Home > Uncategorized > Scrupulosity II: A note to Stephan Kinsella on growing statism. limited liability, deposit insurance, and rampant moral hazard (and moral confusion)

Scrupulosity II: A note to Stephan Kinsella on growing statism. limited liability, deposit insurance, and rampant moral hazard (and moral confusion)

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

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

My question:

TokyoTom June 4, 2011 at 7:20 am

Jeffrey, are state-created corporations – the ones that embody moral hazard via a gift of limited liability to shareholders, have an eternal life, and in which responsible persons are fairly anonymous and bear little or no direct obligations to the outsiders they affect – are “absolutely central to capital accumulation and for the advance of civilization”?

Did we have no capital accumulation in the days of business partnerships and associations, before governments started giving away the store to their own little Franskensteins? Didn’t all businesses once have a rather clear set of owners, where the buck stopped?

Please clarify.


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

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

TokyoTom June 5, 2011 at 5:58 am

Thanks for your comments, Stephan.

1. 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, 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.

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

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?

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

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 we are left with massive corporations which are massively entangled with government 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) whenever bad decisions resulting from government-institutionalized buck-passing results in unfortunate “accidents”.

As Mises long ago noted, moral hazard matters. Mises on fixing externalities: progress along the Kuznets curve is not magic, but the result of institution-building – TT’s Lost in Tokyohttp://bit.ly/cM4iVb

Clearly, our continuing crises in our banking sector are due not simply to money-printing by the Fed, but to massive moral hazard within banks, investment banks and other advisers, all of which can be laid at least in part at the foot of government. Government’s role in guaranteeing deposits has the effect of telling them they get a free lunch, and don’t need to worry about how well the banks invest their deposits – and of shifting to our wonderful government the risk of failure. Government responds by imposing “prudential rules” (like “investment-grade” requirements and capital standards that are always gamed by insiders to put bonuses in pockets, while leaving risks to the banks and thus the government. Somehow – inevitably – the government is always late to diagnose the gaming and to tighten up rules – which, like Sarbanes^Oxley and other rules imposed on super-duper “public” companies, serve to further raise barriers to entry and to distance managers from shareholder control.

Tell me again that the massive games that a fairly insulated managerial class is engaged in at mega-firms are both natural and inconsequential?

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?

Just as for limited liability, the grants of legal entity status, unlimited life, unlimited purposes and the ability to own subsidiaries are all substantial AND consequence-laden gifts from the state.

Show me a partnership that has any of these, without a grant from the state. Precisely because all of these matter, business people of all stripes clamor to incorporate (or to adopt a new, state-created limited partnership form that makes pass-through tax treatment possible).

4. Your long paragraph of the entity theory that “the state has foisted” on us has much I agree with. The state creation of corporations has do much to muddle who, exactly, is responsible for injuries to third parties caused by “the corporation”. In fact, this is one of my points about limited liability and other benefits that the state bestowed on individual investors – and you and Lew exhibited the same confusion yourself last year when you were stumbling over yourselves to feel sorry for BP’s shareholders, executives and employees:

Corporations uber Alles: Conveniently inconsistent on “abstractions” like “the environment”, Austrians overlook their preference for “corporations” over individuals,& their lack of interest in problem-solving – TT’s Lost in Tokyo http://bit.ly/lWpvol


Getting rid of limited liability would do much to provide moral clarity, and to end not simply risk-shifting and purchase of government favor, but demands by citizens for preventative regulation by government.

5. 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.

Thanks for the substantive engagement.



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



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