While recent events vividly demonstrate the need for better mechanisms to rein in greed, we must recognize that the law can only go so far in enforcing ethical standards. "Intermediary groups" may be our best hope for furnishing industry with the self-policing functions it will need going forward.

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In part 1 of this series I asked what has caused free-market economics and economic liberalism to run amok and precipitate the financial crisis that has swept the world. Here I would like to offer my views on the kinds of mechanisms needed to keep these forces in check and ensure that they perform their role properly.

Let us begin by taking a look at the kinds of steps that have already been taken since the crisis broke.

Beyond the Band-Aid

Deliberation in such international economic forums as the Group of Seven and the Group of Twenty has focused on measures like stronger oversight of hedge funds and full public disclosure of their activities. In the United States, meanwhile, the administration has imposed a $500,000 cap on executive compensation for the most troubled financial firms receiving public funds under the Emergency Economic Stabilization Act of 2008.

No doubt the high rollers of Wall Street will chafe at such restrictions after years of doing exactly as they pleased, but there is no denying they are reaping what they sowed.

With popular measures such as these our leaders are focusing on the superficial symptoms of a deeper illness, and particularly those symptoms that lend themselves to the appearance of a quick fix. But what about the more deep-seated "lifestyle disorders" that gave rise to this crisis?

The markets' blind faith in credit rating agencies and the short-term mindset encouraged by such practices as market-value accounting and quarterly reporting are issues that have yet to be addressed. Where is the outrage against the rating agencies that reaped big profits by assigning investment-grade ratings to financial products that could only be unloaded at throwaway prices? Where is the soul searching by the audit firms and certified public accounts who heaped praise on the US investment banking model without ever warning us about its risks? These supporting players in the financial market also took part in the orgy leading up to the current meltdown, and their role must be fully disclosed as we move forward.

To call these people selfishness incarnate may be impolitic, but there can be no doubt that the basic impulse motivating all of them was greed.

Before proceeding further, let us revisit the basic question of why businesses exist. Why do all these investment bankers, hedge fund managers, rating agencies, mortgage brokers, corporate auditors, and so forth do what they do? If their answer is simply "to make money" and nothing else, then there is little more to be said. But if one believes that the purpose of one's business is creating value in answer to society's needs and fulfilling one's clients' mandate, then one needs to give some thought to those responsibilities as well. The players in the current meltdown appear to have given so little thought to the purpose of their business that we can only conclude they were "blinded by greed," to use the popular idiom.

Restoring Self-Regulation

In part 1 of this series I attempted to identify some of the root causes of such behavior. Here I would like to focus on what we can do to prevent similar misconduct going forward.

I believe that an important key is the growing role of such "intermediary groups" as professional organizations, unions, and guilds. In the future, I look to such groups to perform a restraining function through the power of censure and ostracism. When individual people or businesses are blinded by greed and run amok, their colleagues should join in denouncing them as a disgrace to their profession or industry and deal with them appropriately, as by barring them from the market. This is not a particularly radical idea; in Europe such mechanisms are already built into the ethics codes of a number of industry groups. But in the United States—as in Japan, where American practices are so often emulated without question—self-governance of this sort has been half-hearted at best.

The advantage of having intermediary groups perform this role is that it allows professions and industries to police themselves. When self-governance is lacking, human behavior must be controlled solely by the law. Part of the problem with relying exclusively on the law is that legal statutes cannot possibly cover every improper behavior. A more serious problem, however, is that it fosters the attitude that anything goes as long as one does not violate the letter of the law, and thus encourages businesses to find loopholes in each law, leading to a vicious circle as the government struggles to plug each loophole with new statutes. Such a state of affairs may be the natural outcome of the Anglo-Saxon individualism and social Darwinism that I discussed in part 1 of this series, but it seems to me that the self-regulatory function of intermediary groups offers real hope for mitigating these evils.

In fact, wherever we look today we can already see comparable groups assuming this kind of function. The activities of environmental nongovernmental organizations and microfinance institutions like Grameen Bank are oriented to the welfare of small communities, but from a broader perspective they also embody the principle of community-based governance.

It seems to me, therefore, that an essential element of any viable 21st century business model must be the ability to effectively integrate these intermediary groups and communities. At the very least, we may be confident that as a new era unfolds, those who continue to place personal profit above the collective good will be weeded out and cast aside as relics of the previous century.