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Limited Liability, Part 4: Libertarians sidestep the gift of limited liability & the resulting wreckage by arguing it's now unfair to make irresponsible shareholders liable

September 25th, 2010 No comments

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

TokyoTom September 21, 2010 at 8:40 am

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

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

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

Jon Leckie September 21, 2010 at 9:10 am

Hello Tokyo, thanks for a powerful reply. …

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

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

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

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

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

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

 

TokyoTom September 21, 2010 at 2:01 pm

Jon:

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

A few comments in response:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TT

 

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

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

TokyoTom September 22, 2010 at 12:00 am

Agreed; that’s MY point exactly.

Jon Leckie September 22, 2010 at 4:40 am

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

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

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

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

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

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

Jon Leckie September 22, 2010 at 6:24 am

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

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

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

TokyoTom September 23, 2010 at 12:30 pm

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

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

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

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

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

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

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

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

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

TT

TokyoTom September 23, 2010 at 12:48 pm

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

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

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

 

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

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

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

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

TokyoTom September 23, 2010 at 11:20 am

Lord Bungulous Bringer of Beefcake:

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

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

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

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

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

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

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

TT

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

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

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

TokyoTom September 23, 2010 at 1:09 pm

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

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

TokyoTom September 23, 2010 at 9:39 pm

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

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

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

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

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

TT

 

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

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

What about someone who hands his money to some third party to manage and this third party puts his money into BP? Is he more or less liable than someone who does it directly?

Your distinction is not helpful. “offers money for the profits he expects to gain from the company’s business model” – this is just having dividends stuck into your bank account. How is this different in your view from the “services” you mention in the first part?

TokyoTom September 24, 2010 at 11:43 am

TKS, thanks for your questions.

I am quite aware of the point that, as a consequence of the existing grant of limited liability, shareholders have little actual control over public companies in which they have shares of stock and thus – along with zero legal liability for corporate torts – very little moral responsibility for corporate behavior. But such observations of the status quo cannot serve to justify the state intervention that has so neatly divorced the supposed “owners” of a business from any such liability.

While the differences between shareholders and customers now may appear to be slight, this is a situation (where there re no human actually owning the business and any downside risks) created artificially by government; I can assure you that the differences between owners and customers is much more stark in partnerships and other forms of business enterprise where the owners are not given a liability shield by government and thus bear personal risk if things go wrong. While this largely as we think it should be, I have never heard a libertarian or legal argument that those who purchase products from an enterprise should have any legal liability for harms that the business causes to others (though it is not uncommon to see moral suasion pressure being put on customers as well as creditors and shareholders when an enterprise engages in harmful or objectionable activities).

..[You might have noted that I have remarked several times that I am NOT arguing FOR a general rule that shareholders SHOULD be liable for corporate torts; rather, I haveļ¼š

(1) pointed out that limited liability itself has served to muddle the question of whom, exactly, should be responsible for the very real harms that corporatons frequently cause,

(2) noted that the limited-liability corporate form has enabled risk-generation and -shifting on a massive scale, with innocent third parties frequently being stuck holding the bag (not solely when liabilities exceed assets, but more generally since the cycle of escalating government interventions to rein in corporations perversely ends up raising barriers to entry and giving corporations “rights to pollute” that curtail recourse even when sufficient assets are available),

(3) argued that libertarians should reconsider the grant of limited liability for torts (as opposed to limited liability as to those who contract with the corporation on a voluntary basis) not simply because it is clearly non-libertarian to begin with, but because it has had profound consequences – consequences at a serious enough level that state-loving libertarians concede simply by troubling themselves to argue against curtailing limited liability,

(4) noted that the most efficiacious way to roll back the regulatory state lie in the direction of shifting ultimate responsibility for managing risks to enterprise owners (and ending the counterproductive regulatory risk-management experiment), and

(5) noted that a curtailment of limited liability for torts could be hedged by shareholders via insurance, and could be achieved by state governments and the federal government offering more lenient regulation to busness enterprises that operate as partnerships, unlimited liability corporations, or in cases where shares are not fully paid up so that calls for signifcant additional capital could be made against shareholders if needed to pay claims.

IOW, the insistence by Kinsella . . . that one must “provide a theory of liability that coherently distinguishes shareholders from any other patron of the company” BEFORE one can examine the justifications FOR and the consequences of the state grant of limited liability is both sadly non-libertarian and dangerously blind and shallow.

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Limited Liability, Part 3: limited liability for torts is a non-libertarian gift from the state that has done tremendous damage – both literally and in driving the growth of a massive regulatory state

September 25th, 2010 No comments

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

Jon Leckie September 18, 2010 at 5:08 am

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

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

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

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

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

I didn’t get the scholarship.

JUL

TokyoTom September 18, 2010 at 8:16 am

Jon, thanks for your comments.

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

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

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

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

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

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

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

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

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

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

TT

 

 

TokyoTom September 18, 2010 at 10:45 am

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

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

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

 

 Jon Leckie September 18, 2010 at 11:14 am

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

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

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

TokyoTom September 21, 2010 at 8:13 am

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

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

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

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

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

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

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

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

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

I encourage you to investigate further at my blog.

TT

 

TokyoTom September 21, 2010 at 9:04 am

Geoffrey and Stephan, cat got your tongue?

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

Your friendly neighborhood envirofascist,

TT

Categories: Uncategorized Tags:

OMG – those ecofascists hate statist corps, too, and even want to – GASP – end that oh-so-libertarian state grant of limited liability!

September 21st, 2010 2 comments

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

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

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

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

Stephan Kinsella

 

From what Ivā€™e seen, most libertarians who oppose ā€œlimited liabilityā€ donā€™t really understand how it works or really know what they are criticizing. To oppose limited liability means there should be liability in the first place. But should there? For whom? For what? Shareholders should be liable for torts committed by employees of a company the shareholder owns stock in? But why? That is vicarious responsibilty. Why is the shareholder liable for the torts of another person, any more than the tortfeasorā€™s mom, sister, roommate, co-worker is, or stakeholder, creditor, debtor, supplier, contractor, customer of the corporation is? For more on this see: http://www.stephankinsella.com/?s=hessen+pilon

TokyoTom September 17, 2010 at 10:04 am

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

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

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

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

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

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

Regards,

TT

Stephan Kinsella September 17, 2010 at 10:21 am

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

And people almost always confuse limited liability of shareholders with that of managers. and they donā€™t understand the role of shareholders, or directors, contrasted with managers. And they mix in unprincipled incentive concerns. Itā€™s just a mess.

