I. Who’s Fault Is This Mess?

I believe in free markets. As a computer scientist, I’ve seen how the principles of capitalism have led to astonishing new inventions and positive economic activity just in my own field. As an historian of the Soviet space program, I also see just how poorly socialism functions in comparison.

In our current economic problem, there is plenty of blame to spread around. I personally see two places where the market was subverted:

1. Pressure from liberal government policies to give loans to people who couldn’t afford them.

2. Dishonest labeling of the risk and quality of some mortgage-based bonds.

I’m not adverse to regulating the amount of leveraging in the market, but I can’t help but think that people would never have risked so much if they had not thought they were buying “A” rated securities. Civil and criminal liability needs to be applied to those responsible for that.

II. Fear Mongering and Political Opportunism

Crisis brings out the best and worst in people. The mainstream media has contributed to the problem by flat out telling people to dump their stock. If you sell your stock now, you turn unrealized loss into actual loss. If the meat puppets on the network news keep yammering about bad banks, they could cause a run on the banks, and then of course they really would fail.

Talk of the Great Depression are popular now, but in fact there is no comparison: Depression Fears Overblown

Crisis also creates opportunity for would-be political mass movements. On the far left we hear talk of socialism and the failure of capitalism. On the far right, we hear populist nonsense about the bailout. Just the kind of hysterical actions that are bad for America now.

III. Fundamentals – Education and Energy

Adam Smith taught us the most important thing we can know about economics: the wealth of a nation is created by human productivity, not by “treasure”. Compare a resource-poor nation like Japan to a resource-rich nation like Saudi Arabia or Venezuela. Where would you rather live? Nations that are truly wealthy have invested in their people, educating them to be productive and self sufficient. America does a fair job of this, but should do better.

Both candidates of said something to this effect, probably because they have been talking to T. Boone Pickens: we could revitalize our nation’s economy by embarking in a project to rebuild our energy infrastructure. Here is why I think that is a great idea:

1. Energy is crucial to a modern economy because it amplifies human productivity. We cannot allow ourselves to ride the downslide of global petroleum production.

2. New energy sources will free of us from dependence on hostile foreign petroleum suppliers.

3. Building a new infrastructure will create jobs and build long-term economic opportunities in the same way that the space program and the computer revolution did.

4. More young people will be encouraged to learn science and engineering.

5. I believe we can create vast amounts of cheap electrical power, but it may have new characteristics. Electricity might be cheap when the wind is blowing in northern Texas, and expensive during week-long lulls. People and the market can adjust. It creates a market incentive to store energy when its cheap and sell it when its expensive, which will level the pricing to some extent.

6. The free market can solve the energy-storage problem, but nation action is needed to upgrade our electrical grid so we can move more power over greater distances. The Soviets did this in the 1930s, we can certainly do it in America today. But it requires the national will to override eco-extremists and opponents of eminent domain.