who have come before you or whose materials you read. so that those of you who have come to certainty can leave early, i was never certain that it was right@@@@@@@ @ @ @ @ @ @ e

thought was a nice virtue. he was less interested in expanding the division of labor's efficiently to the world then he was of increasing the wealth of nations which is a different thing. i think there is a lot of wisdom and the emphasis on the role of creative destruction but i am not certain how to treat the externalities' and social costs of that special form of creativity.

i am not certain that monetar ism is the right one. i remember going to lunch with market thatcher -- margaret thatcher. she asked about money supply before anything else. i am not certain that we can ignore monetary measures. i am not sure that second-best should cause their kids to -- cause them to pack their kids and go. the attempt to realize the unrealizable is tending to be pernicious. the best may be indicated of the worst.

the second-best is messy but attainable. most of all, i suspect most troubling to the audience, i am not certain that a fear of unintended consequences is a reason to leave market power and market imperfections free from market intervention -- free from government intervention. nothing has had unintended consequences like the recent turmoil shows. adam smith's invisible hand had unintended consequences. we love those consequences. not all consequences are undesirable. i do not think we have to fear them as long as we have modest goals so that if we are wrong, we can fix them.

one economist pointed out that the utopian fantasy to think that we can eliminate all of capitalism's costs of preserving benefits i do not worry as much about consequences as other people do. i was encouraged in this conversation i had iirving in which he said that he read an essay in which the concept of unintended consequences was described but he said -- . he said he was going on to change the world and this changes it. i said that you went on and changed the world. you were not paralyzed by the fear of unintended consequences.

you knew about them. if he decided to stop and just yell unintended consequences, we would not have the public interest. that is something that conservatives should think about. that is only one reason why i did not live in fear of government action. another is, when i came to washington, i was a blank slate. i came here because i wanted to do some thinking. one professor had a profound effect on me. he talked about the role of government and legitimizing and delegitimizing behavior. successful bidders legitimize the macho behavior that we saw on wall street in overreaching and it is to president barack obama's credit that he is

dealing with this sort of behavior although his motive for doing so is not a careful reading of the professor's works. the power he has to do so is more than just chat. there is a bank in britain that it not take any the government money to the fury of the shareholders. their leading executives have given up large portions of their bonuses. another leading banker in america who was entitled to $70 million because of the performance of his investment bank, and i will not name goldman sacks, decided to take it in deferred stock. there is something to be said for the role of government in legitimizing behavior but it apparently works. now that i told you why you

should leave, this is in favor an outline of principles which might guide government action that conservatives can support. two final thoughts, i am here to open discussion and stimulate thought. this is a thought experiment. that means i do not mean it and if i am wrong, i can retreat from it pretty quickly because it was only a thought experiment. that is really true. james buchanan wrote in a brief treatment it is helpful to make old charges about positions taken by leading figures. i mean no disrespect for the great proponents of limited action and the economic sphere. but they lived in a society that no longer exists. adam smith wrote at a time when

shame was a economic behavior. transactions often occurred for parties to reputation of capital. that was their most important asset. that was then, this is now. we cannot waive our copies of "the wealth of nations" in except -- and expect that to have an effect. he could rely on markets of the sort that we no longer have. nor can we rely on the religious supply which was one thing being tossed around a while ago. goldman sacks argues he is doing god's work which is the first merger of god and man. those of us that admire adam

smith and others should feel comfortable and relying on something more down-to-earth than the religious revival. i would like to call it creating a neo-orthodoxy. a new capitalism rooted in old verities adapted to now. it is absolutely imperative that we take that at a time when capitalism is under such severe attack and strain as was mentioned when its very legitimacy is under attack. that is not to say that i'm insensitive to milton friedman's warning that the bulk of the community automatically favors any expansion of government powers as long as it protects