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

TokyoTom September 18, 2010 at 6:40 am

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

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

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

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

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

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

Regards,

Tom

 

panika2008 September 17, 2010 at 12:24 pm

ā€œLimited liability is as bogus as pretending all your debts are really owed by your invisible friend.ā€

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

Ā TokyoTom September 18, 2010 at 7:21 am

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

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

TT

panika2008 September 19, 2010 at 10:08 am

How can anyone become an involuntary creditor of anyone otherwise than by criminal action (extortion?) or government subsidy? I donā€™t quite understand what you mean.

TokyoTom September 20, 2010 at 10:40 am

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

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

Jon Leckie September 18, 2010 at 5:08 am

Tokyo Tom, good morning. Iā€™m willing to engage in a good dialogue with you on these interesting points.

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

It seems to me that tortious liability canā€™t exist without a state to impose the tortious duties by fiat, whereas limited liability can be created through contract (perhaps with initially high transaction costs, but standard contratual forms should emerge over time). Do you agree or disagree? What are your thoughts? It seems to me that if you think thereā€™s any truth in this position, you have to engage in a rather deep rethink of the way you express your argument against limited liability.

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

Just for background, I have sympathy with your view, even though I no longer agree. When I was at school I applied for a scholarship for an LLM to explore the idea of piercing the corporate veil for companies that engage in human rights violations. The subset is small, mainly companies engaged in extractive industries in the developing world, and I thought that if you allow unlimited liability for such violations, you create incentives for companies engaged in such industries to implement and publish internal procedures designed to avoid such violations; otherwise no one will invest in them. So in preparing for the interview, I presented the idea to some colleagues at the research centre at which I was an assistant, one of them asked why shareholders should bear responsibility for the human rights violations of the company in which they invest. I didā€™t think I needed to consider that, it was obvious, right? Whatever it takes to prevent such violations should be considered.

I didnā€™t get the scholarship.

JUL

TokyoTom September 18, 2010 at 8:16 am

Jon, thanks for your comments.

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

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

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

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

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

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

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

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

Too Many or Too Few People? Does the market provide an answer? ā€“ TTā€™s Lost in Tokyo http://bit.ly/8zlecI

My ā€œAvatarā€ posts: TTā€™s Lost in Tokyo http://bit.ly/9s32uD

TT

TokyoTom September 18, 2010 at 10:45 am

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

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

TTā€™s Lost in Tokyo http://bit.ly/4nr2Ay

Ā Jon Leckie September 18, 2010 at 11:14 am

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

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

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

TokyoTom September 21, 2010 at 8:13 am

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

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

And sure thereā€™s ā€œnever a guarantee of returns to shareholdersā€, ā€œany guarantee that a company will commit a tortā€, nor ā€œa guarantee that any such tort will result in liability that exceeds the available assets of the company and thus leaves third parties bearing a great loss.ā€ But corporations choose to ring-fence all of what they see as risky businesses in separate subsidiaries, precisely to limit the size of the bag if the business fails and/or third parties are injured.

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

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

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

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

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

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

IĀ encourage you to investigate further at my blog.

TT

TokyoTom September 21, 2010 at 8:40 am

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

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

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

TokyoTom September 21, 2010 at 9:04 am

Geoffrey and Stephan, cat got your tongue?

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

Your friendly neighborhood envirofascist,

TT

Jon Leckie September 21, 2010 at 9:10 am

Hello Tokyo, thanks for a powerful reply. You say ā€œaccuseā€, well thatā€™s a perjorative word, I guess itā€™s technically correct (that I did so) but please credit me with good intentions. I apologise for my immediately preceding post being worded rather shortly, Iā€™ve trying to strike a better tone here.

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

Ultimately, extraordinary claims require extraordinary evidence. You put so much responsiblity at the feet of limited liability that I donā€™t think itā€™s unfair of me to ask for more evidence, better arguments (I may find them on further reading of your blog :-)). I think Stephan Kinsellaā€™s request of you earlier on this page remains valid, to quote:

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

I believe I understand your response: ā€œno one else gets to avoid tortious liability to third parties based EITHER on the grant of limited liability of the state or by a private contract, so why should people who stand behind an LLC get to do so? The existence of limited liablity (at least vis a vis third parties) is not the default position, theyā€™re a creation of the state.ā€ (Is that right? Iā€™ve tried to be fair, Iā€™m not interested in strawmen). Nonetheless, I donā€™t think that is a satisfactory libertarian theory of cause for tortious liability for reasons Iā€™ve tried to set out already (contractual liability can exist absent a state (and thus so can limited liability) how would tortious liability exist absent the state?) and so Kinsellaā€™s request remains valid.

If you think that question is covered, my other objection remains: it must ultimately be demonstrated that the abuses outweigh the upside. The law of unintended consequences applies to every proposal for change, and I donā€™t think you give fair credit to the role that limited liablity entities play in an advanced economy.

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

Ā 

TokyoTom September 21, 2010 at 2:01 pm

Jon:

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

A few comments in response:

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

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

ā€œyou donā€™t seem to acknowledge any benefits to limited liabilityā€

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

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

ā€œcompliance and monitoring is not costless and that the burden can sink an otherwise profitable and socially beneficial project.ā€

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

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

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

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

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

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

ā€œmy other objection remains: it must ultimately be demonstrated that the abuses outweigh the upside. The law of unintended consequences applies to every proposal for change, and I donā€™t think you give fair credit to the role that limited liablity entities play in an advanced economy.ā€

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

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

TT

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

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

TokyoTom September 22, 2010 at 12:00 am

Agreed; that’s MY point exactly.

