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Yes, Tom Woods; Corporations ARE Unlibertarian. And the Massive Regulatory State and Rampant Crony Capitalism Are the Result.

June 12th, 2015 3 comments

[Note: this started as a Facebook post, which is also open for comment.]

I have been bugged by friends to share some thoughts on the recent discussion (January 2015) between Tom Woods​ and Stephan Kinsella on the “libertarian-ness” of corporations, which was held on the Thomas Woods​ Show, and which they have respectively posted, with supporting references:

http://tomwoods.com/podcast/ep-325-are-corporations-un-libertarian/
http://www.stephankinsella.com/paf-podcast/kol170-tom-woods-show-are-corporations-unlibertarian/

I’ve had countless discussions with Stephan on this topic, chiefly when the Ludwig von Mises Institute ran an open blog; many great conversations were lost when LvMI closed down the blog, but the interested reader can find some of my own conversations here (I backed them up to a personal LvMI blog, and further migrated them when those too were closed by LvMI):

Here are a few thoughts that I shared privately with someone, both in advance of listening to Stefan and as the talk show proceeded:

He’s missing how the state provision of the legal entity structure, and especially the limited liability aspect, has, by risk socialization flowing from shareholders’ incentives to turn a blind eye (to NOT be involved in decisions that hurt others) fuelled the growth of the snowballing and ever-more captured regulatory state.

He mis-states here completely how corporations came about — they were all one-off, special purpose and limited-duration monopolies created in the public interest, not charters that the government let you file that were just like limited partnership agreements.

I am happy that he says state incorporation statutes (and government-made corps, presumably), should be done away with.

His statement that legal entity status is a convenience for the benefit of creditors is basically hogwash — without entity status, creditors could sue ANY (all if they wanted) partners and employees, and let THEM either bring others in as co-defendants or let them work out indemnification arrangements. Entity status is not favor to creditors.

He’s finally making some of the arguments that I did years back — that the favors granted in creating corporations are an excuse/justification for endless meddling by governments in business affairs.

I’ve proposed marked deregulation of non-corporate businesses and of corps whose owners keep a risk tail (i.e., in the case that equity is only partially paid-in, so that directors would have a capital call on shareholders if claims were to exceed assets), but Kinsella instead is trying to say that all government “favors” are meaningless, so government regulations of the corporations they create were never justified. —

It’s an argument that entirely ignores the easily accessed history of harms that, because corporations were made in the “public interest”, courts let corporations get away with, so that people had to go running to legislatures to beg government to “do something” about the corporate Frankensteins that the government had set loose. And it ignores that corporations drive regulatory capture and that the big ones are the partners of government — so much so that it has long been damned-near impossible to tell where business ends and government begins.

He says it would be a good thing if we removed legal entity status — I appreciate this, but in fact, of course, everyone (and Stephan himself) uses Stephan’s argument to deflect criticism from corporations and crony capitalism.

He speculates that “that wouldn’t lead to unlimited liability” for shareholders, but that’s largely a strawman — shareholders could be sued, and would have to bear costs of defense, which would make them quite interested in making sure the execs/manages/employees weren’t running around creating risks/hurting people. Just POTENTIAL exposure to risk gets people’s attention, and cutting that off is a massive subsidy to corporations.

Of course business firms that aren’t corporations could outlive their founders — through a gradual handover to younger generations, bringing in others, etc. But the natural, common law methods of business organization (partnerships, family businesses, cooperatives and associations) keep the owners very, very interested in making sure possible successors are brought up within the firm and understand employees, customers, suppliers, community members, etc., and in carefully monitoring the activities of such possible successors.

The artificial, statist corporation form loosens the bonds of mutual accountability  among owners, and between employees/other community members.

As for limited liability; he’s right about voluntary creditors — that voluntary counterparts can agree to limit each other’s liability to “business assets” only, and to exclude the personal assets of owners.

But as for the involuntary tort creditors, creating the corporate form and eliminating any possible liability of shareholders has had the clear consequence of totally muddling WHO it is that is acting and who should be responsible for torts — so we ended up totally eviscerating the old doctrines of privity of contract, grossly expanding the notion of “respondeat superior” (so corporate assets are on the hook, even when it isn’t clear what INDIVIDUALS ought to be liable for harms) and a lessening of accountability within firms. (Witness the confusion of Stephan and Lew Rockwell regarding the catastrophic BP Horizon blow out a few years ago, when they proclaimed that “BP” was the “biggest victim” of the catastrophe, without identifying whether the victims were those killed, workers generally, managers, execs or shareholders, and that “accidents happen”.)

I agree that “ownership” shouldn’t necessarily imply personal responsibility when innocent persons are harmed in the course of corporate business activities — my point is that shareholders should NOT be automatically excluded from POTENTIAL liability. By excluding them entirely for liability the effect has to been fashion unnaturally large pools of assets and capital that are managed by executives who are agents for no principals whatsoever, leading to a host of nonsense, including not simply a massive Regulatory State and rampant crony capitalism, but to nearly powerless shareholders in listed companies whom themselves claim to be “victims” whenever Bad Shit “happens.”

His argument that shareholders aren’t “owners” is garbage; it’s another post facto argument, and itself statist. Until this point, he argued that shareholders were just like partners/limited partners (who just have indemnity agreements that spread out individual liability for claims by making each other mutually responsible) –now he’s arguing that, hey, because the shareholders BY LAW have no responsibility, they shouldn’t be considered “owners”.

He then makes the point — which I made to him years ago — that if shareholders were exposed to risk, they would just buy INSURANCE — so the world would NOT collapse and everything would just go on as before. Well, not so fast — if shareholders had potential risk exposure and wanted insurance, it would be a COST that they would have to bear — and what he’s actually doing is acknowledging that, at least as to the cost of such insurance (which would vary company by company, industry by industry), government is now currently SUBSIDIZING corporations (or at least being shareholders in them).

As a result, his “net of causality” for torts has been totally confused.

His argument that shareholders may not contribute a dime directly to the corporation is technically true, but that’s another post facto argument. If there was no corporation, then any new partner in a partnership would certainly, if not also be making a partnership contribution, be directly undertaking obligations to the other partners.

All of the D&O and other liability insurance that Kinsella refers to have real costs; the bigger the firm, the more government-afforded protection, and the less important these costs are. Further, of course, thanks to the government-granted “get out of potential liability free” card (in the form of limited liability), shareholders in corporations don’t have to face costs and risks of monitoring, insuring or self-insuring for potential liability or hassles of being sued by injured persons if damages exceed the assets of whoever proximately caused them or the insurance coverage and business assets of the firm. These things matter, and we face greater risks and reduced incentives (and corresponding markets) to monitor and manage risks as a result.

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