TT's Lost in Tokyo — by TokyoTom

Just like deposit insurance means depositors don’t bother to pay attention to whether or not bankers engage in risky activities, so too does limited liability mean that shareholders have little incentive to invest in managing risk.

While it should be shareholders (along with others who have stakes of one kind or another in commerical enterprises) – not governments – that are responsible for overseeing companies or banks, the reverse is precisely the situation we find ourselves in. Why?

Could government’s efforts to “protect” us have anything to do with poor management and decisions that benefit executives and traders, but harm shareholders, depositors and third parties?

(Enron, Lehman, BP, TEPCO, Bernie Madoff, and the whole raft of “Public” companies that are immune from shareholder criticism, but subject to growing heaps of federal prudential micro-management directives like Sarbanes-Oxley?)

How do we get government out of the risk management business, unless we insist that others take responsibility for their own investments?

In surfing for a simple post on moral hazard to distribute last week to a leadership seminar that I’m faciliating at a university here (not wanting to hazard my double-secret identity by proffering a post of my own), I stumbled across this little, thought-provoking piece from Joshua Pelton-Stroud.

This was posted June 13 2010, in the midst of last year’s little oil spill — for which, it seems, naturally enough, NOBODY is responsible. Corporations are now simply Acts of God, and the health of the State (emphasis added):

I copy below some more of my dialogue with Stephan Kinsella and others, regarding Jeffrey Tucker‘s unhappiness that not all libertarians are cheerleaders for our current model of “capitallism” (see my eariler posts on “scrupulosity“).

Stephan does a great job at wrestling with strawmen, attributing to me positions that I have expressly argued against, and questioning my forthrightness and my dislike for the state:

{Folks apologies if you are seeing disordered paragraphs; the blogging software seems to do that frequently when one copies in various blocks of text. I have added a few numbers to make chronological order clear.)

1.  Stephan Kinsella June 5, 2011 at 8:33 am

Calling shareholders “passive” might be a fair representation of the existing, government-created system – especially for listed, “public” companies, but that’s pretty much my point. This is NOT true of partnership or other traditional types of business organization,

See Hessen et al.–it is true of limited liability partnerships, where you have limited partners who are passive, and general partners who are active.

But even for a general partner–why is he automatically liable for what torts employees commit? this hoary, feudal notion of respondeat superior–you are responsible for your “servants’” actions–is a bit insulting and elitist.

” and the grant of limited liability itself deliberately signals shareholders that they can turn a blind eye to activities that profit the company while posing costs and risks to others.”

If they would not be liable in the first place then it’s not a grant, any more than you, as a Walmart customer, are “granted” limited liability just b/c the law does not currently make you jointly reponsible for torts committed by Walmart employees. I suppose you could argue this “grant” of limited liability to you as customer makes you as customer turn a blind eye to its risky activities. As I said in my post, this broad view of causal responsibiltiy would make everyone in society liable for everyone else all the time, without exception, which is why I analogized it to socialized medicine/Obamacare.

Sure, it’s probably not now “fair” to passive shareholders to “attribute vicarious liability to them … for torts committed by employees”, but that is both a strawman and besides the point. The point is that the government grant of limited liability MAKES A DIFFERENCE;

You keep saying it’s a grant but this is question begging, as this assertion assumes that absent this legal rule they would be liable vicariously under some libertarian principles of causation. I deny that they would. So if you say it’s grant you are arguing dishonestly by assuming your premise.

the strawman is that I am certainly NOT proposing a new rule that shareholders be assigned liability for acts by corporate employees, but simply that the limitation on liability be eliminated

WElt he state should be eliminated of course. There should be no laws whatsoever regarding corporations. I agree with this. The limitation of liability law should be abolished. I of course agree, which shoudl be apparent from reading what I have written since unlike many left-libertarians who are vague and maunder and equivocat and are disingenuous I try like Rothbard to be clear and upfront, and am very openly anti-state. I simply disagree with people like you who explicitly or implicitly propose that in a free society it would be appropriate to automatically hold the equivalent of passive shareholders (whatever you call them) vicariously responsible for others’ torts. If you think removing limited liability would make a difference, this is your implicit view. This is what I disagree with; your distractions seem to be an attempt to cloud the water to make it hard to see that this issue is at the heart of our disagreement.

– just as other grants by the government of liability limits (nuclear power, offshore oil drilling, and pollution permitting generally) should be eliminated.

Yes, I agree, but that is a bad analogy b/c those ARE real limits that do have an effect, unlike the shareholder case which does nothing IMO but ratify the situation that would obtain anyway.

Your assertion that limited liability of shareholders “would also be present in a free society in which private contractual ‘corporations’ arose” is totally unsupported. Can you point to where Rothbard, Hessen or Pilon argue that private contracts that limit liability of investors against voluntary creditors could serve to limit their personal liability against INVOLUNTARY creditors, viz., tort victims?

It’s not contracts that do it. It’s simply the fact that tort victims can pursue the tortfeasor, and the shareholder is not the tortfeasor; and there is no ground for making the shareholder liable vicariously for the employee’s torts.

And yes, see: Rothbard on Corporations and Limited Liability for Tort; Legitimizing the Corporation and Other Posts; Defending Corporations: Block and Huebert; Pilon on Corporations: A Discussion with Kevin Carson; Corporations and Limited Liability for Torts; In Defense of the Corporation

For example, see pilon http://www.stephankinsella.com/wp-content/uploads/texts/ga-l-rev-1979_6.pdf pp. 1310-. for Hessen, see this excerpt,http://www.lewrockwell.com/blog/wp-content/uploads/2004/04/Hessen+corporation+tort+liability+excerpts.pdf , pp. 18-20
and http://www.stephankinsella.com/2010/02/rothbard-on-corporations-and-limited-liability-for-tort/ — this last post also quotes Rothbard: “Similarly, if a corporate manager committed a wrong and damaged the person or property of others, there is no reason but “deep pockets” to make the stockholders pay, provided that the latter were innocent and did not order the manager to engage in these tortious actions.”

So, Rothbard, Hessen, Pilon–all hold that passive shareholders are not automatically liable vicariously for torts committed by employees, any more than limited partners would be.

Just as you, surely, have no objection to private agreements between parties to protect the information created by one of them (private “intellectual property”)

I would not call it that. “Intellectual property” is a propaganda term invented recently to justify state grants of monopoly privilege (patent and copyright)http://blog.mises.org/14914/intellectual-properganda/

but simply oppose state-created IP, so too should you (as a lawyer!) be able to understand that in principle, of course, I have no objection to contract-based companies, but oppose the obvious and important favors granted by the state in the case of all corporations?

You are confusing the case for contractual limited liability of shareholders for contractual debts, with the case for shareholders not being liable vicariously for others’ torts. The latter is not based on contract.

2. Not to be missed is that the grant of limited liability is extremely important and consequential:

See: The Cliff Notes version of my stilted enviro-fascist view of corporations and government – TT’s Lost in Tokyo http://bit.ly/9oBkC7

It has allowed owners to divorce themselves from formal reponsibility for the acts of their agents/employees, to divorce themselves from the communities in which their firms act, and to dodge claims of moral responsibility.

So what? this is not a justification for a law. It’s just some “policy” musings.

So we are left with massive corporations which are massively entangled with government

That’s b/c there is a state (which you favor, not me; I’m the anarchist), not b/c of the way people would create firms on the free market

and are powerful buyers of favors, which citizens forever clamor for “more control!”, and which lack any clear locus of responsibility — and in which we find anarchist libertarians like yourself and Lew Rockwell acting as their lawyers, and calling them and their shareholders “the biggest victims” (not the little people on the short end of the stick of projects like Gulf oil drilling, nuclear reactor meltdowns or even mundane health/air/water/soil damage from pollution)

Emotivism. You are not making an argument. It is not unlibertarian to have a view as to who is victimized by a given state policy. In fact the central state whose legitimacy you yourself support claims the overlord/landlord status in the offshore continental shelf; BP held a lease. It was your central state that is the landlord whose tenant had the oil spill. By your principles of vicarious responsibilty where you want to willy nilly say some old lady holding a single share of BP stock should be personally liable for this tort, of course the landlord should be too, right? I.e., your state is responsible, so why are you blaming me for favoring private investors in a free society, when you support the very state’s existence, the state that is responsible for the BP spill in the first place? And of course the nuclear industry is heavily distorted and corrupted by the state; Chernobyl was teh state’s fault, and the entire meltdown-prone western nuclear industry was corrupted by your beloved state for military reasons — instead of safe Thorium we needed the current system to produce nuclear weaponshttp://www.libertarianstandard.com/2011/04/01/the-states-corruption-of-nuclear-power/

So blaming this on private investors is rich. It’s the state’s fault, as usual. You think that getting rid of one of the few state laws that happens to mimic the likely result on a free market (limited liability for passive shareholders) is what you should focus on?!

As Mises long ago noted, moral hazard matters.

This is how statists and law professors reason. It is not how libertarians reason. We believe in individual rights–property rights–and have principles. we don’t run around “weighing” various “policy reasons” to tweak and fine tune statist positive law.

3. While in principle any partnership can keep going even when one partner dies or decides to leave and new partners are added, surely you are aware that this is a very cumbersome process, not in small part because of the concerns that the partners and its lenders, suppliers and customers all have about who, precisely, is managing the business and who has liability for potential losses?

Nonsense. SEe the Hessen excerpt above, p. 17, regarding how partnerships or firms can easily make the firm effectively immortal by use of continuity agreements. This is not hard.

Just as for limited liability,

More question begging, as I have explained

the grants of legal entity status,

this is not a gift but an unnecessary status that the state uses to justify regulation and double taxation of shareholders. In a free market firms would not have legal personality nor do they need to. Hessen has already explained this almost 30 years ago.

unlimited life,

See Hessen, last mention above. This can be done contractualy.

unlimited purposes and the ability to own subsidiaries are all substantial AND consequence-laden gifts from the state.

The purpose is whatever the shareholders agree to. It has nothing to do with the state just as marriage should not. Ownign a subsidiary is not a privilege but just another contractual private scheme. Nothing you described is a gift fromt he state. All these features are doable privately and contractualy, except for entity theory which is not a gift but a penalty.

Show me a partnership that has any of these, without a grant from the state.

This is like asking me to show you a 100% reserve bank. They are not used now b/c the state’s fractional reserve/guaranteed system outcompetes it. If I want a perpetual firm I just use a corporation b/c the state provides this mechanism. In a free market people would have to do it privately contractually, on their own; I have no idea if they would be called limited partnerships, LLP, LLC, or what. Who cares? IT’s just a detail. Get the state out of the way, and we’ll see.

Waht i object to is your clamoring for shareholders to be liable, when you have no theory whatsoever undergirding this.

The state creation of corporations has do much to muddle who, exactly, is responsible for injuries to third parties caused by “the corporation”.

So what, really? In most cases the corporation pays the victim, and has assets to do so.

Getting rid of limited liability would do much to provide moral clarity,

Again, this is question begging, b/c you are assuming there would and should be liability for shareholders absent the limitation of liability law.

I would note that, just as if deposit insurance were eliminated, market actors would step up to advise on which banks are safe and to provide deposit insurance, so too would insurers step up if limited liability were ended.

We are NOT talking about bringing down capitalism.

I know, but this still does not justify your claim that shareholders should be liable vicariously for the torts of others. What is your theory of causal responsibility? I have tried to sketch one out — http://mises.org/journals/qjae/pdf/qjae7_4_7.pdf — and see no way to hold passive shareholders liable; confirming the reasoning on the same lines of Hessen, Pilon, and Rothbard.

TokyoTom June 5, 2011 at 10:00 am

3. TokyoTom June 5, 2011 at 7:14 pm

[from a Facebook post]

State-made limited liability corporations are the health of the massive Regulatory State, which is likewise the health of the crony corporations. It’s a rachet, and racket.

Are you a Bootlegger, or a Baptist?

