TT's Lost in Tokyo — by TokyoTom

Yesterday I stumbled across a blog post by Joel S. Hirschhorn, a self-described libertarian who is author of Delusional Democracy, the Chair of the Independent Party of Maryland and co-founder of Friends of the Article V Convention (www.foavc.org), one of the first of the growing movements to rally citizens at the state level to seek to check excesses by the federal government.

While I think Joel is right to be angry about the state of ‘capitalism’ and of our politics, he doesn’t quite have his finger on the problem and thus his proposed solutions seem quite a bit off.

Joel’s post is here: Two Capitalisms; he urges that we learn from Germany; I abjur. I quote below key passages:

Maximizing financial returns to reward corporate bigwigs and stockholders even though the actions greatly harm the US economy and society results from US companies practicing bad, immoral capitalism. Think of this development as the conquest of Wall Street over Main Street, of those who make money over those who create and make products, of those who promote economic inequality over those who value the middle class.

The power elites that have succeeded in perverting capitalism have also succeeded in making much of the American public so dumb and distracted that they no longer function as informed and effective citizens, which has allowed the government to be hijacked by the rich and powerful through a two-party plutocracy.

Selfish capitalism was exemplified by the role of Fannie Mae in creating the economic disaster by perverting the housing market, as conservative David Brooks correctly concluded; he noted “the leadership class is fundamentally self-dealing;” it practiced “shameless self-enrichment” which produced disastrous results.

To be clear, the conflict is not between capitalism and socialism, the way right wing ideologues talk, but between the good and bad kinds of capitalism, which those on the left need to learn how to talk about. Bad, greed-driven, too-big-to-fail capitalism has ruined the US for all but the rich which have sucked off much of the nations wealth.

A fine analysis by Harold Meyerson on the difference between the highly successful German economy and the dismal US one drives home the crucial differences between the two forms of capitalism. The need is for the US to learn from the more successful German, good form of capitalism and develop policy reforms that could rejuvenate the US economy by curbing the bad form of capitalism. The ideas that Republicans keep advocating are all wrong because all they want to do is promote bad capitalism, which only serves the interests of the rich and powerful, not ordinary Americans, not the middle class, and not workers. Peter Coy has also assembled great information on what can be learned from other nations.

The German economy makes the US one look like it is on its deathbed. The German tripartite system has business, labor and government working together. Faced with the same competition from low wage developing countries and the entire globalization condition, Germany has a booming manufacturing sector that constitutes almost twice the share of the economy than that in the US. And even in the current global economic recession German unemployment is 7 percent. The tripartite system has kept German labor unions strong and, therefore, protects the middle class whose pay has risen at roughly the same rate as top incomes. This is in stark contrast to the rich-getting-richer and unionbusting situation in the US. Indeed, the top 1 percent in the US are seeing their proportion of total income rise dramatically, even as their German counterparts are seeing their share of total income shrink. German corporate boards are required by law to have an equal number of management and employee representatives. By law! Germany’s stakeholder capitalism benefits the many unlike the US where selfish capitalism benefits the upper class and brutalizes everyone else. Corporate power has not captured the German government the way it has hijacked the US government.

Our answers cannot lie in more government, but on rolling back the government interventions that insulate corporations (and their shareholders and executives) from markets, communities, and from the adverse consequences of their behavior. What interventions?

• The whole regulatory state, which substitutes political battles and micro-management for stricter enforcement of private and community property rights;
• Public company regulations, which raise barriers to capital markets (and thus barriers to entry) and which substitue a busybody by inept and corruptible government for shareholder vigilance;
• Deposit insurance, that substitutes a card-house of prudential government regulations – that encourage moral hazard and games by bankers, traders, investment bankers and rating agencies rather than prudence – for oversight by depositors and their proxies; and
• The initial government grant of limited liability to shareholders, which not only encourages shareholders not to worry to closely about the risks that ‘corporate’ actions pose to third parties, but has fuelled the growth of the regulatory state and external pressure by advocates of the ‘precautionary principle’.

Anger over our perverted ‘capitalism’ is perfectly fine and appropriate – nay, essential. But let’s have some clearer thinking, please.

