator Obama's attitude about spreading wealth around is so opposite the values that support capitalism that this alone should be sufficient to say that Senator Obama is not a friend of capitalism.

Over all it seems to me that Senator Obama is not a friend of capitalism, and I think his policies and views might even be called anti-capitalism. I think Senator Obama is a foe of capitalism.

Senator McCain seems a bit more difficult for me to characterize. His voter record is clearly one of a free trader, and that suggests he is a friend of capitalism. Many of his other policy views suggest he is a friend of capitalism as well. But, he also seems to have been a bit too comfortable with big government, not only with some past policy positions but also with respect to a significant number of his policies offered in his presidential campaign, not the least of which seem to be his reactions to the financial crisis. Over all, Senator McCain may not be a close friend of capitalism, but he does seem to be a friend of capitalism.

Joe The Plumber . . . Capitalist?

So, what do you think? Does Joe love liberty and capitalism? I wonder if Joe would like to be in Congress?

Capitalism & Development

WILLIAM EASTERLY:

"Development economics still bears the scars of the Depression. A prominent World Bank Growth Commission concluded in May that 'fast, sustained growth does not happen spontaneously. It requires a long-term commitment by a country's political leaders,' and 'each country has specific characteristics and historical experiences that must be reflected' in the leaders' 'growth strategy.' Some at the U.N. still recommend the discredited Big Push strategy of state-planned investment.

How much poverty has endured because individual entrepreneurs were shunned in favor of the likes of the $5 billion state-owned Ajaokuta Steel Mill in Nigeria, which never produced a bar of steel? Or because African governments spend their time preparing World Bank-required national Poverty Reduction Strategy Reports instead of freeing space for innovators?

We will never know. But we do know that the free market has a long-run track record of creating prosperity -- even with the occasional crash. The Depression's deceptive intellectual legacy is that development flows from all-knowing states rather than creative individuals. Here's hoping that the backlash to today's crash will not spawn another round of bad economics for the poor."

Financial Crisis: Congressional Coverup?

JEFF JACOBY:

"'THE PRIVATE SECTOR got us into this mess. The government has to get us out of it.'"

That's Barney Frank's story, and he's sticking to it. As the Massachusetts Democrat has explained it in recent days, the current financial crisis is the spawn of the free market run amok, with the political class guilty only of failing to rein the capitalists in. The Wall Street meltdown was caused by "bad decisions that were made by people in the private sector," Frank said; the country is in dire straits today "thanks to a conservative philosophy that says the market knows best." And that philosophy goes "back to Ronald Reagan, when at his inauguration he said, 'Government is not the answer to our problems; government is the problem.' "

In fact, that isn't what Reagan said. His actual words were: "In this present crisis, government is not the solution to our problem; government is the problem." Were he president today, he would be saying much the same thing.

Because while the mortgage crisis convulsing Wall Street has its share of private-sector culprits -- many of whom have been learning lately just how pitiless the private sector’s discipline can be -- they weren't the ones who "got us into this mess." Barney Frank's talking points notwithstanding, mortgage lenders didn't wake up one fine day deciding to junk long-held standards of creditworthiness in order to make ill-advised loans to unqualified borrowers. It would be closer to the truth to say they woke up to find the government twisting their arms and demanding that they do so - or else.

This is where I think we should be finding the explanation for this crisis. When people risk their own money, without the assurance that government will cover their bad bets, people take fewer risks. You should read the whole piece by Jacoby and see if his story makes more sense to you that the stories being told by most of the members of Congress.

The Question We Have To Ask

Of course the reports are that Congress has a "bailout" deal. I'm not sure I'm going to like the deal. I'm also not sure I will even be able to get information about what the specifics of the legislation will look like.

In the meantime, I would like to take a look at something Senator Obama said in the debate last Friday. The exerpt here begins with a question from Mr. Lehrer:

But, I mean, are you -- do you favor this plan, Senator Obama, and you, Senator McCain? Do you -- are you in favor of this plan?

OBAMA: We haven't seen the language yet. And I do think that there's constructive work being done out there. So, for the viewers who are watching, I am optimistic about the capacity of us to come together with a plan.