Jon Leckie September 22, 2010 at 4:40 am

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

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

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

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

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

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

Jon Leckie September 22, 2010 at 6:24 am

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

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

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

TokyoTom September 23, 2010 at 12:30 pm

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

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

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

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

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

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

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

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

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

TT

TokyoTom September 23, 2010 at 12:48 pm

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

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

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

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

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

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

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

TokyoTom September 23, 2010 at 11:20 am

Lord Bungulous Bringer of Beefcake:

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

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

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

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

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

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

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

TT

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

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

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

TokyoTom September 23, 2010 at 1:09 pm

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

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

TokyoTom September 23, 2010 at 9:39 pm

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

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

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

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

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

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

TT

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

ā€œOne offers money in exchange for goods or services, the other offers money for the profits he expects to gain from the companyā€™s business model.ā€

What about someone who hands his money to some third party to manage and this third party puts his money into BP? Is he more or less liable than someone who does it directly?

Your distinction is not helpful. ā€œoffers money for the profits he expects to gain from the companyā€™s business modelā€ ā€“ this is just having dividends stuck into your bank account. How is this different in your view from the ā€œservicesā€ you mention in the first part?

TokyoTom September 24, 2010 at 11:43 am

TKS, thanks for your questions.

I am quite aware of the point that, as a consequence of the existing grant of limited liability, shareholders have little actual control over public companies in which they have shares of stock and thus ā€“ along with zero legal liability for corporate torts ā€“ very little moral responsibility for corporate behavior. But such observations of the status quo cannot serve to justify the state intervention that has so neatly divorced the supposed ā€œownersā€ of a business from any such liability.

While the differences between shareholders and customers now may appear to be slight, this is a situation (where there re no human actually owning the business and any downside risks) created artificially by government; I can assure you that the differences between owners and customers is much more stark in partnerships and other forms of business enterprise where the owners are not given a liability shield by government and thus bear personal risk if things go wrong. While this largely as we think it should be, I have never heard a libertarian or legal argument that those who purchase products from an enterprise should have any legal liability for harms that the business causes to others (though it is not uncommon to see moral suasion pressure being put on customers as well as creditors and shareholders when an enterprise engages in harmful or objectionable activities).

..[You might have noted that I have remarked several times that I am NOT arguing FOR a general rule that shareholders SHOULD be liable for corporate torts; rather, I haveļ¼š

(1) pointed out that limited liability itself has served to muddle the question of whom, exactly, should be responsible for the very real harms that corporatons frequently cause,

(2) noted that the limited-liability corporate form has enabled risk-generation and -shifting on a massive scale, with innocent third parties frequently being stuck holding the bag (not solely when liabilities exceed assets, but more generally since the cycle of escalating government interventions to rein in corporations perversely ends up raising barriers to entry and giving corporations ā€œrights to polluteā€ that curtail recourse even when sufficient assets are available),

(3) argued that libertarians should reconsider the grant of limited liability for torts (as opposed to limited liability as to those who contract with the corporation on a voluntary basis) not simply because it is clearly non-libertarian to begin with, but because it has had profound consequences ā€“ consequences at a serious enough level that state-loving libertarians concede simply by troubling themselves to argue against curtailing limited liability,

(4) noted that the most efficiacious way to roll back the regulatory state lie in the direction of shifting ultimate responsibility fpr managing risks to enterprise owners (and ending the counterproductive regualtory risk-management experient), and

(5) noted that a curtailment of limited liability for torts could be hedged by shareholders via insurance, and could be achieved by state governments and the federal government offering more lenient regulation to busness enterprises that operate as partnerships, unlimited liability corporations, or in cases where shares are not fully paid up so that calls for signifcant additional capital could be made against shareholders if needed to pay claims.

IOW, the insistence by Kinsella . . .Ā that one must ā€œprovide a theory of liability that coherently distinguishes shareholders from any other patron of the companyā€ BEFORE one can examine the justifications FOR and the consequences of the state grant of limited liability is both sadly non-libertarian and dangerously blind and shallow.

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Poor statists! If we close our eyes tightly enough, we can see clearly that Corporations are innocent VICTIMS, of governments that foist on them meaningless grants like limited liability & IP, and of malevolent, grasping citizens

May 10th, 2010 1 comment

I pulled out my peashooter the other day and levelled a few criticisms (“Risk-shifting, BP and those nasty enviros“) at  Lew Rockwell‘s Feel Sorry for BP?.  I don’t imagine that Lew noticed, but my buddy Stephan Kinsella did.

I have long noted the reflexive defense of corporations by prominent Austrians and the stubborn unwillingness to closely examine the role that the special grants to corporate investors that lie at the core of the problem of snowballing corporate statism, spiralling politicized rent-seeking battles, incompetent government and concupiscient and grand-standing politicians. So Stephan’s comments come as no surprise:

1.  Stephan chooses to set the stage with a bunch of labels –  “enviro-global-warming anti-corporation libertarian”. Whatever makes you happy, Stephan. I know you and others have a hard time resisting the urge, which is why I often playfully sign off as the resident friendly enviro fascist! Nah, couldn’t possibly be a “real” libertarian.

On corporations, the “environment”, and climate – as on central banking, fiat currency and the whole mess of banking and capital markets regulation – I’m simply anti-un-contracted-for-risk-shifting-and-government-enabled-moral-hazard and arguments against rent-seeking that ignore existing special deals.

But if it’s easier, just keep calling me”anti-corporation” and continue to lump me in with “enviro-fascists”.

 2.  I had wondered: 

Even if one concedes that some criticisms of BP will be unfair, how can BP possibly be cast [by Lew] as the LEADING victim – as opposed to all of the others whose livelihoods or property are drastically affected by this incident, which they had no control over whatsoever?

Stephan’s lame response?

BP is a victim in the sense that a terrible tragedy just happened to it, and it’s gonna cost it dearly. It’s the leading victim assuming the others damaged are going to be compensated from BP. The point is it’s a bad thing that’s happened to it.Why not feel sorry for them?

Really, Stephan?  BP deliberately measures and takes risks as part of its business; no one else who has been or maybe injured had a clear concept of such risks or either assumed them or had any ability to control them. Clearly, BP is the one that has interfered with others’ use and enjoyment of their own property, of common property and of government-owned property; in law, we call them “tort-feasors”.  They are not a “victim” in any sense that we commonly apply in situations like this. Empty word games like yours turn reality in its head. Right, Toyota is a victim when its cars’ brakes have problems, TVA is a “victim” when its coal fly ash dams break, and so are others who “unintentionally” injure the health or damage the property of others – when latent risks materialize or they are caught at it and suffer some economic loss as a result.

