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

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

[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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  1. Mark
    January 1st, 2016 at 15:42 | #1

    I might be the least knowledgeable of commenters on your blog but I’m learning about this topic and so I welcome being educated on it.

    As far as I am concerned , limited liability laws just enshrine in law what is morally correct. Just because you have invested money into a business how that means you should take responsibility for decisions made in that company that you are not aware of and did not partake in. I have yet to read a convince argument that they should be held personally liable simply because they have invested money. The liability for actions should fall onto those who are responsible for them i.e. those who made the decisions and those who took the actions. In most cases, I imagine that makes things more complicated – exactly who is responsible and to what degree – the persons acting, the persons ordering the actions or those who should have been aware but weren’t through neglect of duty. A court would have to prove individual knowledge and culpability of such actions when deciding who to penalize. In many cases, it would be very difficult to prove exactly who is responsible and to what degree. Where individual liability cannot be easily proven or apportioned beyond reasonable doubt it would be easier to hold the company to account as a separate legal entity. The litigant and defendant may even agree to proceed that way – it being easier for the litigant (it could be beyond doubt that the company is responsible but more doubtful that individuals are; there may be more assets to claim in compensation) and less risky for the defendant(s) (for obvious reasons).

    If limited liability laws did not exist (e.g. we abolished the government or it’s power to grant it), the courts should default to holding only those who ordered and participated in the damaging actions (which may include investors who were aware of the actions and invested), not those who happen to be connected financially but were not aware of the actions. Of course, if the company’s business is taking risky actions like digging for oil, yes, shareholders are aware and are liable. Morally, I think an investor should be only be liable in proportion to their investment, no one investor should be solely liable for all damages.

    What about shareholders who are given shares in lieu of payment (e.g. workers) — should they also be liable and to what proportion? That seems unfair to me.

    These are some reasons why I think just having shares in a company should not automatically make you liable.

    I’m grateful for any comments on my perspective.

  2. Bill Rood
    June 16th, 2015 at 18:34 | #2

    Thanks for commenting on Stephen Kinsella’s at Tom Woods’ defense of corporatism. As I said in my reply there, you are obviously way beyond me in in economics and law. Yet sometimes those of us with a less technical understanding have thoughts that can stimulate further enrichment by those with deeper knowledge. With that in mind, you may be interested in a couple posts I made at http://mosquitocloud.net. My own political journey started with a deep concern for social justice tempered with suspicions on the misuse of the dole, then disgust at the “whose ox is gored” hypocrisy of Republicans and Democrats and consequent involvement with the Libertarian Party in the early ’80s. I wasn’t really comfortable with the Libertarian position on monopolies and anti-trust legislation, but their platform was so consistent and attractive on many other issues, that I thought it was worth the experiment. Well, we tried deregulation and Free Trade agreements and as far as I’m concerned, it didn’t work. That led me to think more deeply about what corporations are, etc, and I’ve “jumped the gap” once more to become what I call a left-libertarian. If you have time to glance over the following posts, they may provide you with some fresh lay insights into the problem we’re discussing. You may also want to comment on any inaccuracies due to my limited technical knowledge of the subject.

    The first post is my analysis of limited liability as a “government entitlement,” its consequences for the growth of large capitalist enterprises, the ways in which is distorts any notion of a “free market,” etc, and basically how it is the one basic issue that divides left-libertarians from right-libertarians: http://mosquitocloud.net/limited-liability-corporatisms-original-sin

    I’ve also been somewhat fascinated by the ideas presented in Who Owns America? A New Declaration of Independence, edited by Herbert Agar and Alan Tate, an anthology of essays by twenty-one social critics considered to be conservative when the book was first published in 1936. Ralph Nader mentions that book repeatedly in Unstoppable. These guys, conservative as they were, had a much better understanding of these issues than most of today’s Libertarians and conservatives. Here are some comments I made on Chapters 3-6 of that book and its discussion of what property ownership really is, including both its rights and responsibilities: http://mosquitocloud.net/review-part-3-of-who-owns-america-a-new-declaration-of-independence

  3. H. A. Bott
    June 15th, 2015 at 18:34 | #3

    Excellent piece!

    Corporations are the beasts of government and as they have been ruled to have all of the rights of an individual with none of the responsibilities of the same, a stake needs to be put through their hearts.

    Business will adapt.

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