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Note to William Anderson: Limited liability is a key to understanding the Great American Ponzi scheme

January 5th, 2009 No comments

William Anderson (an adjunct scholar of the Mises Institute and economics prof. at Frostburg State University) has a thoughtful New Year’s Day post, pointing out how Paul Krugman fails to understand the causes of ouir economic stagnation and financial meltdown.

I posted the following comment, in which I argue that the state grant of limited laibility (which I have discussed in several recent posts) is a key to understanding the Great American Ponzi scheme:

Bill, I agree with the thrust of your criticisms of Krugman, but have a few small quibbles.

First, while you rightly condemn “most economic regulation … of the command-and-control variety”, you blame all of this on “the whims of bureaucrats and environmentalists” and completely fail to note that state and federal environmental regulation (i) initially responded to real environmental problems and (ii) also represents the successful efforts by established firms to raise barriers to entry and to cartelize their industries.  See Roger Meiners & Bruce Yandle, Common Law and the Conceit of Modern Environmental Policy, 7 Geo. Mason L. Rev. 923, 926-46 (1999), and Walter Block, Environmentalism and Economic Freedom: the Case for Private Property Rights..

Second, while you are correct that Krugman fails to understand the role of the state in creating the distortions that underlie our current problems, it seems to me that you have neglected one of the key state interventions that has fuelled the rent-seeking and risk socialization that we see today – the grants of legal personhood (with unlimited purposes and life and Constitutional rights) to corporations and blanket limited liability to shareholders.

Limited liability has enabled corporate managers to act without close shareholder oversight and management; this I believe has played a key role in the vast misalignment of incentives that Michael Lewis and David Einhorn describe at the NYT, and in the risk mismanagement that Joe Nocera of the NYT describes at length in the NYT Magazine.  Those taking large bonuses (whether in the financial industry or large corporations) were essentially playing with OPM – Other People’s Money – and capturing the upside of short-term gains while leaving shareholders and taxpayers holding the bag for loses.

I hope that you and others here will look more deeply at the role of the state in the problem of misaligned incentives that continue to corrupt American capitalism.

Dialogue with Stephan Kinsella on the state grant to shareholders of limited liability for corporate torts – a gift that keeps on giving

December 22nd, 2008 No comments

Stephan Kinsella, in two recent blog posts, Left-Libertarians on Corporations “Expropriating the Efforts of Stakeholders” and Corporations and Limited Liability for Torts, kindly provided a forum to discuss the issue of the limited liability that states grant to shareholders of corporations (and more recently to partners in LLPs (limited liability partnerships) and LLCs (limited liability corporations)) for torts committed by business enterprises and their employees and agents. 

It was in the context of these two posts that I have done a little legwork in pulling together legal resources regarding limited liability, which I publish in an earlier post.

By law, under most statutes providing for the establishment of corporations, shareholders (whether individuals or business interests) simply risk the amount of their investment in the event that corporate liabilities exceed corporate assets, and otherwise have no personal liability for a corporation’s debts, whether such debts resulting from negotiated loans with creditors or similarly negotiated obligations to employees, or from the harms that a corporation’s business activities (which may or may not also be attributable to identifiable employees, agents and managers) cause to involuntary third parties.

The short version of our conversation is that Stephan acknowledges that the state grant of limited liability is non-libertarian and unjustified, but plays down its importance – essentially by ignoring the past and ongoing effects that the absence of any personal risk to shareholders has certainly had on the evolution of corporations, on shareholder control, and on managerial and employee behavior, and instead focussing on a static argument that today, under libertarian principles, shareholders have little actual control over corporate actions and merely passive shareholders probably would not have liability.  While Stephan’s point is correct, it is shallow and static, and ignores the bigger picture.

My own view is that the grant of limited liability for torts has played an important role in engendering shareholder powerlessness vis-a-vis management, fuelling the growth of the environmental movement, general mistrust of corporations, and the at time rather paranoid “risk society” that we face today, and locking us into a spiral of increasing government interventions into corporate management that tend to further free management from shareholder control while raising barriers to entry, and providing greater incentives and opportunities for non-investor “stakeholders” to try to increase their influence on corporate behavior.

I hope to explore these issues in further posts, but for now I thought it would be useful – to those interested in exploring the ramifications of limited liability – to pull together some of my comments and dialogue (with Stephan and others) from the two posts noted above. 

 1.  Published: December 9, 2008 3:25 AM (emphasis added)

Stephan, while I agree with most of your post, your attempt to shift the burden of argument on the issue of limited liability strikes me as a bit disingenuous:

most people … seem to simply assume that … absent state law, shareholders ought to be liable for torts committed by employees. This has has to be established before one can bluster in outrage at the failure of the state to hold shareholders personally liable for such torts.

As I’ve noted elsewhere,  one of the chief purposes and effects of the corporate form is that through it, the state allows owners to sidestep any personal liability for the wrongful acts that their corporation commits, with the result that liability for such wrongful acts is limited to the assets of the corporation. Very clearly, limited liability to investors is an act of state, and not something that investors could contract for in advance with the as yet unknown victims of their future torts. As such it seems to me clearly inconsistent with libertarianism.

Do you find it so difficult to establish that such limited liability IS consistent with libertarianism that your best response is to shift the burden of proof, while characterizing those who disagree with you as “blustering with outrage”?

2.   Published: December 10, 2008 7:43 AM (emphasis added)

Stephan, thanks for your comments.

1. Me: “one of the chief purposes and effects of the corporate form is that through it, the state allows owners to sidestep any personal liability for the wrongful acts that their corporation commits”

You: It’s only sidestepping if they should have this liability in the first place. Should they?

Again, you are shifting the burden of proof on the issue. Is there any libertarian argument that the state OUGHT to step in and allow investors to unilaterally shift a portion of the risks of their business venture to others who might be damaged by the activities of the business?

I don’t believe that there is any such libertarian justification for limited liability. Without the act of state in creating limited liability for shareholders, such limited liability would not exist – except perhaps vis-a-vis creditors and business counterparties who might otherwise agree to limited their claims to the assets of the company, in exchange for agreed methods of risk control or higher prices. However, such limited liability could not otherwise exist as to Involuntary (or “tort”) creditors who without their consent are injured by the corporation, who have not agreed to assume the risk of corporate insolvency and shareholders’ limited liability, and who have neither received ex ante compensation for doing so nor had the opportunity to bargain for contractual safeguards.

This result seems to be entirely outside of libertarian principles that require voluntary exchanges and eschews takings by force (including by the state), particularly if uncompensated.

2. Me: “with the result that liability for such wrongful acts is limited to the assets of the corporation.”

You: This is untrue. Liability on the part of the *person who committed the wrongful act* is unlimited. If an Exxon employee robs your house, you can sue him for all he’s worth.

Me: My point is that limited liability lets investors entirely off the hook for damages that the wrongful acts of the corporation and its employees. While a few employees might individually be held responsible for their actions, this still may leave many injured persons uncompensated for injuries cause by a corporation’s business activities (many of which it many be impossible to identify a single bad/responsible actor inside the firm: defective products, pollution, etc.).

Before limited liability corporations were established, the common law doctrine of respondeat superior required investors to bear responsibility for the acts of a business, just as individual proprietors and partnerships remain so liable today.

3. Me: “Very clearly, limited liability to investors is an act of state, and not something that investors could contract for in advance with the as yet unknown victims of their future torts.”

You: Now, if you want to object to the inability to sue shareholders for vicarious liability for the torts of another, you need to show that the victim *should* be able to sue the shareholders. Should he? If so, why? What exactly is your theory of causation and responsibility?

Me: Again, you simply fail to answer my question, and presume that the state action that leaves shareholders free to shift business risks to others is valid and justifiable. Even as you remain unwilling to make your case, I am happy to expand my argument that limited shareholder liability is an unlibertarian grant by the state to shareholders.

