Archive for June, 2011

Scrupulosity III: More fun at pretending that nothing about the nature of state-created corporations leads to statism

June 6th, 2011 No comments

 I copy below a few more of my comments on Jeffrey Tucker‘s unhappiness that not all libertarians are cheerleaders for our current model of “capitallism” (see my eariler posts on “scrupulosity“):

TokyoTom June 3, 2011 at 8:35 pm

Thanks for the great Rothbard quote, Rodney.

Unfortunately, it looks like Rothbard never focussed on the special state grants to those forming corporations that institutionalize Moral Hazard and make them such powerful agents of both corrupting/buying favors from government and at destroying commons. The grant of limited liability got the ball rolling, and things have snowballed mightily, as citizens clamor for ever more government control of our government-created amoral agents.



PS: In addition to my comment above,,
there’s more here:

TokyoTom June 5, 2011 at 6:44 am

Anthony, many corporations are very obviously in bed with government and driving the decisions of politicians and bureaucrats. Are we to pretend that this isn’t happening, or that those in corporations trying to buy government favor have no moral responsibility for their actions?

Are we also to just hope government goes away, instead of fighting for greater freedom and less government favors to corporations?

I disagree: 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 – TT’s Lost in Tokyo



sweatervest June 5, 2011 at 1:23 pm

“driving the decisions of politicians and bureaucrats”

The only thing that drives the decision of a politician or bureaucrat is that politician or bureaucrat. They are the ones that are holding the guns, not the corporations. If the corporations ask a favor of the state they must offer something in return, because the operators of the state must voluntarily agree to it (no one case force them). Corporations are by no stretch of the imagination in charge of the state.


TokyoTom June 5, 2011 at 6:25 pm

Incentives, good and bad, drive decisions of all people.

We get poor decisions from politicians and bureaucrats because of moral hazard, the information problem, budgetary incentives, lack of accountability, the information problem and, not least, the pressure and enticements of corporations.

“Corporations are by no stretch of the imagination in charge of the state.”

I think I said: “many corporations are very obviously in bed with government and driving the decisions of politicians and bureaucrats.” Are you denying corporate influence?


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The Catholic Church's small problem with institutionalized moral hazard

June 6th, 2011 No comments

Power and a lack of accountability: just where might they lead?

See Maureen Dowd’s June 4th column, An Archbishop Burns While Rome Fiddles.

No, of course this is not at all related to the issue of moral hazard in state-created corporations, particularly the mega, “public” ones.

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

June 5th, 2011 No comments

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

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 Tokyo

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

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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Who wants to trouble with "moral scrupulosity", when we can pretend that the state-created capitalism we're cheering on isn't profoundly corrupt?

June 3rd, 2011 2 comments

I tried to leave a few thoughts with Jefrey Tucker in response to his June 2 post, Scrupulosity and the Condemnation of Every Existing Business, but it looks like my immoderate use of links has landed me in moderation, again.

So, here are my comments, which I have confidence Jeffrey will soon personally let through (I fixed a typo and added a link):

Sorry, Jeffrey, but weren’t YOU exemplifying the same “moral scrupulosity” you now protest when you and others somehow found a way a couple of weeks ago to fault efforts by those who love fish to use markets to put water back into overdrawn Western rivers and streams (by finding ways to connect buyers of water with those with absolute homesteaded water rights)?


Further, it seems to me that there are good explanations for the rise of the “moral scrupulosity” that you can’t seems to get around to puzzling out — could it be that there’s a massive rise in corporate statism, or at least in the feeling that corporate statism is out of control? And of the sense that now is an important time for libertarians to point out such statism and to suggest ways to roll it back?


You suggest that our new shibboleth ought to be to “ask ‘do you love commerce?’ to ferret out real defenders of real markets as versus those who just enjoy standing in moral judgement (sic) over the whole world as it really exists.” Besides that being itself a very neat trick of standing in moral judgment of others, I would suggest a different question: do you love corporations? Those state-created entities that institutionalize moral hazard via an absentee shareholder class that was ab initio absolved of residual responsibility for the acts of the the legal fiction they own, and whose CEOs and executives operate without responsibility to any owners?


We have a serious and growing rot at the core of capitalism, easily visible in TEPCO, BP, the entire banking/securities/rating sector, Enron, the auto industry, Big Ag, Big Pharma, you name it. But for you, the real problem is a lack of cheerleaders for our rotten free markets!


Kind regards, your friendly enviro-fascist,




PS: A few recent and relevant posts:


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