Home > Uncategorized > Yes, the Economist was right in 1999 that industrial capitalism was built on limited liability. But were the resulting statism, bubbles and risk-shifting really necessary?

Yes, the Economist was right in 1999 that industrial capitalism was built on limited liability. But were the resulting statism, bubbles and risk-shifting really necessary?

Here is another piece of my dialogue on the comment thread to Matt Ridley‘s “Nuclear crony capitalism” post that I blogged on earlier.

Posted by, Robin Guenier (not verified) (emphasis added)

Tom:

I disagree. I’m sure that limited liability was a key factor in making available to mankind many of the benefits developed in the nineteenth and early twentieth centuries. I think that the Economist put it well in 1923 when it suggested that whoever invented the concept might earn ““a place of honour with Watt, Stephenson and other pioneers of the industrial revolution”. Of course, it was the latter not the former who, as you say, “kicked off” all that technological innovation. But, for its widespread exploitation, it needed huge amounts of capital. And that was provided by private investors – I cannot see how that would have happened without limited liability.

However, as I indicated in an earlier post, I strongly agree about the pernicious consequences of the many current examples of moral hazard. But I’m unconvinced that they’re a direct result of limited liability. For that, I think it’s necessary to look elsewhere.

Robin

Friday 1st April 2011 – 09:25am
I just left the following comment, which I don’t see up yet (emphasis added):
Robin, thanks for your further thoughts.

In retrospect, isn’t it clear that the Economist is praising stock market BUBBLES, which are destructive disruptions created by artificial credit expansions by banks and central banks? http://www.economist.com/node/347323

Unwary individual investors, lulled by government regulations of “public companies” that have removed managers from all shareholder oversight, have been badly burned — and much capital wasted and directed into the pockets of executives and traders, who have shifted risks of failure to shareholders and to the governments that continue to bail out these failed organizations.

Sure, all that technological innovation required huge amounts of capital, which was provided by private investors. But capital is created by savings. Those savings could have been more wisely invested if shareholders bore greater residual risk – and were thus more incentivized to monitor the risk-taking by executives.

I think there is growing empirical evidence that firms that are more closely overseen by shareholders are more profitable. This, in addition to the hurdles to the public capital markets created by Sarbanes-Oxley, is leading to greater reliance on private capital-raising.

Tom


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