The chief point, of course, is that the creation by the state of corporations limits tort liability to individual tortfeasors (if any) and to the corporation itself – up to the value of its assets (after sharing with all other creditors), and frees the owners from liability. This reduces the likelihood that victims will receive full compensation for corporate acts. Unlike an unincorporated entity, the act of the state in authorizing investors to act through corporations thus places the owners (and managers, who are similarly free from liability except for torts they may individually commit) in a position to shift some of the social costs of their business activity on to members of the public who have not agreed to bear those costs.

Because the shareholders (and employees and managers) bear no responsibility for the full magnitude of costs that corporate activities may impose on others, as an activity holds some promise of increasing shareholder wealth, limited liability for tort claims creates a moral hazard problem by leaving shareholders (and managers) with the possible upside benefits to such activities without regard for the full magnitude of possible social costs (which might greatly exceed the benefits).

This results in not simply in an unjust and uncontracted for shifting of risks from tortfeasor corporations to victims, but also inefficient resource allocation decisions – by shifting risks to those least positioned to anticipate or manage them, and by encouraging excessive entry and aggregate overinvestment in hazardous industries while not fully incentivizing investment in precautions.

Further, the limited liability of the corporate form greatly reduces incentives of shareholders to monitor corporate risk-taking, and frees executives to act in ways that further their own interests without bearing full responsibility for risks that are posed to third parties and to investors (which is quite evident in the activities leading up to the ongoing financial crisis).

The subject of limited liability has been much discussed recently; may I recommend the following?  [see my related post with links to discussions among legal scholars]

3.  Published: December 10, 2008 11:14 AM  (emphasis added)

In corporations, by government fiat none of the owners has unlimited liability, and the lack of control that investors or their transferees typically have is a reflection of that limited liability. Of course it is possible for shareholders to have actual control, whether in the case of close corporations or even large public ones, and courts sometimes “pierce the corporate veil” (very sporadically) to hold shareholders responsible for bad acts despite legal niceties.

Corporations are creatures of the state that could not exist in their current form without a transfer of risk that is neither voluntary nor fully compensated.

There is nothing objectionable in excluding bondholders or other voluntary creditors from unlimited liability; they can bargain for limited risks and certain controls over corporate action. The question is whether it is consistent with libertarian principles to limit the liability of ALL investors to those who are subjected unwillingly to damage resulting from the torts of the corporation.

While I am sympathetic to common investors in public corporations, who have bargained for the situations they find themselves in, and not for unlimited liability, the question of where we go from here is logically distinct from the question as to whether the course to the present situation is one that comports with libertarian principles.

It seems to me that it does not, and that we face any number of undesirable consequences as a result – not merely a shifting of risks to citizens that finds its counterpart in citizen pressure groups, but in a bifurcation of ownership and control that provides ample opportunity for executives to loot their firms. These come on top of the problems with rent-seeking and politicization that tie in with the growth of big government.

4.  Published: December 11, 2008 3:42 AM (emphasis in original)

TT: “Is there any libertarian argument that the state OUGHT to step in and allow investors to unilaterally shift a portion of the risks of their business venture to others who might be damaged by the activities of the business?”

SK: No, and the state should not exist. But people criticize corporations as being *mere* creatures of the state on the grounds that the state gives them privileges that would not exist in the free market.

TT: My point is simply that there is no libertarian argument that the state OUGHT to step in and allow investors to unilaterally shift a portion of the risks of their business venture to others who might be damaged by the activities of the business. I’m glad that you agree, and am puzzled that you do not acknowledge that the state grant of limited liability to investors (and to transferees of such investors) in corporations constitutes an uncontracted-for shifting of risks to investors from victims of corporate torts.

TT: “Without the act of state in creating limited liability for shareholders, such limited liability would not exist – except perhaps vis-a-vis creditors and business counterparties who might otherwise agree to limited their claims to the assets of the company, in exchange for agreed methods of risk control or higher prices. However, such limited liability could not otherwise exist as to Involuntary (or “tort”) creditors who without their consent are injured by the corporation, who have not agreed to assume the risk of corporate insolvency and shareholders’ limited liability, and who have neither received ex ante compensation for doing so nor had the opportunity to bargain for contractual safeguards.”

SK: Again: the question is, absent the state, should shareholders be vicariously liable for torts committed by employees, or not? The presumption is they should not, since they did not commit the acts–unless you can come up with a sound argument for why they should (and pointing to the way it’s been done before doesn’t cut it).

TT: Stephan, again you refuse to actually advance a justification for the government grant of limited liability to shareholders (indeed, you concede that, there is no libertarian argument for such a state grant), but simply argue for the status quo, on the grounds that shareholders don’t typically themselves do not commit the torts.

If there is no libertarian grounds for the use of government fiat to limit the liability that shareholders bear for the risks that the activities of the business might injure others, then surely the “presumption” you offer should be reversed, and you should advance a case that whether those who are injured by business enterprises should justly be forced to assume the risk that their ability to make claims against the assets of the business owners depends upon whether the business happens to be a sole proprietorship, a partnership or limited liability corporation.

TT: “My point is that limited liability lets investors entirely off the hook for damages that the wrongful acts of the corporation and its employees. While a few employees might individually be held responsible for their actions, this still may leave many injured persons uncompensated for injuries cause by a corporation’s business activities”

SK: You are assuming the “business activities” are “the cause”. This is question begging.

TT: Well said, Artful Dodger, but it’s not me who’s begging the questions. Putting aside (i) the question of the scope of vicarious liability WITHIN the firm and (ii) cases where there is a only one a single injured party and a single employee committing an unauthorized tort, it is undeniable that small, medium and large corporations have in the past and continue from time to time to commit large-scale torts – in the form of pollution, dumping of waste, defective products, other personal injuries, slander and the like – that arise directly from their business activities. In most such cases, no single individual tortfeasor within the corporation can be identified. Clearly, in some such cases a few employees might individually be held responsible for their actions, this still may leave many injured persons incompletely uncompensated for injuries caused by a corporation’s business activities.

TT: “Before limited liability corporations were established, the common law doctrine of respondeat superior required investors to bear responsibility for the acts of a business, just as individual proprietors and partnerships remain so liable today.”

SK: Why should they be? Because the common law says so?

TT: No; sole proprietors and partnerships have been and remain liable for the acts of a business because it is unjust to allow them to externalize a significant portion of the risks of their activities, while capturing the benefits of those risks. The state, by providing the corporate form, allows the externalization of such risks on a vast scale, and continues to do so by further making limited liability available for those who prefer to be taxed as partners. But to reverse the question, perhaps you care to point to libertarian principles or a common law doctrines (which libertarians frequently point to as a valid basis for determining the scope of ownership rights and who should be responsible for injuries caused to others) that would justify a position that those who own and operate businesses ought NOT to be responsible for the damages those business activities cause, beyond the assets of the business?

TT: “Again, you simply …. presume that the state action that leaves shareholders free to shift business risks to others is valid and justifiable. Even as you remain unwilling to make your case, I am happy to expand my argument that limited shareholder liability is an unlibertarian grant by the state to shareholders.”

SK: You need to explain why shareholders should be liable. You keep calling them investors–shareholders are usually not investors.

TT: Again, you are nonresponsive. Perhaps you should pick fewer nits and acknowledge the bigger picture. For small corporations, start-ups, and corporations raising capital, the shareholders typically are investors. Moreover, for small firms, closely-held firms (including large LBOs) and even for many large firms, there are major shareholders that are also clearly “owners”. You have advanced no libertarian or other argument that justifies limiting the liability of investors and owners at all for the torts of corporations; much less for your implied position that investors and owners should be able to freely slough-off any vicarious responsibility for damages to victims of corporate acts by the simple expedient of selling their shares to others (who, while they do not directly fund the company, are certainly investing in ownership of the same set of assets and liabilities as the initial investors).

