Making a killing in business: when crime pays, there will be plenty of criminals.

• Author: Lynch, Mike
• Position: Columns

THE REASON THERE are so many murders in Washington, D.C., is that people can get away with it. In the 1990s D.C. police caught fewer than four people for every 10 murders in the District. At the end of 2000, two in three individuals who killed in were free. Considering these odds, killing for some becomes simply another dispute resolution tool. There's a similar explanation for America's outrage du jour: the market-tumbling revelation that during much of the 1990s a few corporate chieftains pushed the bounds of honesty in financial reporting.

Is the comparison between executives and murderers too harsh? Downgrade it to thieves. The reason someone burglarized my apartment in San Francisco several years ago is that he figured he would get away with it. In 2000 a dot-coin executive defrauded me of $2,000 in article fees for the same reason. Both thieves were right.

Even when they aren't the same person, chief financial officers, thieves, and masters of the short con are cut from the same cloth: the cloth of humanity. And all human beings respond to incentives. Increase the cost of something, and there will be less of it. Lower the cost, and there will be more.

The inverse holds for rewards. Until recently the rewards for massaging financial data, structuring finance to make debt disappear from books, and engaging in sham trades to increase revenue were huge. The companies that facilitated the deals--Citibank, Merrill Lynch, J.P. Morgan--pocketed millions in fees, with the promise of millions more. Executives received millions in compensation for their companies' superior performance.

Just as important, the punishment for not playing could be devastating. "The equity market put enormous pressure on management to manufacture good earnings," says Robert Barbera, chief economist with Hoenig & Company. "That's not to say that fraud is a reasonable option. It simply describes the system that would push many in the direction of creative accounting." The system, like my open window, was irresistible for some.

As one who believes in both the morality and the efficiency of the free market, I think it's important to recognize that markets aren't pristine institutions handed down by God that make people fair and trustworthy. They are systems framed by rules that foster cooperation among individuals and organizations that are seeking to maximize their happiness, which usually translates into money. Over the long term, markets reward honesty. Over shorter...