Bernard Madoff, Adam Smith, and capitalism's moral crisis

Business ethics professors are the Cassandras of the financial world. In good times, their warnings about the economic consequences of moral misbehavior go unheeded. In bad, people blame them for not raising their voice.

Thus, financial crises present a special set of challenges for business ethicists. After the fraud and flamboyance of the late 1980s and the dot-com implosion in the early part of this decade, business schools scrambled to explain the moral meltdown of some of their best and brightest. They called on ethicists to diagnose these lapses in professional integrity and to provide business schools a road ahead where their star pupils would no longer exchange their pinstripes for prison stripes, where they would prove themselves prudent stewards of the nation's wealth and role models to our youth.

So much for that idea.

The current financial mess is extraordinary, but it differs in degree only from those before it. Take all the mistakes and misdeeds of the past few years and strip them of the arcana of credit-default swaps, mark-to-market accounting, and other terms that serve more to confuse than edify, and a common denominator remains: greed. Not the kind of greed that gets you thrown in jail, but a more pernicious strain, the greed that breaks no laws but turns a blind eye, that relies on the quiet collusion of the morally bankrupt and the grossly negligent.

The Gordon Gekkos of the world are rolling their eyes. The business of business is business, they would say, hoping to silence the Wendy Whiners of the commentariat and tenured scolds of the B-School set. They won't – not because their pronouncement is wrong, but because it's incomplete. The business of business may be business, but the business of life is not.

No one knew this better than Adam Smith, who spent as much time worrying about the moral consequences of capitalism as he did deriving its theoretical underpinnings. Long before his "Wealth of Nations" provided a template for economic growth, Smith wrestled with the demands of a society's moral development in "The Theory of Moral Sentiments."

The logic of the invisible hand united both works. In ethics and economics alike, countless decisions, independent but linked by common instincts, reveal themselves in broad social patterns. Accordingly, the pursuit of private gain can benefit the broader society by putting a premium on industry, frugality, and other commercial virtues that help spur economic growth. But if that pursuit becomes synonymous with greed – a greed untempered by any social or moral restraint – it shouldn't surprise us if the invisible hand has sharp claws.

Bernard Madoff is the poster boy for such greed. His fingerprints were not on the financial instruments that rocked the world markets and sent his pyramid scheme tumbling, but the single-mindedness with which he pursued personal gain is stunning. No concern for faith, family, friendship, reputation, or simple decency kept Mr. Madoff from picking the pockets of people all around him.

The con man who fleeces a Noble Peace Prize winner has a special claim to villainy. Yet if the essential difference between him and others involved in the crisis is that the latter did not think the bets they made with other people's money would pay off, whereas Madoff knew this for certain, we might thank him for making it easy on us. The law has ways of redressing outright theft – which is why Madoff sits in a jail cell today – whereas legal confidence games and the swindlers who perpetrate them must be left to the scourge of public opinion and the tired appeals of beleaguered business ethicists.

So business school students, when your ethics professors greet you with careworn faces and an exasperation unbecoming of anyone with a guarantee of lifetime employment, be patient with them. They don't have the weight of the world on their shoulders, just the fate of your chosen profession. Listen to them. They can't solve this moral crisis in capitalism, but they can convince you to give it a try.

John Paul Rollert teaches business ethics and leadership at Harvard Summer School. He is pursuing a JD at Yale Law School and a PhD at The Committee on Social Thought at the University of Chicago.