TT: “The chief point, of course, is that the creation by the state of corporations limits tort liability to individual tortfeasors”

SK: It limits state-imposed vicarious tort liability. If the state stops taxing you, this is good, because it should not be taxing you in the first place. If the state stops imposing vicarious tort liability on shareholders, this is also good, if it should not be doing this in the first place. You seem to assume they should. why?

TT: Where does “the state” impose vicarious tort liability? Respondeat superior is largely an old and evolving part of the common law. I don’t agree with all cases, but individual judgments are hardly the same as the state acting by law to free shareholders from liability above the amount they paid for the shares for the risks generated by corporate activities.

TT: “This reduces the likelihood that victims will receive full compensation for corporate acts.”

SK: If a FedEx driver negligently crashes into you, why arey ou calling it a “corporate act”? He was not directed to do this by FedEx, was he? Why is his negligence theirs?

In any event–this whole critique is ridiculous. Whenever a corporation’s employee commits a tort, the victim is compensated by the corporation or its insurer. IT’s almost always irrelevant that he can’t sue shareholders individually. Even if they could, shareholders could simply purchase shareholder-liability-insurance, no biggie.

TT:  The grant of limited liability to involuntary creditors cannot be justified on libertarian grounds, and arguments I have noted regarding efficiency, moral hazards, equity, the disincentives for shareholders to closely monitor firms, the relative freedom of managers and executives to loot, and the related rise of citizen pressure groups to seek to have governments provide checks are all substantial and important.

While there are many cases where injured persons are compensated, there are many cases where corporations have generated widespread risks and failed, leaving countless others holding the bag, while investors (and managers) may have profited and then exited without substantial loss. The limited liability grant actually encourages such behavior.

You say that, if victims could “sue shareholders individually”, in which case “shareholders could simply purchase shareholder-liability-insurance, no biggie”. I heartily agree – a system of pro rata shareholder unlimited liability would work (as one of the law journal articles argues), as well as being more just. I appreciate the concession – so have you stopped fighting this point?

5.  Published: December 12, 2008 3:42 AM  (emphasis added)

Say you have an unincorporated sole proprietor who is engaged in manufacturing and produces is a hazardous or toxic waste. If he disposes it in a way that causes injury to others, he is liable – up to all of his assets (and even further, though it may be a bankruptcy law cut off and it not be worth the injured person’s efforts). If he hires one or more employees, he is responsible for any injuries if he directs them to dump the hazardous waste, or if they cut corners as a result of his negligent oversight.

If he incorporates, he will not be held responsible personally unless he committed the tort himself or directed it; his liability will be limited to the net assets of the firm. Clearly, the state grant of limited liaiblity lessens the ability of persons injured by his business activities to recover damages for their losses (they MIGHT be able to recover from the employee, but they will not have access to his personal assets). This creates a moral hazard on the part of the corporation owner to maximize private benefits from business activites while not having to worry about whether the full scope of losses may exceed the value of the gains. Courts recognize the injustice in this and sometimes “piece the corporate veil” to protect injured persons and even voluntary creditors.

The state grant of limited liability has made it possible for founding shareholders to gather even more capital from persons who know that their downside risks are limited and wish to capture upside benefits. As these shareholders have limited liability, they also have limited interest in making sure that risks are managed well. The result has been a continuing erosion of shareholder rights, a whithering of control over managers, and the growth of ever larger corporations able to impose ever larger risks on society (the downside of which they can further limit by separately incorporating different business lines, especially the riskier ones).

The focus on investors earning profits while bearing no personal responsibility for losses has given us a gradual shift in the nature of corporations (which now are given rights by the state to have unlimited lives and unlimited purposes, and are even recognized as “persons” for purposes of the Bill of Rights), a growth in corporate scale and risks posed to others (as shareholders, creditors and executives, managers and employees have increasingly less identifiable personal risk and more opportunity to look out for number one while ignoring risks), and a growth in citizens forming pressure groups to push for the regulation of firms and the risks they pose (mandating the posting of bonds for certain activites, mandating pollution clean up, etc.).

All fed by the state grant of limited liablity – which could only exist on a libertarian basis (without veil piercing) if a substantial owner was covering the risks.

6.  Published: December 15, 2008 6:21 AM  (emphasis added)

Stephan, thanks for the further remarks.

1. me: the state grant of limited liability to investors (and to transferees of such investors) in corporations constitutes an uncontracted-for shifting of risks to investors from victims of corporate torts.

you: “It’s not a shift if they don’t or shouldn’t have liability in the first place”

TT: Your conditional rejection obviously fails. Clearly state action is necessary to limit shareholders’ liability to the amunt of their investment, and a key aspect of the popularity of the limited liability corporate form over other forms is precisely that it limits the downside liability that shareholders would otherwise bear for the risks of damage that the activities of the company (via employees) pose to unconsenting others who are victims.

As new limited liability forms have been created (LLC and LLPs), once tax authorities have confirmed pass-through tax treatment, their use has exploded, precisely to limit prior liability for torts (and to voluntary creditors). Large public firms separately all of the various hazardous ventures (that they own and control) precisely because they want to limit liaibility to third parties that they would otherwise be exposed to.

2. Nice to see that you see no justification for the government grant of limited liability to shareholders in the first place, and that youy are not arguing for the status quo.

3. you: “there is no libertarian grounds for the state to *impose* liability on shareholders for acts of employees.”

I agree with your statement, but it dodges the real issues. The government acted in a unlibertarian fashion by establishing granting limited liability – previously, unlimited liability of investors for acts of a venture had been imposed not by the state, but by common understanding; as most ventures had no separate legal entity status, vicarious liability for torts was more narrowly applied, and wouldn’t always reach investors.

But with the corporate form, the scale of risks imposed increased and the legal entity was imputed by courts to be the master to which corporate employees reported. But this new “master” was accountable to no one directly, with an ability to seek gains for the benefit of shareholders while creating risks for others, without any requirement to maintain assets to make others whole for the risks imposed: dividends could be paid to shareholders from profits, but when liabilities arose, the firm could simply be shut down.

There are of course many firms where there are identifiable shareholders in charge, and who would have liability but for the corporate form.

4. “I have little interest in reading the works of a bunch of mainstream unlibertarian utilitarian state apologist lawyer hacks.”

Your call, but others may think that reading about the history of the rise of limited liaiblity corporations, some of the results (transfer of risks to parties who are injured without any ability to bargain ahead of time, and resulting pressures for the state to interfere FURTHER), consideratons of the equities and economic efficiency of the status quo, and suggestions for reform might be useful in understanding the full subject.

5. you: “absent the state, should shareholders be vicariously liable for torts committed by employees, or not?” “I’ve given my reasons and sketched out my view of a theory of causation.”

Sounds like I need to refer to the other thread, but certainly here you’ve done nothing of the kind here.

But as for an argument that shareholders should be vicariously liable for torts committed by employees, I could advance the following:

– there are many cases where a small group of shareholders clearly owns and controls a company, in which there is no basis to artificially limit vicarious liability to the company level. Such shareholders may be individuals that own a small firm or via and LBO own a very large firm that was once public, or may be corporations that own and control subsidiaries.

– without limited liability, shareholders of large firms would have been much more interested in limiting the risks of losses and damages that exceed company assets, and would have made sure that they were in a position to manage downside risks directly (through management of executives, managers and employees) and indirectly via insurance (which insurers would also be incentiivized to manage and price risks).

– Sure, there are many investors/shareholders of in “public” companies that have no ability to control corporate risks, but except for the state grant of limited liaiblity, there are no other such classes of shareholders.

– The imposition of large-scale risk of injuries by limited liaibilities on involuntary victims is unjust and inefficient, shareholders (and executives) are better placed to bear the risks, shifting to pro rata unlimited liability by shareholders would not destroy markets (insurers could step in, for a price), and moving to such umlimited liability would greatly reduce the pressures on (and rationales used by) governments to force corporations to disclose more risks, maintain greater capital, bonds and insurance.