It’s hard to believe you want to further support Lew’s absurd claim that BP is the leading victim now – we simply have assume that in the future, BP or someone else will throw some compensation at all of those other unworthy, insignificant passive victims. Nice.

Sure, it’s too bad that this happened, all around. BP gambled (heroically?) to make money; everyone has lost. Poor BP!

3. Lew: “The incident is a tragedy for BP and all the subcontractors involved. It will probably wreck the company”

Me: 

The incident will certainly be costly for the firms involved, but the firms will survive the death of employees, and there is certainly very little risk indeed that BP will be “wrecked” by the spill. Far from it; it is unlikely that BP will even bear the principal costs of cleanup efforts, much less the economic damages to third parties that federal law apparently caps at $75 million.

Have you not heard of “INSURANCE”? A little thinking (and Googling) would tell you that BP (and its subcontractors) has plenty of it. To the extent BP is NOT insured, it has ample capability to self-insure, unlike all of the fishermen, oystermen and those in the tourist industry who are feeling significant impacts. Insurers will bear the primary burden, not BP.

Stephan:

Obama has threatened BP and they have caved in, agreeing to pay above the $75M cap. And the cap was in exchange for a tax on oil companies to be put into the Oil Spill Liability Trust Fund for such emergencies–do you think that BP will be able to get that tax refunded? Naah.

Sounds like you’re agreeing that this incident is unlikely to “wreck”BP, given insurance, self-insurance and the $1.6 billion Oil Spill Fund. But it sounds like you also are suggesting that BP has every right to negotiate with government for liability caps. Interesting.

4. Lew:   “we might ask who is happy about the disaster: 1. the environmentalists, with their fear mongering and hatred of modern life”

Me:

Sorry, but this is perverse: enviros might feel that they have been proven right – and you might be annoyed that they can make such a claim – but they certainly aren’t “happy” with any of the loss of life, damage to property or livelihoods of the little guy (or of bigger property owners), or to a more pristine marine environment that they value.

Stephan: 

Aren’t happy? Have you seen, say, Spill Baby Spill, Boycott BP! ? And another tolerant, caring liberal on Slate’s Political Gabfest Facebook page said, “I don’t get the calls for pity. Boohoo another oil giant might have bankrupted itself.” These misanthropic sickos oppose nuclear power, which makes fossil fuels necessary. They act like they hate BP. Why? For making a mistake? Mistakes are inevitable. For drilling for oil? Why? We need oil.

Let me repeat: some might feel vindicated and be eager to use this incident to bash BP, etc. – people/firms certainly are fighting over government – but that doesn’t make them “happy” that disaster has occurred.

You apparently missed it, but there were plenty of “misanthropic sickos” on Lew’s comment thread who expressed thoughts similar to “I don’t get the calls for pity. Boohoo another oil giant might have bankrupted itself.”

The rest of this is also packed with nonsense.  Funny that Austrians fail to overlook that enviro opposition to nukes and to other fossil fuels is more than a little related to government’s dirty role in the industries, including liability caps like those present here. Do Austrians “hate” banks, securities firms and AIG for making “mistakes”? But aren’t mistakes “inevitable”? And don’t we need lenders and insurers? And a domestic auto industry?

Just what do these utilitarian arguments have to do with libertarian principles, anyway?

5.   Me:

[Lew’s] projection of happiness at damages to common resources/private property and hatred of modern life is especially perverse, given your own explicit recognition that government ownership/mismanagement of commons, and setting of limits on liability both skew the incentives BP faces to avoid damage, and limit the ability of others (resource users and evil enviros) to directly protect or negotiate their own interests. Why is the negative role played by government any reason to bash others who use or care about the “commons”?

Stephan: No libertarian is in favor of liability caps. What is he talking about?

Simple, Stephan. Lew explicitly recognizes that government has screwed up  the ability of enviros and others who have conflicting preferences about the use of resources to engage in voluntary transactions that would advance mutual welfare – yet he chooses to bash those whose preferences are frustrated by government, while feeling sorry for those whose preferences are favored. What is remotely even-handed – or Austrian – about this imbalance? Is it simply that it’s okay for those who make omelets to take eggs from others, since the omelet “makers” are being “productive”?

6.  Me:

We have seen Austrians – sympathetic to the costs to real people in the rest of the economy – rightly call for an end to a fiat currency, central banking and to moral-hazard-enabling deposit insurance and oversight of banks. In an April 9 post by Kevin Dowd on the financial crisis, we even had a call “to remove limited liability: we should abolish the limited-liability statutes and give the bankers the strongest possible incentives to look after our money properly” – but Dowd’s comments simply echoed in the Sounds of Silence. Why do you and others refuse to look at the risk-shifting and moral hazard that is implicit in the very grant of a limited liability corporate charter – not only in banking, but in oil exploration and other parts of the economy?

Stephan:

Removing artificial caps on liability has nothing to do with the limited liability of passive shareholders in a corporation. Their liability is limited simply because they are not causally responsible for the torts of employees of the company in which they hold shares.

I suspect this is the key reason why Stephan troubled himself to respond, but surely he can see it is not only counterfactual, but dodges any consideration of the consequences of limited liability in terms of fuelling industrialization and fights over using government to check corporate excesses. Investors then and now deliberately choose to conduct business activities through corporations precisely because government absolves owners from any liability in excess of enterprise assets.  While it is possible for voluntary counterparties (employees, lenders and others doing business with the firm) to agree in advance to limit their resources solely to enterprise assets, those who are injured by acts of companies or their employees and agents do not in advance choose the nature of the those who are responsible for harming them. Accordingly, the broad blanket grant of limited liability to corporations is clearly anti-libertarian.

Accordingly, dividends received by shareholders from risky activities are not clawed back if risks are realized and claims exceed corporate assets. Further, shareholders are given disincentives from too closely directing manage risk (for fear of claims that they have direct responsibility for torts). When combined with other corporate attributes (unlimited life & purposes, relative anonymity of ownership, remoteness of owners from communities in which the firms operate, and ability of powerful firms and wealthy investors to influence judges, legislators, bureaucrats and other officials), we have seen a steady erosion of common law and growth in the regulatory state – as citizens fight to limit the risks and costs that corporations impose on individuals and communities. Is Stephan unaware of the central role of corporations in rent-seeking battles? In the perversion of the 14th Amendment – designed to protect emancipated slaves and Chinese coolies – into a weapon to elevate corporations over the states, and to permanently shift power to the Federal government?