In the wake of the recent deaths and illnesses in Germany from a dangerous strain of E. coli, thinker and former banker Matt Ridley – who’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

Daniel P. Aldrich is an up-and-coming political scientist who got interested in disaster recovery when New Orleans was hit by Hurricane Katrina a few months after he had moved there with his family.

He has also spent quite a bit of time living and studying in Japan; I ran across him recently in connection with my reading and blogging on post-earthquake, post-tsunami and post-Fukushima nuclear power plant disaster Japan; he’s mentioned prominently in the NYT article excerpted in my preceding post.

According to his bio at Purdue University, Aldrich:

received his Ph.D. and M.A. in political science from Harvard University, an M.A. from the University of California at Berkeley, and his B.A. from the University of North Carolina at Chapel Hill. Daniel has focused on the ways in which state agencies interact with contentious civil society over the siting of controversial facilities such as nuclear power plants, airports, and dams. His current research investigates how neighborhoods and communities recover from disasters. He has published a number of peer-reviewed articles along with research for general audiences. His research has been funded by grants from the Abe Foundation, IIE Fulbright Foundation, the National Science Foundation, the Reischauer Institute at Harvard University, the Weatherhead Center for International Affairs, and Harvard’s Center for European Studies. He has been a visiting scholar at the Japanese Ministry of Finance, the Institute for Social Science at Tokyo University, Harvard University, the Tata Institute for Social Science in Mumbai, the Institut d’etudes politiques de Paris (Sciences Po), and the East West Center in Honolulu, Hawaii. He has spent more than three years conducting fieldwork in Japan, India and France.

His research and writing on disasters and resilience is very interesting and speaks to the importance of strong communities of the type that governments and their corprate agents frequently do their best to seek to erode. Here is his own description and set of links to that work:

Externalities of Strong Social Capital: Post Tsunami Recovery in Southeast Asia forthcoming in Journal of Civil Society

Much research has implied that social capital functions as an unqualified “public good,” enhancing governance, economic performance, and quality of life (Coleman 1988; Cohen and Arato 1992; Putnam 1993; Cohen and Rogers 1995). Scholars of disaster (Nakagawa and Shaw 2004; Adger et al. 2005; Dynes 2005; Tatsuki 2008) have extended this concept to posit that social capital provides nonexcludable benefits to whole communities after major crises. Using qualitative methods to analyze data from villages in Tamil Nadu, India following the 2004 Indian Ocean tsunami, this paper demonstrates that high levels of social capital simultaneously provided strong benefits and equally strong negative externalities, especially to those already on the periphery of society. In these villages, high levels of social capital reduced barriers to collective action for members of the uur panchayats (hamlet councils) and parish councils, speeding up their recovery and connecting them to aid organizations, but at the same time reinforced obstacles to recovery for women, Dalits, migrants, and Muslims. These localized findings have important implications for academic studies of social capital and policy formation for future disasters and recovery schemes.

Social Science Perspectives on Disasters in Perspectives on Politics

In this extended review, I discuss three recent books on disaster: Governing after Crisis: The Politics of Investigation, Accountability, and Learning edited by Arjen Boin, Allan McConnell, and Paul ‘T Hart, Learning from Catastrophes: Strategies for Reaction and Response , edited by Howard Kunreuther and Micheel Useem, and The Next Catastrophe: Reducing Our Vulnerabilities to Natural, Industrial, and Terrorist Disasters by Charles Perrow. All three books invoke the market and state as core forces at work in mitigation and disaster recovery, overlooking the critical role of social capital.

Separate and Unequal: Post-Tsunami Aid Distribution in Southern India published in Social Science Quarterly

Objective. Disasters are a regular occurrence throughout the world. Whether all eligible victims of a catastrophe receive similar amounts of aid from governments and donors following a crisis remains an open question. Methods. I use data on 62 similarly damaged inland fishing villages in five districts of southeastern India following the 2004 Indian Ocean tsunami to measure the causal influence of caste, location, wealth, and bridging social capital on the receipt of aid. Using two-limit tobit and negative binomial models, I investigate the factors that influence the time spent in refugee camps, receipt of an initial aid packet, and receipt of 4,000 rupees. Results. Caste, family status, and wealth proved to be powerful predictors of beneficiaries and nonbeneficiaries during the aid process. Conclusion. While many scholars and practitioners envision aid distribution as primarily a technocratic process, this research shows that discrimination and financial resources strongly affect the flow of disaster aid.