6.  Published: December 11, 2008 4:54 AM

By the way, Stephan, I don’t consider myself an “anti-corporate type”, or an “anti-industrialist”, “socialist” or “left-libertarian” either.

I’m just an anti-uncontracted-for-limited-liaibility-for-torts” type. There are plenty of my type in the world of corporate lawyers, as I noted on the other thread.

7.   Published: December 15, 2008 5:02 AM (emphasis added)

Roger:

Kinsella has already established that the master is responsible for the actions of his servant, so corporations are responsible for employees. Anti-corps want the responbibility to go even further to the stockholders. But why stop there? Why not make the customers responsible too? And let’s throw in the bond holders. Then let’s add the suppliers. How about the relatives of stock and bond holders?

The corporation is a legal fiction. Are there any persons within it where the buck stops? Created in order to free investors from downside risks, the limited liability has removed incentives for investors to keep executives and managers under control and to monitor business risks. Although small corporations remain under investor control, the result has been the growth of large public companies that are owned but not controlled by shareholders, leaving discretion but limited downside risk to employees, managers and executives.

Of course I’m being ridiculous. My point is where do you draw the line of responsibility for the actions of coroporate employees? Stopping with the stockholders is an arbitrary judgement. You need some principle that can delineate who is responsible for the actions of another. Traditionally, that line is drawn where control of the actions of the other party ends.

As for line drawing, voluntary creditors are all able to investigate whom they deal with, and to negotiate risks and prices. Victims of torts are seldomly so situated. But the problem of corporations leaving real victims behind is precisely why governments have started to seek further pockets, such as lenders and suppliers (via Superfund laws, for example), to require firms to post bonds and maintain certain capital levels, and why governments have fallen to the temptation to heavily regulate “public” firms.

As for what “tradition” was and where lines used to be drawn, surely you recognize that before limited liability corporations were established, investors had unlimited liability for losses – and risks for widespread torts were much lower? Unlimited shareholder liability was once more common than limited liability, and large markets like Lloyds until recently required that all Names bear unlimited liability for losses. It used to be that most small businesses and partnerships were structured with unlimited liability; now with LLCs and LLPs, there is a rush into structuring as limited members, precisely to limit liabilities.

8.  Published: December 15, 2008 8:50 AM (emphasis added)

  • Stephan, I’ve responded on the initial post as well, but here’s a bit more on what you’ve written above.

    1. You: “But you say “shift” here, which smuggles in your presumption that shareholders have a natural or default liability. If they don’t, there’s no “shift.””

    I thinks it’s a fair and natural presumption that investors (as opposed to lenders, who have a claim only for interest and no residual claim for profits) have a natural default liability. This is still the case for sole proprietors and partnerships. “Shareholders” exist only because states created corporations as legal entities. Without such action, there would be at least one natural person to whom employees would have to answer and who would be responsible for risks posed by his business activities (loans and involuntary torts), up to the full amount of his personal assets.

    Yes, there is still the question of the range of vicarious liablity, but clearly even today business owners and partners are deliberately incorporating (using corporation, LLC and LLP forms) for the chief purpose of limiting personal liability for the acts of employees. And courts continue to pierce the corporate veil from time to time to reach shareholders as well.

    2. Me: “the state grant of limited liability to investors (and to transferees of such investors) in corporations constitutes an uncontracted-for shifting of risks to investors from victims of corporate torts.”

    You: “To me, what is wrong with it is that the state steps in and monopolizes a field, as it has done with transportation, power, education, defense, justice, money.”

    Me: I agree with what you think is wrong with state action, but in the case of granting the corporate form and granting limited liability, there have been a a number of pernicious consequences, one of which involves an externalization of risk of the kind I mention.

    This and other consequences all tend to encourage the further growth of the state, such as the pressures on the state to regulate corporations (with a vicous cycle of battles over control over government), and the use corporations as money and jobs banks.

    3. You: “As a libertarian, I don’t think the positivist arguments of some mainstream law profs are going to be that mind-blowing.”

    To each his own; they’re certainly relevant and provide useful background information.

    4. You: “All these actions are done by individuals–and if done as decisions of the managers, then they and the corporate assets probably ought to be liable. But why the shareholders, if they didnt make this decision?”

    In many cases the shareholders ARE in a position of control; should they be able to escape liability merely because they use the corporate form, as is the rule today? I think not.

    I agree that it is difficult to argue that minority and non-controlling shareholders in public firms bear any responsibility for acts of the corporation, since that was not a part of the bargain they understood that they were making when they acquired their shares and they largely have no actual ability to affect decisions that end up causing injury to others.

    6: You: “I dont tink it’s a nit. I assume you call them investors since you think giving money to the company is some kind of aiding and abetting that helps make them responsible. I’m pointing out they are not necessaril investors in the corporation.”
    Me: Stephan, I’m only discussing the difference a shareholder and an investor because you seem to think it’s importance. Anyone who acquires a newly issued share is an investor; anyone who buys one on a market is stepping into his shoes.

    7. Me: “For small corporations, start-ups, and corporations raising capital, the shareholders typically are investors.”

    You: “True. AS Hessen notes, the entity theory helps to insulate liabiltiy most egregiously in the close corporation case. Another strike against the fervor agains bigness.”

    Sorry, but I have no “fervor”. The insulation from liability is most obvious in the close corporation case, but some close corporations are huge (LBOs). But it’s the larger public co.s that are really shifting the greatest amount of risk to others, in the form of toxic torts and dangerous products.

    8. Me: “Moreover, for small firms, closely-held firms (including large LBOs) and even for many large firms, there are major shareholders that are also clearly “owners”.”

    You: I don’t konw what proving ownership status does. So waht? I will grant you that in some cases some shareholder wields such influence and direction over the firm that he ought to be as culpable as management for actions he helps direct. So what? My point is that *merely being a shareholder* is not by itself sufficient to attribute liability.”

    Thanks for the acknowledgment. The point’s obvious – “*merely being a shareholder* is not by itself sufficient basis to exclude a shareholder from liability. In addition there’s a larger point – without limited liability, shareholders would have had potentially unlimited liablility, and consequently would have been much more cautious about whom they invested in, and making sure that downside risk was closely managed.

    9. You: “I am in favor of a nuanced and fact-specific approach, as I laid out in my Causation piece w/ Tinsley. If you can show in a given case that a shareholder is causally responsible for torts of the corporation, get ‘im. I’m just saying you have not shown that merely being a shareholder makes this case. It takes something more.”

    I’m not opposed to a nuanced and fact-specific approach, but the fact is that the grant of limited liability has essentially eviscerated it.

    10. Me: “your implied position that investors and owners should be able to freely slough-off any vicarious responsibility for damages to victims of corporate acts by the simple expedient of selling their shares to others (who, while they do not directly fund the company, are certainly investing in ownership of the same set of assets and liabilities as the initial investors).”

    You: “Saying they invest in liabilities is a bit of question-begging. The question is: does the status of a person as a shareholder–having certain dividend and liquidation and director-voting rights–make you liable for what the corporation does? I don’t rest my own conlcusions on whether the state “officially” classifies the shareholder “as an owner.” I’m looking at the functional reality of what they are and do.

    I’m not begging any question; a shareholder who buys shares that aren’t fully paid up purchases may be required to contribute the rest of the capital, and a whole host of obligations may accompany shares in a close corporation. And I’m looking at the effect of the state grant of entity status and limited liability on what a shareholder’s bundle of rights and obligations is.

    11: Me: “Where does “the state” impose vicarious tort liability? Respondeat superior is largely an old and evolving part of the common law.”

    You: “Yes, and we are a new and modern creature called “libertarian,” not tradition- or state-law-worshipping positivists.”

    How about actually answering my question? Where does “the state” impose vicarious tort liability? The common law is not state-imposed. And surely you haven’t failed to notice that libertarians routinely refer to the common law as the reason why regulation isn’t needed (other than those like Rothbard who recognize that regulation is needed because corporations persuade judges to subvert it).