Just as most commentators overlook the massive moral hazard and risk-shifting that is part and parcel of the federal oversight of banking (necessitated by deposit insurance and fractional banking), so do Stephan and Lew insist on keeping their eyes closed to the legacy of risk-shifting, statism and escalating fights over increasingly incompetent and corrupt government. Why?

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Limited liability produces both pollution and political meddling: Block on Environmentalism

December 23rd, 2008 No comments

In my recent post on limited liability, I argued that one of the perverse consequences of limiting shareholder responsibility for corporate torts was to create the moral hazard by which investors could capture the upside of risky activities that imposed costs on others, without having to worry about whether the harms such activities may impose on others exceeded the benefits to the firm. 

This dynamic can be clearly seen in the historical growth of various environmental torts, which expanded as courts, taking a signal from government policy to favor industry, turned away from a strict enforcement of property rights.  The result was massive pollution, which enriched corporate owners while transferring costs to others.  The further result?  The massive resort to federal regulatory approaches that further undermined property rights, not only by dictating to industry but by giving firms that complied with regulations a “right to pollute” within such bounds, regardless of harms caused to others.

Walter Block captures some of these dynamics in his excellent piece on the need to return to a property rights approach to environmental harms,  “Environmentalism and Economic Freedom: the Case for Private Property Rights”, Journal of Business Ethics 17: 1887–1899 (1998).  An excerpt is below (emphasis added):

But then in the 1840s and 1850s a new legal philosophy took hold. No longer were private property rights upheld. Now, there was an even more important consideration: the public good. And of what did the public good consist in this new dispensation? The growth and progress of the U.S. economy. Toward this end it was decided that the jurisprudence of the 1820s and 1830s was a needless indulgence. Accordingly, when an environmental plaintiff came to court under this new system, he was given short shrift. He was told, in effect, that of course his private property rights were being violated; but that this was entirely proper, since there is something even more important that selfish, individualistic property rights. And this was the “public good” of encouraging manufacturing.

Under this legal convention, all the economic incentives of the previous regime were turned around 180 degrees. Why use clean burning, but slightly more expensive anthracite coal rather than the cheaper but dirtier high sulfur content variety? Why install scrubbers, and other techniques for reducing pollution output, or engage in environmental research and development, or use better chimneys and other smoke prevention devices, or make locational decisions so as to negatively impact as few people as possible? Needless to say, the incipient forensic pollution industry was rendered stillborn.

And what of the “green” manufacturer, who didn’t want to foul the planet’s atmosphere, or the libertarian, who refused to do this on the grounds that is was an unjustified invasion of other people’s property? There is a name for such people, and it is called “bankrupt.” For to engage in environmentally sound business practices under a legal regime which no longer requires this is to impose on oneself a competitive disadvantage. Other things equal, this will guarantee bankruptcy.

From roughly 1850 to 1970, firms were able to pollute without penalty. This is why “there is no way to force private polluters to bear the social cost of their operations” a la Pigou; this is why there was a Samuelsonian “divergence of social and private costs.” This was no failure of the market. It was a failure of the government to uphold free enterprise with a legal system protective of private property rights.

In the 1970s a “discovery” was made: the air quality was dangerous to human beings and other living creatures. Having caused the problem itself, the government now set out to cure it, with a whole host of regulations which only made things worse. There were demands for electric cars, for minimal mileage per gallon for gasoline, for subsidies to wind, water, solar and nuclear power, for taxes on coal, oil, gas and other such fuels, for arbitrary cutbacks in the amount of pollutants into the air. The nation wide 55 mile per hour speed limit was not initially motivated by safety considerations, but rather by ecological ones. “Rent seeking” played a role in the scramble, as eastern (dirty burning sulfur) coal interests prevailed over their western (clean burning anthracite) counterparts. The former wanted compulsory scrubbers, the latter wanted the mandated substitution of their own coal for that of their competitors.

FN 23. From 1845 to 1970, approximately, polluters had a free run of the atmosphere, other people’s property and their lungs. From roughly 1970 to 1995, and counting, there was concern for invasive air and water borne pollutants, but only command and control (and in the last few years tradeable emissions rights schemes) regulations. Provision for environmental lawsuits is still, as of this 1995 writing, virtually nonexistent. See Horwitz (1977), Block (1990, pp. 282–285).

The Bundys, the BLM and the fruits of Govt-owned “property”

April 17th, 2014 No comments

[cross-posted from The Anti-Establishment Center Community on Facebook]

A few thoughts on the notion of Govt-owned “property”, in connection with the radical misanthropes who have been ranching in Nevada for 100+ years on “Federal land”.

I’m afraid it’s turtles all the way down, with respect to corrupt “Govt ownership,” particularly with respect to the politics and special interests relating to the Bundy Ranch and Gold Butte:

http://www.infowars.com/breaking-sen-harry-reid-behind-blm-land-grab-of-bundy-ranch/

Also, please consider the corrupt mining of coal, oil, gas and hard rock minerals, our forests and offshore resources, including fisheries — from BP/Gulf to Alberta’s oil sands.

Then consider the corrupt railroad grants and payments, the creation of ā€Ŗ#ā€ŽLimitedLiabilityā€¬ corporations, and the granting to them of pollution permits and use of Govt eminent domain powers.

Finally, don’t ignore all the ridiculous, expensive and environmental Federal hankypanky/”Defense” activities — including decades of open-air nuclear bomb testing — that are possible because the Govt asserted territorial claims over vast resources in which natives, Mexicans and tens of thousands of Americans had already “homesteaded” and lived in one way or another. The Feds have long been and continue to be agents for wealthy private interests to take control of land already used by others.

The destruction of the Appalachians is a long historical example of rich men using government to take land from others who were there first, and using state-made corporations to hide behind the thugs they hired:

http://www.dailyyonder.com/what-happens-when-you-dont-own-land/2009/07/03/2205
http://www.encyclopedia.com/doc/1G2-2536601159.html
http://wesscholar.wesleyan.edu/cgi/viewcontent.cgi?article=2148&context=etd_hon_theses

The story continues, and hopefully the Bundy ranch dispute can be a trigger for people seeing a bigger picture.