In free, voluntary markets, there is no Get-Out-of-Personal-Liability-for-Harms-Caused-to-Others-Free Card.

Limited liability for shareholders is a state-granted favor that is demonstrably at the bottom of the dynamic of people forever running to a gamed “democratic” government, to make government make its creations behave more nicely (with the regulations then serving to protect the big, to limit competition, and to fuel corruption and further government capture). As soon as governments began creating corporate monopolies and/or limited liability cos, then judges followed suit by rejecting strict common-law protections of private property in favor of a pollution-/corporation-favoring “balance” of equities that Block and Rothbard noted.

In a private law society, one finds ALWAYS individuals and associations of individuals who may negotiate liability caps with voluntary counterparties, but remain potentially personally liable up to the remainder of their personal assets for harms that their activities (and those of their agents) caused to others.

While the persons who actually directly caused harms would of course be liable, their principals would try to limit their own potential exposure by either closely managing their agents or making sure that others were independent contractors.

Historian and Constitutional scholar Kevin Guzman posted a comment on his Facebook wall on the Citizens United decision that I took a disliking to.

Here is his September 6, 2014 post and my responses (to him and his other commenters):

There’s a popular meme that “Corporations aren’t people.” The aim is to repeal the Supreme Court’s decision in Citizens United that Congress cannot under the Speech and Press Clauses of the First Amendment limit political advertising so stringently as it had been under the McCain-Feingold Act. The point of the meme is that only people are entitled to constitutional protections, and so Congress can do whatever it wants to corporations. Let’s follow the implications of the claim that “Corporations aren’t people.”

September 7 at 1:24am

Tokyo Tom Kevin, this is an interesting an important topic, which hasn’t been set up very well. 

First, I think you missed the gist of the Dartmouth case, which essentially said that NH couldn’t alter Dartmouth’s charter (which had been granted by the English Crown), because the corporate charter was a form of private contract that was protected from “impairment” by states under the Constitution. The case was brought by the Trustees of Dartmouth, and didn’t particularly “recognize that corporations do indeed have rights of individuals.” States responded by reserving greater powers when they create corporations.

http://en.wikipedia.org/wiki/Dartmouth_College_v._Woodward
http://www.oyez.org/cases/1792-1850/1818/1818_0
http://www.americanbar.org/…/students_in…/dartmouth.html

September 7 at 1:32am

Tokyo Tom Hopefully, we’re all clear on the fact that corporations are created by governments, were traditionally considered as forms of contracts and property rights, and have special powers, rights and characteristics provided by state legislatures that render them quite different from real, live human beings?

Unfortunately, many on the Left and Right are confused about the origin, history and nature of corporations. As I said to some progressives:

“Sadly, it seems that most if not all of the progressives here want to deny what cannot be denied: that corporations exist only because they are made by acts of legislative power of Governments. They also want to deny that the special characteristics that Govt give to “corporations” are the very attributes that lead to harms to others/social ills that continually fuel more regulation of corporations by governments.

“It’s hard to discern why they have these views–perhaps, because they are so ingrained in seeing Govt as their sole savior in fighting against corporate Frankensteins–but they are clearly incorrect, as a legal and historical matter.
Be that as it may, as a matter of understanding and attacking the roots of our problems, it behooves progressives to investigate and understand how government and corporations shape the incentives and influence the behavior of the people who find themselves within them.

“Not only do corporations exist only because of Govt, but it is clear that the reasons why corporations play such negative roles in society and have corrupted Govt are their state-granted characteristics that would NOT exist in a “free market”. Sole proprietorships, partnerships, associations and co-operatives do NOT have#LimitedLiability, unlimited lives, unlimited purposes, and the businesses do not have legal entity status different from the owners.

http://tokyotom.freecapitalists.org/…/corporations…

 

September 7 at 1:47am

Tokyo Tom Corporations have continued to find the Federal government and Supreme Court their friend in escaping control by the states that created them; see this pre-Citizens United post about the perversion of the anti-discrimination (due process/equal protection) provisions of the 14th Amendment (that used “persons” to protect freed slaves and unnaturalized Chinese) to require various states to treat corporations made in other states the same as their own corporations:

http://tokyotom.freecapitalists.org/…/corpspeak…/

 

September 7 at 1:51am

Tokyo Tom Karl Pope’s thoughts after Citizens United are largely spot on, and explain the drive that Sen. Colburn is now sponsoring to convene a Constitutional Convention to consider amendments:

http://tokyotom.freecapitalists.org/…/carl-pope-sierra…/

 

• Kevin Gutzman It’s impossible to remove money from politics. If you deny individuals the right to buy political ads, you’ve effectively elevated owners of media corporations to the status of Elite Class, as only they will be able to say what they want. On the other hand, the Tenth Amendment reserves power to regulate elections to the states; if they want to ban donations from out-of-state interests or individuals, they should be allowed to do so. Score another negative result for the Incorporation Doctrine.

  September 7 at 2:55am ·
• 

  Kevin Gutzman I think that all federal campaign regulation is unconstitutional, as nothing in the Constitution empowers Congress to regulate anything other than the “time, place, and manner” of elections. At the federal level, there’s no reason not to have a sunshine law requiring disclosure of all donations.

  September 7 at 2:57am · Edited ·
• 

  Tokyo Tom Good point, Savana — states can and should be able to condition any corporate license on things that the corporation cannot do in its own name, such as lobbying. 

  Such a conditioning of the grant of corporate charter would be Consitutional, and would NOT deprive any individual of his own rights to lobby (or to combine with other employees to do so).If we want to get crony capitalism and the runaway regulatory state under control, we should simply stop granting #LtdLiability to corporate shareholders, and restore shareholder responsibility to monitor risk management by executives and managers.

  http://tokyotom.freecapitalists.org/…/immodest…/

  Tokyo Tom Kevin, I didn’t realize that “deny[ing] individuals the right to buy political ads” was the premise here, but denying the “right” of state-made entities to buy political ads, make contributions etc.

  September 7 at 3:03am

  • Tokyo Tom From my own Constitutional analysis, corporations, as artificial things, don’t “speak” at all (just as a printing press doesn’t speak either); people speak. Unfortunately, corporations (including media corporations) HAVE become ways for people to mask WHO is speaking. I think it perfectly acceptable under state corporation law and under the 1st Ad to constrain certain types of corporate “speech”.

    September 10 at 7:00pm · Edited
  • 

    Kevin Gutzman Big money wins? Big money often loses. Google “Michael Huffington” or “Clayton Williams” and see what you find. Let people know who is doing the contributing.

    Note: I agree with Savana that foreign contributions should be illegal. In theory, they already are, although Bill Clinton took advantage of them, (in)famously.

    September 7 at 3:21am
  • 

    Kevin Gutzman The idea that I should be forced to contribute to Hillary2016! thrills me about as much as being forced to help fund the Westboro Baptist Church.

    Tokyo Tom SCOTUS has the First Amendment wrong －this was intended to bind tie Feds, at a time when corporations were profoundly despised and considered property of their shareholders, with rights only grudgingly granted by states.

    Property doesn’t “speak,” even as every single shareholder and employee retains full personal speech rights.

    September 8 at 1:33am · Edited

    Kevin Gutzman “Groups of people are not people.” — ISIS

    September 8 at 1:36am ·

    Tokyo Tom Mark, without corporations, are people UNABLE to associate to conduct business together?

    Corporations are creations of governments. People are not. Nor are voluntary associations of people, as businesses/partnerships, co-ops, unions or churches.

    September 9 at 1:27pm · Edited ·

    Tokyo Tom ISIS? “of course a few less than enlightened people are not seeing the distinction between an inactive band of musicians and a band of terrorists involved in current world affairs.”

    • http://m.huffpost.com/ca/entry/5722758

  September 8 at 11:12am

  Kevin Gutzman Right, they’re sheep.
  Special sheep with all the constitutional rights of individuals that they are capable of exercising–as I enumerated in my original post. The only one they don’t have is, “coincidentally,” the one the Democratic Party doesn’t want them to have.
  From Dred Scott to present, that’s the way Democratic Party “constitutionalism” works.

  September 8 at 11:35pm

  Tokyo Tom “Of course corporations have the same rights as people. A corporation is not a tangible thing. It is an abstract term describing a group of organized individuals/people.”Balderdash on a stick, that we are reminded of in the cases of BP and Fukushima. Show me any individuals without a government-made liability shield who could do the damage that corporations (and governments do). Where are the mass torts? The Superfund sites?

  Individuals, business partnerships and coops can all be kept in check (to a significantly greater degree) by others in the communities in which they live.

  http://tokyotom.freecapitalists.org/…/quot-biggest…/

  Kevin Gutzman Tokyo Tom, I got off at “Senator Joe Barton.”

  September 8 at 11:15pm

  Tokyo Tom State-made corporations are the health of the massive regulatory state, which is likewise the health of the crony corporations. It’s a rachet, and racket.

  Are you a Bootlegger, or a Baptist?

  September 8 at 11:38pm

  Tokyo Tom Let’s look more at BP as a “person”:|

  • 
    Jim Hightower:
    “And now, its rap sheet grows almost daily. In fact, the Center for Public Integrity has revealed that the oil giant’s current catastrophic mess should come as no surprise, for it has a long and sorry record of causing calamities. In the last three years, the center says, an astonishing “97 percent of all flagrant violations found in the refining industry by government safety inspectors” came at BP facilities. These included 760 violations rated as “egregious” and “willful.” In contrast, the oil company with the second-worst record had only eight such citations.While its CEO, Tony Hayward, claims that its gulf blowout was simply a tragic accident that no one could’ve foreseen, internal corporate documents reveal that BP itself had been struggling for nearly a year with its inability to get this well under control. Also, it had been willfully violating its own safety policies and had flat out lied to regulators about its ability to cope with what’s delicately called a major “petroleum release” in the Gulf of Mexico.

    “What the hell did we do to deserve this?” Hayward asked shortly after his faulty well exploded. Excuse us, Tony, but you’re not the victim here — and this disaster is not the work of fate. Rather, the deadly gusher in the gulf is a direct product of BP’s reckless pursuit of profits. You waltzed around environmental protections, deliberately avoided installing relatively cheap safety equipment, and cavalierly lied about the likelihood of disaster and your ability to cope with it.

    “It wasn’t our accident,” the CEO later declared, as oil was spreading. Wow, Tony, in one four-word sentence, you told two lies. First, BP owns the well, and it is your mess. Second, the mess was not an “accident,” but the inevitable result of hubris and greed flowing straight from BP’s executive suite.
    “The Gulf of Mexico is a very big ocean,” Hayward told the media, trying to sidestep the fact that BP’s mess was fast becoming America’s worst oil calamity. Indeed, Tony coolly explained that the amount of oil spewing from the well “is tiny in relation to the total water volume.” This flabbergasting comment came only two weeks before it was revealed that the amount of gushing oil was 19 times more than BP had been claiming.
    Eleven oil workers are dead, thousands of Gulf Coast people have had their livelihoods devastated and unfathomable damage is being done to the gulf ecology. Imagine how the authorities would be treating the offender if BP were a person. It would’ve been put behind bars long ago — if not on death row.
    [link above, past the Joe Barton part]

    And here’s a couple of fun video clips riffing on the nature of the unaccountability of corporate/BP execs (not to mention the absentee shareholders, “protected by limited liability” who are themselves “victims”):

    http://tokyotom.freecapitalists.org/…/satire-oil-spill…/
    http://tokyotom.freecapitalists.org/…/time-light-humor…/

    September 9 at 1:35pm

    Tokyo Tom Corporations are “Special sheep with all the constitutional rights of individuals that they are capable of exercising,” Kevin?
    Hah. Try limited liability for one.http://archive.freecapitalists.org/…/speech-and…

    September 9 at 1:41pm

    Tokyo Tom Corporations are the Health of the State. Is this why you and other good “conservatives” cheer them on, Kevin?
    http://tokyotom.freecapitalists.org/?s=health+of+state

    September 9 at 1:42pm

    Tokyo Tom Timothy, can I recommend you look at well-known Republican shareholder activist Robert Monks, and “drone corporations”?
    The most abusive crony corporations tend to be a low-performing bunch of listed firms, with no significant shareholder blocs:http://tokyotom.freecapitalists.org/?s=drone+corporation

    September 9 at 1:46pm

    Tokyo Tom Stacey, yes, my problem is with “corporatism” and how government-made corporations are the hand-maiden of both the snowballing state, crony capitalism, and confused people across the spectrum bewailing or defending “capitalism!” and “free markets”. is the natural result of governments creating Btw,
    1. BP is half Amoco, and ofc operates in the US through subsidiaries. Did you miss this in my quote? In the period just before 2010, “an astonishing “97 percent of all flagrant violations found in the refining industry by government safety inspectors” came at BP facilities. These included 760 violations rated as “egregious” and “willful.” In contrast, the oil company with the second-worst record had only eight such citations.”

