TT's Lost in Tokyo — by TokyoTom

As I have previously noted, renowed Harvard Law professor Lawrence Lessig is also seriously concerned about political corrpution and the Citizens United decision.

I recommend to readers his recent Washington Post op-ed, his related WaPo interview by Fred Hiatt and his August talk to TED Boston (which can be found here, though Lessig has yanked it because of an apparently spurious Lincoln quote about corporations).

In addition, as I think there is a role for libertarians to play in informing the discusssion, I copy here his September call for a non-partisan effort to reform Congress at Fix Congress First! (emphasis added): 

Where We Are, Where We’re Going

September 22, 2010

By: Lawrence Lessig

On Thursday, the House Committee on Administration will take a vote on the Fair Elections Now Act — the bill that we, along with many others, have been pushing for the past two years. The Committee will pass the bill. With a bit of luck, and a lot more pressure, the managers of the bill believe it could have the votes to pass the House as well. If they’re right, and if the Speaker allows the bill to come to the floor, then for the first time in a generation, the House will have ratified fundamental and effective campaign finance reform.

This optimism will surprise many of you. As I’ve travelled to talk about this issue, the overwhelming attitude of people who want better from our government is that our government is incapable of giving us better. The House ratifying Fair Elections would be the first, and best evidence, this skepticism might be wrong. It would also be a testament to the extraordinary work of organizations like Public Campaign and Common Cause (especially the campaign director, David Donnelly), as well as many others, including MoveOn, the Coffee Party, You Street (as in “not K Street”) and many of you. This victory would give American voters an idea worth fighting for. It would be a critical victory, at least if we can gather the final few votes needed in the House. (You can help in that by using our Whip Tool).

But we should recognize that this victory would also be just a first step. I don’t believe the Senate will pass this bill this session, which means the fight must begin again in January. So as we’ve been at this now for almost two years, I wanted to give you a sense of where we are and where we’re going. I also want to begin to share with you my own sense of how to get there.

This isn’t a short letter. But I hope you’ll take the time to read it. (Here’s a PDF if you want to print it). We all need to understand the kind of fight this will be. And after many sleepless nights thinking it through, I believe I have a sense of what victory will require.

Reform Movements, Past

The fight to win in the House has been a traditional legislative battle waged effectively and well. I joined this fight late, and I’ve been happy to help however I can. But the kudos here goes to those I’ve already mentioned. Fingers crossed, they will have done what the experts thought was impossible.

But as I’ve said many times before, we cannot rely upon this inside the beltway fight alone. The change that the Fair Elections Now Act would effect would change Washington fundamentally. There are too many inside DC who depend upon the system as it is — for their own wealth, and future. They are not about to permit this fundamental change, and they have not yet even begun the fight against it.

Instead, the battle to pass this reform will require something that none of us have seen in our lifetime — a broad based, cross-partisan, citizens movement that demands fundamental change in how our government works.

This movement must take aim at the core corruption that is our government. Not the corruption of bribery, or improper (as in illegal) influence. Instead, it must attack the in plain sight corruption of the current system of campaign finance. Our Congress has become dependent upon their Funders. Their attention is devoted to their Funders. And like a 5 year old watching his dad on his BlackBerry, we get that we’re no longer the most important souls in their lives. In a very precise sense of the term, this Congress has been corrupted by this competing dependency. We must change this.

The last best example of this sort of change is a movement that is as misunderstood as any in American history — the Progressive Movement. Most of us today think the “progressives” were liberals. No doubt many were. But as I described in a piece for the Huffington Post, Progressivism was actually a multiparty movement. It was a Republican, Wisconsin Senator Robert La Follette, who took up the Progressive cause for the Right, by challenging a sitting Republican President, William Howard Taft. La Follette lost, but he inspired Republican Teddy Roosevelt to return from the wilderness to wage a third-party campaign against Taft. In that election of 1912, America had an extraordinarily broad range of ideologies to choose among: Eugene Debs ran as a Socialist, Taft ran as a “standpat” Republican, and two Progressives ran between these two extremes: TR, a former Republican, and Woodrow Wilson, a new kind of Democrat. Almost 70% of Americans voted for these two leading Progressives, with Wilson — the more conservative, small government, pro-liberty Progressive — beating Roosevelt by almost 15 points.