individuals from big bad corporations, reduce poverty, protect the environment, or promotes equality. i will try to avoid that trap. but the start with a fact. capitalism has been on arrival in its ability to produce material well-being and to distribute those goods and services more widely than any other system with which scientists have experimented. karl marx knew this. max ankle during the rule of 100 years, capitalism was more profound than all the other proceeding generations. that was true. not how would results and how it was just to did was wrong. the port live better in capitalist economies than most of the battle class and

socialist economies and better than those in the copter credit -- kleptocratic societies. there is a long and arduous path to duplicate the living standards produced by capitalist economies and prove that the limits to growth in centrally managed economies like russia and china or bureaucrat have the and -- governments like india can show the american economy as maximizing individual freedom. those economies can accomplish what dynamic capitalism has accomplished in america. what do i think the role of government is? but may try a few suggestions --

let me try a few suggestions. they are and mounting offensiveness for conservatives. the first one will be easy and it gets harder and harder. i actually mention the word taxes somewhere. government has an obligation to force and preserve competition. competition performs an economic and social function. i have argued that the american enterprise forces firms to fight for consumer to buy better products at lower prices. incumbents are prevented from blocking the entrance of newcomers thereby contributing to social mobility. this means in practice preventing all sorts of exclusionary behavior.

and the whole panoply of what the antitrust laws or all about. i recognize the argument i have gotten from conservative friends is it is difficult to tell the difference between good old competition and predatory behavior. i think that exists in the minds of academic critics but those who have worked this area know how to distinguish those things. i could give you a lecture on that but the six people remaining would be bored. the obama administration has criticized its predecessors. that is not news. the news is that he is probably right. i am somewhat chagrined that conservatives did not halt on

this bandwagon for not only consumer interests but for two other reasons. oene is if you replace the invisible hand, you will get regulation. that is the only alternative. the only alternative to a return to competition is the control of monopolies by the state. we should keep that in mind when we get annoyed by some antitrust case that we think is picking on some great big efficient company. i think this is probably more important as said it into my social sciences as opposed to economist mode, it is very important not to foreclose opportunities for newcomers. we are a socially mobile society which prevents the kind of class

warfare you see in other more rigidly constructed societies. go try to start a business in france. believe me, it is very difficult. it is even difficult and britain which is suh@@@@@ @ @ m@ @ @ @

if you keep competition moving, you did not have to have a regulatory structure. that is one thing i think conservatives can do. kiddie picture some of the conservatives we know testifying for an extended budget for the antitrust division? where effective competition is impossible, we need regulation. you cannot a kid out of that. there are and there remains something that we called natural monopolies.

there are not as many as we used to think. not telecommunications or airlines but the transmission of electric power over long distances, the distribution of natural gas under the streets of this city, those are bound to be monopolies. at least for very protracted periods during which price gouging is possible and entry is impossible for very long amounts of time. they need the government control. sorry about that but you need it and you have to do with the best to can. thank you to technology because it is -- we used to think the airlines cannot tolerate competition. we know that because we have had to buy new luggage when hours got lost. sooner or later, monopolies attract regulation. if you do not believe that, as

the insurance companies who spent decades sheltered by laws that prevent interstate competition and exemption from the antitrust laws. lookit to where they got. if they have their premiums regulated as if there were public utilities. there would have been better off and bracing competitive structures. there are grey areas, no question. regulation might enhance monopoly power. regulators may see the people they see as clients to be protected from competition. there might even be some corruption. i have not seen, i would not say any but i have not seen significantly large number of cases of corruption. i have not seen a kind of corruption that other countries see when they have direct regulation. the closest i ever came was in

new york city, the taxicab fares are regulated and mayor koch asked me to head a commission to redo taxing regulation. i had several bright ideas about how to do this like charging more during peak periods. what i did not realize this they had total income goals. the higher the fair, the quicker they went off the street. i did not realize when you start fooling with this, you better stay as far away from staten island as you possibly can because there are people living there who did not appreciate interference with their income levels. we do create a government which can have problems because there

are regulations that are tough to review. i think that is the worst the eagles. i suggest that this sort of neo- orthodoxy that i am suggesting is preferable to the new conservative orthodoxy of just saying no when any regulation of economic activity is suggested. third, i think government has an obligation to see to it that the social costs of private production and consumption that those decisions are internalized. that is, if gasoline costs $3 per gallon but does not include the cost of global warming or the health consequences of these emissions, those costs should be internalized.

