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A Human-Precipitated Mass-Extinction?; a libertarian discussion of preferences about things unowned

July 16th, 2009 No comments

For the benefit of the curious and/or idle reader, I`m cross-posting from my little-used personal blog a short post on the above topic and the ensuing conversation.

(I note that my inaugural post at this LvMI-hosted blog covered a related topic:   “Too Many or Too Few People? Does the market provide an answer?“.)

 

Wednesday, April 01, 2009

Planet’s First-Ever Mass-Extinction Precipitated by Humans

Should we be alarmed at the current massive die-offs being noted in the animal and plant kingdoms? After all, new species arise and old species die off all the time. Its just nature taking its course, right? Not necessarily. What’s different about this die-off is that this is the only such event precipitated by a biotic agent: humans.

read more

posted by TokyoTom at 1:35 AM
9 Comments:
 
 
James Rothfeld said…
 
Wrong. One of the largest extinctions in the history of our earth was when oxygen from photosynthetic life forms began to reach levels that were toxic for anaerobic life forms. Granted, the victims were mostly bacteria and some other simple life forms, but – extinction is extinction.

So, humans are not the first biotic agent to lead to massive extinctions.

4/23/2009 01:43:00 AM  

 

TokyoTom said…

James, thanks for honoring me with a visit and comment.

Of course, I mainly blog at LVMI – http://mises.org/Community/blogs/tokyotom/ – and I`m not really quite sure what I did that caused this post (which is the intro to a longer piece that I didn`t write) to go up, but in any case I appreciate the engagement.

You have a valid point about the great switch from anaerobic to aerobic life, which many people seem to forget about, but:

– obviously the main comparison is which other great extinction events (caused by meteors/ volcanic/ climate events) that affected complex vertebrate and other life, not archaea or bacteria;

– the event you speak of actually CONTRIBUTED to the development of more complex life;

– there is plenty of anaerobic life still around and being discovered (even in rocks miles down), and we really have very little idea as to whether the switch to aerobic life caused any kind of massive loss of anaerobic species; and

– what we are now doing to the oceans – via “dead zones” resulting from fertilizer run-off and further changes expected from warming and pH changes will result in areas not “dead”, but occupied by less complex abearobic bacterial communities.

4/23/2009 03:20:00 AM  

 

James Rothfeld said…
 
Now you are weaseling out, Tom! You did not specify that you were only referring to complex vertebrae, but only seemed to talk about extinctions in general. I think this is arbitrary and obfuscates the point: the point is that extinctions are caused by all kinds of events, and at the time of the event, they are not horrible for most life forms (horrible being a function of going extinct).

The argument that the aerobic extinction contributed to more complex life forms does not really get us anywhere, since there is no reason to assume that higher life could not emerge out of anaerobic life. What can be said is that the aerobic extinction contribute to the emergence of complex aerobic life, but that’s simply proving the assumption, or whatever logical fallacy we are dealing with here. The likely reason anaerobic life is rather simple these days is that it is forced to live in rather confined environs, including the gut of aerobic life.

The world’s oceans seem to have passed through a number of anoxic events, and those life forms that made it through the malaise probably did quite nicely as competition was greatly reduced. I’m sure life as such will make it quite nicely through the next one as well. Whether we humans will make it through it remains to be seen, though I am actually quite optimistic (pessimistic??) that they will. In smaller numbers, but nonetheless.

I think it is too early to judge whether or not the current extinction will in fact be a disaster. I am in fact not even convinced we are really going through a particularly dramatic extinction – the claim about dozens or even hundreds of species going extinct is based on some pretty speculative reasoning.

As far as I know, there have only been about 300 or so documented extinctions in the last few centuries. I also don’t think the the extinction of species limited to very small local habitats should really be counted: if the only place you can find a particular animal is a small island or a specific mountain, I suggest the species is done for no matter what.

I also don’t think that anybody has yet established a relationship between species extinction and human survival (and don’t start with the buffalos – the populations at First Contact were human artifacts).

But, back to the dead-zones in the oceans: I am amused that few ecologists have yet made the link between agricultural subsidies and fertilizer run-off. The link is so blatant and in your face, this oversight is almost telling.

In any case, I came by your blog because that’s where clicking on your name at Crash Landing gets me.