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Despite financial crises, BP's mess in the Gulf and now TEPCO's costly meltdowns in Japan, Matt Ridley doesn't understand the attractiveness of a little 'precaution'

June 13th, 2011 No comments

In the wake of the recent deaths and illnesses in Germany from a dangerous strain of E. coli, thinker and former banker Matt Ridleywho’ve I discussed before in the context of nuclear crony capitalism –  has an article in the June 11 Wall Street Journal on “When Precaution Trumps Public Safely“.

As I thought Matt’s post to be curiously uncurious as to the factors driving the ‘precautionary principle’, I ventured to address the deficiency with a thought or two of my own, and left the following comment at Matt’s blog:

Matt, ever wondered where the ‘precautionary principle’ comes from?

Ever heard of ‘once burned, twice shy’?

It seems clear to me that the insistence of many on the precautionary principle has it roots in massive externalities (pollution) by government activities and by corporations, those great pools of anonymous and irresponsible capital who shareholders, freed by the government grant of limited liability from downside risks, decided to turn a blind eye to risk management.

If we want more risk-taking, we should demand more responsibility by investors. Saying that it’s the common man who has to have the greatest skin in the game is a recipe for continued stonewalling.

Tom

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Scrupulosity IV: Corporations are the Health of the State (thanks to institutionalized moral hazard)

June 6th, 2011 2 comments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As Mises long ago noted, moral hazard matters.

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

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

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

Just as for limited liability,

More question begging, as I have explained

the grants of legal entity status,

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

unlimited life,

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

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

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

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

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

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

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

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

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

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

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

We are NOT talking about bringing down capitalism.

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

TokyoTom June 5, 2011 at 10:00 am

Stephan, of course the state is also at fault when statist corporations do stupid s**t like in the case of BP and TEPCO, and I’ve been arguing the case against the state as landlord loudly here for years now.

” claim that shareholders should be liable vicariously for the torts of others.”

You keep asserting this, even though I’ve made careful efforts to make it clear that I make no such claim. Do you anarcho-capitalists have such a difficult time reading? (By the way, since the boxes you want to put people in matter so much to you, I’m not by my own consideration “left” anything.)

I simply want to end the state creation of corporations, in particular the grant of limited liability to shareholders. You think it doesn’t matter and fight tooth and nail to defend corporations that lack any clear personal moral locus, while I think it has mattered and still quite profoundly, not the least in providing the rationale for the regulatory state.

Just as deposit insurance is at the root of rampant moral hazard in our financial sector, so too is limited liability at the root of corporate statism.

Sorry, but it’s late and I have a full day tomorrow. But I’ll ask, what INDIVIDUALS would you hold responsible for the BP oil spill and TEPCO bad decisions?

nate-m June 5, 2011 at 10:49 am

I simply want to end the state creation of corporations, in particular the grant of limited liability to shareholders. You think it doesn’t matter and fight tooth and nail to defend corporations that lack any clear personal moral locus, while I think it has mattered and still quite profoundly, not the least in providing the rationale for the regulatory state.

” claim that shareholders should be liable vicariously for the torts of others.”You keep asserting this, even though I’ve made careful efforts to make it clear that I make no such claim.

?
So you do not think that share holders should be liable for actions of employees, but you think that the legal framework that prevents share holders being liable for the actions of the employees should be removed?

It seems that these two statements are diametrically opposed under the current system. If you do not think that share holders should be liable then the way you achieve this is via LLC.

The only alternative is to go full AnCap with a contract-based legal framework, but that’s not going to happen any time soon.

If you remove LLC protections then your making shareholders liable vicariously for the torts of others.

 

2. TokyoTom June 5, 2011 at 6:47 pm

I suspect that Stephan’s lack of my response to my most recent comment to himhttp://blog.mises.org/17179/scrupulosity-and-the-condemnation-of-every-existing-business/comment-page-1/#comment-785116
indicates that he finally understands the difference between (1) a government rule absolving shareholders from personal liability for acts of the corporate legal fiction or its agents and (2) the absence of such a clear limitation of risk, which would leave shareholders subject to the risk of claims and a possible finding of liability.

There is quite a difference, and it can be seen in the choice of corporate founders to use the limited liability form, as opposed to alternatives that leave shareholders/investors on the hook, such as partnerships, corporations where shareholders expressly have no liability limitations (Amex was one such when it was created) or where shares are not fully paid in (and the corporation has a capital call), and in the continuing pressure by owners of partnerships to get governments to create entity forms that absolve owners of liability for damages to involuntary creditors.

nate-m, does this help understand my point? http://blog.mises.org/17179/scrupulosity-and-the-condemnation-of-every-existing-business/comment-page-1/#comment-785121

I am not saying we should have a rule that automatically makes shareholders liable for acts by the corporation and its agents, but that we should end the government rule that frees them from risk – and the incentives to oversee and monitor that risk.

The consequence of limited liability has been the steady growth of the regulatory state, and of use of the regulatory state by corporations (via CEOs who have slipped shareholder control) to create barriers to entry.

Just like we can end financial regulation by ending deposit insurance and forcing depositors to monitor banks, so too can we end the regulatory state by making shareholders pay attention to the risks created by corporations.

http://mises.org/Community/blogs/tokyotom/archive/2011/05/12/immodest-thoughts-to-fix-capitalism-we-must-get-govt-out-of-corporate-risk-management-rent-selling-business-and-get-shareholders-to-stop-playing-39-victim-39-amp-start-paying-attention-to-risks.aspx

REPLY

Stephan Kinsella June 5, 2011 at 7:35 pm

Your comments are incoherent, Tom. waht in the world are you trying to say.

REPLY

TokyoTom June 5, 2011 at 9:14 pm

I’ll make it simple, so even a non-lefty, non-stupid and non-dishonest anarcho-cap lawyer can understand:

The state grant of limited liability to shareholders, besides simply being unjustifiable under libertarian principles, has, by reducing the need of shareholders to monitor risk, had a profound affect on the development of what we now call ‘capitalism’ and on the growth of the regulatory state in response to complaints about corporate excesses.

