Matt Ridley, British author of The Rational Optimist: How Prosperity Evolves, and populat TED presenter “When Ideas Have Sex“), has a couple of blog posts out in response to Japan’s troubled post-earthquake and post-tsunami nuclear reactors owned by TEPCO.

In a somewhat ironic post, “Nuclear Crony Capitalism“, Ridley first notes that the troubles at TEPCO’s Fukushima plants have caused environmentalist George Monbiot to change his mind about nuclear power  — and to SUPPORT it, as demonstrating the low risks of nuclear power. (I find this perverse by both Monbiot and Ridley, as radiation releases from four of the reactors have already done substantial damage to people, property and livelihoods in the Fukushima region, as well as to cause grave concerns in Tokyo and indeed, globally. Moreover, the situation is not yet stabilized, strong earthquakes continue, and strong radiation in the vicinity of the plants is seriosuly hampering efforts to regain control over the plants and ope-air spent fuel rod pools.)

Yet despite his views on the safety of nuclear power (he noted a few days ago in the WSJ that much safer designs may be available, and that the TEPCO designs are a product of the Cold War and nuclear bomb production designs), Ridley castigates Japan’s government and nuclear power industry.(emphasis added) [readers, html is a pain. If the quote isn’t here, it’s the italicized text that wants to be at the bottom.]

What worries me is the economics of an electricity generating industry that requires massive capital projects, whose costs usually over-run and whose costs per kilowatt hour are roughly double those of the newest gas turbines. … But a perceptive article by Shikha Dalmia explains where nuclear’s flaws come from — its symbiotic relationship with government. Nuclear power requires, demands and gets subsidies of many different kinds.

That’s exactly the problem with crony capitalism, whether in finance or energy or anything else. The `market’ and `capitalists’ are not on the same side and against `government’. No, its government and capitalists colluding against the market, which is on the side of the people. The `financial market’ proved to be no such thing; it was a casino for favoured clients run by central banks. The `energy market’ is no such thing. It is a scheme run by governments for favoured clients in the nuclear, renewable and environmental-pressure group industries.

As Adam Smith so astutely observed,

The proposal of any new law or regulation which comes from [businessmen], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

Nice to see Ridley both recognizing the corrupt and skewing dynamics, AND taking not merely government but the industry itself to task, TEPCO and its finaciers are, after all, real people who have moral responsibility for their own actions – right? – whether they are aware of such responsibility or not.

Unfortunately, Ridley, like Dalmia, fails to extend his analysis to the state-created corporate structure itself, which systematically shifts risks from shareholders and managers to the public at large, particularly via the grant of limited liability to shareholders, which reduces incentives for shareholders to care about risks to others and exacerbates the “agency problem” which leaves managers as essentially unsupervised actors who typically do not bear liability for so-called “corporate torts” – thus leaving the “corporation” as a legal fiction without a clear locus of responsibility or liability.

The grant of limited liability is of course the driving feature for choosing the main corporate form over other alternatives (Amex was long a coproaton whose shareholders had unlimited liability), and why corporations establish subsidiaries (US nuclear plants are virtually all held by different legal entities), and why traditional partnerhips have pushed for LLC and LLP entity forms that retain partnership-like tax treatment but no personal liability.

One hopes that some day our leading lights will devote a little time to exploring the obvious perverse incentives and massive negative consequences generated by the state-created corporate form. What we have instead is a sympathy for faceless corporate “victims” of a faceless state, and a beside-the-point defense of the poor existing, irresponsible shareholders, which didn’t bargain for a downside risk. Shall libertarians forever defensd this Heads I Win, Tails You Lose mentality? Do they have so little faith that, if limited shareholder liability was NOT granted by the state, that shareholders would not increase their diligence, or engage insurers to mitigate risks?

I note that I pointed out the issue of the corporate form itself to Matt Ridley, he responded with a “very interesting”. Stay tuned!