Best,

JR

4/23/2009 06:32:00 AM  

 

TokyoTom said…
 
James, I was not weaselling out, but expanding on a point that you also acknowledged: “Granted, the victims were mostly bacteria and some other simple life forms.”

The fact that remains that if there is a wave of extinctions underway as a result of the rise of opportunistic and technological man (with various man-related extinctions starting millenia ago), this is clearly different from prior catastrophic extinctions, which resulted from external physical impacts on the planet. That`s the comparison being made, and reference to the initial shift to oxic life forms is interesting, but irrelevant.

“there have only been about 300 or so documented extinctions in the last few centuries. “

This of course tells us little, since even now we have no comprehensive catalog of life.

“I also don’t think the the extinction of species limited to very small local habitats should really be counted: if the only place you can find a particular animal is a small island or a specific mountain, I suggest the species is done for no matter what.”

I fear you are right as to the “no matter what”, but your conclusion that the extinction of localized species “shouldn`t count” is a value judgment. Good Austrians will recognize that others have equally valid preferences. Biologists and others familiar with the dimishing diversity of life express a deep sense of loss.

4/23/2009 11:50:00 AM  

 

James Rothfeld said…
 
Tom – I was just teasing about the weaseling in any case. What I am trying to get at is your last point: whether or not any of this is good or bad is in the eye of the beholder. Every activity has externalities – whether good or bad depends on the judgment of those affected, physically or otherwise, including emotionally.

So, yes, localized species extinction is certainly not good for the species affected or those who care about them. Maybe the world would be a better place with dodos and woolly mammoth in it, but maybe not. Who can tell?

I’m sure nomads think settled societies with their strict geographic borders stink, but farmers have little sympathy for dirty herders and their stomping herds.

Will the world be worse off if the only life forms to survive are those that serve human needs? Aesthetically, I would say no, but then again, those who will live in such a world will hardly miss what they have never known.

I don’t lose sleep because there are no more Aurochs, even though I think they were really amazing animals. I also don’t miss the dinosaurs, though other might differ.

In the end, it’s all a question of preference – and who am I to say that my preferences are any more worthwhile than those of others.

Here’s another question I was wondering about, by the way, and it’s serious – if a change in technology would bring about economic ruin for a particular region and its population, simply because it would make their only product useless, would the inventor/users of this technology have to compensate the people who were damaged? Would the users of word processing software have to compensate print employees for lost jobs? Would users of the internet have to compensate newspaper workers for lost jobs? I’m not being funny, it’s an important question that is directly relevant for the question of property rights in the context of environmental change. I am sure you see the relevance. I have no real answer to this (except gut opinion). Any thoughts?

4/24/2009 05:48:00 AM  

 

TokyoTom said…
 
“Maybe the world would be a better place with dodos and woolly mammoth in it, but maybe not. Who can tell?”

I agree completely that this is a question of human judgment. However, we should acknowledge that we are bumping some species off the planet and squeezing others drastically (and many to a completely unknown degree).

“Will the world be worse off if the only life forms to survive are those that serve human needs?”

Are you confident that the species that don`t survive don`t serve human needs? Many we simply have no clue about, while others, such as whales, dodos, passenger pigeons, Steller sea cows and numerous crashed/crashing fisheries have been extinguished and are threatened not because of lack of utility, but simply because nobody owned them.

How much more shall we destroy, for want of investment in property rights/commons management?

” would say no, but then again, those who will live in such a world will hardly miss what they have never known.”

Only partly true, as some of the world that we have been losing has been and will be documented.

“would the inventor/users of this technology have to compensate the people who were damaged?”

Not in a libertarian order. But I fail to see the relevance to “environmental” problems, either those that involve activities that damage the persons or property of others, or damage resources that are communally owned or are owned under regimes that fail to protect the resources. Care to clarify?

