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I haven't spent this much time thinking about economics since college, when it was my second major. I have dedicated the last 15 years primarily to my first major, computer science, and my first love, entrepreneurship. But that has changed in the last six months, although my primary concern still remains entrepreneurship.

I was invited by Tim Kane and Bob Litan of the Ewing Marion Kauffman Foundation, the world's largest foundation dedicated exclusively to the cause of promoting and fostering entrepreneurship, to a small conference of economics bloggers held in Kansas City recently.

About 30 of us spent a stimulating day--and two dinners--discussing the current crisis, the path forward, policy issues and a variety of other topics. (Read "Reconnecting With Economics.")

A growing concern is the current lack of policy to support entrepreneurship from this administration, especially bootstrapped entrepreneurship. As the government tries to assess what might stimulate entrepreneurship, I don't see many "practitioners" of true entrepreneurship represented on President Obama's advisory council. Who represents the voice of the bootstrapped entrepreneur in the government? Who understands the extreme cash-strapped conditions under which entrepreneurs operate? Without understanding, how can they design an effective system?

Yet, we're constantly wrapped around the axle of venture capital as the primary driver for entrepreneurial growth. President Obama has a few venture capitalists around him, including John Doerr. But Doerr has never been a practicing entrepreneur, especially not a bootstrapped entrepreneur.

In fact, this week, there was some whining from the venture capital industry about a tax increase for carried interest per the Obama budget proposal. The administration proposes raising taxes on these firms' general partners by treating carried interest, the portion of profits they take from successful investments, as ordinary income instead of capital gains. That change would increase the tax rate, starting in 2011, to 39.6% from the current 15% level.

My first reaction when I read this was, "What carry?" Most venture firms have had negative returns in recent years! But on a more serious note, my reaction is that there is some legitimacy to this proposal. The VCs are outrageously overcompensated as it is. (Read "VC-Entrepreneur Compensation Disbalance.")

There is no reason to give them additional tax breaks, unless they truly participate in risk taking, and they're not doing that these days. What we need to incentivize is the very early stage entrepreneurship and investment process, which comes primarily out of the entrepreneurs' own pockets and those of friends and family and angel investors. (Read "Stimulus Package for Entrepreneurs.") To the extent VCs should have any incentive via low capital gains taxes, I would offer that only to those who practice the high-risk art of true early stage venture capital, not en masse. My recommendation is a two-tier capital gains tax structure, which President Obama may consider to achieve some of the same results, but without choking up the growth engine.

An aspiring entrepreneur ought to be allowed to create a tax-free pool of income for use as personal venture capital. Such a pool of capital would go a long way to help kick-start new ventures.

Most entrepreneurs--especially first-time entrepreneurs--don't have access to such high net-worth people. They raise money from friends and family. Thus, the government should be very careful how a $400,000-a-year uncle is treated from a tax policy point of view. The choice may well be between $250,000 being invested in a start-up, versus that $250,000 going into the government's pocket as income tax. Furthermore, angel investors should also be allowed to create pools of tax-free capital for investing in start-ups.

Variations on this thinking have been implemented in certain states like Arizona, Oklahoma, Indiana and a few others. In fact, InfusionSoft Chief Executive Clate Mask wrote on my blog: "A couple years ago, our business was the beneficiary of a state program in Arizona that gives angel investors a state tax credit on their investment in a 'qualifying small business.' For our company, this credit was just the nudge several angel investors needed to go forward on an investment in our company. We raised about $400k from those angels. Today, we have about 140 employees, our business is excelling and our investors got their state tax credit."

Arizona offers a 30% tax credit to angel investors, but they have to be residents of the state to take advantage of the program. Mask believes a federal version of such an incentive structure would be much more effective so that entrepreneurs may be able to attract investors nationwide.

These are complex issues that require careful consideration from the Obama administration in order to design a properly functioning growth engine. For that, the president needs to first decide that entrepreneurship is a major issue that he cares about, and not just something he gives lip-service to. Then, he needs to recruit an advisory council made up of bootstrapped entrepreneurs, not venture capitalists or super high net worth investors. This will be the key to spawning a million small businesses that employ 10 million people--or more.

And therein lies the engine of growth now silenced by the $20 billion flushed down into General Motors' (nyse: GM - news - people ) bottomless abyss.

Sramana Mitra is a technology entrepreneur and strategy consultant in Silicon Valley. She has founded three companies and writes a business blog, Sramana Mitra on Strategy. She has a master's degree in electrical engineering and computer science from the Massachusetts Institute of Technology. Her first book, Entrepreneur Journeys (Volume One), is available from Amazon.com.