    2. They “are sorry individuals, should they not have rights?”

    Which “they” are you talking about, and for what purposes? If you are talking about “speech”,” then in the case of BP, who is it who is speaking, and for whom? Who speaks for workers killed? Shareholders? Management? Who are the principals, and who are the agents?

    Every individual in BP/connected to BP retains personal rights to speak, and can form voluntary groups to do so if they wish–the doctrine Kevin is pushing is a socialist/collectivist one that DENIES individual accountability and and MASKS self-interest, thus forcing those who interact with or are affected by BP into a position where, since individual accountability is near-impossible, to seek government assistance in getting at least some collective responsibility, but little private redress — very little of whatever the government ends up collecting from BP will actually trickle down, and individuals will remain beholden to the government and to BP for risk management going forward, rather than having direct rights.

    See my above clips on BP cats and the Clarke and Dawe spoof for light takes on unaccountability and who speaks for whom.

    September 9 at 2:27pm

    Kevin Gutzman Tom, you have got to be kidding. The reason Obama wants to muzzle corporations is so that he can take more of our money and give it to his constituents, invite more Guatemalans to come here and become his constituents, etc. He sees them as an obstacle, and so he wants to undo American legal precedent dating all the way back to the days when a ratifier of the Constitution was chief justice of the Supreme Court. And you say that I am the one who is pushing statism. Since the Revolution of 1937, there has never been a time when the Democratic Party stood for originalism in constitutional interpretation; they always argue for new, unknown doctrines that advance redistribution, secularization, etc. This new idea that corporations don’t have the rights of individuals is more of the same.

    September 9 at 2:36pm · Edited

    Tokyo Tom The purpose of the First Amendment was to protect we the people from acts of the Federal government, NOT to protect state-created corporations from the governments and people who make them.The Federal government, this time through the Supreme Court, continues to play the role of helping elites, through state-created corporations, to destroy free markets and local representative government.

    I’m sorry to see so many deluded “conservative” cheerleaders for this.

    September 9 at 3:28pm

    Tokyo Tom The answer to the following question is “NO”: [Does it make any sense to treat corporations as “persons”, given the differences in incentive structures?]
    http://tokyotom.freecapitalists.org/…/sense-treat…/

    September 9 at 3:29pm

    • Kevin Gutzman Give me a break. The new argument that government can regulate corporate purchases of political advertizing is entirely about protecting incumbents from criticism. McCain said so, explicitly.

      September 9 at 3:29pm

      Kevin Gutzman If you think advertizing against Obama is “destroying free markets,” we speak different languages.
    • September 9 at 3:30pm
    • Tokyo Tom Whip conflation now, Kevin. Try addressing my actual arguments.

      September 9 at 3:32pm
    • Kevin Gutzman Show me where the Constitution gives Congress power to regulate purchases of political ads by corporations. You can’t, because it doesn’t. The argument that it does is based on the “reading” of the Commerce Clause invented by Klansman Black and his fellow FDR political hacks in the 1930s. It’s completely contrary to the 10th Amendment.

      September 9 at 3:32pm
    • Kevin Gutzman Case closed.

      September 9 at 3:33pm
    • Tokyo Tom I’m not a fan of the Feds regulating anything, Kevin. But the states that make corporations sure as hell have a right to limit what they can do in exchange for very special privileges granted.

      September 9 at 3:34pm
    • Tokyo Tom But I already addressed the First Ad several times upthread. Corporations are THINGS, not people. Things don’t “speak”, at least for Constitutional purposes.

      September 9 at 3:36pm ·
    • Tokyo Tom My argument doesn’t refer to the absurd Commerce clause jurisprudence at all.

      September 9 at 3:37pm
    • Tokyo Tom “The new argument that government can regulate corporate purchases of political advertizing is entirely about protecting incumbents from criticism.”

      I am sure that this IS the case now, but the argument against allowing corporations to speak (why does NYT get special treatment?) is 100+ years old — pretty sure I copied in a Teddy Roosevelt quote upthread.But you’re a HISTORIAN; you know this already.

      September 9 at 3:51pm

      • Stacey York Morris States that “make” corporations? Huh?

        September 9 at 3:40pm
      • Tokyo Tom Stacey, yes. Surely you’re aware of “corporation laws”, and checked out the Dartmouth case (rare exception of a one-off corporation made by King George). Corporations are creatures of governments — there are NO “free market” corporations.

        September 9 at 3:43pm
      • Tokyo Tom The American Taliban is alive and well in “conservatives” who reflexively defend as “free markets” the corporatism that has always fuelled the “Progressive” movement.

        We have our own Sunni and Shia, battling over who gets to control the State:http://tokyotom.freecapitalists.org/…/state…/
        http://tokyotom.freecapitalists.org/…/dysfunction…/

        September 9 at 3:50pm 

        Stacey York Morris States don’t create corporations. They tax them but thats not creation. I’m a teeny corporation and trust me, the state did nothing. States don’t have the right to silence them one bit. They do court them but that’s because they bring jobs for their state and lots of tax money. States like Maryland and California blackmail and harass them to death. Charge them for infrastructure and tax them at the federal rate which is highest in world, so they may find a state that is more friendly, but that’s not “creating” them. King George wasn’t a capitalist.

        September 9 at 3:53pm

        Tokyo Tom Stacey, unfortunately you’re sounding more like a liberal all the time, with the wrinkle that they deny that governments make corporations because it’s their view that the evil aspects of corporations are due to “capitalism” and “greed”, while with you it’s a desire to defend “free markets” from “greedy” and “grasping” GOVERNMENTS (did you NOT read the Sheldon Richman piece that you posted above)?Undeniably, corporations are made by governments; the fact that governments have, via a race to the bottom have “democratized” the process doesn’t change its nature. Rather, it simply masks the deep roots of corporatism and the reasons for the regulatory state.

        I explained this upthread already, with excerpts from this blog post:

        http://tokyotom.freecapitalists.org/…/corporations…/

        September 9 at 4:51pm

        • Brett Sylvester ^ Funny how advocates of free markets can perfectly predict the property norms that would arise in the absence of a sate…

          September 9 at 5:29pm
        • Tokyo Tom Brett, if you’re talking to me, I fail to see how you’re addressing anything I’ve said.

          Propertyrights continuously evolve in all societies, as technology, demand, mores and institutions change.So?

          September 9 at 9:45pm · Edited
        • Tokyo Tom Jeff, focus. We’re only talking about the corporate form – which is undeniably a creature of governments and not free markets. Our Founding Fathers all knew this, and detested the Crown’s corporations/monopolies － does the original Tea Party not ring a bell?

          But you raise an important issue － the deep entanglement of government with business that flows from government creation of corporate forms is what underlies people bashing “business” and “capitalism” when they mean corporatism, as well as why they think governments have rights to micromanage business.

          September 9 at 9:58pm

          • Kevin Gutzman I reference specific provisions of the Constitution, and Tom invokes proto-fascist Theodore Roosevelt. Non sequitur.

            September 10 at 2:05am
          • Kevin Gutzman I agree that states have a right to regulate corporate behavior. I oppose the Incorporation Doctrine.

            September 10 at 2:06am

            Kevin Gutzman Since a corporation’s holdings are the pooled property of its shareholders, yes, it has fiduciary responsibility for the property to which they have a natural right. That’s why in Dartmouth College v. Woodward (1819), Chief Justice Marshall spoke of the shareholders’ rights in considering the College’s claims.

            September 10 at 11:33am

            • Kevin Gutzman Some corporate crimes lead to incarceration of officers, some don’t.
              The reasons there’s a move to deny that corporations have rights are two: 1) that some politicians don’t like being criticized, and so want to ban corporations from contributing to campaigns against them (as McCain said in explaining the McCain-Feingold Law); and 2) that there’s a general tendency for the Federal Government to deny all rights as they come to mind, and Citizens United brought this particular set to mind.

              September 10 at 2:12pm ·
            • Tokyo Tom “I reference specific provisions of the Constitution, and Tom invokes proto-fascist Theodore Roosevelt. Non sequitur.”Hah. The historian can’t recall or research the history of his own thread.

              Kevin, you said “The new argument that government can regulate corporate purchases of political advertizing [sic] is entirely about protecting incumbents from criticism”; I didn’t disagree as to Dem motives now, but simply said “the argument against allowing corporations to speak (why does NYT get special treatment?) is 100+ years old” and referred to your proto-fascist Teddy Roosevelt.

              September 10 at 7:29pm ·
            • Tokyo Tom “I agree that states have a right to regulate corporate behavior. I oppose the Incorporation Doctrine.”Glad we agree on the first point; on the second, with the exception of Citizens United (on the First Amendment), much of the history of extending Constitutional rights to corporate “persons” has been of “Incorporation” — viz., making the Bill of Rights applicable to state and local governments through the due process clause of the Fourteenth Amendment. Corporations now have fourth amendment safeguards against unreasonable regulatory searches; fifth amendment double jeopardy and liberty rights; and sixth and seventh amendment entitlements to trial by jury.

              You oppose these extensions to state-made corporations, presumably, Kevin?

              Then you also OPPOSE the Supreme Court’s SUMMARY extension of its new First Amendment doctrine to the STATES via the 14th Ad “Incorporation” doctrine, in the 2012 Montana case, American Tradition Partnership v. Bullock?

              If you are, then I commend you — other than your failure to point it out to people on this thread.

              http://thehill.com/…/234515-supreme-court-reaffirms…

              September 10 at 9:44pm · Edited ·
            • Tokyo Tom Brett: “You’re claiming that society would necessarily not be ordered in a certain wayin the absence of a state, when there’s no reason that it couldn’t be.”No, I’m not; I’m just saying that corporations are made by governments and have rights granted by governments, and observing that these are rights that you and I don’t have — owners of unincorporated businesses don’t have limited liability to persons who they may injure, we die, etc.

              As Marshall said in Dartmouth: “A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it either expressly or as incidental to its very existence.”

              September 10 at 8:00pm · Edited
            • Tokyo Tom “in Dartmouth College v. Woodward (1819), Chief Justice Marshall spoke of the shareholders’ rights in considering the College’s claims.”

              
              You speak with great authority of matters that Marshall doesn’t address in his opinion. His chief point is to determine that the grant of Dartmouth’s charter was a CONTRACT among the Crown, the founders (donors) and Trustees — not a trust with fiduciary obligations:“This is plainly a contract to which the donors, the Trustees, and the Crown (to whose rights and obligations New Hampshire succeeds) were the original parties. It is a contract made on a valuable consideration. It is a contract for the security and disposition of property. It is a contract on the faith of which real and personal estate has been conveyed to the corporation. It is, then, a contract within the letter of the Constitution, and within its spirit also ….”
              http://www.law.cornell.edu/supremecourt/text/17/518…

              September 10 at 8:09pm
            • Tokyo Tom “The 14th Amendment applies to Americans.”

              Due Process and Equal Protection apply to “persons” (there were plenty of non-naturalized Chinese, and the Amendment also had to clarify state and federal citizenship), which is how railroad and other corporations have been able to escape the states and capture the feds.