The Power of People: Social Capital’s Role in Recovery from the 1995 Kobe Earthquake forthcoming in Natural Hazards

Despite the regularity of disasters, social science has only begun to generate replicable knowledge about the factors which facilitate post-crisis recovery. Building on the broad variation in recovery rates within disaster-affected cities, I investigate the ability of Kobe’s nine wards to repopulate after the 1995 Kobe earthquake in Japan. This article uses case studies of neighborhoods in Kobe alongside new time-series, cross-sectional data set to test five variables thought to influence recovery along with the relatively untested factor of social capital. Controlling for damage, population density, economic conditions, inequality and other variables thought important in past research, social capital proves to be the strongest and most robust predictor of population recovery after catastrophe. This has important implications both for public policies focused on reconstruction and for social science more generally.

Fixing Recovery: Social Capital in Post-Crisis Resilience in The Journal of Homeland Security June 2010

Disasters remain among the most critical events which impact residents and their neighborhoods; they have killed far more individuals than high salience issues such as terrorism. Unfortunately, disaster recovery programs run by the United States and foreign governments have not been updated to reflect a new understanding of the essential nature of social capital and networks. I call for a re-orientation of disaster preparedness and recovery programs at all levels away from the standard fixes focused on physical infrastructure towards ones targeting social infrastructure. The reservoirs of social capital and the trust (or lack thereof) between citizens in disaster-affected communities can help us understand why some neighborhoods in cities like Kobe, Japan, Tamil Nadu, India, and New Orleans, Louisiana displayed resilience while others stagnated. Social capital – the engine for recovery – can be deepened both through local initiatives and interventions from foreign agencies.

Aldrich Presentation on 25 March 2010 BUILDING RESILIENCE conference

Despite the clear and present danger from disasters, social scientists have yet to provide strong, quantitative evidence about which factors influence the pace of recovery. Using data from four megadisasters over the 20th and 21st century – the 1923 Tokyo earthquake, the 1995 Kobe earthquake, the 2004 Indian Ocean tsunami, and the 2005 Hurricane Katrina – Aldrich argues that social infrastructure is the critical factor in recovery.

The Crucial Role of Civil Society in Disaster Recovery and Japan’s Preparedness for Emergencies in Japan aktuell 3/28

This article is concerned with the empirical puzzle of why certain neighborhoods and localities recover more quickly than others following disasters. It illuminates four mainstream theories of rehabilitation and resilience, and then investigates a neglected factor, namely the role of social networks and civil society. Initial analyses underscore the important role of trust and connectivity among local residents in the process of rebuilding. After examining the role of civil society in Japan’s preparedness for emergencies, the article concludes with some policy recommendations for governments and nongovernmental actors involved in disaster relief.

This paper, entitled the The Need for Comparative Research, was prepared for a conference at the Jamsetji Tata Centre for Disaster Management in February 2008, and sets out some initial ideas which have motivated this project.

Some of Aldrich’s newspaper articles are linked here.

I expect I’ll be commenting further on his work.

We can see the same phenomenon in extractive economies wherever governments own the resources, but locals own the risks – as in the Gulf of Mexico/BP (as I noted in a number of posts) accident, Nigeria, Ecuador/Texaco, etc.

We can also see this more generally with crony, corporation-based capitalism.

Japan’s version is more complicated and seductive: the locals get paid off – at the expense of electric power ratepayers who are subject to a government-supported monopoly – in a way that encourages them to abandon their own livelihoods and further dependent on handouts.

Below are excerpts from a May 31  article at the New York Times:  In Japan, a Culture That Promotes Nuclear Dependency

Excerpts:

When the Shimane nuclear plant was first proposed here more than 40 years ago, this rural port town put up such fierce resistance that the plant’s would-be operator, Chugoku Electric, almost scrapped the project. Angry fishermen vowed to defend areas where they had fished and harvested seaweed for generations.