The question, I think, that we have to ask ourselves is, how did we get into this situation in the first place?

Two years ago, I warned that, because of the subprime lending mess, because of the lax regulation, that we were potentially going to have a problem and tried to stop some of the abuses in mortgages that were taking place at the time.

Last year, I wrote to the secretary of the Treasury to make sure that he understood the magnitude of this problem and to call on him to bring all the stakeholders together to try to deal with it.

So -- so the question, I think, that we've got to ask ourselves is, yes, we've got to solve this problem short term. And we are going to have to intervene; there's no doubt about that.

But we're also going to have to look at, how is it that we shredded so many regulations? We did not set up a 21st-century regulatory framework to deal with these problems. And that in part has to do with an economic philosophy that says that regulation is always bad.

I agree with Senator Obama that before we get to carried away writing legislation we really should ask ourselves how we got into the present situation. However, it seems to me the Senator doesn't really offer a direct answer to his own question. But, maybe it seems that way to me because what he may have offered as his answer seems either lame or incorrect to me.

Perhaps his answer to this important question is this: Well, Jim, the explanation for how we got into this situation is that a couple of years ago I sent out a warning, and then last year I sent out a letter of warning, and my warnings were ignored. That is how we got into this situation.

He may have sent out warnings, but if his answer is really I said trouble was coming but no one listened, then I wonder what he thought his job was in the Senate. As we can see from the past few days, this situation isn't one that seems to have fallen within the power of the President or within existing statutes. If there was a problem, then why didn't the good Senator get to work to craft legislation that would deal with the crisis he was warning about? So, I think if this was his answer, it is kind of lame. Especially since I think it is also the case, from what I've been led to believe from news and commentary, that both Presidents Clinton and Bush made more than one effort each to get Congress to deal with the operations of the Fannie's. It seems each and every one of the efforts by these Presidents was rebuffed by Congress. Nothing changed. Well, maybe something changed, maybe Congress made changes that increased the incentives for the Fannie's to make loans that would ordinarily have been thought to be too risky. Some of the things I read and hear make it plausible to me that Congress did indeed increase the incentives for the bad loans.

In any case, maybe he offers a different answer. He speaks of shredding regulations. I'm not really sure what that is supposed to mean. Probably just political rhetoric that he hopes will merely be taken any way that favors him in the polls. It seems to me it is probably spin trying to confuse or hide the real answer to his good question. The real answer is that Congress made the bad incentives that led to the current situation.

Perhaps you have heard a simple summary of the incentives I refer to here: "privatize the returns, socialize the risks." I think this is a pretty neat and simple way to explain how we got to the present crisis. Congress created these incentives by insuring loans which really means Congress subsidized giving mortgage loans to customers that used to be thought to be too risky. So, I think this simple slogan is a good way to understand the basic economics of how this crisis started.

But, of course, Senator Obama doesn't want us to hear this simple explanation, because consider how the exerpt above ends. It ends by asserting this crisis is due to unregulated capitalism. Such an assertion seems wrong and quite the opposite of the real explanation. But, consider, if you are a member of Congress, you certainly don't want the voters to come to believe the problem was caused by either the action or inaction of Congress. And, if you tend to support policies that regulate markets rather than free markets, then you certainly don't want the voters thinking that it is actually the regulatory structure of our capital markets that explains our present circumstances.

Finally, notice that the policy that has been discussed the most to respond to this crisis involves government buying real estate and then later selling it for a "profit" for the taxpayers. I suppose this may sound good to many voters, but let me use that simple phrase above to explain why I think the essential idea of this "bailout" is a bad idea. The "bailout" take a situation of "privatize returns, socialize risks," into a situation of "socialize returns, socialize risks." Of course, that sounds like socialism doesn't it? Obviously, I think socializing risks led to the crisis, and now socializing returns can't fix the fundamental reason for this crisis. We should be looking for an answer that gets us to "privatize returns, privatize risks." That's capitalism, of course. I'm pretty sure Senator Obama doesn't want to move in that direction.

Maybe the question we have to ask ourselves, or ought to ask ourselves, is why are we apparently going to respond to the current crisis by moving closer to socialism?