I restated this position last September in the comment thread to a post by Geoffrey Plauche:

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

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

The facts that the state now makes the corporate form widely available and that we have huge, statist corporations do not make the status quo acceptable, just as the state’s generosity in making IP widely available and that many are now invested in the status quo doesn’t justify IP or validate all the damage it’s causing.

But despite your ancap identity, you (and Lew Rockwell) keep rushing out to defend our system of amoral and anonymous pools of capital, rather than real people:

http://mises.org/Community/blogs/tokyotom/search.aspx?q=kinsella+victim

Thankfully, others are seeing this re limited liability:

Finally an LvMI commentator who sees the elephant in the room: effective reform to rein in rampant moral hazard at banks means removing limited liability! – TT’s Lost in Tokyo http://bit.ly/atelEr

The Curse of Limited Liability; WSJ.com: Executives/traders of big financial corporations generate risky business, while smaller partnerships are much more risk averse – TT’s Lost in Tokyohttp://bit.ly/8nlWr7

Best,

Tom

REPLY

3. TokyoTom June 5, 2011 at 7:14 pm

Block points to corporate moral hazard as a dynamic behind the rise of the regulatory state:

Limited liability produces both pollution and political meddling: Block on Environmentalism – TT’s Lost in Tokyo http://bit.ly/mvV4Qn

Ludwig von Mises on laws that cap risks: http://mises.org/Community/blogs/tokyotom/archive/2007/10/11/draft.aspx

“The laws concerning liability and indemnification for damages caused were and still are in some respects deficient. By and large the principle is accepted that everybody is liable to damages which his actions have inflicted upon other people. But there were loopholes left which the legislators were slow to fill. In some cases this tardiness was intentional because the imperfections agreed with the plans of the authorities. When in the past in many countries the owners of factories and railroads were not held liable for the damages which the conduct of their enterprises inflicted on the property and health of neighbors, patrons, employees, and other people through smoke, soot, noise, water pollution, and accidents caused by defective or inappropriate equipment, the idea was that one should not undermine the progress of industrialization and the development of transportation facilities. The same doctrines which prompted and still are prompting many governments to encourage investment in factories and railroads through subsidies, tax exemption, tariffs, and cheap credit were at work in the emergence of a legal state of affairs in which the liability of such enterprises was either formally or practically abated.”

“Whether the proprietor’s relief from responsibility for some of the disadvantages resulting from his conduct of affairs is the outcome of a deliberate policy on the part of governments and legislators or whether it is an unintentional effect of the traditional working of laws, it is at any rate a datum which the actors must take into account. They are faced with the problem of external costs. Then some people choose certain modes of want-satisfaction merely on account of the fact that a part of the costs incurred are debited not to them but to other people. …

“It is true that where a considerable part of the costs incurred are external costs from the point of view of the acting individuals or firms, the economic calculation established by them is manifestly defective and their results deceptive. But this is not the outcome of alleged deficiencies inherent in the system of private ownership of the means of production. It is on the contrary a consequence of loopholes left in this system. It could be removed by a reform of the laws concerning liability for damages inflicted and by rescinding the institutional barriers preventing the full operation of private ownership.”

REPLY

Stephan Kinsella June 5, 2011 at 7:36 pm

What is your question, exactly?

REPLY

TokyoTom June 5, 2011 at 9:18 pm

Not a question, but a response to your claim that my concern about “moral hazard” and CONSEQUENCES and somehow taints me and is non-libertarian:

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

Balderdash: we all care about consequences, which is the chief reason why people are paying the slightest attention to your ‘principled’ ragings about IP.

 

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Immodest thoughts: To fix capitalism, we must get govt out of corporate risk-management (rent-selling) business and get shareholders to stop playing ‘victim’ & start paying attention to risks

May 11th, 2011 2 comments

I am prompted by recent events to follow up on thoughts I emailed to Sheldon Richman a few months back:

I feel strongly that If we want to fix the country (and if libertarians don’t want to be dismissed as irrelevant/patsies for rent-seekers) we need to find ways to restore shareholder ownership of downside risk. This is the only way to back away from the destruction of communities and our natural and government commons by faceless elites through corporations – and the battle for control over Government micromanagement that so often is captured by corporations and serves as barriers to entry.

Insurers would step in to help shareholders and act as a check on management.

The states that create corporations retain power under the 14th Amendment to discriminate in favor of local, unlimited liability forms of corporation or corporations in which shares are not fully-paid up. There is nothing like a substantial risk tail to focus shareholders on managing management.

 

In addition, allow me to summarize thoughts that I have posted extensively elsewhereThe state has institutionalized moral hazard and exacerbated principal-agent problems via the grant of limited liability to corporate shareholders. This grant is at the core of why investors chose to us the corporate form (as opposed to traditional partnerships and older versions of corporations where shareholders retained substantial risk), and is something that cannot be obtained merely by voluntary transactions – as it involves future potential involuntary victims of acts by the new corporate legal entity (lenders and other parties can of course agree in advance to liability caps and recourse limits). 

This state intervention has set in motion and greatly fuelled the growth of government and battles with citizen groups over the wheel of government — battles in which insider elites, generally acting through long-lived and deep pocketed corporations that are armed with greater knowledge and cloaked with anonymity, have the overwhelming advantage. I earlier summarized these dynamics here: The Cliff Notes version of my stilted enviro-fascist view of corporations and government

 

As I have noted elsewhere: I am NOT arguing FOR a general rule that shareholders SHOULD be liable for corporate torts. Rather, Iļ¼š

(1) point out that limited liability itself has served to muddle the question of whom, exactly, should be responsible for the very real harms that corporations frequently cause (if, as some argue, the corporations and their shareholders themselves are the “victims” of the troubles they create, then whom, exactly, are the perpetrators?),

(2) note that the limited-liability corporate form has enabled risk-generation and -shifting on a massive scale, with innocent third parties frequently being stuck holding the bag (not solely when liabilities exceed assets, but more generally since the cycle of escalating government interventions to rein in corporations perversely ends up raising barriers to entry and giving corporations regulatory ā€œrights to polluteā€ that curtail liability even when sufficient assets are available),

(3) argue that libertarians should reconsider the grant of limited liability for torts (as opposed to limited liability as to those who contract with the corporation on a voluntary basis) not simply because it is clearly non-libertarian to begin with, but because it has had profoundly perverse consequences (consequences at a serious enough level that state-loving libertarians in effect concede simply by troubling themselves to argue against curtailing limited liability),

(4) note that the most efficacious way to roll back the regulatory state lie in the direction of shifting ultimate responsibility for managing risks to enterprise owners (and ending the counter-productive regulatory risk-management experiment), and

(5) note that a curtailment of limited liability for torts could be hedged by shareholders via insurance, and could be achieved by state governments and the federal government offering more lenient regulation to busness enterprises that operate as partnerships, unlimited liability corporations, or in cases where shares are not fully paid up so that calls for significant additional capital could be made against shareholders if needed to pay claims.