The 26-year-old, a former Microsoft employee who helped put together the Windows Home Server product, founded a company called Esgut within months of the debut of Facebook's developer platform in May 2007. Esgut is a portfolio of Facebook applications, and a few of them, like Superlatives and Entourage, became genuine viral hits.

In April, Ali sold the 12-employee Esgut to the Social Gaming Network, a Silicon Valley company backed by the likes of Bezos Expeditions, the Founders Fund, and Greylock Partners. He said the price was in the seven figures.

But Ali is the first to acknowledge that for upstart social-platform developers, hailed just months ago as the Valley's hottest breed of bright young things, the condition has taken a significant turn for the worse.

"Most people are not counting on anything," the lanky and bespectacled Ali said over lunch at an organic restaurant near New York's Union Square in early December. "They're just operating from day to day."

When Facebook's developer platform launched, the social network's traffic began to really skyrocket. What had started as a no-frills networking site for students at elite universities became a Silicon Valley buzz factory with legitimate geek credentials. And however gimmicky many of the most popular Facebook Platform apps were, millions of people decided they now had a reason to join the site. The floodgates had opened. Facebook was a phenomenon.

When other social networks such as MySpace, Friendster, and Hi5 also paraded out developer platforms, the tech world took it as evidence that there was a big future in building platform applications. More importantly for developers and ambitious tech entrepreneurs, it looked like there could be gobs of money in it; the open, anyone-can-play attitude created the notion that there was enough for everyone.

"The social platform (on Facebook) actually launched the last day that I was at Microsoft...I was quitting without any idea of what I was going to do," Ali recalled. His aims for leaving Redmond were starry-eyed. "I left because I wanted to do a start-up. I wanted to see what I could do out there on my own. And I wanted to care deeply about what I was working on."

But he had no concrete plans to go the Facebook route initially, he said. "I ended up in my parents' house in Florida and was kind of bored, and started building Facebook apps just out of restlessness and the desire to do something."

Then, Ali continued, he went to the Graphing Social Patterns West conference in San Diego in March and met Social Gaming Network founder Shervin Pishevar. At the time, he was looking to raise venture funding but hadn't thought about selling his apps. "We talked for 30 minutes and he was like, 'You sound like the exact type of people we want at SGN.'"

Ali sold Esgut to Pishevar's company the next month.

Widgets buzz turns into hush

Ali got lucky. Even before the reality of the recession set in, the social-platform craze was subsiding. The venture capital buzz about widgets began to quiet over the summer. Some of the sillier novelty apps wore off in popularity. Companies that were snapping up small apps and raising huge amounts of venture capital, like Slide and RockYou, grew intimidatingly bigger--but the glut of independent apps made it more difficult to grab the attention of potential buyers.

And after new restrictions, a redesign, and then the social network's focus on expanding through its Facebook Connect log-in service, it became evident that a social-network platform is still a new phenomenon that can change dramatically, and not always to the benefit of little start-ups.

"There's definitely a lot of tightening up," Ali said. "There's a few people that I know that have apps that are relatively small, and they're selling them for valuations lower than what they could've sold them for a month ago, and there are just no buyers in the marketplace. I think they're going to have a hard time selling, period--forget trying to sell at a lower valuation. They're just having a hard time getting rid of them."

So would he still be able to sell his company as easily now? "No, probably not," Ali admitted. "If we were the same company we were then, it would be much harder to sell today. I think we would've had to evolve as a company. I think we would need to be generating more revenue than we were."

But for all his concern about the fate of social-platform developers in a recession, Ali is still strikingly bullish on Facebook--enough so that his newest project is a fund for Facebook stock. He started purchasing it in November, he said, and is meeting with investors in the hopes of purchasing more. He added with surprising gusto that Facebook's decision to delay direct cash-outs hasn't derailed his plan.

"I think that's actually good news for us," Ali said. "I think that means that the price that we pay will actually go down because there are all these employees who intended to sell stock back to Facebook, and now they're not going to be able to sell it to Facebook, (so) they'll have to sell it somewhere else."

He hopes to keep the stock until Facebook files for an initial public offering, and he still thinks that's on track, too. "I think it's going to be a function of the economy and when the markets open back up for an IPO," he said, and cited target dates that had been provided in interviews by Facebook investor and board member Jim Breyer. "From a Facebook perspective, I think it'll be ready to IPO in 2011."

Many critics would say that's wishful thinking, and that the company will sell--to existing investor Microsoft, maybe--for much lower than its $15 billion preferred-stock valuation.

But Ali got lucky on Facebook once already, and even in a recession he hasn't given up hope that it could happen again.