Two decades later, when Chugoku Electric was considering whether to expand the plant with a third reactor, Kashima once again swung into action: this time, to rally in favor. Prodded by the local fishing cooperative, the town assembly voted 15 to 2 to make a public appeal for construction of the $4 billion reactor. …

As Kashima’s story suggests, Tokyo has been able to essentially buy the support, or at least the silent acquiescence, of communities by showering them with generous subsidies, payouts and jobs. In 2009 alone, Tokyo gave $1.15 billion for public works projects to communities that have electric plants, according to the Ministry of Economy, Trade and Industry. Experts say the majority of that money goes to communities near nuclear plants.

And that is just the tip of the iceberg, experts say, as the communities also receive a host of subsidies, property and income tax revenues, compensation to individuals and even “anonymous” donations to local treasuries that are widely believed to come from plant operators. …

In a process that critics have likened to drug addiction, the flow of easy money and higher-paying jobs quickly replaces the communities’ original economic basis, usually farming or fishing.

Nor did planners offer alternatives to public works projects like nuclear plants. Keeping the spending spigots open became the only way to maintain newly elevated living standards.

… Towns become enmeshed in the same circle — which includes politicians, bureaucrats, judges and nuclear industry executives — that has relentlessly promoted the expansion of nuclear power over safety concerns. …

“This structure of dependency makes it impossible for communities to speak out against the plants or nuclear power,” said Shuji Shimizu, a professor of public finance at Fukushima University.  …

Much of this flow of cash was the product of the Three Power Source Development Laws, a sophisticated system of government subsidies created in 1974 by Kakuei Tanaka, the powerful prime minister who shaped Japan’s nuclear power landscape and used big public works projects to build postwar Japan’s most formidable political machine.

The law required all Japanese power consumers to pay, as part of their utility bills, a tax that was funneled to communities with nuclear plants. …

Political experts say the subsidies encourage not only acceptance of a plant but also, over time, its expansion. That is because subsidies are designed to peak soon after a plant or reactor becomes operational, and then decline.

“In many cases, what you’ll see is that a town that was depopulating and had very little tax base gets a tremendous insurge of money,” said Daniel P. Aldrich, a political scientist at Purdue University who has studied the laws.

As the subsidies continue to decline over the lifetime of a reactor, communities come under pressure to accept the construction of new ones, Mr. Aldrich said. “The local community gets used to the spending they got for the first reactor — and the second, third, fourth, and fifth reactors help them keep up,” he added.

Critics point to the case of Futaba, the town that includes Fukushima Daiichi’s No. 5 and No. 6 reactors, which began operating in 1978 and 1979, respectively.

According to Professor Shimizu of Fukushima University, Fukushima Daiichi and the nearby Fukushima Daini plants directly or indirectly employed some 11,000 people in communities that include Futaba — or about one person in every two households. Since 1974, communities in Fukushima Prefecture have received about $3.3 billion in subsidies for its electrical plants, most of it for the two nuclear power facilities, Mr. Shimizu said.

Despite these huge subsidies, most given in the 1970s, Futaba recently began to experience budget problems. As they did in Kashima, the subsidies dwindled along with other revenues related to the nuclear plant, including property taxes. By 2007, Futaba was one of the most fiscally troubled towns in Japan and nearly went bankrupt. Town officials blamed the upkeep costs of the public facilities built in the early days of flush subsidies and poor management stemming from the belief that the subsidies would remain generous.

Eisaku Sato, who served as the governor of Fukushima Prefecture from 1988 to 2006 and became a critic of the nuclear industry, said that 30 years after its first reactor started operating, the town of Futaba could no longer pay its mayor’s salary.

“With a nuclear reactor, in one generation, or about 30 years, it’s possible that you’ll become a community that won’t be able to survive,” Mr. Sato said.

Futaba’s solution to its fiscal crisis was to ask the government and Tokyo Electric, Fukushima Daiichi’s operator, to build two new reactors, which would have eventually increased the number of reactors at Fukushima Daiichi to eight. The request immediately earned Futaba new subsidies.