5/19/2009 01:04:00 PM  

 

James Rothfeld said…
 
My basic point is that every action has effects at least one person would perceive as injurious to their well-being, and would prefer that it rather not happen. If we were to refrain from all such actions, we would probably lose the freedom to act at all. Fundamentally, I want to argue that a ‘negative externality’ that cannot be dealt within a libertarian order has to be simply accepted as a given along the lines of ‘shit happens’.
If we cannot find a non-libertarian solution to an environmental problem, than so be it. That’s my only point. Nothing more, nothing less. Which is why I agree that in a libertarian order it’s your tough luck that you lose your job because somebody else is smarter. It also means that if, for example, people using a specific aquifer cannot agree on a libertarian solution to its management simply have to suck it up. Or that if I live on a nice piece of land with a pretty view, and my neighbor erects an ugly building with garish design elements spoiling my aesthetic enjoyment, I’ll have to suck it up – unless the two of us can agree on a solution.
I think some environmental problems have no libertarian solution. I don’t know which they are, but maybe we simply have to accept that.
For example, there may be no libertarian solution to fighting asteroids about to hit our planet. Maybe we could collectively deal with it, but maybe not enough people can be bothered – or believe in it – and so the few who care simply have to deal with the fact that they will die, well-knowing that a solution was at hand.

To repeat the point: in my hierarchy of needs, freedom comes before security. If the price of freedom is to live in a world that will experience dramatic changes in climate, and if the only way to avoid is were to give up my personal freedom – then I’ll accept the dramatic changes in climate.

That’s my only point.

5/20/2009 09:55:00 AM  

 

TokyoTom said…
Thanks for the clarifications, James.

I`m not so far away from you, but come to different conclusions: where there are obvious commons problems, those who care about the problem should obviously work to resolve them.

This includes libertarians who are personally most interested in individual freedom, freedom that is imperilled by the state-heavy “solutions” that often underlie the problem (to the benefit of entrenched insiders) in the first place.

Far from leaving the field of battle to others, libertarian ought to be proactively trying to mediate, lest what they value most highly be trampled.

5/20/2009 10:51:00 AM  

 

 James Rothfeld said…
Seems we ran out of disagreements šŸ™‚
5/20/2009 09:47:00 PM  

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.]

    "Worldwatch" enviro group praises moves to water rights and markets in China

    May 18th, 2008 No comments

    Yingling Liu, manager of the China Program at the Worldwatch Institute, has praised recent steps by Chinese water authorities to clarify rights to water and to encourage water trading as a means to resolve serious issues over the use of water.

    Here are a few key excerpts for the article (“Water Trading in China: A Step Toward Sustainability”):

    “In recent years, scarcity and pollution of water have become the paramount environmental woe in China. Numerous reports and books have exposed China’s water crisis, depicting a nation suffering in the face of black-running rivers and dried-up waterways. Nationwide, the per capita availability of fresh water is only one-quarter of the world average.

    “But a new regulation from the nation’s water authority may hold the key to achieving water sustainability in this thirsty country. The Interim Measure for Water Quantity Allocation, which came into effect on February 1, provides a framework for allocating water rights across provinces, autonomous regions, and municipalities that are under the direct jurisdiction of the central government. The ruling’s 17 stipulations lay out the principles, mechanisms, and practices for water allocation, potentially opening Chinese markets for water trading and enabling the use of market tools to promote conservation.

    “The need for better delineation of water rights in China has become increasingly urgent. Water demands within shared river basins are frequently at conflict due to industrial expansion and urbanization. … Such competing claims are prevalent in nearly all of China’s major river basins.

    “As water demands keep rising, water waste remains pervasive due to the current “open-access” nature of China’s water resources. According to statistics, in 2003 China’s utilization coefficient for agricultural irrigation water was only 0.4-0.5, compared to 0.7-0.8 in industrial countries. Water use per unit of gross domestic product was as high as 413 cubic meters, four times the world average, while water use per value added of industry was 218 cubic meters, 5 to 10 times the level in industrial countries. China’s industrial water-recycling rate was only 50 percentļ¼Œcompared to 85 percent in industrial countries.

    “The traditional practices of promoting conservation through education, moral suasion, and technological innovation are no longer able to keep up with China’s rising water demand. By allocating water rights and introducing market-based tools, the new regulation may accelerate progress toward water saving, protection, and pollution control.”

    More here:  http://blogs.tnr.com/tnr/blogs/environmentandenergy/archive/2008/05/18/a-step-toward-water-markets-in-china.aspx

    Query:  Is this really a step in the right direction, or should it be faulted as state action in creating property rights?

    Categories: China, markets, state action, water rights Tags: