- The Wall Street Journal, APRIL 21, 2009

The most damaging fallout from this economic crisis may well be a loss of trust in the democratic capitalist system, especially if those who are unemployed and suffering begin to believe that "anything goes" in an unfair world. In the rush to rewrite the rules of the game, policy makers might consider the message of dharma from Indian philosophy and literature, which offers a more nuanced answer to moral failure and the ethics of capitalism.

Dharma can mean virtue, duty or law, but is mainly concerned with doing the right thing. It is the moral law that gives order and balance to each human being and the cosmos. The concept is uniquely suited to guiding us through our present economic and regulatory quagmires because it is concerned with the achievable rather than the ideal. It recognizes that happiness comes from upholding a certain balance, by living according to a system of beliefs that restrains and gives coherence to our desires. Dharma does not seek moral perfection as Christianity or Islam does. Hence, pragmatic Indian statesmen throughout history have turned to it to address issues of public policy.

Dharma is probably best exemplified by the story of Queen Draupadi in the 2,000-year-old Indian epic, the "Mahabharata." In it, the queen asks her husband, Yudhishthira, about unmerited suffering: "When everything was going so well for us, why was our kingdom stolen in a rigged game of dice?" she complains. She exhorts her husband, who gambled away the kingdom, to raise an army and get their possessions back. But he reminds her that he has given his word to his enemies to remain in exile for 13 years as punishment for losing the game.

"What is the point of being good?" she persists. "Isn't it better to be powerful and rich than to be good in an unfair world where those who steal and cheat sleep on sheets of silk and pillows of down while those who are good have to settle for the hard earth? Why be good?" To this he replies in the only way that he knows: "I act because I must."

The King's answer represents the uncompromising, compelling voice of dharma. For him, good acts produce good karma, and these acts eventually change the balance of dharma in the universe. If people did not keep their commitments, the social order and the rule of law would collapse. Dharma is needed by everyone to live a happy, flourishing life.

There were many dharma failures in the run-up to today's economic crisis, in which all actors seemed to behave rationally. When U.S. house prices were rising and interest rates were low, even the poor got a chance to get a mortgage and a home. Banks securitized these mortgages and sold these complex financial products to other financial institutions, who also gained through better returns. When the housing market turned down, these financial products turned toxic. Whom do you fault?

Dharma draws a fine line between rational self-interest and selfishness. It would judge all actors in today's crisis guilty for tipping the balance of dharma in the wrong way. The undeserving recipient of the loan may have misjudged his or her ability to repay. The banker, motivated by short-term reward, pushed subprime mortgages to shaky borrowers without doing sufficient due diligence. Rating agencies underestimated the riskiness of the assets. The institution that bought the risky financial products failed to protect its shareholders. Regulators were captured by interests -- and when they acted, it was from domestic compulsions, forgetting the global consequences.

President Barack Obama's reaction to the crisis, among other things, was to seek to claw back bank bonuses. Congressional Democrats suggested an extortionate tax on bonus recipients at banks that received federal bailout money. To want to punish someone in this crisis is understandable but it is a dangerous path. What the world needs instead is the calm and principled voice of King Yudhishthira. He would have appealed for a voluntary return of bonuses while explaining to the public that Wall Street had been bailed out to save Main Street's pain. Furthermore, honoring bonus contracts is necessary to support the rule of law.

If envy is the sin of socialism, greed is the sin of capitalism. As capitalist nations grow, the resulting wealth creates enervating influences. Generations of savers are replaced by spenders. Ferocious competition is a feature of the free market and it can be corrosive. But it is also an economic stimulant that promotes human welfare. The subtle art of dharma tries to strike the right balance between healthy and unhealthy competition.

The choice for policy makers today is not between free markets and central planning but in getting the mix of regulation right. No one wants state ownership of production where the absence of competition corrodes the character even more. Dharma's approach is not to seek moral perfection, which leads inevitably to theocracy or dictatorship. It recognizes that it is in man's nature to want more and it seeks to give coherence to our desires by containing them within the discipline of an ordered existence. It not only catches crooks but also rewards dharma-like behavior and nobility of character.