              September 10 at 8:13pm
            • Tokyo Tom “The reasons there’s a move to deny that corporations have rights are two:”And then there are those who want to breathe real meaning back into “federalism” and states rights, and to end the conflation of corporation=business and crony capitalism=capitalism. 

              The key to regaining control over our lives from Big Brother and Big Corporations isn’t the Federal government, but by reining in corporations/revising corporation laws state-by-state.

              September 10 at 8:19pm
            • Tokyo Tom HEY THREAD FOLLOWERS —

              
              Kevin indicated above that, because he opposes the 14th Amendment “Incorporation Doctrine,” he “agree[s] that states have a right to regulate corporate behavior.”…

Yesterday I stumbled across the July 23 repost in LvMI Daily of Walter Block’s article, IsThere a Right to Unionize?, which apparently originally appeared on LewRockwell.com, January 1, 2004.

I left the following comment:

Funny how Walter finds not worthy of mention the coercive role of the state in setting up limited liability corporations, whose founders and owners are absolved from personal responsibility for the injuries their creatures and managers (whom otherwise would be the Agents of the shareholders) cause to others (including to workers).

These favors to “capitalists” led naturally to abuses against workers (both by corporate-hired thugs and by formally “public” policemen) and more broadly to society (pollution, anyone?), which in turn led to the pro-labor laws and vast public health and safety regulatory state that Block and others at LvMI decry.

Is libertarianism only skin-deep here? Where are the heavyweights who see that the only way to roll back Big Government is to insist on an end to limited liability and other “protections” of shareholders that have served only to generate institutionalized moral hazard, opacity and unaccountability?  

One does not have to scratch very hard to see the hand of the state, via corporations, police and the military, in both initiating violence against workers and in forcefully ending it.

http://en.wikipedia.org/wiki/Union_violence

http://en.wikipedia.org/wiki/Anti-union_violence

Joel Hirschhorn, author of a clear-sighted post of the above title, gave me permission to cross-post it here. More about Hirschhorn, an evil lefty enviro technocrat professorial egghead type who is the Chair of the Independent Party of Maryland and co-founder of the“Friends of the Article V Convention” (a movement to amend the Constitution to constrain the President and Congress) here and here.

The emphasis is mine:

As I am glued to cable stations showing the street battles in Egypt all I keep thinking about is how Egyptians have mustered the courage to fight their government’s tyranny while Americans remain unready to revolt against the peculiar American brand of tyranny.

Of course, the dictatorship in Egypt is far different than what the vast majority of Americans face. Despite liberty and freedom, our tyranny exists within an electoral, constitutional republic. But with a two-party plutocracy thoroughly corrupted by corporate and wealthy interests most Americans are victims of a dysfunctional, inefficient and unfair democracy. How ironic that in the nation with monumental gun ownership among its citizens there is no hint of people giving up on meaningless elections and taking to the streets in massive numbers to protest their corrupt government.

Just this week to the new report by the U.S. Department of Agriculture, a new report documented this: Nearly a year and a half into the economic recovery, some b, just another result of stubborn high unemployment and low incomes among the employed. According to the new report by the U.S. Department of Agriculture , compared to a year ago the number of people receiving food stamps was up 14.2 percent. Many other Americans are getting food at various kinds of charities and food banks. Add to this real unemployment approaching 20 percent in most areas and huge numbers of Americans going homeless and facing home foreclosure. Does this sound like the best country on Earth that politicians like to jabber about? Of course not. [Hirschhorn misses that food stamps and unemployment insurance themselves hinder job creation.]

The US is in terrible shape, but President Obama lied in his recent state of the union address. It was not his first time, nor will it be his last time. But it was one of the biggest possible lies. The state of union is absolutely not strong. Anyone with a smidgen of intelligence and critical thinking capability knows that in almost every conceivable way the US is in awful shape for a large fraction of its citizens.

Imagine if the President of the USA stood up in front of Congress, the whole nation and the world with the courage to tell the truth: the state of the union is terrible, about the worst in over 100 years. And that is why Americans have to wake up, pay attention, sacrifice and join together in rebellion to make things much, much better and the hell with conventional politics driven by the worst special interests and the rich.

By telling the lie that the state of the union is strong, Obama removed the necessary motivation for Americans to get their distracted and delusional minds oriented in the right direction. The nation needs to shift into revolution mode. Watching the Superbowl will not improve our government.

What Americans must face is the ugly truth that China and other nations are beating the crap out of the US and nothing the US is currently doing has the ability to change this situation and win the global competition. In just about every objective way that nations can be judged the US is losing the present. Our educational system for children is a joke; data keep showing that American children are far behind those in many other countries. Our industrial sector has lost an incredible amount of manufacturing and most large companies now make more money from foreign operations and invest money abroad for that reason. That explains a huge loss of jobs with no reversal possible. Our financial sector is awash with corruption, greed and dishonesty. Our health care system no longer produces healthy citizens, compared to many other nations, despite costing much, much more. Our physical infrastructure is a disgrace, crumbling and threatening public health and safety. Upward mobility has largely disappeared and the middle class continues to sink into a lower class. Economic inequality has skyrocketed with the rich becoming richer and everyone else suffering more and more. The large number of homeless, hungry, poor and imprisoned Americans defines a nation that has lost its glory.

Just as Americans have watched once great companies disappear (Remember Polaroid?), they need to wake up to the downfall of their own country. All the talk about jobs is just another monumental deception, because there is no way that millions of new, good paying jobs will be created for many years. Even more and more Americans face hunger and homelessness as well as joining the working poor.

In stark contrast to the empty rhetoric of Obama, at about the same time a remarkably honest report by the Financial Crisis Inquiry Commission that provides incredibly honest criticisms and explanation of exactly what caused the economic meltdown that millions of Americans are still suffering from. If President Obama respected its findings, he would use them as the basis for detailing his actions against the entities responsible for the Great Recession. Here is a sample of the report’s important views:

“The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble.”

The financial industry has gotten away with murder and ended up profiting enormously. No mystery because it and groups affiliated with it spent more than $3.7 billion on lobbying and campaign contributions from 1999 to 2008.

And imagine if the President would have had the guts to talk openly about the incredibly awful financial predicament of most states! Many more people will lose their jobs as governments cut spending.

Nothing defines our delusional democracy more than a president providing delusional thinking to mostly delusional citizens. Make no mistake; this is an epidemic of bipartisan delusion. This is what makes America exceptional. A once great nation is sliding down the toilet and most everyone, especially politicians, are lying endlessly as it does, as if the nation’s decay should be ignored rather than honestly combated by its citizens.

Obama said “We do big things.” Once, the country did big things, but not now. The best is behind us, the worst is now with us. The US is stuck in a quicksand of corrupt politics that has been killing the middle class as the elite and rich upper class gets more and more wealth and power. Republicans like to talk about US exceptionalism; it is a farce. There is no longer anything exceptional in a positive sense. That is a terribly bitter and painful truth to acknowledge, but if we do not do so, then how can we possibly fix the many things that are broken? We cannot. We are in a massive national state of delusion, hanging on to the fantasy that the nation is still great. Yes, we need to do big things to restore greatness to the nation, but for that to happen we must first admit the ugly truth and fight American tyranny.

Winning the future, the hot new slogan from Obama, only has meaning if he acknowledges that the nation is losing the present. Yet Americans remain unready to revolt. And the Tea Party movement puts its faith in Republicans! What a disgrace, especially for a nation built on revolution.

More follow-up comments regarding on limited liability excerpted from the comment thread to Geoffrey Allan Plauche‘s post, “Ecofascism in the Name of Fending Off Ecofascism“. Here is my first post and second post.

Jon Leckie September 18, 2010 at 5:08 am

Tokyo Tom, good morning. I’m willing to engage in a good dialogue with you on these interesting points.

I followed your links, and thought your two principal concerns were (1) limited liability allows the sponsors of corporate actors to avoid liability for the tortious acts of the company and (2) limited liability is inconsistent with anarchism because it’s only possible through state fiat.

It seems to me that tortious liability can’t exist without a state to impose the tortious duties by fiat, whereas limited liability can be created through contract (perhaps with initially high transaction costs, but standard contratual forms should emerge over time). Do you agree or disagree? What are your thoughts? It seems to me that if you think there’s any truth in this position, you have to engage in a rather deep rethink of the way you express your argument against limited liability.

And of course on top of that remains Stephan Kinsella’s absolutely proper request that you explain why equity investors should have additional duties imposed on them beyond other stakeholders.

Just for background, I have sympathy with your view, even though I no longer agree. When I was at school I applied for a scholarship for an LLM to explore the idea of piercing the corporate veil for companies that engage in human rights violations. The subset is small, mainly companies engaged in extractive industries in the developing world, and I thought that if you allow unlimited liability for such violations, you create incentives for companies engaged in such industries to implement and publish internal procedures designed to avoid such violations; otherwise no one will invest in them. So in preparing for the interview, I presented the idea to some colleagues at the research centre at which I was an assistant, one of them asked why shareholders should bear responsibility for the human rights violations of the company in which they invest. I did’t think I needed to consider that, it was obvious, right? Whatever it takes to prevent such violations should be considered.

I didn’t get the scholarship.

JUL

TokyoTom September 18, 2010 at 8:16 am

Jon, thanks for your comments.

I think the arguments about anarchism vs. minarchism are a distraction in the face of the enormous problem we currently face of corporate risk-shifting, compounded by escalating and counterproductive regulation. Our goal should be to MOVE toward freer societies, not ignore real problems resulting from grants of corporate status/limited liability by assuming a true free market without governments and statist corporations.

But to engage somewhat, let me note that in an anarchic society even the enforcement of contracts may require moral sanction and a possible threat of force. I don’t see that claims by non-contracting parties that they have been injured would not also be subject to very similar “voluntary” court systems, in which injured parties may be supported by community associations, consumer associations, retail stores and the like, which business enterprises (or associations to which they belong) may contract with in advance in order to do business. Other counterparties to a business that engages in risky activities might also insist that the business submit to some type of judicial process regarding any tort claims.

I believe that many traditional societies, precisely to deal with issues of potentially damaging activities, require that people of stature in the community guarantee their behavior.

Let me note that while of course some types of limited liability can be created through contract , NO type of contract lets you say you have no liability to third parties whom you injure but who have not contracted with you in advance.

Stephan hasn’t requested that I explain why equity investors should have additional duties imposed on them beyond other stakeholders; he’s simply noted that, given the status quo, in which shareholders purchase shares based on a legal promise that they will have no liability for corporate acts (other than those they personally direct), it hardly seems fair for the state to impose such liability on them. I would certainly agree; I’m not seeking to use the state to unwind limited liability overnight.

However, that does not at all obviate my concerns about the key role that limited liability plays in our perverse cycles of risk-shifting, increasing regulation and statist rent-seeking and efforts by outraged/concerned/ecofascist citizens groups to apply political pressure and moral suasion.

It seems to me we ought to recognize the negative features of limited liability and to recognize that we can pare back the damage by rolling back the regulatory state in the cases of business entities that do NOT have limited liability for their main investor class: sole proprietorships, partnerships, unlimited liability corporations, corporations whose shares are only 10% paid-in (so a call remains on the remaining 90%). As I have noted in various blog posts, several astute observers have made very similar suggestions regarding banks, securities companies and firms engaging in mineral exploitation on public lands.