    12. Me: “You say that, if victims could “sue shareholders individually”, in which case “shareholders could simply purchase shareholder-liability-insurance, no biggie”. I heartily agree – a system of pro rataliabilityactivitiesactivitiesliability sharliabilityeholliabilityconsiderationsderincentivizedliabilityliabilitiesunlimitedliabilityresponsibilitycorporate unlimited liability would work (as one of the law journal articles argues), as well as being more just. I appreciate the concession – so have you stopped fighting this point?”

    You: “It’s not a concession. It’s pointing out that this is just a red herring on your part. You guys throw up limited tort liability as if it’s some huge advantage given to corps that allows them to survive. It’s not a huge advantage b/c removing it really doesn’t affect victims;a nd imposing it can easily be handled with a slight change of the already-existing insurance coverage. If we did this, not much would change, but I’m sure the anti-industrialist types would find something else to yap about. You are not *really* concerned with this–it’s just one of an arsenal of arguments you whip out to attack industry and busienss and “bigness” and capitalism and whatnot.”

    Stephan, first, I’m disappointed by your dismissive and somewhat offensive talk of “you guys” and what you presume my motives to be. I’m not an “anti-industrialist type”, and I’m here on my own and making my own points (which must mean I’m “yapping,” in your book). Second, raising the issue of limited tort liability is not a red herring, at least for me, and it’s not something I think corporations need to survive. I do think it’s very important because I think that real shifting or risk, moral hazard, corporate governance and other issues are intertwined and that underlies the whole politicized struggle over corporate regulation.

    Courts rarely find individuals responsible, other than for very deliberate torts, in part because negligence is attributed to the firm (and managers and executives are generally excused from liability for the negligent acts of employees) but chiefly because those injured – particularly where the damges affect many people – don’t bother chasing those without substantial assets.

    That it will seldom be the shareholders is a result of the state grant of limited liability – given such a grant, shareholders have no interest in monitoring, and no ability control, corporate/employee acts. Without such a grant, it would be a different story – which is why business partners are still running to limited liability forms, and leaving unlimited liability partnerships and sole proprietorships behind.

  • 9.  Published: December 16, 2008 5:10 AM (emphasis in original)

    You: Again: shareholders are not investors necessarily. In any case, you are question-begging. It’s not a fair presumption for the libertarian–that’s the issue here.

    While I would agree with you that there should be no presumption that shareholders SHOULD have tort liability – after all, that should be a decision that depends on the facts of particular cases – I think it’s pretty clear that the blanket grant of limited liability has in fact acted to shield shareholders (and initial investors) from tort liability.

    You: Yeah, like you mean, the President or CEO, or manager or boss? Sure. These guys run the company. Not shareholders.

    Yes, the guys who run the company ought to be liable, but in some cases, controlling shareholders as well. Most individuals simply don’t have the assets to cover all of the risks, so a blanket rule that stops tortfeasor liability with the firm is clearly wrong.. Note that there are no rules that require managers, executives or even firms to acquire insurance sufficient to cover all risks created by corporate activity.

    You: I don’t think so. It’s primarily for contractual liability limitation, which would continue to exist in a free society. Tort liability could easily be handled by insurance.

    Stephan, come on. The partnerships could contract for liability limitations without a limited liability form; they have been moving rapidly into LLCs and LLPs solely to slough off risk to their personal assets for torts; for the same reasons, big firms that are already corporations separately incorporate subs for dangerous activities in order to limit potential liability for damages (both for torts and to creditors).

    You: Yep, when formalities are not followed or a shareholder is too dominant and really acts as a manager.

    My point about veil-piercing is that such cases show that no general state grant of limited liability is justified. The doctrine itself is extremely inconsistently used, in part because given the legal grant of limited liability courts are reluctant to use their equity power.

    You: Well, if the state is abolished as we want, any “externalities” would go away.

    Yeah, “IF”. Until then, there is certainly a lot of externalization that takes place, which seems to excite a few people.

    You: Right, I agree. Thoguh even in today’s law, if a shareholder is in a position of control, it’s either (a) because he’s also a manager or director; or (b) he goes beyond his passive shareholder role and pushes the company to do his bidding. In case (a), he’s not protected by limited liability. In case (b), well,l of ten in such cases the corporate veil would be pierced, again reaching his personal assets.

    I am happy that you agree that shareholders in a position of control should not be able to escape liability merely because they use the corporate form.

    You: I actually think it’s got nothing to do w/ the bargain they thought they were entering, since A and B cannot contractually limit C’s tort-recover rights. However, I do agree w/ you that their ability to control is key. Now you appear to have swung in my direction on this.

    In any particular case, I agree with you that actual ability to control is key. But generally, the state grant of limited liability is wrong and should be repealed.

    Me: Stephan, I’m only discussing the difference a shareholder and an investor because you seem to think it’s importance.
    You: I think they are *different*. The investor *gives money to* the company. The shareholder *votes for directors*. Both are different ways of having an affect on the company. The advocate of vicarious liability could make a separate argument based on each action for liability. Both are flawed, but in different ways.

    I’m not sure that there’s a relevant distinction. If an investor provides money to a firm, he does so in exchange for a bargain of certain rights and liabilities; any purchaser simply steps into his shoes. Granted, if an investor or shareholder has separately taken actions that make him liable for a tort, that liability is not conveyed by a sale. I do not otherwise presume that a shareholder, by virtue of owning shares and having rights (and maybe an obligation to fully pay up shares), should become liable for the torts of others.

    You: Small companies cut all kinds of corners–tons of illegal dumpting etc. It’s decnetralized and harder to track. And of course the biggest polluter is the state–e.g., w/ its wars. In any event, I don’t see that teh danger of toxic torts implies that shareholders have vicarious liabiltiy for torts of others.

    I agree with you about small firms and the state, but large firms pollute – often as part of doing business with government – and generate risks too. The point is that the state grant of limited liability has as its purpose cutting off liability at the corporate level, thereby freeing shareholders. Without such a grant, investors and shareholders in firms would be much more careful about the risks that they generate.

    You: it’s not obvious to the anticorpo crusaders, who think it’s a Holy Crime to NOT impute liability to them! They “are” “owers,” after all!

    Thanks for the acknowledgement that *merely being a shareholder* is not by itself a sufficient basis to exclude a shareholder from liability. But there you go again, “yapping” about other people who aren’t on this thread!

    Me: In addition there’s a larger point – without limited liability, shareholders would have had potentially unlimited liablility,
    You: Auugh! No, they wouldn’t. Not if they were merely passive shareholders.

    I agree with you that merely passive shareholders probably would not have liability, but the potential risk is there that they would have to face. They could wall off the risk by insurance (which would put an insurer in a position to evaluate the riskiness of a business and the degree of insulation that a shareholder is afforded by how the rights of shareholders are structured), or self-insure by making a similar analysis. But absent the limited liability rule, no doubt some shareholders would opt for measures that ensure better management by the company of risks of injury to third parties.

    Me: I’m not opposed to a nuanced and fact-specific approach, but the fact is that the grant of limited liability has essentially eviscerated it.
    You: Probably; but none of us are in favor of a state grant of limited liability.

    Progress!

    You: We just think that the left’s focusing on this as the Root of All Evil is confused and misplaced.

    It does sound like it may be confused, but is it really misplaced? My own view is that without a state grant of limited liability on torts that we would see greater shareholder efforts to control the risks of injury to third parties, more responsible corporate behavior, more responsible management, fewer efforts by citizens groups to get government to impose asset/bonding requirements, to impose broader liability in pollution cases (Superfund), andliability toviscousdidn’t rdon’tegulate. There would be less vilification of corporations generally.

    Me: “How about actually answering my question? Where does “the state” impose vicarious tort liability? The common law is not state-imposed.
    You: sure it is; and in any event, it is not necessarily libertarian.

    Howliability about actually answering my question? Where does “the state” impose vicarious tort liability?