In addition to the comment that I blogged the other day regarding Jeffrey Tucker’s June 2 post, Scrupulosity and the Condemnation of Every Existing Business, I posed a question to Jeffrey in response to this further comment by him:

But Rothbard was not just an anarchist. He was an anarcho-CAPITALIST. From what I can tell, Rothbard has yet to win THAT victory among libertarians. They have learned from his anti-state writings, but have they learned from his economic writings on the absolute centrality of capital accumulation for the advance of civilization?

My question:

Stephan Kinsella kindly jumped in; his response to me on June 4 is here.

I use this blog post to copy my response to Stephan:

 I note my related earlier posts on deposit insurance and moral hazard:

http://mises.org/Community/blogs/tokyotom/search.aspx?q=deposit+insurance

http://mises.org/Community/blogs/tokyotom/search.aspx?q=moral+hazard

I ran across an interesting WSJ piece today that I Tweeted as follows:

#Nuclear=EXPERIMENT: Tepco Let #Fukushima Pressure Soar to Twice Design Limit Before Venting that then Exploded WSJ http://on.wsj.com/fwKNXC

Here are some excerpts of the WSJ article,”Reactor Team Let Pressure Soar“

The operator of Japan’s stricken nuclear plant let pressure in one reactor climb far beyond the level the facility was designed to withstand, a decision that may have worsened the world’s most serious nuclear accident in a quarter century.

Japanese nuclear-power companies are so leery of releasing radiation into the atmosphere that their rules call for waiting much longer and obtaining many more sign-offs than U.S. counterparts before venting the potentially dangerous steam that builds up as reactors overheat, a Wall Street Journal inquiry found.

Japan’s venting policy got its first real-world test in the chaotic hours after March 11’s earthquake and tsunami knocked out cooling systems at the Fukushima Daiichi nuclear-power complex. By the first hours of March 12, an emergency was brewing inside the plant’s No. 1 reactor.

By around 2:30 a.m., the pressure inside the vessel that forms a protective bulb around the reactor’s core reached twice the level it was designed to withstand. Amid delays and technical difficulties, it was another 12 hours before workers finished releasing radioactive steam from this containment vessel, via reinforced pipes, to the air beyond the reactor building.

About an hour later, the reactor building itself exploded—a blast that Japanese and U.S. regulators have since said spread highly radioactive debris beyond the plant. The explosion, along with others amid overheating at reactors 2, 3 and 4, contributed to radiation levels that led to mandatory evacuations around the plant and the government’s admission that the Fukushima Daiichi disaster ranks alongside Chernobyl at the top of the nuclear-disaster scale.

Experts in the U.S. and Japan believe the venting delay may have helped create conditions that led to the blast. In one possible scenario, pressure built so high that it damaged gaskets and other parts of the venting system, through which highly explosive hydrogen gas leaked from the core into the reactor building. It was Japan’s cautious approach to venting, an outgrowth of its profound concern over nuclear contamination, that may well have made the accident worse, they say.

Containment vessels can withstand higher pressures, some studies have indicated. Among these are studies conducted in the 1990s by Japanese operators and equipment manufacturers, in preparation for Japan’s first set of severe-accident protocols, that say such vessels can withstand twice the design pressure. Many Japanese operators have adopted this as their benchmark for releasing contaminated air.

Tepco spokesman Yoshikazu Nagai confirmed that if there is a risk of releasing radiation, the company doesn’t vent until pressure hits roughly twice the design limit. “Venting is a last resort,” Mr. Nagai said.

General Electric Co., the designer of the vessel at Fukushima Daiichi, said it is unaware of any such Japanese studies or venting protocols.

The International Atomic Energy Agency said it doesn’t have specific guidelines on venting and doesn’t comment on the appropriateness of actions taken in member countries.

U.S. protocols on handling accidents at similar reactors call for venting before pressure exceeds the design level. The same protocol is followed by plant operators using similar types of reactors in Korea and Taiwan, industry experts in those countries say.

I am reminded of the article by Bill Keisling on the Three-Mile Island that I cross-posted earlier; here’s a relevant excerpt for those of you who missed it:

Rule 1: Commercial atomic energy technology is a pseudo-science and is not based on proper scientific experimentation.