Regarding the problem you mention of extractive industries in the developing world, too few people (and far too few libertarians) note that the chief dynamic is one of the theft of indigenous resources by elites via the state, using conveniently amoral Western corporations to complete the robbery and leave the natives with nothing but a mess. IOW, an “Avatar”-like problem, not at all dissimilar to the way our federal government claims ownership to marine resources, grants leases to BP and the like, and leaves fishermen with little to no control over their own livelihoods:

Too Many or Too Few People? Does the market provide an answer? – TT’s Lost in Tokyo http://bit.ly/8zlecI

My “Avatar” posts: TT’s Lost in Tokyo http://bit.ly/9s32uD

TT

TokyoTom September 18, 2010 at 10:45 am

Shay, since liability as to voluntary counterparties CAN be limited by mutual agreement, that is NOT at all what drives the use of the limited liability corporate form, but the ability of owners to shift risks to involuntary third parties. One of the KEY PURPOSES of using the corporate form is the promise to generate great returns to shareholders at the risk of great losses to involuntary third parties, who because of state action lose ANY right to claw back profits for the poor, innocent shareholders.

I suggest you look through my many other posts on limited liability, and that explore this and related topic in the context of the financial crisis and BP:

TT’s Lost in Tokyo http://bit.ly/4nr2Ay 

 Jon Leckie September 18, 2010 at 11:14 am

TokyoTom: You say “One of the KEY PURPOSES of using the corporate form is the promise to generate great returns to shareholders at the risk of great losses to involuntary third parties, who because of state action lose ANY right to claw back profits for the poor, innocent shareholders.”

That is a bald assertion, Tom. There’s nevier a guarantee of returns to shareholders, let alone great returns. There’s never any guarantee that a company will commit a tort, and there’s never a guarantee that any such tort will result in liability that exceeds the available assets of the company and thus leaves third parties bearing a great loss. These are all events that may happen, but are in no way guaranteed to happen. This is classic baby with the bathwater stuff.

You’ve identified a real problem, but you drastically overstate the extent of it and use it to support abolishing a very useful vehicle for mobilising and deploying capital for socially productive ends. There are other solutions that should be explored before abolishing limited liability should be considered.

TokyoTom September 21, 2010 at 8:13 am

Jon, you accuse me of exaggeration, but understatement is really more like it.

Since limited liability could otherwise be achieved by contract it is clear that the chief effect of that grant is to protect shareholders (and whatever dividends they make) from claims by injured third parties. This is a clear primary intention of many who incorporate and is why lawyers, accounts, doctors and professionals have all pushed to get out of partnerships and into professional corporations.

And sure there’s “never a guarantee of returns to shareholders”, “any guarantee that a company will commit a tort”, nor “a guarantee that any such tort will result in liability that exceeds the available assets of the company and thus leaves third parties bearing a great loss.” But corporations choose to ring-fence all of what they see as risky businesses in separate subsidiaries, precisely to limit the size of the bag if the business fails and/or third parties are injured.

And there have been MANY cases of risks being manifested and damages to innocent parties exceeding corporate assets (and of parent companies working feverishly to make sure those injured get as little as possible). Ever hear of “Superfund sites”, for example?

The history of the limited liability corporate form has been one of a continuing stream of abuses that has led steadily to the aggrandizement of federal power over the states that create corporations, to a continuing cycle regulation in the wake of undermining of strong common-law protection of property (see Block) to protect workers and citizens (regulating health, safety, and welfare, public companies, banks, etc.), and to a steady weakening of shareholder influence over ensconced management.

Far from throwing the baby out with the bathwater, people have to start recognizing that the ‘babies’ have nearly totally slipped our control and, with the government that they have much greater influence over than any of us do, are destroying our communities and freedom.

Anybody who wants to pare back the regulatory state has to strike at the root of regulation and corporate statism – the grant of limited liability that motivates demands from citizens for the mirage of state control.

Contrary to your suggestion, trying to rein in limited liability would NOT mean an end to the corporate form; corporations with uncapped shareholder liability would simply mean shareholders that have far greater incentives to oversee managers and who would be motivated to purchase insurance to cover potential claims against shareholders – which insurers would be well-positioned to help shareholders in oversight. States (and the federal govt) could offer incentives to move in the right direction by reducing regulatory burdens on unlimited liability corps, which would also be in a position to market themselves as more careful and conservative than their competitors. Another way to pare back limited liability would be to provide that companies ensure that common shares are only 10% paid in (so that a call on the remaining 90% remains).

A related step would be to end the counterproductive and risk-shifting federal and state grants of limited liability for particular risky activities, such as nuclear power plants and offshore oil and gas drilling; some commentators, both here at LvMI and elsewhere, have called for a requirement that banks and securities companies be partnerships, precisely because partners have greater incentives to control risk (moral hazard ran rampant in Wall Street as soon as the securities firm went public, and so were playing at making high bonuses while shifting risks to shareholders and US taxpayers, via the “Greenspan-Burbank put”).

I encourage you to investigate further at my blog.

TT

TokyoTom September 21, 2010 at 9:04 am

Geoffrey and Stephan, cat got your tongue?

I’m waiting to hear more about the libertarian wonders of state-granted limited liability (and the evil nature of those citizens groups who have started to figure out not only that our good-willed statist corporations are way ahead of them in the struggle to use government, but are catching on to the idea that Mises explored of laws that enable the externalization of costs).

Your friendly neighborhood envirofascist,

TT

Such is the tone of a deep, searching piece on the Mises Economic Blog [now  only at CSMonitor] by budding philosopher Geoffrey Allan Plauche, “Ecofascism in the Name of Fending Off Ecofascism“.

Sometimes I scratch my head at why, when enviros in panicked tones cast about for ways to come to grips with statism, including latching onto the clearly non-libertarian grant of limited liability to corporate shareholders, libertarians and Austrian economists cannot see an opportunity to find allies in striking at the roots of statism — but then I recall man’s tribal nature and remember that Miseseans are as prone to anyone else to prefer a good hate. When an enemy is in sight, discussing principles and logically analyzing problems just isn’t any fun!

Plauche refers to an article where one commentator makes what Plauche describes as three “authoritarian environmental and anti-market proposals“. One of the  “ecofascist solution[s includes] the revocation of corporate power“, to be effectuated in part through the “authoritarian means of eliminating limited liability”. Complains Plauche, “only corporations are to blame and government is the solution“. Oh, those stupid enviros, thinking they must use government to undo what government has done! One wonders how else one might possibly curtail stated-granted limited liability WITHOUT further state action.

In any event, as readers may have noticed in my earlier posts on the state grant of limited liability to corporate shareholders, I have reached the conclusion that limited liability is one of the key roots of snowballing corporate statism. Accordingly, I thought I’d pull together here some of my comments on Plauche ‘s comment thread and some of the comments I was responding to (emphasis added):

Stephan Kinsella

From what Iv’e seen, most libertarians who oppose “limited liability” don’t really understand how it works or really know what they are criticizing. To oppose limited liability means there should be liability in the first place. But should there? For whom? For what? Shareholders should be liable for torts committed by employees of a company the shareholder owns stock in? But why? That is vicarious responsibilty. Why is the shareholder liable for the torts of another person, any more than the tortfeasor’s mom, sister, roommate, co-worker is, or stakeholder, creditor, debtor, supplier, contractor, customer of the corporation is? For more on this see: http://www.stephankinsella.com/?s=hessen+pilon

TokyoTom September 17, 2010 at 10:04 am

Stephan, I think you know that SOME libertarians who oppose “limited liability” understand very well how it works and know what they are criticizing; I have commented extensively on the very un-libertarian state grant of limited liability to shareholders and the pernicious consequences in fuelling the growth of statist, risk-shifting corporations, of pressures by ordinary citizens to rein in corporations, and of the federal regulatory state that the big corporations manipulate and welcome as a massivie barrier to entry:

http://mises.org/Community/blogs/tokyotom/search.aspx?q=limited

It is obvious that state grants of limited liability are not justifiable, are crucial in the overwhelming choice by investors to use the corporate form, have led to lax oversight of corporate management by shareholders and to a massive shifting of risks by corporations to the public as a whole, and to the growth of the massive federal regulatory state to “check” corporate abuses and to oversee “public” corporations.

Not only have corporations been the driving factor in elevating federal power (via expansive interpretations of the Equal Protection and Commerce Clauses) over the states that create corporations, but it is easy to see (and a number of commentators have noted) the negative role that corporation-enabled rent-seeking, lax management and moral hazard have played in the financial crisis and in the Gulf oil spill.

It is perverse that ANY libertarians seek to defend either the state grant of limited liability or the mess that it has clearly triggered and enabled.

A Cliff Notes’ version of my view is here:
http://mises.org/Community/blogs/tokyotom/archive/2010/07/06/the-cliff-notes-version-of-my-stilted-enviro-fascist-view-of-corporations-and-government.aspx

Regards,

TT

Stephan Kinsella September 17, 2010 at 10:21 am

Tom, when you say the state grant of limited liability is not justifiable, this is a disingenuous way of trying to reverse the burden of proof. This very statement is relevant ONLY if the grant changes what would be the case anyway. That is, if shareholders would be vicariously responsible under a libertarian theory of cause for torts of employees of corporations they owned shares in. I’ve yet to see anyone develop a careful, libertarian-compatible theory of causation and responsibility that would (a) implicate shareholders for torts of employees; and (b) not implicate co-employees, vendors, suppliers, customers, lenders, stakeholders, in short everyone.

And people almost always confuse limited liability of shareholders with that of managers. and they don’t understand the role of shareholders, or directors, contrasted with managers. And they mix in unprincipled incentive concerns. It’s just a mess.

If you have a coherent theory of why shareholders should be liable, please point me to it. If not, I don’t know how you are immune from my criticism.

TokyoTom September 18, 2010 at 6:40 am

No, Stephan; what’s perverse is that YOU think it’s incumbent on libertarians to jump through a lot of hoops before they can argue that the state grant of limited liability to shareholders is unlibertarian and ought to be done away with.

The very fact that you protest so loudly is itself evidence that limited liability MATTERS — on top of the piles of evidence that the limited liability grant is crucial to investors in choosing organizational form and has played a key role in the growth of the destructive corporate statism that has shifted risks from managers and owners to the public at large, trampled states rights and led to calls for the regulatory state that corporations both are advantaged over citizens in influencing and which in part keeps corporations subject to political and bureaucracy whim.

A key reason that corporations have become so important, powerful and ubiquitous is that they are risk-shifting machines, reflecting moral hazard both within shareholders and within the managerial class, and because many of them are extremely capable rent-seekers.

Tell me honestly: do you think partnerships, sole proprietorships and the few unlimited liability corporations out there pose anywhere near the risks to society that corporations do? It is corporate status that has enabled the growth of shareholder and managerial anonymity and nearly severed the corporate organizations from communities of people whom they affect. Without corporate status and limited liability, the simple risk of potential liability means that shareholders have much greater incentives to monitor and oversee the risks that corporate business activities pose to others. This risk they could mitigate by using insurers expert in their lines of business.

In the absence of this, we have a managerial class that is largely free from shareholder oversight and that insulates itself from risk via corporate indemnification and D&O insurance, and reams of federal and state laws and regulations that struggle to manage the risks that corporations pose to the public (but serve chiefly as barriers to entry and to further protect management).

The “mess” that you speak of – the confusion over who should be responsible for “corporate torts” – is not only one that you yourself manifest when you say that the Gulf oil spill is “just a tort” (by whom, pray tell?) but is itself a consequence of the grant of limited liability and corporate status, which encourages citizens, judges and juries NOT to look at the real people INSIDE of corporations who should be held responsible for their own behavior. Limited liability has created grand buck-passing machines.

Regards,

Tom

panika2008 September 17, 2010 at 12:24 pm

“Limited liability is as bogus as pretending all your debts are really owed by your invisible friend.”

Nah. Limited liability is just a simple juristic construct to make default what would otherwise result in a substantial growth of legal homeorrhage, namely specifying in all and every contract of the company the exact limits and conditions of liability. This is impractical, especially for small firms, so they are given the option to incorporate using the “default” set of rules. It’s a part – quite sensible at that – of our common (sense) law tradition – make good/popular practices into codex’s. If only all legislation would proceed basing on this pattern!

 TokyoTom September 18, 2010 at 7:21 am

Panika, the libertarian issue is not about default rules for what could otherwise be voluntarily contracted for – namely, agreements between firms, their shareholders and their voluntary creditors or customers to limit the liability of the firm to its certain assets.