Of course, the Liberal Progressives of 1912 wanted different things of government from the Conservative Progressives. But despite these differences, they shared a common recogniti All Progressives believed that government had become corrupted. That with its appointed Senate, and enormously powerful corporate funding of elections, our democracy, they all believed, was no longer a democracy. The government had become dependent not, as Federalist No. 52 puts it, “upon the People alone.” Instead, it was the People who were left alone, as the government did what ever it could to curry favor with the richest and most powerful in society.

Progressives of all stripes wanted to restore that democracy — again, not because they all agreed upon a single platform for government action, but because they all believed that the platform of democracy had to be restored if we were to be true to the best ideals of the founders.

Cross-partisanship was thus the first feature of that Progressive Movement. Headlessness was a second. Though there were many important Progressive leaders, the Progressives had no single leader. Every Progressive group did their own work in their own field. None tried (for long at least) to claim the authority of the movement as a whole. Everyone recognized a common need to reform a corrupted government, and worked with astonishing public commitment to achieve that reform in addition to the particular policy objectives that their wing of the Movement wanted to push.

Finally, there was one more critical element to the Movement’s success: citizens. This was not ultimately a movement controlled by politicians. Of course, we remember the movement for its politicians. TR, and Wilson, and perhaps now that I’ve mentioned him, La Follette. But politicians were not the lifeblood of that movement. Citizens were. There were thousands of leaders in hundreds of fields, from women’s suffrage to the temperance movement, to labor reform, to judicial and electoral accountability. These citizens were the giants. Yet the overwhelming majority of these people never dreamed of running for office. They had been awoken from a slumber by the repeated and grotesque excesses of a corrupted government. And they worked hard to end that corruption, not to become famous senators, or president. But so that they could go back to their private life, and do the private things they wanted to do.

It was this cross-partisan, headless, citizens movement of passion that changed the American government at the turn of the last century. Not in perfect ways. In some cases, not even in smart ways. But the point to remember is that this change happened in the only way real change ever does: From the many, putting aside key differences, to focus the swarm upon the key problem in government: corruption.

Reform Movements, Today

As hard as this might be to believe — given the way most of us are oriented by party leaders who want to keep us loyal to the way things are now — each of these elements of the old Progressive movement is returning to American politics.

Start with passionate citizens: We have not in our lifetimes seen as angry and frustrated a citizenry as we now have. That anger sometimes expresses itself poorly, but we need to get beyond this critique. From the Tea Party to the Coffee Party to the millions of Americans who call themselves “Independents,” America is filled with citizens who are desperate to end the corruption that is our government. Many of these citizens thought they had their reform leader in 2008. All of them are now looking for the leaders who can deliver the reform that 2008 didn’t.

“Leaders,” not “leader.” The key here is the plural. We are used to movements in the style of Mussolini: charismatic leaders, like FDR, Kennedy, Reagan, who unite millions to a cause. But that’s not what’s happening here. No doubt there are leaders, but none who can pretend to speak for the full breadth of this movement. Indeed, my heroes are people like Mark Meckler, and Jenny  Beth Martin, who however much I disagree with them on policy substance, conceive of the movement they are trying to build (the Tea Party Movement) as a swarm, not an army; as headless, not the borg. This is the model of real reform. It is the model that our reform too must make successful.

And finally, cross-partisanship: The Tea Party Movement has been framed as right wing. Its most successful candidates are on the far right of the Republican Party (localized at least: Scott Brown is no Rand Paul, but he is the Right of Massachusetts). But the most significant and important part of the Tea Party Movement is the demand for fundamental change, not just a change in parties. And in this respect, they are no different from many of us on the Left. No doubt, we don’t have common ends. But we do have a common enemy. And we need to find a way to push a common movement that defeats this common enemy, through the peaceful mode of revolution given to us by our framers: Democracy.

In the next two years, I want Change Congress to help this Neo-Progressive movement. That may well not be the right name, given how misunderstood the term “progressive” now is, but it is the right idea. We need to build a community of citizens, each taking the initiative to teach a message to Republicans, Democrats, and Independents alike: that regardless of your party, regardless of what you want government to do (or not do), the current system is the enemy. And regardless of what you want government to do (or not do), you won’t make progress to your ends until this system fundamentally changes.