    You: No. I still think it’s unjust for them to have liability where it’s not warranted–it’s just that it would make little difference, which shows that this is just a straw man for the left–it masques their real issue which is hostility to modern business and capitalism.

    Again, I’m not “the left” (and off of this site I am considered radically right); it may be a strawman for some of them, but I actually think that the grant of limited liability has had serious pernicious affects and removing it would be a great positive step. Under libertarian principles, individuals are responsible to the full extent of their assets for their harms to others; the creation of legal entities with limited liability for torts has allowed for the massive generation of risks, without regard to whether such risks are backed by the assets of real individuals. Rather, such risks are cut off by fiat at the corporate level, allowing shareholders to take profits for the upside of gains but not having to bear downside risk. 

    To be continued.

    [Note: some typos have been fixed.]

    [Update] Another Clear Thinker at Mises warns us about "The vicious lie behind the global warming scare"!!!

    June 26th, 2008 No comments

    This time it`s David Veksler, with a post on the main LvMI blog, with the title I`ve quoted above.

    Why is it that so many Mises commentators flee from reason and prefer a fever-pitched focus on strawmen when it comes to addressing environmental issues?

    I copy below my comments on the thread [note:  I’ve added a few links, along with bracketed comments]:

    David, I read your post with interest, but came away disappointed, for a number of reasons.

    First and foremost, you didn`t identify the “vicious lie” behind the global warming scare.  What`s the lie, what`s vicious about it, and who`s behind it?

    Second, even if THERE BE VICIOUS LIARS behind the AGW scare (the monolithic movement of envirofascist/commie/watermelon man-haters), you really haven`t helped me figure out why it`s so important  that we should focus our attention and energies on the vicious liars

    Do they occupy the entire universe of people who have announced their concern over climate change, man`s likely role in it and what if anything we should do on  a organized basis about it?  Or do they so predominantly provide the driving power and strategy for such concerns that we should simply ignore everyone else as mere puppets of the All Powerful Enviros – that is, all of the prestigious National Academies of Science (East, West and South), other scientific associations, the period internationally reviewed digests of ongoing scientific work regarding climate change, all of the world leaders who have backed study and action for the past twenty years, corporate leaders (including captains of insurance, finance, industry, power and fossil fuels), leaders of established religions, and defense and intelligence heads?

    Third, assuming again that there are vicious enviro-liars, you clearly overstate their views on geo-engineering, which run the gamut from reflexive opposition to a nuanced recognition that, given the long-lasting effects of GHGs and the continued ramp up in emissions worldwide, some degree of geo-engineering may be desirable. [Enviro-liars like me have made a number of blog posts on geo-engineering]

    Fourth, you paint, without support or discussion, a rosy picture of how cheap and effective geo-engineering is likely to be.  I`m not very well-read in this, but from what I`ve seen, they are not cheap or certain and offer potential negative consequences as well.

    Fifth, you ignore the fact that the institutional settings in which geo-engineering will occur are clearly statist.  The firms that have started to explore “ocean fertilization” have done so in the expectation that carbon capture and sequestration efforts would be compensated under incentives created by carbon-trading schemes.  While your tacit approval of use by states of tax dollars to cure problems that our industries have created for us seems hardly libertarian – in the face of adamant opposition to the decades-old arguments (by vicious liars like Stephen Hawking [whom you link to], Joe Stiglitz, Kenneth Arrow, Thomas Schelling, Robert Mendelsohn, William Nordhaus, Martin Weitzman and Gregg Mankiw [many whom I’ve referred to a number of times]) that governments introduce disincentives to GHG releasing activities – it certainly seems rather prevalent.  [In effect – the principled/preferred approach seems to be to let industry transfer costs to others and THEN use government/tax dollars to pay for remediation; that way, politicians can dole out pork twice – first, by looking the other way; then, by regulating in a way that locks in advantages for established firms.]

    Dr. Reisman, for example, has thought long and hard and come up with a number of brilliant statist ideas, for which he longs for a good old-fashioned heavy industry-loving left to spearhead, including the following:

    “there is a case for considering the possible detonation, on uninhabited land north of 70° latitude, say, of a limited number of hydrogen bombs. … This is certainly something that should be seriously considered by everyone who is concerned with global warming and who also desires to preserve modern industrial civilization and retain and increase its amenities. If there really is any possibility of global warming so great as to cause major disturbances, this kind of solution should be studied and perfected. Atomic testing should be resumed for the purpose of empirically testing its feasibility.”

    Sixth, you fail to explain to your readers on the basis of Austrian understandings – from von Mises through Block and Cordato – why we should not take seriously the expressed concerns of the vicious enviro-liars (or others) about AGW.  Are there no problems that arise when property rights are not in place for open-access resources or are not clearly aligned to external costs, or if homesteading and private transactions are not practical?  Or when resources are “owned”, but mismanaged by governments and fought over by rent-seekers in political battles?  In such cases, do Austrian insights tell us to ignore the preferences and frustrations of particular groups of people, in favor of other groups that apparently have done a better job of purchasing political influence? 

    Seventh, as a tactical matter, are essays like this the best approach to productively engaging the all-powerful enviro-liars?

    Shall we ignore any underlying commons problems simply because we hate the vicious enviro-liars?  Or is it your view that, in hating the enviro-liars, we most effectively resolve commons issues – by clarifying that powerful industries (those few not controlled by enviro-liars, that is) have first dibs on them, and that those with other preferences need to pay off industry (and their political handlers)? [Of so, then have we just clarified the applicable property-rights rules?  Great!  Now citizens and other groups will know how to proceed to with “market” transactions!]

    I could go on, but as you can see, I`m simply puzzled and lack your clear views about whom we should hate and what we should do.

    Sadly, my confusion seems to be shared by a number of others here, who also seem confused about the principled basis and efficacy of hating enviro-liars, whomever and wherever they may be.

    In fact, the responses by others here are almost enough to make a good Austrian wonder whether even the Mises board has been infiltrated and infected by vicious enviro-liars!

    You might consider asking the blog administrators to take close note of those who are clear sympathizers of the enviro-liars, and where appropriate to suspend commenting or blogging privileges, such as for particularly vicious and unprincipled man-haters.  Watermelons should be roasted whenever and wherever found, I say!  Enviro-haters, unite! 

    Or maybe you`re way ahead of me on that? 

    [There’s gotta be a good way, after all, to remove the “stain” of those nasty enviros or to at least to contain the infection threat posed by their evil but insidious views.  Let me know if I can make any further suggestions.]

    Regards,

    TT

    Environmental damage as theft: report by prominent enviros "highlights the need for secure ownership of wildlife resources by poor people"

    June 2nd, 2008 No comments

    Yes, even enviros recognize the importance of clear and enforceable property rights in protecting wlidlife.

    A new report by TRAFFIC, the wildlife trade monitoring network, and WWF finds that “Well-managed wildlife trade has the potential to deliver significant development benfits for the world’s poor.”   According to a press release, the report “In particular, … highlights the need for secure ownership of wildlife resources by poor people.”  The press release further noted:

    According to Dr Susan Lieberman, Director of WWF International’s Species Programme: “Trade in wildlife products can have a significant positive economic impact on people’s livelihoods, childhood education, and the role of women in developing countries, provided it is legal, well-managed and sustainable.”

    Conversely, wholesale ‘plundering’ of natural resources and illegal trade not only deplete wildlife populations, but also deprive poor communities of vital livelihood benefits. 

    It’s good to see important environmentalists becoming quasi-Austrians in recognizing that property rights deficiencies – and the stripping of resources by non-owners – lie at the core of environmental problems.