Rather, it is about whether governments should be gifting shareholders with limitations on liability vis-a-vis persons who become INVOLUNTARY creditors of the firm because of corporate actions (via managers, employees or agents) that damage them.

TT

panika2008 September 19, 2010 at 10:08 am

How can anyone become an involuntary creditor of anyone otherwise than by criminal action (extortion?) or government subsidy? I don’t quite understand what you mean.

TokyoTom September 20, 2010 at 10:40 am

Panika, “involuntary ” creditors is fancy legalese designed to distinguish (1) those who VOLUNTARILY to do business with a corporation (or other company, person or association) and to which the business owes money, and (2) those who have not contracted with the business, but have a claim because they have been INVOLUNTARILY injured by it.

Because of ability of parties to freely negotiate contracts, the parties in category (1) do not need a state grant of limited liability; rather, the chief effect of limited liability is to allow corporations to make profits for shareholders, lenders and managers, while passing risks on to those who made NO choice to be injured.

Jon Leckie September 18, 2010 at 5:08 am

Tokyo Tom, good morning. I’m willing to engage in a good dialogue with you on these interesting points.

I followed your links, and thought your two principal concerns were (1) limited liability allows the sponsors of corporate actors to avoid liability for the tortious acts of the company and (2) limited liability is inconsistent with anarchism because it’s only possible through state fiat.

It seems to me that tortious liability can’t exist without a state to impose the tortious duties by fiat, whereas limited liability can be created through contract (perhaps with initially high transaction costs, but standard contratual forms should emerge over time). Do you agree or disagree? What are your thoughts? It seems to me that if you think there’s any truth in this position, you have to engage in a rather deep rethink of the way you express your argument against limited liability.

And of course on top of that remains Stephan Kinsella’s absolutely proper request that you explain why equity investors should have additional duties imposed on them beyond other stakeholders.

Just for background, I have sympathy with your view, even though I no longer agree. When I was at school I applied for a scholarship for an LLM to explore the idea of piercing the corporate veil for companies that engage in human rights violations. The subset is small, mainly companies engaged in extractive industries in the developing world, and I thought that if you allow unlimited liability for such violations, you create incentives for companies engaged in such industries to implement and publish internal procedures designed to avoid such violations; otherwise no one will invest in them. So in preparing for the interview, I presented the idea to some colleagues at the research centre at which I was an assistant, one of them asked why shareholders should bear responsibility for the human rights violations of the company in which they invest. I did’t think I needed to consider that, it was obvious, right? Whatever it takes to prevent such violations should be considered.

I didn’t get the scholarship.

JUL

TokyoTom September 18, 2010 at 8:16 am

Jon, thanks for your comments.

I think the arguments about anarchism vs. minarchism are a distraction in the face of the enormous problem we currently face of corporate risk-shifting, compounded by escalating and counterproductive regulation. Our goal should be to MOVE toward freer societies, not ignore real problems resulting from grants of corporate status/limited liability by assuming a true free market without governments and statist corporations.

But to engage somewhat, let me note that in an anarchic society even the enforcement of contracts may require moral sanction and a possible threat of force. I don’t see that claims by non-contracting parties that they have been injured would not also be subject to very similar “voluntary” court systems, in which injured parties may be supported by community associations, consumer associations, retail stores and the like, which business enterprises (or associations to which they belong) may contract with in advance in order to do business. Other counterparties to a business that engages in risky activities might also insist that the business submit to some type of judicial process regarding any tort claims.

I believe that many traditional societies, precisely to deal with issues of potentially damaging activities, require that people of stature in the community guarantee their behavior.

Let me note that while of course some types of limited liability can be created through contract , NO type of contract lets you say you have no liability to third parties whom you injure but who have not contracted with you in advance.

Stephan hasn’t requested that I explain why equity investors should have additional duties imposed on them beyond other stakeholders; he’s simply noted that, given the status quo, in which shareholders purchase shares based on a legal promise that they will have no liability for corporate acts (other than those they personally direct), it hardly seems fair for the state to impose such liability on them. I would certainly agree; I’m not seeking to use the state to unwind limited liability overnight.

However, that does not at all obviate my concerns about the key role that limited liability plays in our perverse cycles of risk-shifting, increasing regulation and statist rent-seeking and efforts by outraged/concerned/ecofascist citizens groups to apply political pressure and moral suasion.

It seems to me we ought to recognize the negative features of limited liability and to recognize that we can pare back the damage by rolling back the regulatory state in the cases of business entities that do NOT have limited liability for their main investor class: sole proprietorships, partnerships, unlimited liability corporations, corporations whose shares are only 10% paid-in (so a call remains on the remaining 90%). As I have noted in various blog posts, several astute observers have made very similar suggestions regarding banks, securities companies and firms engaging in mineral exploitation on public lands.

Regarding the problem you mention of extractive industries in the developing world, too few people (and far too few libertarians) note that the chief dynamic is one of the theft of indigenous resources by elites via the state, using conveniently amoral Western corporations (that are generally unable and uninterested in getting outright title to the land/resources in question) to complete the robbery and leave the natives with nothing but a mess. IOW, an “Avatar”-like problem, not at all dissimilar to the way our federal government claims ownership to marine resources, grants leases to BP and the like, and leaves fishermen with little to no control over their own livelihoods:

Too Many or Too Few People? Does the market provide an answer? – TT’s Lost in Tokyo http://bit.ly/8zlecI

My “Avatar” posts: TT’s Lost in Tokyo http://bit.ly/9s32uD

TT

TokyoTom September 18, 2010 at 10:45 am

Shay, since liability as to voluntary counterparties CAN be limited by mutual agreement, that is NOT at all what drives the use of the limited liability corporate form, but the ability of owners to shift risks to involuntary third parties. One of the KEY PURPOSES of using the corporate form is the promise to generate great returns to shareholders at the risk of great losses to involuntary third parties, who because of state action lose ANY right to claw back profits from the poor, innocent shareholders.

I suggest you look through my many other posts on limited liability, and that explore this and related topic in the context of the financial crisis and BP:

TT’s Lost in Tokyo http://bit.ly/4nr2Ay

 Jon Leckie September 18, 2010 at 11:14 am

TokyoTom: You say “One of the KEY PURPOSES of using the corporate form is the promise to generate great returns to shareholders at the risk of great losses to involuntary third parties, who because of state action lose ANY right to claw back profits for the poor, innocent shareholders.”

That is a bald assertion, Tom. There’s nevier a guarantee of returns to shareholders, let alone great returns. There’s never any guarantee that a company will commit a tort, and there’s never a guarantee that any such tort will result in liability that exceeds the available assets of the company and thus leaves third parties bearing a great loss. These are all events that may happen, but are in no way guaranteed to happen. This is classic baby with the bathwater stuff.

You’ve identified a real problem, but you drastically overstate the extent of it and use it to support abolishing a very useful vehicle for mobilising and deploying capital for socially productive ends. There are other solutions that should be explored before abolishing limited liability should be considered.

TokyoTom September 21, 2010 at 8:13 am

Jon, you accuse me of exaggeration, but understatement is really more like it.

Since limited liability could otherwise be achieved by contract it is clear that the chief effect of that grant is to protect shareholders (and whatever dividends they make) from claims by injured third parties. This is a clear primary intention of many who incorporate and is why lawyers, accounts, doctors and professionals have all pushed to get out of partnerships and into professional corporations.

And sure there’s “never a guarantee of returns to shareholders”, “any guarantee that a company will commit a tort”, nor “a guarantee that any such tort will result in liability that exceeds the available assets of the company and thus leaves third parties bearing a great loss.” But corporations choose to ring-fence all of what they see as risky businesses in separate subsidiaries, precisely to limit the size of the bag if the business fails and/or third parties are injured.

And there have been MANY cases of risks being manifested and damages to innocent parties exceeding corporate assets (and of parent companies working feverishly to make sure those injured get as little as possible). Ever hear of “Superfund sites”, for example?

The history of the limited liability corporate form has been one of a continuing stream of abuses that has led steadily to the aggrandizement of federal power over the states that create corporations, to a continuing cycle regulation in the wake of undermining of strong common-law protection of property (see Block) to protect workers and citizens (regulating health, safety, and welfare, public companies, banks, etc.), and to a steady weakening of shareholder influence over ensconced management.

Far from throwing the baby out with the bathwater, people have to start recognizing that the ‘babies’ have nearly totally slipped our control and, with the government that they have much greater influence over than any of us do, are destroying our communities and freedom.

Anybody who wants to pare back the regulatory state has to strike at the root of regulation and corporate statism – the grant of limited liability that motivates demands from citizens for the mirage of state control.

Contrary to your suggestion, trying to rein in limited liability would NOT mean an end to the corporate form; corporations with uncapped shareholder liability would simply mean shareholders that have far greater incentives to oversee managers and who would be motivated to purchase insurance to cover potential claims against shareholders – which insurers would be well-positioned to help shareholders in oversight. States (and the federal govt) could offer incentives to move in the right direction by reducing regulatory burdens on unlimited liability corps, which would also be in a position to market themselves as more careful and conservative than their competitors. Another way to pare back limited liability would be to provide that companies ensure that common shares are only 10% paid in (so that a call on the remaining 90% remains).

A related step would be to end the counterproductive and risk-shifting federal and state grants of limited liability for particular risky activities, such as nuclear power plants and offshore oil and gas drilling; some commentators, both here at LvMI and elsewhere, have called for a requirement that banks and securities companies be partnerships, precisely because partners have greater incentives to control risk (moral hazard ran rampant in Wall Street as soon as the securities firm went public, and so were playing at making high bonuses while shifting risks to shareholders and US taxpayers, via the “Greenspan-Bernanke put”).

I encourage you to investigate further at my blog.

TT

TokyoTom September 21, 2010 at 8:40 am

Shay: “What limit is there to who all one can sue for damages? Owners, OK. Shareholders (if that term even applies to non-LLCs)? Employees? Customers?”

Your uncertainty here is a manifestation of the confused discussion over liability for “corporate torts”that Stephan Kinsella refers to. His position is that only humans act, and not corporations (though they are given “legal entity” status), so only particular persons who actually injured someone else (and those who directed/ordered their actions) should be liable for any tort – not the corporation itself (and certainly not shareholders, unless they were personally involved somehow). I agree that granting corporate status has greatly confused discussions over whom should be liable for corporate torts, and think Stephan too lightly brushes back the enormous and anonymous torts that our now massive corporations commit — precisely what individuals, for example, is responsible for the BP disaster, for the damage to health and property caused by pollution, or for injuries resulting from faulty products?

Rolling back limited liability should not mean that shareholders SHOULD be held liable for corporate torts in the same way that executives, managers and employees (the first two benefiting from company-purchased insurance policies) and sometimes lenders are; it would just mean that they would get no government-provided “get out of jail free” card. In this way, common shareholders would be put on a similar footing to partners in a partnership that acts through paid managers.

TokyoTom September 21, 2010 at 9:04 am

Geoffrey and Stephan, cat got your tongue?

I’m waiting to hear more about the libertarian wonders of state-granted limited liability (and the evil nature of those citizens groups who have started to figure out not only that our good-willed statist corporations are way ahead of them in the struggle to use government, but are catching on to the idea that Mises explored of laws that enable the externalization of costs).

Your friendly neighborhood envirofascist,

TT

Jon Leckie September 21, 2010 at 9:10 am

Hello Tokyo, thanks for a powerful reply. You say “accuse”, well that’s a perjorative word, I guess it’s technically correct (that I did so) but please credit me with good intentions. I apologise for my immediately preceding post being worded rather shortly, I’ve trying to strike a better tone here.