This lesson won’t come from lectures by law professors. It won’t be taught by senators, or candidates for president. We will only spread it if we can get at first thousands, and then millions, to carry the word friend by friend. In house parties, over dinner, in Rotary Clubs, and in small meetings. We need to provide the tools, and build a platform to help spread the message. But the message here is not Read-Only. It is Read-Write. We must give citizens the resources to enter into this debate, and then encourage them to spread the message as broadly as they can.

This will make our work somewhat different from others in this movement. The standard form of digital advocacy today is clicktivism — finding ways to get people to react to messages, to push support (and of course, raise dollars) to one group and then another. The strategy is simple: Build a list of people who agree with you, and push their buttons so they click yours in return, and send you cash, and support.

We want to do something different. We want to build a conversation that engages a wider and wider community, focused on the single objective of fundamental reform. We want that community to spread the message. Not just our message, or my message, but their message, or at least a message remixed, hand-made, by them.

Here’s how are are going to do this.

We’re first going to build out more explicitly the cross-partisan character of Change Congress [now Fix Congress First]. Already our board has an extraordinary mix of talent. In the next 6 months, we will expand that mix more. All of these leaders are leaders in their own field. None of them intend to be leaders in government. Indeed, as I think about who to recruit to this list, the single question I ask myself is this: Can this person inspire others without others believing the inspiration is just the first step to their own political campaign?

Second, while we continue to build the board, we will also strengthen the communities that it supports. Today, many of you associate the work of Change Congress with me. If we are successful, next year, the vast majority of Change Congress followers will not even recognize me among the many who are pushing this message. None of us, me especially, will try to claim control of this movement. All of us, and me especially, believe there is only a movement when there are many cells of strength each pushing in its own way. Remember: A swarm, not an army; headless, not the borg.

Third, as we multiply the parties, and multiply the leaders, we will push to spread tools that anyone can use to learn, spread, and teach the message. Through SlideShare, we will make available the assets anyone needs to craft this story in the shape that makes most sense to them. Through our video channels on Vimeo, YouTube, and Blip.tv, we will make available as many of the telling of these stories as possible, for you to use however you can to do the same with your friends. The mission here is shared. The responsibility is all of ours. And through the work of all of us, we will build a recognition of the kind of change that is needed here.

Justice Louis Brandeis, perhaps the greatest, and certainly the most misunderstood, Progressive of the last century, warned “the greatest menace to freedom is an inert people,” and demanded “that public discussion is a political duty.” When I first read that quote, it sent a chill down my spine. For of course: We, as a People, have become “inert.” We have not lived up to our “political duty.” We have instead allowed the professionals to take over our politics.

But we have a chance to do something here. It will take an enormous effort to teach and then persuade. We don’t have easy anger to tap into here. But as I’ve found as I’ve given more than a hundred talks over the past few years, there is real anger and real commitment to this issue once the issue is understood. Our role in this must be this ground campaign — building a large and powerful base that recognizes the peculiar corruption of this Congress, and how it must change.

Here’s how you can help:

1. Visit FixCongressFirst.org. Don’t simply sign up for the mailing list. Instead, read about the Fair Elections Now Act. Skim the blog to get a sense of the current conversations happening around election reform. Convince a friend, online or off, about the need for fair elections. If we can get one million people each to have a real conversation about corruption and campaign finance, we will have succeeded.
2. Do join the Fix Congress First mailing list if you’d like to stay informed. Better yet, tell us if you’d like to volunteer, and we’ll let you know when opportunities arise.
3. Visit the Fix Congress First whip tool to see which members of Congress haven’t yet supported the Fair Elections Now Act. Call your representative if he/she is not a supporter, or send your thanks if she/he is.
4. Use your networks. Spread the word. Take things into your own hands. Tell us how we can help you and how we can do better.

And since Robert Reich has invited readers to “send this post to your friends”, I’ve taken the liberty of cross-posting it below.