As we recently witnessed during the multiple nuclear accidents at the Fukushima nuclear power plant, a damaged reactor (or reactors) often has broken controls, computers systems, and gauges that make monitoring a runaway nuclear reaction difficult, if not impossible.

Confusion and fright in the control room(s) at the time of emergency create what can almost be called A Fog of War. Indeed, war it is. They’re at war with a runaway nuclear reactor.

At Fukushima, as on Three Mile Island, operators wished they could simply peer into the containment building with their own eyes and dispense with the broken alarms, computers and gauges that tell them nothing, and often mislead them.

But that’s only a small part of the problem. Truth is, no one really understands the behavior of tons of melted nuclear fuel in a reactor.

For a variety of reasons, the commercial nuclear power industry and its government regulators never conducted a single experimental meltdown of a full-size nuclear reactor.

So, until one melts, no one knows how a runaway reactor will behave.

As most of us remember from high school, scientific knowledge has advanced over the centuries because of what’s called the Scientific Method.

The Oxford English Dictionary defines the Scientific Method as “a method of procedure that has characterized natural science since the 17th century, consisting in systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses.”

In simple words, real-world experiments must be designed to test a hypothesis, and results must be reproducible.

As we know, cars and planes are rigorously tested and crashed all the time, in all manner of ways, in all sorts of conditions. That’s how designers and regulators learn how these complicated machines behave in real-world accidents, and whether they’re safe.

Not so nuclear reactors. For a variety of reasons, including half a century of financial and political considerations, regulators in the United States side-stepped or outright ignored the issue of full-scale reactor safety testing, and continue to ignore it to this day.

This inescapable and troubling fact is entwined with the history of atomic power regulation in the United States. 

Perhaps it’s time for us to try the experiment of ending all government support for nuclear power, “public” utility monopolies, and corporations in general (which could not exist in their present form without state grants of limited liability to shareholders)? Maybe then – when investors and power companies are faced with a greater share of the actual risks generated by their businesses – we will see a more responsible and prudent form of capitalism, one that generates true wealth, and noty simply moral hazard and risk-shifting, plus profits for a few?

In the wake of the troubles at TEPCO’s Fukushima nuclear power plants, on March 18, 2011, Jerry Taylor of the Cato Institute discussed the past and future of U.S. nuclear power on WOR’s The John Gambling Show.

I note that Taylor has really only scratched the surface of the problems relating to nuclear power. For example, far from governments simply shifting the risks of nuclear power cost over-runs to ratepayers and taxpayers, this incentive structure actually compounds financial risks, as the contractors do not have to bear the amount of cost over-runs, and the utilities can put their hands into the pockets of others.

Further, Taylor has not addressed the further subsidies provided in the form of Federal liability caps and by “limited liability” state corporation laws that leave shareholders without ANY liability for damages that nuclear accidents may cause others – as has now materialized in Japan. Just as we have seen in our financial sector, the result is a loss of personal “skin in the game”, a concomitant reduction in critical oversight, unleashed moral hazard, poor decision-making and then hand-wringing and blame-shifting when the “black swans” come home to roost.

Here is the link to 10-minute clip (which Cato has so thoughtfully made easy to share, but unfortunately seems too big to upload here)

[View:http://mises.org/Community/themes/mises2008/utility/:550:0]

I’m a fan of Jerry Taylor, an even-handed, level-headed guy working out of the Cato Institute who sometimes almost (but not quite) comes across as a radical envirofascist. (My earlier posts referencing him are here.)

Jerry’s Cato bio says he “is among the most widely cited and influential critics of federal energy and environmental policy in the nation … a frequent contributor to the Wall Street Journal and National Review and appears regularly on CNBC, NPR, Bloomberg Radio, the BBC, and Fox News. His op-eds on public policy have appeared in the pages of The Washington Post, The New York Times, The Los Angeles Times and most other major dailies.’

Jerry and his collegaue Peter Van Doren have a new piece out at Forbes.com and Cato Institute on nuclear power; Jerry has kindly given me permission to cross-post it in its entirety here.

[Just added: Allow me to I note that Taylor has really only scratched the surface of the problems relating to nuclear power. For example, far from governments simply shifting the risks of nuclear power cost over-runs to ratepayers and taxpayers, this incentive structure actually compounds financial risks, as the contractors do not have to bear the amount of cost over-runs, and the utilities can put their hands into the pockets of others.

[Taylor also does not address the further subsidies provided in the form of Federal liability caps and by “limited liability” state corporation laws that leave shareholders without ANY liability for damages that nuclear accidents may cause others – as has now materialized in Japan. Just as we have seen in our financial sector, the result of these government interventions is a loss of personal “skin in the game”, a concomitant reduction in critical oversight, unleashed moral hazard, poor decision-making and then hand-wringing and blame-shifting when the “black swans” come home to roost. 

[Nuclear crony capitalism is just the tip of the iceberg of the vast, rotten and still metastasizing crony-capitalist mess that limited liability corporation laws have engendered: Beyond ‘Nuclear Crony Capitalism’: Does state-created corporations mean we are stuck with a wonderfully confused ‘capitalist’ mess of socialized risk?]

This is how the Taylor and Van Doren piece appears at Cato (emphasis added)

Nuclear Power in the Dock

by Jerry Taylor and Peter Van Doren

This article appeared on Forbes.com on April 5, 2011.  [TT: Here’s the Forbes link.]

The unfolding nuclear emergency in Japan has prompted a reconsideration of nuclear power here in the United States. Surprisingly, the political faith in nuclear power appears to be relatively unshaken at the moment, with opinion leaders on both the left and right cautioning against overreaction and politicians in both parties swearing continued fealty to the federal campaign to jump-start new construction orders.

This is unfortunate — not necessarily because nuclear power plants are a catastrophic meltdown waiting to happen — but because nuclear power makes no sense from an economic perspective and the political campaign to ram these plants down the market’s throat threatens catastrophic harm to both taxpayers and ratepayers.

The fact that nuclear power can’t come within light-years of passing a market test is painfully obvious to all who wish to see. Consider the feds are presently telling banks that if they loan money to a utility company to build a nuclear power plant and the loan subsequently goes bad, the U.S. Treasury (that is, you) will compensate the bank for up to 90% of its losses. And yet the banks still refuse to loan. For principled supporters of a free market, that should be information enough about the merits of this commercial enterprise.

First, nuclear energy is not even remotely competitive in power markets with gas-fired or coal-fired electricity now or in the foreseeable future. Even the more optimistic projections of new nuclear power plant costs — such as those forwarded by MIT — find that nuclear’s production costs over the lifetime of a new facility are about 30% above those for coal or natural gas-fired generators. So while we can only speculate about new plant construction costs (we haven’t tried building one for more than 30 years) and estimates vary a great deal, all parties agree on one thing: Nuclear is substantially more expensive than conventional alternatives at present.

That’s particularly the case when one figures in the revolution in natural gas extraction, which has significantly lowered the cost of gas-fired power. Exelon CEO John Rowe recently told the press that natural gas would have to cost more than $9 per million BTUs before nuclear power plants could compete — about double its current price and far north of the $5.3 per million BTU price over the next 5 to 10 years that forecasters predict for the future. MIT’s nuclear energy study, by comparison, projects a $7 per million BTU natural gas price (which makes nuclear energy seem more competitive than it actually is), but of course, the MIT study was based on 2007 data that failed to fully reflect the revolutionary advances in hydraulic fracking.

It’s worth noting, moreover, that nuclear’s hefty price tag would be even heftier if government subsidies were to fall by the wayside. One economist calculates that existing nuclear subsidies are equal to one-third or more of the value of the power produced. Tufts economist Gilbert Metcalf estimates that nuclear power plant operators face a negative 49% tax rate. Hence, banks betting on nuclear power are also betting on the longevity of such breathtaking taxpayer largesse — a risky bet indeed.

Second, the risk of cost overruns and, thus, defaulted loans are higher than the politicians would have us believe. Most of the nuclear power plants built in this country have cost three times as much to build as utilities initially advertised at the onset of construction.

While the industry swears that this is a thing of the past, new power plants being built in Finland and France by Teollisuuden Voima and Electricite de France, respectively — the only nuclear power plants being built right now in free-market energy economies — are already coming far above their advertised cost. The Finnish plant — which was supposed to cost only 3 billion euros — is already 2.7 billion euros above cost and is four years behind schedule. The French plant fairing a bit better, only 1 billion euros over budget and two years behind schedule.

The fact that both of these projects deploy state-of-the-art reactors built by French nuclear giant Areva — arguably the most experienced nuclear power company in the world — speaks volumes. Accordingly, both the Congressional Budget Office and the Government Accountability Office expect about 50% of any future U.S. loans to default.

So why are utilities trying to build these things in the first place? Well, most aren’t. Those few utilities that are interested in going ahead do business in states where construction costs are automatically plugged into the rate base. So in theory at least, risks would be transferred from the utility to the ratepayer with utilities at least guaranteed to break even. Even so, the increasing cost gap between nuclear and gas-fired power makes it unclear whether any of these generators will actually get built.

As Peter Bradford, a former member of the U.S. Nuclear Regulatory Commission and former chair of the New York and Maine utility regulatory commissions, puts it, “In truth, the nuclear renaissance has always consisted of the number of plants that government was willing to build.” Regardless, federal attempts to jump-start the industry — as Herculean as they have been — haven’t come even close to closing the competitive gap with gas-fired generation. Events unfolding in Japan are unlikely to change that. And for that, at least, we can all be thankful.

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

Science reporter Andrew Revkin, writing at NYT’s Dot Earth blog, can’t seem to get his head around the complete failure of Tokyo Electric, its suppliers (GE, Westinghouse, Hitachi etc.) and the Japanese government to consider the possibility that large tsunamis might hit the Fukushima coast  history: (emphasis added).

‘Disaster Memory’ and the Flooding of Fukushima

Over the weekend, I mused on a question that’s bothered me since I read Roger Bilham’s report on the great earthquake and tsunami of March 11: Given the history of devastating tsunamis not far away, how could it have taken until 2006 for the word “tsunami” to show up in government guidelines related to the  Fukushima nuclear complex? (For instance, in 1933 a tsunami more than 90 feet high  erased coastal villages along part of the same stretch of  Honshu coast devastated on March 11.)

Revkin quotes from geologist Roger Bilham:

In hindsight it appears impossible to believe that nuclear power stations were located on a shoreline without recognizing the engineering difficulties attending prolonged immersion by a large tsunami. In 1896 a 33-meter high tsunami drowned the Sanriku coastline 200 kilometers to the north of Fukushima. A 23-meter wave surged on the same coast in 1933, and in 1993 a 30-meters wave swept over Okushira Island.

But to me, the puzzlement itself seems puzzling. I sent Andy the following tweet (emphasis added)

.@revkin Andy,as I emailed b4,there was so little ‘Disaster Memory’ at #Fukushima simply bc Govt absolved all from personal responsibility

Which I followed with this comment to his blog post: (emphasis added)

Andy,

This really is not so hard. The problems at Fukushima are just the latest manifestation of poor decision-making, resulting from pervasive, institutionalized risk-shifting, brought to us by LEAVE IT TO US, WE’LL HELP YOU! governments. The snowballing rot started with the creation by government of that form of human association known as ‘corporations’, whose shareholders are freed from any liability for the harm that corporate acts may cause others. That lack of personal liability eliminated a need to closely monitor risks, managers and employees.

Injured citizens have insisted that governments step into the breach, but bureaucrats and politicians are oddly susceptible to influence from those firms whose profits and competitive advantages may depend on government regulation.

Beyond ‘Nuclear Crony Capitalism’: Does state-created corporations mean we are stuck with a wonderfully confused ‘capitalist’ mess of socialized risk? – TT’s Lost in Tokyo http://bit.ly/gFfDlQ

“Rational Optimist” Matt Ridley blasts Japan’s “Nuclear Crony Capitalism,” fails to examine limited liability corps http://bit.ly/eCBbvW

Institutionalized moral hazard: Fun with Nuclear Power in Japan, or, prepare for a glowing twilight, with scattered fallout in the morning – TT’s Lost in Tokyo http://bit.ly/hvvWHU

Risk-Shifting,BP +now #Fukushima:Cliff Notes version of my stilted envirofascist view of corps+govt -TT’s Lost in Tokyo http://bit.ly/9oBkC7

Tom

—
http://mises.org/Community/blogs/tokyotom/default.aspx
http://twitter.com/Tokyo_Tom
https://www.google.com/profiles/TokyoTomSr

“The first principle is that you must not fool yourself – and you are the easiest person to fool.”
Richard Feynman

I post here some of my further dialogue on the comment thread to Matt Ridley‘s “Nuclear crony capitalism” post that I blogged on earlier.

Last night I was Sleepless in Tokyo because Matt Ridley and one of his commenters rewarded, with nice words and questions, a comment I left there on his “Nuclear Crony Capitalism” post.

So naturally I wrote more.

Here’s the relevant comment thread, plus my excited scribblings at the bottom (now up; thanks, Matt!). Skip to the bottom if you’re in a rush:

Posted by, TokyoTom (not verified)

Matt, great post — but I think you’ve only barely scratched the surface on the ‘crony capitalism’ institutionalization of risk.

I’ve spent a bit of time delving into this at my blog that Ludwig von Mises Inst kindly hosts:

– Sorry, but I can’t resist asking: Feel Sorry for Tokyo Electric Power Co?, http://tokyotom.freecapitalists.org/2011/03/27/39-resist-feel-tokyo-electric-power/, a tribute to Lew Rockwell’s ‘Feel Sorry for BP?’)

– Institutionalized moral hazard: Fun with Nuclear Power in Japan, or, prepare for a glowing twilight, with scattered fallout in the morning:  http://tokyotom.freecapitalists.org/2011/03/26/institutionalized-moral-hazard-fun-nuclear-power-japan-prepare-glowing-twilight-scattered-fallout-morning/

– My posts exploring the ramifications of the state grant of ‘limited liability’ corporation status: http://tokyotom.freecapitalists.org/?s=limited+liability

 – The case of BP: http://tokyotom.freecapitalists.org/?s=BP+gulf

 – Not surprisingly, similar issues arise with respect to the rest of the Govt-licensed energy sector and climate: http://tokyotom.freecapitalists.org/?s=climate+liability

 Thus small things contribute to the Road to Serfdom: http://tokyotom.freecapitalists.org/2011/03/27/rot-core-prophetic-words-hayek-grim-threat-posed-erosion-quot-market-morals-quot/ and http://tokyotom.freecapitalists.org/?s=prophetic+words+from+hayek+grim+threat

I hope you’ll take your concern for nuclear crony capitalism even further.

TT

Wednesday 30th March 2011 – 04:39am

Posted by, Matt Ridley

Tom,

very interesting. Thanks. will follow up.

Matt

Wednesday 30th March 2011 – 04:54am

Posted by, Robin Guenier (not verified)

Matt:

This is an intriguing post …. If one agrees (and I do) that the moral hazard enjoyed by financial institutions is deplorable, then logically it’s impossible not to take the same view of crony capitalism and nuclear power. And, as j ferguson and Tom have pointed out, it doesn’t end there. For example, I’ve been involved with the UK defence industry and recently with the appalling NHS computer system – in both cases, I’ve seen huge overruns and vast sums wasted. Classic examples, I suggest, of “government and capitalists colluding against the market”: neither the government nor its suppliers are penalised; all the pain is passed onto the public. And, if that is unacceptable – and surely it is – it’s hard to dispute Tom’s conclusion that the state grant of limited liability may be the problem: “one of the key roots of snowballing corporate statism”.