You and I are not going to reach agreement in the short run, but it’s been interesting and you’ve given me a lot to think about. I don’t agree with you that all of the evils you identify can be laid at the feet of limited liability. I remain of the view that the abuses of the corporate form must be set against the benefits of allowing investors to mobilise capital in such a way that the downside is limited to the assets originally invested. It may ultimately be demonstrated that the abuses outweigh the upside, but from I have seen you don’t seem to acknowledge any benefits to limited liability. You also don’t seem to consider what the costs of the extra compliance and risk to investors with personal liability: I can tell you from personal experience that compliance and monitoring is not costless and that the burden can sink an otherwise profitable and socially beneficial project. You might say “Well too bad!”, but that’s lost jobs for people, that’s products that won’t be made, that’s wealth foregone.

Ultimately, extraordinary claims require extraordinary evidence. You put so much responsiblity at the feet of limited liability that I don’t think it’s unfair of me to ask for more evidence, better arguments (I may find them on further reading of your blog ). I think Stephan Kinsella’s request of you earlier on this page remains valid, to quote:

“Tom, when you say the state grant of limited liability is not justifiable, this is a… way of trying to reverse the burden of proof. This very statement is relevant ONLY if the grant changes what would be the case anyway. That is, if shareholders would be vicariously responsible under a libertarian theory of cause for torts of employees of corporations they owned shares in.”

I believe I understand your response: “no one else gets to avoid tortious liability to third parties based EITHER on the grant of limited liability of the state or by a private contract, so why should people who stand behind an LLC get to do so? The existence of limited liablity (at least vis a vis third parties) is not the default position, they’re a creation of the state.” (Is that right? I’ve tried to be fair, I’m not interested in strawmen). Nonetheless, I don’t think that is a satisfactory libertarian theory of cause for tortious liability for reasons I’ve tried to set out already (contractual liability can exist absent a state (and thus so can limited liability) how would tortious liability exist absent the state?) and so Kinsella’s request remains valid.

If you think that question is covered, my other objection remains: it must ultimately be demonstrated that the abuses outweigh the upside. The law of unintended consequences applies to every proposal for change, and I don’t think you give fair credit to the role that limited liablity entities play in an advanced economy.

I’ll come and see you at your site, or watch out for a reply here. You’ve helped me clarify my own thinking and I appreciate that a lot. Best, JL.

TokyoTom September 21, 2010 at 2:01 pm

Jon:

Thanks for your response. While my envirofascist skin remains somewhat thin, I am fine with your tone – even if I see you as exaggerating and not fully comprehending my position.

A few comments in response:

“I remain of the view that the abuses of the corporate form must be set against the benefits of allowing investors to mobilise capital in such a way that the downside is limited to the assets originally invested.”

What, if anything, is libertarian about your proposed cost-benefit calculation? In determining whether state-granted limited liability is justifiable, shall we engage in a utilitarian weighing of the advantages to investors against the disadvantages to others?

“you don’t seem to acknowledge any benefits to limited liability”

But I have; but I have also pointed out that most of the benefits could be achieved by contract. It’s the benefits that can ONLY be achieved by government fiat and at the cost of innocent third parties that I object to.

You seem to think that either the intrusion of government here is minor or the cost to innocent third parties is trivial, but I can assure you that it is not. Indeed, much of what is wrong with the US in particular and with the world more generally can be laid at the foot of wide-scale government-enabled risk-shifting and moral hazard of the type seen in grants of limited liability and the concomitant cycle of regulation (in which the losers are always a number of steps behind) that such grants have set off.

“compliance and monitoring is not costless and that the burden can sink an otherwise profitable and socially beneficial project.”

I’m quite aware that compliance and monitoring are not costless; you, however, see to think that shifting risks to others and thus easing compliance and monitoring costs IS costless and “socially beneficial”, while ignoring that there are clear winners and losers from such government favor. Did you miss the Gulf oil spill, the limits on liability, the poor planning and oversight, the lack of caution, and the costs being borne by quite a different class of people than BP’s shareholders? Of many cases of environment harms experienced throughout the US? Are you unaware of the massive and ongoing environmental damage similarly caused by “socially beneficial” oil and gas development in Nigeria and Ecuador?

You and Kinsella: “Tom, when you say the state grant of limited liability is not justifiable, this is a… way of trying to reverse the burden of proof. This very statement is relevant ONLY if the grant changes what would be the case anyway. That is, if shareholders would be vicariously responsible under a libertarian theory of cause for torts of employees of corporations they owned shares in.”

Au contraire; it’s you and Stephan who are shifting the burden of proof and trying to avoid yourselves to come up with any convincing libertarian arguments FOR the state grant of limited liability to corporate shareholders. Stephan has acknowledged elsewhere that the grant is NON-libertarian, could not be contracted for voluntarily, and that if it were not to exist that insurers would be offering to insure shareholders from downside risks, but like you stubbornly seeks to cling conservatively to a status quo that favors investors and the big government corporatism has produced.

Far from me having to make a libertarian case shareholders should be vicariously responsible under a libertarian theory of cause for torts of employees of corporations, I simply need to show that the grant of limited liability significantly CHANGES the structure of the market and the behavior of market participants. Clearly, limited liability MATTERS, as amply demonstrated not simply by looking at markets and cases where limited liability shields shareholders from damages in cases where partnerships would be liable, but also by your own deep reluctance (and Stephan’s) to do anything about it. Stephan makes a thin lawyerly dodge, while you offer utilitarian arguments.

Stephan’s desire for a libertarian theory of vicarious liability of shareholders in the case of “torts of employees” of corporations is commendable, but as I have already noted, such a desire is itself confused by the failure to recognize the state favors given to corporations and the massive scale at which they operate and can damage third persons. It appears that Kinsella would have us treat most damages caused by companies as “torts by [particular] employees”, thus denying any recourse by injured parties to corporate assets. Such an analysis may be appropriate in the case of small businesses where who acts and under what authority may be very clear (as in the case of partnerships and sole proprietorships), but hardly make any sense in the case of the large, anonymous and bureaucratized institutions that limited liability and legal entity status have directly led to.

Sorry, but it seems to me that your own approach to the issue of tort liability makes even less libertarian sense: you have concluded that in a stateless society institutions would arise only to enforce contracts, while individuals and firms would get away scot-free if they willfully or negligently harmed others. Surely a brief look at traditional societies would quickly inform you that such societies have very sophisticated and effective ways of controlling behavior that damages others.

“my other objection remains: it must ultimately be demonstrated that the abuses outweigh the upside. The law of unintended consequences applies to every proposal for change, and I don’t think you give fair credit to the role that limited liablity entities play in an advanced economy.”

Ahh, there’s your non-libertarian insistence on the need for cost-benefit analysis for a change in eliminating limited liability as to persons involuntarily injured by corporate acts again. Do I need to add up all of the people harmed in the BP spill and weigh them against the potential cost to BP shareholders?

“The law of unintended consequences” sounds suspiciously like the precautionary principle that enviros always argue for (precisely because corporations are risk-shifting machines); bravo! Actually, I’m very well aware, not only of the very central and valuable role that corporate entities play in our economy, but of all of the negative unintended consequences that the grant of limited liability (and other favors) has entailed. But far from throwing the baby out with the bath water, I see reform in this area as both a sine qua non for any meaningful effort to reduce statism and something that is eminently achievable and with a net benefit in efficiency, risk-management and, last but not least, justice.

TT

J. Murray September 21, 2010 at 9:17 am

There is no such thing as a libertarian state-granted limited liability.

TokyoTom September 22, 2010 at 12:00 am

Agreed; that’s MY point exactly.

Jon Leckie September 22, 2010 at 4:40 am

Well hang on now guys, there’s very much a thing as libertarian state-granted limited liability – aren’t you conflating liberatarianism with anarchism? The two are not the same and I can find no definition of libertarianisn that requires the abolishment of the state.

There very much is such a concept of state-granted limited liability, it’s just that Tokyo sees proponents as being obligated to justify its continuance PRECISELY because it is a gift from the state, whereas – on this point – I view it as also capable of existing absent the state through private contract. Tokyo then asks how private contract can exclude third party tortious liability, and I respond with how can tortious liability even EXIST in a stateless environment? (Which might be a stupid question, but no one’s yet said anything on it, it must be a question addressed in the literature somewhere).

Tokyo, one discrete question on your response above: you say it’s non-libertarian to weigh costs and benefits, summing this up as a crude utilitarianism. Why is that not an approach I can take? I mean, on the BP example, one might read your post and wonder whether BP merrily skipped town, having destroyed the gulf completely, taken no remedial action and paid no billions of dollars into a compensation fund, plus remaining exposed to private civil claims? Ask British pensioners whose payments are reliant on BP’s dividends whether they’ve suffered or not. Yes those living around the Gulf have had a hell of a time, but that’s not enough of an argument: accidents happen. BP is being punished. So it’s not a crude balancing act between (a) environment destroyed, people suffering and (b) callous shareholders laughing to the bank. I’m saying that limited liability may be responsible for a vast amount of economic activity that otherwise may not take place due to the unlimited risk of personal liability. Surely you need to take this into account, no?

Oh, and I need to ask you to do me a favour: please don’t accuse me of supporting big government corporatism. I may not be an anarchist, but I am as resolutely against corporate welfare and crony capitalism as anyone else who enjoys these pages. Supporting limited liability as a vehicle for mobilising investment is NOT the same thing as supporting GE or GM, please acknowledge this.

J. Murray September 22, 2010 at 5:30 am

I’m not really confusing libertarianism with anarchism here. A state-granted limited liability would be violating the life, liberty, and property angle. I don’t see libertarianism compatible with a state granting immunity to a party for any wrongdoing. The general argument between minarchism and anarchism in libertarian circles is whether the state should exist to punish those who violate those three key tennents, not whether the state exists to protect the wrongdoer against just punishment.

Jon Leckie September 22, 2010 at 6:24 am

Thanks, J. Murrary: that’s helpful. It’s probably apparent enough, but I’ve a lot more reading to do and am picking up a lot as I go along.

Does it affect your view at all to stress that limited liability does not preclude recovery? There’s no immunity: but recovery is limited to the assets held in the vehicle and if damages are in excess of the value of those assets, the entity is dead. There seems to be remedies available beyond banning limited liability to prevent/minimise undercapitalised entities engaging in behaviour likely to give rise to torious liability (contrast BP with Mom&Pop LLC running a local hardware store): I’m really struggling to get across the line on limited liability as ipso facto in breach of the life, liberty and property standard (thanks again for clarifying the perspective there though). Maybe one day I’ll end up in his camp, I’m keeping an open mind (as much as one can try!). Lots to think about.

PS. Without a state to impose liability for and punish tortious acts against the property rights of another, how would liability for the tortious act be enforced against the tortfeasor?

TokyoTom September 23, 2010 at 12:30 pm

Jon, as for “how can tortious liability even EXIST in a stateless environment?”, I clearly addressed this above where I said:

Sorry, but it seems to me that your own approach to the issue of tort liability makes even less libertarian sense: you have concluded that in a stateless society institutions would arise only to enforce contracts, while individuals and firms would get away scot-free if they willfully or negligently harmed others. Surely a brief look at traditional societies would quickly inform you that such societies have very sophisticated and effective ways of controlling behavior that damages others.

Maybe this post with Bruce Yandle’s thoughts on how humans manage commons might be a good start: http://bit.ly/8V2q6R

Utilitarianism presumes both that it is possible to measure and aggregate conflicting preferences and that it is acceptable for government to do so and to intentionally benefit particular groups of individuals at the expense of others. Austrians say that the first is impossible and libertarians say that the the second violates basic principles.

