Dick Grasso is one of the most competent leaders that the famous New York Stock Exchange (NYSE) has had in decades, but he resigned on September 17 because they discovered that he had been paid a shockingly-high salary. When I read about his $140 million salary and benefits, I thought it must be a misprint, but the obscene figure turned out to be true, and even I, a votary of free markets, winced. The head of California Teachers Retirement System (Calpers) told us that it would take an average American 5,200 years, working 40 hours a week, to make the same money. The Wall Street Journal reported that even his 2002 base salary (without benefits) of $12 million was greater than the combined pay of the heads of nine top stock exchanges around the world.

What does one make of all this, and who, in fact, is guilty? Dick Grasso for receiving a high salary or the board for giving it to him? And what lessons does this hold for us in India? Grasso's defenders argue that his pay came from the pockets of the seat holders who own the stock exchange; since NYSE is a private company in competition with Nasdaq and foreign stock exchanges, his job was to build his exchange's brand equity, which he did brilliantly.

So, his salary is no one's business except the board. Grasso's critics point out that NYSE captured dominant market share because of historic luck and regulatory advantage.

They argue that the future of trading is electronic and NYSE has been unwilling to move in that direction because the present system favours insiders at the expense of the public.

The 211-year-old auction system ensures that every trade passes through a live trader's hands on the NYSE floor; they would like the NYSE to become a transparent publicly-listed company, and more accountable.

When my leftist friends in India heard about the Grasso affair, they gleefully said, 'We told you so - Capitalism is only about greed'. And they called for a return to the good old days of the licence raj.

If this scandal had happened in India, there would have been cries in Parliament for the government to control executive salaries.

But in a mature capitalist economy like America, the Grasso affair is leading to solid reforms in the system, bringing more transparency through all-electronic trading and stripping NYSE of its regulatory role.

Every once in a while a scandal engulfs American capitalism; then repairs take place as men of character take charge; and the system lunges forward once again.

The furore over Grasso's pay occurred because markets were recovering from an unprecedented period of corporate scandal, including shockingly-high compensation for CEOs.

These scandals have reminded people that the bottom 20 per cent of American workers have not seen their incomes grow for decades.

Clearly, the soft underbelly of capitalism is its tendency to inequality, but the public accepts it as the price for efficiency and for the enormous risk that entrepreneurs take in the marketplace where four out of five ventures fail.

Out of this 'creative destruction' comes economic growth and technological innovation, making everyone better off.

To take an example closer home, the lowest worker at Hindustan Lever does not grudge Banga for earning in crores because he believes the latter's competence will bring higher returns for Lever and a higher increment for himself. Were Banga not to perform, well, he could be fired. This is the unwritten compact of capitalism.