And yet … and yet: the industrial revolution and the huge benefits it has provided to society were built on the foundation of limited liability. Moreover, many major projects that would not have been implemented without an alliance between capitalists and government have turned out to be widely beneficial despite seemingly inevitable delays and cost overruns.

Is there a distinction to be drawn and, if so, where?

Robin

Wednesday 30th March 2011 – 07:32am

Posted by, Matt Ridley

Robin,

Yes. I agree with both points you make and see what you mean about limited liability’s role and the importance of govt-driven infrastructure. Compulsory purchase for railways and canals springs to mind: easier in Birtain than in France.

Not quite on the same lines, but sometimes I get criticised for being too hard on government and I reply that if Carnegie and Rockefeller and Maxwell were bad, then they weren’t half as bad as Hitler, Mao and Pol Pot.

I hope to get time to dig further into this issue.

Matt

Wednesday 30th March 2011 – 10:59am

My follow-up thoughts (readers may be disappointed that I haven’t loaded this down to cross-references to relevant posts from this blog):

Robin, your statement that “the industrial revolution and the huge benefits it has provided to society were built on the foundation of limited liablity” is a statement of fact – not one necessarily of causation – but so has been our financial house of cards: banks are corporations, shareholders have limited liability (and megabanks are public cos in which shareholders are even further removed from oversight), and depositors are insured by Uncle Same. As a result, depositors don’t bother to check out what a crapload of risk that traders and execs are piling on in order to get bonuses, and Uncle Sam and his legions of wizards set up regulations that the smart boys at Goldman and lawyers figure out how to finesse to load up ever more risk at the lowest possible capital – BANG! And all thanks to the wonders of institutionalized misincentives!

Sure, we got wonderful things from complex organizations, all of which remain in check somewhat by competitions. But there’s been a lot of abuse, alot of risk-shifting, alot of Superfund sites, alot of barriers to entry raised by the very regulations whose purported intent is to rein in the bad behavior, massive statism, and a ball and chain of costly and intrusive IP legislation and enforcement.

I’ve given a very short summary of the dynamics at this post but it’s a fairly obvious and understandable game of whack-a-mole, where government and the big boys – with their unlimited lives, purposes, facelessness, deep pockets and revolving doors – always seems to benefit while ordinary citizens and smaller firms and potential rivals get whacked.

It is very clear that limited liability of shareholders is a gift from government at the expense of un-consenting creditors (‘victims’ IOW), and thus is a subsidy from the public as a whole to the wealthier classes who owned corporations and still by and large are the shareholder class.

Corporations used to be very rare – the grants have a very dubious history, typically one of false justifications of offering a ‘public good’ in exchange for monopoly rights. The owners of very limited life, limited purpose firms somehow always managed to get the special deal extended. So we got bigger firms and more corruption, and labor unions and then regulations and workers and citizens finally started to get fed up.

The widespread statism and government-provided social welfarism – now falling into cynical kleptocracy and fuelling a breakdown in initiative, integrity and other virtues Hayek saw are necessary for market-based wealth generation to works to work – we now see are part of the price we’ve paid. The other part of course is damage to peoples’ lives, property, communities and to whatever public or community property that corporations can get their hands on and strip, without have an owner’s incentive to balance possible revenues over the long run.

Is this kit and caboodle a necessary part of “capitalism”? I don’t think so. Wall street banks and investment firms were private partnership for most of their lives, Amex was a listed corporation who owners had UNLIMITED liability, and Lloyds of London itself was not a firm but a private MARKET of names who all had unlimited liability. Many firms used to have only partially paid-in shares, so that managers had a call in case more capital was needed for new projects or to pay off debt.

Just because we’ve democratized corporate formation by opening the floodgates of socializing risk to anyone doesn’t mean ways can’t be found to put an end to institutionalized moral hazard. Eliminating unlimited liability would shift risk and responsibility for oversight back to a conveniently truant shareholder class from government and the public at large. It would of course mean that people not in a position to evaluate risks would be less likely to invest, making firms work harder to earn trust and get capital. Credit evaluation, rating agencies and insurers would all compete to step into the breach and to lower and spread risk.