the consumer bears the full cost and less this audience which is increasingly selling begins moving its lips to chant "no new taxes," let me make two points. if you have regulation, you give permanent self sustaining bureaucracies which is what would happen and is happening when we try to control emissions through epa regulations. unless you're a lawyer or a consultant, that is a nightmare. taxes, on the other hand, you do them and leave. it is not as onerous as would be. compare fuel efficiency standards with the tax on

gasoline. fuel efficiency standards are set by charles schumer who lives in new york and nancy pelosi. they hate cars. these people hate cars. come out west. we drive 40 miles to get a pizza. the notion, you would be better off paying a gasoline tax and everybody would pay the same. the president's card gets about 10 miles per gallon. -- president's car gets about 10 miles per gallon. we should have taxes that incorporate the social cost of externality and the product -- in the products that consumers

buy. consumers passing their private costs on to society as a whole. the question of identifying externalities is no easy thing. you can do it with as much accuracy as kent carroll browner identified the admissions from your lawn mower. here is the hard part. what you do with those externalities' are positive which gets you to the housing market. the housing market creates such bangst that i hesitate to do

it. margaret thatcher preferred increasing home ownership. why? it produces positive externalities. it produces better schools. it produces a whole bunch of things which are not reflected in the prices of the houses. left alone, the housing market will produce too frew houses, -- too freew houses. we had a fiasco in the housing market. we are where we are. there is nothing we can do about that. . .

>> in fact, the deductibility of mortgages, margaret thatcher got rid of that. there are all sorts of distortions in that market. i do not want to be in a position of defending andrew cuomo's heading upon hud, when he continually pressed fannie

and freddie to make loans to people the that they knew could not pay. i do not want to ignore it judge pose near's very important comments about suburbanization. there is more travel, more pollution from cars. but all has to be in there, but i do not think conservatives can content themselves with simply a tax on housing subsidies. or the notable recession of the deductibility of second mortgages. we have to decide whether there are externalities', whether they are positive or negative, and what sort of subsidies are appropriate to that circumstance. that is much harder than just saying, fatty -- freddie and danny, what do you owe us --

freddie and fanny, what do you aus? it is something like $40 million. that is a lot of money, and we did get it wrong. but it is just one of the things we have to think through. when we socialize at risk, which we have done with health care of course, it does not make it crazy for the president to say we, the government, need to have a role in reducing obesity. the cost of obesity is now socialized. so, if mayor bloomberg is going to protect me from a junk food -- what is the new rule? if you cannot sell soft drinks to school children because they will not enjoy their pot quite as much if they cannot have a coca-cola with it. [laughter]

obesity at about 3% to health care costs. certainly, the taxpayers are paying it. the representatives of the taxpayers have some right to say, hey, wait a minute. there may be other ways to do this, personal insurance if you do not believe obesity is a disease rather than a choice. i do not know how we handle that as conservatives. we lose the fight about the socialization of a risk, and then we are stuck with it, and then and what do we do. it seems to me, want to lose the fight, that's who you are. now the question is, what do you do -- i do not know how many of you play poker. when you get dealt a hand, you cannot switch the hand. that is what you've got. the question is, what do we do about it? conservatives would do well to abandon the notion that -- no,

this is a slippery slope. and watched the president during the n.c.a.a. at halftime ordering a national exercise program during a -- and national exercise program. . there is a common-sense a line that you have to draw up somewhere. it is hazy and difficult to find, but that is what conservatives should be looking for before the president appoint a fat cigar and -- a pointppoints a fat czar. -- appoints a fat czar