All of this should be quite evident in the wake of the BP disaster in the Gulf of Mexico, as well as in the nuclear crony-capitalism behind the decision-making that has now come back to bite Japanese individuals and firms that use TEPCO power or which are downwind of their tsunami-damaged nuclear plants (though both of these cases are compounded by even deeper governmental interventions). It should also be evident in the many cases at home and abroad where corporations act to exploit (and pay royalties to governments on) mineral and energy resources that governments purport to “own”, and where governments grant corporations “public utility” monopoly rights.

Any suggestion that one must ā€œprovide a theory of liability that coherently distinguishes shareholders from any other patron of the companyā€ BEFORE one can examine any justifications FOR the state grant of limited liability or the consequences of such intervention would be both sadly non-libertarian and dangerously blind and shallow.

Can I interest any other libertarians in pursuing this avenue of rolling back the state?

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Shikha Dalmia of Reason Foundation doesn't feel sorry for TEPCO

March 30th, 2011 No comments

Shikha Dalmia, senior policy analyst at Reason Foundation, had a perceptive essay out last week that draws attention to the perverse role of government-provided incentives in Japan’s nuclear power industry. (Dalmia is columnist at Forbes, writes regularly for Reason magazine, and was co-winner of the first 2009 Bastiat Prize for Online Journalism.)

The article appeard in The Daily on March 24, and at Reason Online on March 29. I excerpt beloe parts of the article as it first appeared: Glowing endorsement Japan has pushed nuclear energy hard — at the expense of safety. (e,phasis added):

Nuclear advocates are dismayed that radiation fears over Japan’s Fukushima plant might kill an industry that has a better safety record than virtually any other. But the public in Japan and elsewhere has every right to question the safety of nuclear power that everywhere receives government support. The Japanese government, in particular, has aggressively pushed nuclear in its quest for energy independence, perverting with political considerations the market’s natural ability to take safety issues into account.

And judged purely by deaths per terawatt hours, nuclear is 10 times safer than solar and a thousand times safer than coal or oil. 

But that doesn’t mean there is nothing to worry about with nuclear. Its potential for catastrophe is orders of magnitude greater than any other technology. Hence, only when investors are willing to foot the entire bill for its construction and liability can we believe that nuclear is truly safe.

That, however, is not the case anywhere — least of all in Japan.

Nuclear meets about a third of Japan’s energy needs (compared to 20 percent in America) not because it is more competitive than the alternatives; it is not. Nuclear’s exorbitant upfront capital costs and long — and uncertain — lead times make it every bit as unattractive to investors in Japan as elsewhere, especially compared to other fuels.

But nuclear appeals to Japan’s mercantilist rulers, who, since the mid-’60s, have regarded the country’s lack of indigenous energy resources as a major strategic vulnerability that must be corrected at all cost. They have committed themselves to increasing Japan’s energy independence ratio from the current 35 percent to 70 percent by 2030. …

Such thinking has prompted Japanese lawmakers to push nuclear more aggressively than street vendors hawking broken Mao watches in Tiananmen Square. From 1990 to 2000, nuclear’s share of Japan’s energy mix has gone from 9 percent to 32 percent.

To get there, Japan has poured lavish subsidies into nuclear, starting with research. Around 65 percent of Japan’s energy research budget goes toward nuclear — the highest of any country — with the industry spending $250 million, well below 10 percent of what the government spends. Even France, which gets 80 percent of its energy from nuclear, spends three-and-half times less than Japan.

Beyond research, the government offers the nuclear energy industry loans that are a full percentage point below commercial levels. And for four decades, Japan has taxed the utility bills of electricity consumers, distributing the proceeds to communities willing to house nuclear plants. In essence, nuclear’s competitors are being forced to act against their own interest to bribe local communities to accept a risk against the communities’ interest. 

But the mother of all subsidies is the liability cap that nuclear enjoys. In the event of an accident, the industry is on the hook for only $1.2 billion in damages, with the government covering everything beyond that. Japan’s cap is generous even by American standards, which require the industry to cover $12.6 billion before Uncle Sam kicks in. ,,,

The liability cap effectively privatizes the profits of nuclear and socializes the risk. It uses taxpayer money to diminish the industry’s concern with safety — which government regulations can’t restore. In 2008, Tokyo actually started offering bigger subsidies to communities that agreed to fewer inspections. The problem of regulatory capture is particularly endemic in Japan given that regulators seek industry jobs upon retirement, and hence often cozy up to companies they are supposed to oversee.

Nuclear’s advocates argue that, if anything, Fukushima testifies to just how safe nuclear is given that the reactor reportedly shut down as designed in the face of a 9-magnitude earthquake even though it was built for only 7.5-magnitude. Had a freak tsunami not knocked out the backup generator needed to cool down the fuel rods, none of this would have happened.

Perhaps. But had the industry been underwritten by private companies that risk getting wiped out by lax procedures instead of a government that risks nothing, might they not have refused to insure a reactor in an earthquake-prone zone or demanded better seismological studies than those available or ensured that backup generators were built to withstand a tsunami?

Only when the nuclear industry fully internalizes safety costs will we know that it is actually safe. Until then, we can only regard Fukushima as an avoidable tragedy.

I believe that Dalmia has left out the rate guarantees that utilities typically receive. In addition, she has ignored the “limited liablity” corporation structure that eliminates any risk of personal liability for all shareholders. These aspect of course also affect the degree to which shaeholders pay attention to the risks that nuclear power plants pose to others or otherwise to diligently oversee management, and rate guarantees are a hidden tax on consumers and a subsidy to nuclear power.

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