As for BP and other corporations, I have little sympathy for shareholders, who have the benefit of their bargain (including dividends in good times that cannot be clawed back when risks materialize and the company is unable to fulfill its obligation), while persons injured by corporate actions have little or no ability to bargaining in advance whatsoever, or to get ready to get harmed. (The case of BP is compounded by the fact that government, by claiming to own “public” resources, deprives the fishermen harmed of any control over their livelihoods including any property right that they can claimed was harmed.) This just scratches the surface; I have commented extensively on BP on my blog and on other pages here: http://bit.ly/crTbEA

Yes, I see that you are “saying that limited liability may be responsible for a vast amount of economic activity that otherwise may not take place due to the unlimited risk of personal liability.” I see we agree that limited liability is very important – great! – but you seem to think either that, somewhat magically, such limitations on liability make risks simply disappear, or that such a shifting of risks by investors in particular firms (and the investor class generally) to innocent third parties class leads to improved risk management, or that such shifting or risks by those who fund and benefit from them to innocent third parties is justified on utilitarian or some other unspecified principled grounds. Surely you can see that “the unlimited risk of personal liability” is the default situation without state intervention?

By the way, I completely accept your good faith; please accept my pokes simply as attempt to get you to reflect on the implications of your positions.

You might think that you don’t “support[] big government corporatism”, but surely you ought to realizing that limited liability is a key factor in the rise of statist corporations. Supporting limited liability as towards innocent third parties might be effective in creating a vehicle for mobilizing investment, but it is also clear a vehicle of massive risk-shifting, theft and at destroying community in favor of fundamentally amoral governments and corporations.

You suggest you don’t support GE or GM, but if you can accept and support limited liability, then surely also you must accept its consequences.

TT

TokyoTom September 23, 2010 at 12:48 pm

“Accidents happen”? So do systematic trainwrecks due to mismanagement of risks.

Could government interventions that enable risk-shifting in banks, securities firms and corporations (and subsequent bailouts) have anything to do with engendering such mismanagement?

Massive kleptocracy in the third world differs little from what we see at home.

Beefcake the Mighty September 22, 2010 at 9:51 pm

“I agree that granting corporate status has greatly confused discussions over whom should be liable for corporate torts, and think Stephan too lightly brushes back the enormous and anonymous torts that our now massive corporations commit – precisely what individuals, for example, is responsible for the BP disaster, for the damage to health and property caused by pollution, or for injuries resulting from faulty products?”

What does this question have to do with limited liability? Why should shareholders be any more responsible for the disaster than people who filled their tanks with BP’s gas? They both gave the the company money, after all.

I’m having a hard time seeing what point, exactly, you’re trying to make here (beyond anti-corporatist bromides).

TokyoTom September 23, 2010 at 11:20 am

Lord Bungulous Bringer of Beefcake:

What, those who simply buy a company’s products should be treated on the same basis as those who invest in the company’s business model? Are you trying to clarify, or obfuscate? One offers money in exchange for goods or services, the other offers money for the profits he expects to gain from the company’s business model.

I’m having a hard time seeing what point, exactly, you’re trying to make here (beyond pro-statist-corporatist bromides).

What does the question of whether corporations should have any vicarious liability for the actions of its employees and agents have to do with limited liability? Thanks for the opportunity for me to be a bringer of light, but it’s not that complicated: without limited liability and corporate “legal entity” status, investors and corporate managers would care to make sure that employees are careful. The limited liability shield makes it the interest of shareholders NOT TO CARE, and the interest of managers to obscure who is responsible. Because incorporations make possible large, impersonal businesses without a clear locus of responsibility, on the behest of victims seeking recompense for damages suffered, courts tend to hold “the company” responsible.

In short, the confusion that Stephan raises and professes to be concerned about is a product of the very state grant of limited liability that he – like you – thinks is too unimportant to question, but important enough to defend.

Why don’t you and Stephan start a libertarian fan club for essential government interventions? You can start with limited liability for corporate shareholders generally, add the specific caps on liability granted to the oil+gas industry and nuclear industry, and include the preemption of strict common law protection of property from pollution, in favor of federal preemption and rights to pollute.

Or you could think a little more seriously about how we could replace corporate risk-shifting machines and the whole mass of federal and state regulation that are purported intended to curtail such risks (but instead create barriers to entry and ensconce management from shareholders, thus introducing another layer of moral hazard) with internal risk control and risk control via insurers acting for shareholders.

A number of conservative commentators have made the radical suggestion that banks, securities firms and offshore oil+gas cos should be allowed to act only through partnerships (or other unlimited liability entities); they are thinking too modestly and have overlooked the limited liability for corporate shareholders that drives our whole regulatory edifice and has set off our escalating cycle of statist rent-seeking and corruption.

TT

Beefcake the Mighty September 23, 2010 at 11:26 am

“One offers money in exchange for goods or services, the other offers money for the profits he expects to gain from the company’s business model.”

Yeah, what a critical distinction. Shocking I didn’t see it previously; thanks so much!

TokyoTom September 23, 2010 at 1:09 pm

Not sure whether I should be pleased that my comments are so pedestrian, or disturbed that you are content with government interventions that help to erase moral distinctions.

Prior to the creation of corporations, it was clear who was doing what … thank goodness for anonymity and lack of personal responsibility!

TokyoTom September 23, 2010 at 9:39 pm

[I am]  thankful that you provide an opportunity for me to help others examine the growing rot set off by the very non-libertarian grant of limited liability to shareholders regarding injury to involuntary third parties:

http://mises.org/Community/blogs/tokyotom/archive/2009/02/26/the-curse-of-limited-liability-wsj-com-executives-traders-of-big-financial-corporations-generate-risky-businesss-while-smaller-partnerships-are-much-more-risk-averse.aspx

http://mises.org/Community/blogs/tokyotom/archive/2010/06/29/limited-liability-financial-crisis-and-bp-someone-else-sees-the-obvious-quot-black-swan-quot-of-executive-trader-moral-hazard-after-investment-banks-went-corporate.aspx

http://mises.org/Community/blogs/tokyotom/archive/2010/04/22/finally-an-lvmi-commentator-points-out-the-elephant-in-the-room-effective-reform-to-rein-in-rampant-moral-hazard-at-banks-means-removing-limited-liability.aspx

http://mises.org/Community/blogs/tokyotom/archive/2010/08/18/in-a-shocking-moment-of-honesty-conocophillips-ceo-says-offshore-oil-isn-t-economical-without-government-gifts-of-limited-liability.aspx

Thanks so much for coming out to play, Lord Beefcake!

TT

The Kid Salami September 24, 2010 at 5:40 am

TokyoTom September 24, 2010 at 11:43 am

Robert Wenzel has a couple of posts up on his blog that rightly ring alarm bells about the plans of the Obama administration to seek legislative changes that would allow regulators to oversee executive compensation (1) in the financial sector (“The United States of Obama Has Arrived“) and (2) for all public companies generally (“It`s Worse Than I Thought:”). 

And make no mistake, Wenzel is VERY alarmed:

“Treasury Secretary Timothy Geithner’s statement on
executive compensation packages is a clear signal that a dictatorship
has arrived in America. Make no mistake, the compensation package
regulations that are about to be instituted will go way beyond
regulations on banks and other financial institutions that took TARP
money. It is about controlling the entire financial sector–which will
ultimately result in controlling the entire economy.”

“Now that the government is moving in to control the financial sector,
the rest of the economy will be a lay up. Money controls the economy
and Barack Obama is about to take over the money infrastructure. Money
is going to end up going to some very funny places. Mostly to people
who control lots of votes in the next presidential election, and to
those who finance such election campaigns. In other words, the
connected. In the first group, we are talking unions, in the second
group we are talking about Goldman Sachs, Carlyle Group and the like.

“When
this is all over, the United States of Obama is not going to look
anything like the America we now know. Think Cuba, think North Korea,
that’s how all dictatorships end up.”

“The compensation oversight programs announced by Geithner will not be
limited to financial companies. The Treasury will propose legislation
giving the SEC the power to ensure that compensation committees are
more independent, for all publicly traded companies, according to Sperling.”

“What should be of major concern is that this is going to bring to the
compensation table all kinds of people with all kinds of agendas”.

“In short, there appears to be Herculean oversight of executive
compensation coming that is likely to turn into more regulation than
oversight. And there is enough wiggle room in these proposals, at this
point, that the Administration can drive the programs in any direction
they want, any time they want or need to. It sounds like a Paulson plan
all over again. Throw everything up against the wall, get legislation
passed and interpret all these broad generalizations any way you want,
down the road.

“Very scary.”

But in his rush to tell us that the doctor is about to enslave the patient, Wenzel neglects
to offer an opinion on whether the patient is sick, if so, why, and what treatment might be more apt.  Such analysis must be offered if one wants to persuade – either the patient that the doctor is a quack (and to run), or those with the lobotomizing tools to put them down (in favor of a more appropriate diagnosis and treatment). 

Have faulty incentive structures in the financial sector and within public firms not contributed to the financial crisis?  If indeed they have – as seems to be universally acknowledged –  how did those incentive structures arise, and what are the best ways to remedy them? 

While the discussion can become quite nuanced, it seems to me fairly clear that root causes lie in financial regulation and in the regulation of “public” companies, both of which have served to loosen shareholder/investor control over management. 

This loosening of control, of course, has an even deeper root, namely, the grant of limited liability to shareholders for the torts committed by company executives and employees.  This grant incentivized lighter oversight by shareholders (as gains from risky activities could be captured, with losses in excess of  assets being shifted to the public), and in turn has led to a continuing cycle of federal regulation intended to rein in risks – particularly on environmental, health and safety areas, and regulation of stock markets and “public” companies – with resistance from and rampant rent-seeking and gamesmanship by larger risk-generating firms.  Sometimes forgotten by advocates of “free markets” is how larger firms utilize their political influence to co-opt regulators and regulations, both to raise barriers to entry to keep smaller and nimbler competitors at  bay and to ensure that they can continue in business without facing the full external costs of their business activites.

This dynamic – and the way free market advocates miss it – can be seen in Wensel`s most recent post, where he notes:

“The Treasury will propose legislation
giving the SEC the power to ensure that compensation committees are
more independent, for all publicly traded companies, according to Sperling.

“Sperling
championed this as putting standards into effect for compensation
similar to those put in place for audit committees as part of the
Sarbanes-Oxley Act.

“I know of no one, including most legislators
, who don’t think that Sarbanes-Oxely was a big mistake, that it costs
companies millions of dollars annually in compliance costs, with zero
benefit. Setting up such a nightmare for all publicly traded companies
will make it even more difficult, if not impossible for small companies
to raise money and go public, and will force others to leave the public
markets and go private (or overseas).”

Sarbanes-Oxley vastly extended the reach of federal securities regulation, and raised costs for public firms.  But while Wenzel can see this, why has he failed to note that such regulation also greatly raised the costs of access to the public capital markets, thus benefitting public companies by insulating them from potential competitors?

The whole system of public company regulation is rotten.  We need less regulaton, and greater self-policing by investors and market counterparties of the risks they face.  The alternative of lightly-regulated private companies (especially unlimited liability structures like partnerships) ought to be more vigorously explored.

I quote  a summary of my views on this subject from another recent post:

“I share Ariely’s concern that we are likely to be distracted by a
focus on big “bad apples” that may satisfy our needs to string someone
up, but that will ignore the rot at the core – the systemic
cheating that, in the American system, is very much related to the
institution of state-granted “limited liability” to corporate
investors/shareholders.  This grant (1) frees investors from the
downsides of losses suffered and borne by third parties as a result of
corporate actions, (2) limits investor incentives – and abilities – to
monitor and control risks faced by and generated by executives,
managers and other employees, (3) thus incentivizing risky behavior and
providing greater freedom of action to executives and managers –
including freedom of action to seek favors from government , (4)
leaving executives and managers freer to loot their companies by taking
large bonuses, which shifting downside risks to shareholders and
taxpayers, and (5) fuelling pressures by consumers and others adversely
affected by corporations to seek to use legislative, regulatory and
judicial mechanisms to check corporate behavior.  In sum, limited investor liability has proven to lie at the core of the moral
hazards which have produced the Great American Ponzi scheme that our
fearless leaders are now struggling mightily to patch together and
profit from.

“Did I leave anything out?  (Ah, maybe how various firms, investors and their political handlers profit while socializing climate change risks?)

“Anyone game for exploring ways to reduce the destructive gaming and rampant cheating in the American system?”