The continuing disclosures about excessive pensions and payoffs, salaries and bonuses for people at the top stir in us feelings for the oldest of human bloodsports: the search for a scapegoat. But they ought to lead us to think more deeply about the values of our culture as a whole.

Often, these past months, I have found myself going back to one of the most painful conversations I have had. It was with one of Britain's leading industrialists. He had led his company to consistent success for decades. When I met him he had retired and was near the end of his life.

He was not a religious man but he was a deeply moral one. He spoke of the principles that had guided him in business and of the salary he had drawn. It was not negligible, but it was modest. What pained him was that his successor had awarded himself a salary ten times that amount, while systematically destroying the company he had so carefully built.

I recall another conversation with a successful investment banker. He told me that the first thing he had to establish was his character, his reputation for trustworthiness and honesty. Without that, he would have been unable to trade. Nowadays, he said, deals no longer depend on character but on lawyers. Common to these stories is the gradual disappearance of the cluster of principles that went by the name of morality.

Whatever its source -- religion, conscience, custom or code -- it meant that there are certain things you don't do because they are not done. You don't reward yourself when customers, clients or shareholders or employees are suffering losses. You don't pay yourself out of all proportion to what you pay others. You don't take advantage of your position just because you can. You are guided, even if no one is watching, by a sense of what is responsible and right. Without that internalized code of honor and trust, no institution can be sustained in the long run.

Somehow, between the 1960s and 1980s the idea prevailed that we could do without the moral sense. Who needed it any more? In the 1960s we thought that the State would take care of our problems. In the 1980s we thought that the market would. Self-imposed restraints were dismissed as outmoded and killjoy. Greed was good. The guy with the most toys when he dies, wins.

The result was that we began to lose our understanding of the vital distinction between the value of things and their price. The key example -- at the heart of the entire financial collapse -- was housing. The value of a house is that it is a home. It's a shelter, a haven, personal space in an impersonal world. For many, it's where we sustain a marriage and build a family. It's where love finds its local habitation and name. At a point in time, some began to think of houses not as homes but as capital investments. They began to borrow more and spend more. Building societies duly obliged.

House prices kept on rising. Their attraction as investments grew, and so the cycle fed itself: ever higher prices, ever bigger mortgages, until house prices and borrowing lost all connection with average incomes and sustainability. Those who just wanted a home had no choice but to join the game, at great expense and risk. The speculators were convinced they had become richer, but in real terms they hadn't. The value of housing had changed not an iota, because value is not the same as price.

It was bound to collapse, and anyone who had thought it through, said so. The investor Warren Buffett called sub-prime mortgages "financial weapons of mass destruction" as long ago as 2002. In the collective madness, no one was listening.

After financial collapse many questions are being asked. Should there be more regulation? State ownership of financial institutions? Have we reached the end of the market economy? They are good questions, but they get nowhere near the heart of the matter.

The market economy has generated more real wealth, eliminated more poverty and liberated more human creativity than any other economic system. The fault is not with the market but with the idea that the market alone is all we need.


Markets need morals, and morals are not made by markets.


Markets don't guarantee equity, responsibility or integrity. They can maximize short-term gain at the cost of long-term sustainability. They don't distribute rewards fairly. They don't guarantee honesty. When it comes to flagrant self-interest, they combine the maximum temptation with the maximum opportunity. Markets need morals, and morals are not made by markets.

They are made by schools, the media, custom, tradition, religious leaders, moral role models and the influence of people. But when religion loses its voice and the media worship success, when right and wrong become relativized and morality is condemned as "judgmental", when people lose all sense of honor and shame and there is nothing they won't do if they can get away with it, no regulation will save us. People will outwit the regulators, as they did by the securitization of risk so no one knew who owed what to whom.

The big question is: how do we learn to be moral again? Markets were made to serve us; we were not made to serve markets. Economics needs ethics. Markets do not survive by market forces alone. They depend on respect for the people affected by our decisions. Lose that and we lose not just money and jobs but something more significant still: freedom, trust and decency, the things that have a value, not a price.

This article originally appeared in The Times.