Home > Block, Brown Brothers Harriman, Glassman, Hayek, Huebert, limited liability, Long, Nolan, Posner, Woods > Rot at the core: When will Tom Woods and other "Free Market intellectuals" have second thoughts about the state grant of limited liability to shareholders?

Rot at the core: When will Tom Woods and other "Free Market intellectuals" have second thoughts about the state grant of limited liability to shareholders?

Tom Woods, in his recent “Another “Free Market” Intellectual Has Second Thoughts” post at the Mises Economics Blog, notes with great disappointment that Richard Posner is about to publish a book that will apparently abandon the free market and call for greater government intervention.

While I share Mr. Wood’s disappointment that Posner and others are not more vigorously defending free markets, I suggested in comments on Mr. Wood’s post that perhaps free market intellectuals are not yet really pulling their own weight in examining and describing the flaws in the market system that contributed to the current financial crisis, or in explaining the types of reforms that would actually be appropriate.  In particular, it seems to me that the role played by the state grant of limited liability to corporate shareholders in facilitating flawed and irresponsible risk-taking by executives and traders, as well as in perversely fuelling a vicious cycle of rent-seeking and further counterproductive regulation, should be much more seriously examined. 

In short, I believe that, as argued by James Glassman and William Nolan in a recent Wall Street Journal op-ed, unless and until owners and executives have “more skin in the game”, we will continue to ride a tiger of selfish risk-shifting, moral hazard, and ever more disruptive government regulation.

I copy below my comments on Tom Wood’s post:

Tom, it’s hard to judge an unpublished book, but I suspect you’re
right to do so. Has Posner given any more solid clues as to where he’s

However, as it’s clear that things went wrong, I can’t help but
wonder when can we expect to hear more from you and others on what
government factors (besides the Fed, Freddie and Fannie) “fatally
deformed” the financial markets, and laying out a “new, genuinely
free-market paradigm for the economy”. Isn’t there a good book or two
in there from Austrians?

It seems to me that that James Glassman and William Nolan have a key
insight into the type of reforms needed in a WSJ piece that refers to
von Hayek. They argue that “an irresponsible attitude toward risk led
to terrible mistakes in judgment” and conclude that “bankers need more
skin in the game”
. How to move in that direction?  Glassman and Nolan
point to the success of the Brown Brothers Harriman partnership, which
lacks the limited liability feature of modern corporations, and specifically recommend that governments recognize (by less burdensome laws and regulations) that entities like partnerships where owners face unlimited personal liability are more responible risk managers.

As I have argued in a series of posts, starting with my review of
Huebert and Block‘s criticisms of Long
, the state grant of limited
liability to shareholders (in particular the grant vis-a-vis those
injured by corporate acts and involuntary creditors, which is a pure
grant from the state and cannot be contracted for) has led to a number
of perverse results, which can be fairly clearly seen in the financial


  1. TokyoTom
    May 8th, 2009 at 10:32 | #1

    Kurt, take up your argument that “there is NO flaw in the market system” with Tom Woods, who rather clearly implies that “the financial markets as they exist today might in fact be fatally deformed by the presence of the Fed and other government factors”.

    I`m just offering my own humble opinion as to the root of the government intervention that has led to this very obvious problem of moral hazard and risk-shifting.

    Sukrit, thank you very much for your visit. I think we can agree that there many “regulatory moral hazard incentives that encourage irresponsible behaviour.” However, it`s my own humble opinion that the grant of limited liability lies at the core, and that James Glassman and William Nolan are on to something important – the need for owners, executives and traders to “have more skin in the game”.

    Limited liability has meant limited responsibility for the downside, fewer incentives and lessened ability to monitor risks, greater shifting of costs to society and thus to greater social demand for regulation.

    Limited liability is where the cycle of regulation takes wing.

  2. mookrit
    March 9th, 2009 at 04:41 | #2

    Limited liability is a pretty minor problem compared to all the other regulatory moral hazard incentives that encourage irresponsible behaviour.

  3. March 5th, 2009 at 18:49 | #3

    As far as I can see various governments & think-tanks pushed programs for the poor. Most (or all) of the financial instruments for these ideas are NOT traded via established market systems, e.g. CBOT, NYMEX &c…

    Sooo, IMHO there is NO flaw in the market system, the market is doing its job right now, albeit pretty rigorous, punishing companies worldwide, particulary the guilty.

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