Before we start, let me remind my readers that I’ve done a fair bit commenting on what I regard as the profoundly mistaken and wrong-headed Citizens United decision. I post this not to aggravate, but to point to a possiblity of reaching a shared agreement on problems.

Here’s Reich (my emphasis and comments in brackets)

The Secret Big-Money Takeover of AmericaThursday, October 7, 2010

Not only is income and wealth in America more concentrated in fewer hands than it’s been in 80 years, but those hands are buying our democracy as never before – and they’re doing it behind closed doors.

Mises on Copyrights 

No wind-up needed: [View:http://www.youtube.com/watch?v=HfuwNU0jsk0:550:0]

The clip was conceived and edited by YouTube user “Rebelious Pixels” (Jonathan McIntosh), whose website notes:

This is a re-imagined Donald Duck cartoon remix constructed from dozens of classic Walt Disney cartoons from the 1930s to 1960s. Donald’s life is turned upside-down by the current economic crisis and he finds himself unemployed and falling behind on his house payments. As his frustration turns into despair Donald discovers a seemingly sympathetic voice coming from his radio named Glenn Beck.

This transformative remix work constitutes a fair-use of any copyrighted material as provided for in section 107 of the US copyright law. “Right Wing Radio Duck” by Jonathan McIntosh is licensed under a Creative Commons BY-NC-SA 3.0 License – permitting non-commercial sharing with attribution.

Bradford Plumer, associate editor at New Republic, uses the quoted language above to grab our attention for a piece by Stevew Nash (largely behind a paywall) about how cities in the United States are preparing for sea-level rise.

Says Plumer: “The picture’s pretty bleak. Most states and localities aren’t doing much planning at all. And when they are taking action, they’re actually making things worse.”

Says lefty Australian economist John Quiggin (whom I have referred to earlier in other contexts), in a piece titled “How the Americans stole the Ugg boot” (emphasis added):

The world would be a lot better off without intellectual property, or at least with a return to the more reasonable rules of the 19th century (14 years copyright, limited patents restricted to actual inventions, trademarks to identify products rather than to stifle competition) and the attempts of the US government to defend IP monopoly rights are one of the many reasons American “soft power” is such a perishable commodity.

Quiggin refers to a great piece in Reuters by Felix Salomon (“How the WSJ magazine fails its readers“) that responds to a WSJ puff piece on Deckers Outdoor Corporation, which, according to Quiggin, is an “American trademark troll company that has stolen the name ‘Ugg boot’ then used ‘intellectual property’ laws to impose the absurd claim that the only genuine Uggs are those made in China.”

Australians have apparently been making “Ugg boots” for decades, but now find themselves unable to promote such boots abroad; such is the ‘Uggly’ stuff that is fuelling a growing re-think of IP laws.

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, second 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

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

The comments regarding on limited liability at Geoffrey Allan Plauche‘s post, “Ecofascism in the Name of Fending Off Ecofascism” – which I’ve been copying to an earlier post in relevant part – have been running long, so to improve readability thought I’d break up the comments of interest into several posts.

[Here are links to my second, third.and fourth posts.]. 

panika2008 September 17, 2010 at 12:24 pm

“Limited liability is as bogus as pretending all your debts are really owed by your invisible friend.”

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 “default” set of rules. It’s a part – quite sensible at that – of our common (sense) law tradition – make good/popular practices into codex’s. If only all legislation would proceed basing on this pattern!

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 – 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 don’t quite understand what you mean.

TokyoTom September 20, 2010 at 10:40 am

Panika, “involuntary ” 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 liaibility; 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.

I attach for the benefit of readers a short video explaining the “Tragedy of the Commons” by author and environmental historian Robert J. Smith, founder and director of the Center for Private Conservation (a former CEI project), an adjunct scholar in environmental policy at CEI. Smith is also a Senior Fellow at the National Center for Public Policy Research and Distinguished Adjunct Scholar at the Competitive Enterprise Institute. 

Read more by Robert J. Smith here http://cei.org/publications/studies/5811.

I note that I have commented extensively on various commons issues: e.g., bison, fish, whales, “public” lands, oil & gas, and indigenous resources

[View:http://www.youtube.com/watch?v=qAXcvnNqYeM:550:0]