“Putting aside whether ‘drugs’ is the right expression,” Mr. Sato said, “if you take them one time, you’ll definitely want to take them again.”

Eiji Nakamura, the failed candidate for mayor of Kashima, said the town came to rely on the constant flow of subsidies for political as well as economic reasons. He said the prefectural and town leaders used the jobs and money from public works to secure the support of key voting blocs like the construction industry and the fishing cooperative, to which about a third of the town’s working population belongs.

“They call it a nuclear power plant, but it should actually be called a political power plant,” Mr. Nakamura joked.

I hope you’re not wondering just WHO Elinor Ostrom is, but I’ve blogged quite a bit about her.

For those of you who need a reminder, Peter Boettke said the following when this brilliant, hard-working political scientist deservedly won the Nobel Prize in Economics in 2009:

Lin Ostrom is firmly seated in the mainline tradition of economic scholarship from Adam Smith and David Hume to F. A. Hayek and James Buchanan ….. Instead,   she has been a major contributor to public choice economics, new institutional economics, and to our understanding of polycentricity and political economy.

And:

Her presidential address to the APSA summed up her theoretical agenda as “A Behavioral Approach to the Rational Choice Theory of Collective Action.”

She is most deserving of this Nobel, and she has made a unique contribution theoretically and empirically to the study of self-governance. But there is no need to pick a fight where one isn’t there. Her prize fits nicely in a stream of recognitions ANALYTICALLY by the committee to scholars such as Hayek (1974), Buchanan (1986), Coase (1991), North (1993), and V. Smith (2002). These are all scholars within the discipline of economics/political economy that recognize the cognitive limitations of man, and focus analytical effort on institutional analysis.

Lin Ostrom’s contributions come from an analytical framework that grounded in rational choice theory (as if the choosers are human) and builds to an institutional analysis (as if history mattered). The distinction between “rules in form” and “rules in use” means she studies in close detail the social norms that underlie self-governance in the management of resources and the management of social relationships.

It is amazing body of work.

Now for the pitch:

The Gund Institute for Ecological Economics has just posted on YouTube this thought-provoking 38-minute lecture that Ostrom gave in 2006:

The Challenge of Building Social Capital in a Sustainable & Desirable Future

[View:http://www.youtube.com/watch?v=Bo5Unn3AkVY&feature=youtube_gdata:550:0]

Hmm, you mean even the institutions of “private property” and corporations are forms of social capital, and dependent on shared institutions and even “trust”?

And that such “social capital” might include negative externalities?

Just what the heck IS “property“, then?

And corporations might have negative characteristics?

And indigenous “primitives” might have valuable, adaptive social capital?

And are large corporations as well as “government” responsible for the erosion of Hayek’s “market morals”?

So many questions, and so much distrust eating away at the social capital! …

Just like deposit insurance means depositors don’t bother to pay attention to whether or not bankers engage in risky activities, so too does limited liability mean that shareholders have little incentive to invest in managing risk.

While it should be shareholders (along with others who have stakes of one kind or another in commerical enterprises) – not governments – that are responsible for overseeing companies or banks, the reverse is precisely the situation we find ourselves in. Why?

Could government’s efforts to “protect” us have anything to do with poor management and decisions that benefit executives and traders, but harm shareholders, depositors and third parties?

(Enron, Lehman, BP, TEPCO, Bernie Madoff, and the whole raft of “Public” companies that are immune from shareholder criticism, but subject to growing heaps of federal prudential micro-management directives like Sarbanes-Oxley?)

How do we get government out of the risk management business, unless we insist that others take responsibility for their own investments?

In surfing for a simple post on moral hazard to distribute last week to a leadership seminar that I’m faciliating at a university here (not wanting to hazard my double-secret identity by proffering a post of my own), I stumbled across this little, thought-provoking piece from Joshua Pelton-Stroud.

This was posted June 13 2010, in the midst of last year’s little oil spill — for which, it seems, naturally enough, NOBODY is responsible. Corporations are now simply Acts of God, and the health of the State (emphasis added):

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

3. TokyoTom June 5, 2011 at 7:14 pm

 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“):

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.