A couple hundred years ago, in his “Theory of the Moral Sentiments,” Adam Smith contended that capitalism requires a moral and ethical center if it is to function effectively and to the benefit of all.

About 30 years ago, supply-side economic philosopher Irving Kristol similarly emphasized the importance of capitalism’s moral compass. His wife, the brilliant historian Gertrude Himmelfarb, wrote regularly about the importance of morality in society, culture and the economy, a topic she covered in her standout book, “The De-Moralization of Society.” She sets off the Victorians in English history as an example of a moral society.

These authors and themes came to mind as I perused news accounts of convicted Enron crooks Kenneth Lay and Jeffrey Skilling. Of course, we all knew they were crooks before this week’s verdict. But do they represent the moral core of American capitalism? I think not.

Capitalism in this country has been under assault ever since FDR’s New Deal 1930s, a time when a number of alphabet agencies attempted to control America’s industrial and farming sectors. The experiment soon proved a dismal failure, with unemployment running 20 percent to 25 percent up until World War II. It was only when Roosevelt started unleashing businesses to produce wartime goods that the economy ultimately resurrected.

Still, the American welfare state would grow. In the 1960s and 1970s, the murderer’s row of economic morons – LBJ, Nixon, Ford and Carter – in allegiance with their liberal Keynesian advisors, concocted a socialist policy mix that ultimately led to wealth-destroying big-government stagflation.

Providentially, Ronald Reagan changed all that in the 1980s. The Gipper slashed tax rates, deregulated industries and rescued the dollar, unleashing the forces of entrepreneurial capitalism. As a result, for the first time since the post-Civil War period (but for the brief Coolidge-Melon period in the 1920s), the American economic system be came the envy of the world. Since the early 1980s, more than 46 million new jobs have been created, with inflation-adjusted GDP increasing $6.2 trillion, or 120 percent.

As deregulated stock markets democratized the American financial system, a great new investor class grew up. Roughly 20 million investors evolved into over 100 million share-buyers, and they got rich in the process. Since 1982, according to the Federal Reserve, stock market wealth owned by family households appreciated by over $9 trillion, or nearly 900 percent. During this period, the Wilshire 5000 index appreciated nearly 800 percent.

This investor class has also become the nation’s most powerful voting block. In recent elections, nearly two out of every three voters has been a stockowner. And yes, they are voting for capitalism – meaning lower tax rates, limited government and greater opportunities for entrepreneurship.

George W. Bush, a lineal descendant of Reagan, calls this the “ownership class.” And though I can’t prove it, I’m willing to bet that this group’s demand for lower tax rates and entrepreneurial activity goes hand-in-hand with the cultural characteristics of hard work, thrift, personal responsibility and law-abiding behavior.

Indeed, ownership is a self-help virtue, and it is held in much higher cultural esteem than the vice of government-dependant welfarism. This investor culture has at its core the very same ethical foundation that Adam Smith wrote about in 1759. This includes the rule of law that was so badly violated by Lay and Skilling, along with some other rotten apples like Tyco’s Dennis Kozlowski, Worldcom’s Bernard Ebbers and Adelphia’s John Rigas.

These crooks disregarded morality and the law, and in so doing, temporarily demoralized the stock market and American capitalism. They’re the kind of people who would be celebrated by totalitarian socialists like Marx, Engle, Lenin, Stalin, Mao, Castro, Saddam Hussein or even Iran’s Ahmadinejad – the natural enemies of American market capitalism.

But our government prosecutors are doing a fine job of re-imposing the rule of law and re-moralizing our economic system. Much more important than the misbegotten congressional regulatory scheme called Sarbanes-Oxley is the Justice Department’s excellent work to simply enforce the laws on the books. Nothing concentrates the executive mind better than a 25-year jail sentence.

There are approximately 5.5 million businesses in this country, according to the Commerce Department. So our notorious front-page crooks really are few and far between. But a new spate of corporate fraud and insider self-dealing has sprung up, with some CEOs engaging in the practice of backdating stock-option grants and other related forms of anti-shareholder compensation chicanery. The biggest demoralizing miscreant is William McGuire, CEO of United Health Group. In Washington, book-cooking at Fannie Mae has still to be properly punished. So the G-men have more work to do. Theirs is a noble purpose.

Looking down from his perch in heaven, Adam Smith would be very proud.

Mr. Kudlow is host of CNBC’s “Kudlow & Company.”