    Categories: enviros, property rights, TRAFFIC, wildlife, WWF Tags:

    Thanks, Dr. Reisman; or, How I Learned to Hate Enviros and Love Tantrums

    February 23rd, 2008 No comments

    In my recent post, “Escape from Reason: are Austrians conservatives, or neocons, on the environment?“, I noted two recent posts by George Reisman and Sean Corrigan and wondered whether a significant number of LvMI blog authors and commenters, on a host of “environmental” issues for which in Austrian (beginning prominently with Ludwig von Mises) and similarly-minded thinkers have many cogent insights, have begun to turn away from good faith discourse and productive rational thinking (and from the task of exploring and explicating to others how Austrian and libertarian principles apply to various resource problems), and towards the easier and more viscerally satisfying approach of making and appealing for partisan attacks on a strawman – the very poorly constructed strawmen that are “environmentalists”.

    Dr. Reisman has been calling for a jihad against man-hating enviros for the past two full years now on the LvMI main pages (http://blog.mises.org/archives/author/Reisman), and a chance glimpse of one such post happened to stir my own interest in exploring more deeply Austrian and libertarian insights on resource issues.  (While the encounters have been felicitous for me, let’s say that the reception committee for squeaky wheels has been rather … less than welcoming.) 

    The post which prompted my musings this time ran with the screaming headline, “ENVIRONMENTALISM IS RECYCLED COMMUNISM AND NAZISM“.  Dr. Reisman has since responded indirectly to certain comments via two more recent and longer posts that are distinguishable from the first not for their tight substantive arguments but for their even more glaring use of strawmen (the level of dispepsia remains about the same, despite abandoning all caps) – in chronological order, Word to Environmentalists and The Nature of Environmentalism.  My further comments are noted on the respective threads.

    In these posts, Dr. Reisman profoundly disappoints – though fellow lovers of hatred find him bracing.  I keep wondering, when will our “giants” act like senior statesmen, and when will Austrians and their allies be brave enough to embrace on resource issues the reason they say they love so dearly? 

    Or does reason simply require the surrender of logic and principle in favor of fevered enviro-bashing?

    April Fools?! WSJ starts an enviro blog!

    January 30th, 2008 No comments

    “No, your computer isn’t misfiring. Welcome to a new Wall Street Journal blog, Environmental Capital.”


    So says the WSJ’s announcement of its new blog, which replaces its Energy Roundup blog and, in addition to continue to track daily energy news, will “go further, analyzing how the energy world, and all of business, is adapting to mounting concern about the planet.”  The blog description states that: “Environmental Capital provides daily news and analysis of the business of the environment. It tracks how growing green concern, particularly over climate change, is roiling established industries and spurring new ones – and how that shift is affecting investors, consumers and the planet.”


    What’s up with the WSJ?  Is it growing dotty and green, like its new owner, Rupert Murdoch*?  Or is it struggling for market share as industry changes to reflect a changing environment? 


    Inquiring minds want to know!


    The new blog is here:  http://blogs.wsj.com/environmentalcapital/


    h/t to Andrew Revkin of the New York Times, who warmly welcomes the competition: http://dotearth.blogs.nytimes.com/2008/01/29/new-journal-blog-a-sign-of-murdochs-green-bent/


     


    * Murdoch, owner of Fox News, has made a personal commitment that his businesses will become climate neutral. In a recent speech, he stated his reason plainly. “I am no scientist. But I do know how to assess a risk — and this one is clear. Climate change poses clear, catastrophic threats. We may not agree on the extent, but we certainly can’t afford the risk of inaction.”

    Categories: climate, enviros, Murdoch, nyt, rent-seeking, wsj Tags:

    John Baden: is this free market enviromentalist stalwart a Mt. Pelerin misanthrope/watermelon?

    December 16th, 2007 No comments

    [snark meter – medium] 

    John Baden, a former logger and oilman, has long been a pillar of the “free-market” environmentalists.  He founded and leads the Foundation for Research on Economics & the Environment (FREE) and founded and headed the Property and Environment Research Center (PERC), both based in Bozeman, Montana. http://en.wikipedia.org/wiki/John_A._Baden; http://en.wikipedia.org/wiki/Property_and_Environment_Research_Center

    But don’t let his Mont Pelerin Society (http://www.montpelerin.org/home.cfm) membership fool you; John is very green on the outside and, with so much green, might he not be more than a little pink on the inside?

    He recently summarized advice he had given (on request) to policy advisers for a Democratic presidential candidate and a Republican one.  Allow me to quote freely (emphasis added):

    “Both parties need help—but in opposite directions. Republicans need sensitivity to Green issues, Democrats sensibility regarding incentives.”

    We are … eager to help all candidates develop sound policies, ones we believe will foster responsible liberty, environmental quality, and modest prosperity. Over the decades, we’ve made compelling, well-respected arguments against the Green tradition of greater bureaucratic powers, increased federal control, and heightening paranoia over environmental issues.

    “From the Civil War until the first Earth Day in 1970, the West’s politics, culture, and economy were oriented toward the exploitation of its natural resources. But the extractive sector no longer drives the Western economy and hasn’t for several decades. Today’s economic drivers are amenities, services, and symbolic manipulation, not the traditional material stuff of wood, wheat, water, and minerals. …

    “Here’s the reality some politicians ignore at their peril: we’ve high-graded our best, most accessible resources. The richest ores, finest timber, and best dam sites have been developed. The easy fruit has been picked and the Western economy can no longer rely on the extractive sector. No ghost dance will bring them back.

    “Ray Rasker notes that since 1970, “Montana has added over 150,000 new jobs, and not one of the new net jobs has been in mining, oil and gas, farming, ranching, or the woods products industry.” The extractive industries are notoriously unstable, and commodity prices always undulate. The timber industry, for example, has largely abandoned the West for the Southeast and foreign countries. …

    Now, increased opportunities in the West are created by high-tech enterprises and services. The service sector includes professional occupations in law, health care, software, data processing, education, and finance. Although they are not the traditional Western jobs, these occupations, like those in extractive industries, depend upon open space and natural resources.

    “Why? Because professionals seek locations rich in environmental amenities, e.g., wilderness, open space, fish and wildlife, and recreational opportunities. Data indicates the West’s roadless public lands, wilderness areas, free-flowing rivers, national parks and forests, open ranges, and healthy wildlife habitats generate much of our economic growth. Folks don’t move here by accident nor do they do so to maximize income—quality of life trumps.

    “The GOP and the Democrats compete for well-off and well-educated voters, those David Brooks describes in Bobos in Paradise: The New Upper Class and How They Got There, and the Democrats are clearly winning. This is no accident; the nation has become immensely wealthy, and with wealth and education comes heightened environmental sensitivity. When Americans become wealthy most think, or at least posture, Green.

    President Clinton capitalized on these demographic realties when he set aside 40 million acres of National Forest as roadless areas. Many fiscal conservatives and the vast majority of Westerners applauded the decision, even those who disliked Clinton.

    These roadless areas were undisturbed for good reason; most have low economic value. Without explicit or implicit subsidies, resource extraction on these lands is infeasible. Federal lands are political lands where heavy subsidies are the norm. Traditional politics have ignored or discounted the full costs of exploitation. Citizens now demand more honest accounting of both economic and environmental costs.

    A candidate who hopes to capture the West’s electoral votes should not take seriously any campaign policy that ignores links between ecology and economics. Westerners are Greener, more sophisticated, and better informed than 30 years ago. Few are dependent on traditional resource exploitation. A good candidate will discern the implications and propose appropriate policies.

    http://www.free-eco.org/articleDisplay.php?id=573 

    Inquiring minds want to know:

    – are only those in the American West “Greener, more sophisticated, and better informed than 30 years ago”, or is this true across all developed and emerging economies?

    – does “heightened environmental sensitivity” come with “wealth and education”?  Or is such “heightened environmental sensitivity” simply a ploy by the educated wealthy to use the tools of the state to restrict access by brave captains of the extractive industry to the public lands of the West (the better to go fly fishing)?

    – outside of the struggle for control over “public lands” in the West, are there any other areas where voters oppose policies that “ignore links between ecology and economics”?

    if “heightened environmental sensitivity” does come with “wealth and education”, what do we make of the concern that enviros, scientists, industry leaders, and politicians around the world all express concern about climate change and the pressure of economic activity on unowned commons like the atmosphere, oceans and tropical forests/wildlife?  More uninformed nonsense, led by evil man-haters?