Better-managed firms are more profitable than the big Frankensteins we have lumbering around these days; while reform would not happen overnight, it is not only desirable but possible. Firms whose shareholders bear the risk that they may be held liable for damages can be expected to be more cautious and thus could be exempted from the regulations that have been found needed for the Frankensteins. Thus both risks and barriers to entry could be lowered, and consumers and could determine what works best. Other initial steps could be to encourage firms whose shareholders have only fractionally paid-in shares. In the US, at least, corporations are creatures on state law, so just one state is needed to start such an experiment (which would be possible and protectable under the Constitution).

Well I’ve run on quite a bit in my excitement. My sincere apologies! Let me toddle off for a wee bit of sleep.

Tom

Thanks for indulging the rambling title, dear readers. My thoughts wander even as try to gather them.

I thought I would share with you some of the observations I’ve been making – tweeting, largely – on the troubled nuclear reactors that TEPCO so thoughtfully lined up on the Fukushima coast to meet the massive tsunamis on March 11.

A environmental journalist who posted the Atomic Boy’s Upset Stomach YouTube video called it “little more than government-industry propaganda that glosses over the colossal abrogation of responsibility that led to the Fukushima crisis.”  While I don’t think the video was government- or industry-sponsored, I share his further sentiment (emphasis added):

there’s a gaping omission right at the beginning. Nuclear Boy has a stomach ache. No kidding. Why? …. Could it be because the government of Japan let the Toyko Electric Power Company build a series of nuclear reactors next to a seismically active fault line?

Sticking with the bowel-malfunction metaphor, perhaps the video’s creators could have produced a few frames testifying to the reality that Nuclear Boy’s parents fed him some poison because they forgot to read the label carefully. Something along those lines.

Is that too much for Japanese kids to swallow (so to speak?) I don’t think so. Responsibility is something we all try to teach our children as early as possible. It’s important that Japanese leaders acknowledge the real reasons why they (and their children) are going to have to spend tens of billions of dollars to replace the Fukushima reactors years earlier than expected. Reactors that require an independent source of electricity to maintain coolant levels are, of course, a bad idea, and one that today’s generation of reactor designers have abandoned. But building them in an earthquake zone is tantamount to lunacy.

This prompted me to leave a comment with some of my thoughts (emphasis added):

 James, your criticisms are almost spot-on.

The risk-shifting start with ‘limited liability’ corporations that frees shareholders from responsibility, escalates with ‘public companies’ (regulations isolate managers from shareholders and create barriers to entry), and is ramped up even more for utilities, which are effectively granted monopolies and guaranteed returns on investment by government. Operators of nuclear plants are then given express liability caps for damages that radiation releases may cause others.

None of the utility managers/executives will have PERSONAL liability, of course.

Given all of these government policies that truncate responsibility, can there be any surprise that risk analysis and decision-making produces obviously flawed results — and ongoing efforts to cover up and hide blame?

Here are some recent tweets on this:

Nagao versus TEPCO:Case of now dead nuclear worker reveals how Japan protects corps that exist to fulfill state policy http://bit.ly/hModQE

Japan megabanks to extend TEPCO $25 billion lifeline,as Govt is sure to limit TEPCO’s liability for damages http://bit.ly/e9tBnw #eqjp #p2

These days,it’s ‘capitalists’ who r the biggest socialists:’Japanese Gov prepares to protect TEPCO frm liability’ http://bit.ly/hpx8Eb #jpeq

Moody’s on the obvious:”business risk of operating nuclear pwr plants in Japan is higher thn previously contemplated” http://bloom.bg/e8TIlm

Cato’s Jerry Taylor: Nuclear power is “solar power for conservatives”+needs “a policy of tough love” TT’s Lost in Tokyo http://bit.ly/h07XHj

Posted by: TokyoTom | March 25, 2011 9:12 AM

More in posts to come.