    By not stridently demanding privatization of public lands, John Baden sounds like an “incrementalist” rather than a pure libertarian, and by urging policies that favor recognition of the relatively higher values in environmental amenities than in extractive industries, he sounds very much like an environmentalist statist.  

    Does it help us to better understand him, or the problems that concern him, if we call him a misanthropic “watermelon”?

     

    Warning:  If you are an Austrian, you have just been gravely polluted by reading this.  Seek help immediately, and recite the “Corrigan Creed” (or as some may have it, the “Reisman Rule”) at least five times.

    (If you missed it, the Corrigan Creed is here: http://mises.org/Community/blogs/tokyotom/archive/2007/12/17/holiday-joy-quot-watermelons-quot-roasting-on-an-open-pyre.aspx.)

    Does Cordato favor carbon taxes? McKitrick’s "innovative carbon tax proposal"

    December 10th, 2007 4 comments

    [Snark level – medium] 

    [update below]

    Austrian economist Roy Cordato is playing at collectivism by bringing favorable attention to Ross McKitrick’s “T3” carbon tax proposal on Cordato’s blog, Environment NC (hosted by the John Locke Foundation, where he is Vice President for Research & Resident Scholar). 

    Says Dr. Cordato:

    “Canadian economist/statistician Ross McKitrick has a good article in the Christian Science Monitor describing his innovative carbon tax proposal. The tax is tied to actual temperatures as measured in the tropical troposphere. It is an interesting approach in that it does not involve betting on the science coming from either side of debate.”

     McKitrick raised his intriguing carbon tax idea six months ago at the Financial Post

    Steve McIntyre put the proposal up at the Climate Audit blog – in a post which is apparently still open for comment.  This tax was discussed on ealier on the Mises blog here. Some comments by yours truly litter both sites.

    I’m not sure Dr. Cordato fully understands what he is up to – give the misanthropic enviros, “alternative energy” rent-seekers and their political gatekeepers an inch, and they’re guaranteed to take a mile.  If McKitrick’s idea gets any play at all, it’s probably to the effect that, despite his criticism of some scientific work, McKitrick thinks that climate change IS something to be taken seriously and that TAXES are an appropriate policy tool. 

    Dr. Cordato seems determined to help move the Overton Window further in the direction of the Warmers.  Is he intentionally yielding ground?

    [update:

    I note that Austrians who oppose environmental measures that involve the coercive machnery of the state would probably dismiss such measures as “faux environmentalism”.  Here, the T3 proposal of McKitrick and favorably commented on by Dr. Cordato is an example of such “faux environmentalism”.  I guess that makes ME the “faux environmentalist” for drawing our dear readers’ attention to Dr. Cordato’s post.  My humble apologies!]

    Categories: climate, cordato, enviros, mcintyre, mckitrick, tax Tags:

    Bali: Murdoch & 149 Other Top Vile Collectivists/Capitalists Call for Global Poverty …

    December 3rd, 2007 5 comments

    and for a legally binding UN framework to tackle climate change.  Just who are these vile collectivists, red enviros, misanthropes, and others caught up in the totally groundless AGW hysteria?

    [Snark Alert!]

    Let’s go to FOX News – which headlines “Top Corporations Demand Action on Global Warming”  Fox says that “more than 150 global companies — worth nearly $4 trillion in market capitalization — have signed a petition urging “strong, early action on climate change””.  Amazingly, the news report ends with a disclainer:  “FOXNews.com is owned and operated by News Corporation, which is among the signatories of the Bali Communiqué.”  http://www.foxnews.com/story/0,2933,314224,00.html

    Just what the heck is going on?

    On November 30, UK and EU Corporate Leaders Groups on Climate Change (spearheaded by the Prince of Wales) published the “Bali Communiqué”, by which leaders of 150 global companies encouraged world leaders to work for a comprehensive, legally binding United Nations framework to tackle climate change.

    The Bali Communiqué calls for:

    • “a comprehensive, legally binding United Nations framework to tackle climate change”;
    • “emission reduction targets to be guided primarily by science”;
    • “those countries that have already industrialised to make the greatest effort”; and
    • “world leaders to seize the window of opportunity and agree a work plan of negotiations to ensure an agreement can come into force post 2012 (when the existing Kyoto Protocol expires)”

    The vile collectivists provided the following business case:

    “The scientific evidence is now overwhelming. Climate change presents very serious global social, environmental and economic risks and it demands an urgent global response.

    “As business leaders, it is our belief that the benefits of strong, early action on climate change outweigh the costs of not acting:

    “The economic and geopolitical costs of unabated climate change could be very severe and globally disruptive. All countries and economies will be affected, but it will be the poorest countries that will suffer earliest and the most

    • The costs of action to reduce greenhouse gas emissions in order to avoid the worst impacts of climate change are manageable, especially if guided by a common international vision
    • Each year we delay action to control global emissions increases the risk of unavoidable consequences that will likely necessitate even steeper reductions in the future, causing potentially greater economic, environmental and social disruption.
    • The shift to a low-carbon economy will create significant business opportunities. New markets for low carbon technologies and products, worth billions of dollars, will be created if the world acts on the scale required

    “In summary, we believe that tackling climate change is the pro-growth strategy. Ignoring it will ultimately undermine economic growth.

    “It is our view that a sufficiently ambitious, international and comprehensive legally-binding United Nations agreement to reduce greenhouse gas emissions will provide business with the certainty it needs to scale up global investment in low-carbon technologies. We believe that an enhanced and extended carbon market needs to be part of this framework as it offers the necessary flexibility, allows for a cost-effective transition and provides financial support to developing countries.”

    Companies supporting the communiqué included the following:

    US-based: Coca-Cola, Dupont, Gap, GE, Johnson and Johnson, Nike, Pacific Gas and Electric, Sun Microsystems and United Technologies.

    European-based:  Anglo-American, British Airways, F&C Asset Management, Ferrovial, Nestle, Nokia, Rolls Royce, Shell, Tesco, Virgin and Volkswagen.

    Australian-based: Insurance Australia Group, Macquarie, National Australia Bank, News Corporation and Westpac.

    Chinese: Shanghai Electric, Zhufeng Technology and Suntech.

    More here: http://www.balicommunique.com/communique.html

    Well, it’s clear that they are all deluded and don’t care about impoverishing the rest of the world.  They certainly know nothing about science, economics or the potential difficulties that their companies might confront in facing the challenges that they allege.  They’re just sycophants and fellow-travellers of the evil, misanthropic “watermelon” enviros.  http://mises.org/Community/blogs/tokyotom/archive/2007/12/17/holiday-joy-quot-watermelons-quot-roasting-on-an-open-pyre.aspx.

     In other words, there’s nothing here folks; move along.

    Hysteria from McKinsey: Costs of Reducing U.S. Greenhouse Gas Emissions

    December 3rd, 2007 No comments





    McLinsey released an interesting report on November 30.  Details here:  http://www.mckinsey.com/clientservice/ccsi/greenhousegas.asp.


    The summary of the summary? 







    Consensus is growing among scientists, policy makers, and business leaders that concerted action will be needed to address rising greenhouse gas (GHG) emissions in the United States. The discussion is now turning to the practical challenges of where and how emissions reductions can best be achieved, at what costs, and over what periods of time.

    “The central conclusion
    The United States could reduce GHG emissions in 2030 by 3.0 to 4.5 gigatons of CO2e using tested approaches and high-potential emerging technologies. These reductions would involve pursuing a wide array of abatement options with marginal costs less than $50 per ton, with the average net cost to the economy being far lower if the nation can capture sizable gains from energy efficiency. Achieving these reductions at the lowest cost to the economy, however, will require strong, coordinated, economy-wide action that begins in the near future.”

    Categories: climate, enviros, mckinsey Tags: