Sunday, September 29, 2013

Corporations in a Private Property Society

I am seeing a lot of comments with regard to corporations under the On Left Libertarianism post. Most go something like this:
 Corporations are creatures of government. Free association is a product of society. Since governments are coercive by definition, anything that comes from government will be coercive, including corporate law.
The flaw in this thinking is to assume that corporations wouldn't develop on their own in a free market society.

Consider, most roads are now built and controlled by the government but does this mean that we shouldn't have roads in a free market society? Of course, not. Just because the government is involved in a sector of the economy now doesn't mean that such a sector wouldn't evolve in a libertarian society.

A corporation is nothing but a an entity that limits liability and defines ownership. In a free society, there is nothing wrong with my going to a lender and saying, "Hey, I would like to borrow some money for my business (i.e. corporation), but if it fails I want to limit my liability to the liquidation value of the assets of the business." Similarly, a corporation with many stockholders can approach a lender and offer pretty much the same terms. It is then up to the lender to decide whether he wants to lend under those terms. But there would be no necessity for such a corporation to be backed up by government law. In a free market society, it is individuals interacting and deciding when they want to make an agreement and when they don't.

There is nothing wrong with the corporate form. Indeed, I would expect that under a free market society, corporations very similar to the ones we have today would emerge and that hybrids of current day corporations would emerge.

One should keep in mind the answer Ludwig von Mises gave Murray Rothbard when Rothbard asked him when a country should be identified as socialist:
One time I asked Professor von Mises, the great expert on the economics of socialism, at what point on this spectrum of statism would he designate a country as "socialist" or not. At that time, I wasn't sure that any definite criterion existed to make that sort of clear-cut judgment. 
And so I was pleasantly surprised at the clarity and decisiveness of Mises's answer. "A stock market," he answered promptly. "A stock market is crucial to the existence of capitalism and private property. For it means that there is a functioning market in the exchange of private titles to the means of production. There can be no genuine private ownership of capital without a stock market: there can be no true socialism if such a market is allowed to exist."
Given that only shares of corporations trade on stock exchanges, it is clear how important Mises viewed corporations and, indeed, Rothbard supported this thinking. Following the report on Mises answer, Rothbard wrote this:
And so it is particularly thrilling to see that in the headlong flight from central planning and socialism, several of the Communist countries are actually introducing, or preparing to introduce, a stock market. A prospect that would have been unthinkable only a few years ago! The process is already in its early stages in Communist China. And the Soviet Union is beginning to talk about introducing a stock market.

20 comments:

  1. Robert, I believe you are conflating financial liability with tort liability. When people complain about the limited liability of corporations, they are referring to tort liability. At least that is how I understand it.

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    1. If I contract with A to limit liability, but end up damaging C, with whom I have no contract, then I am liable to C for damages. Simple application of the non-aggression principle.

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    2. Why should shareholders even be liable for damages that are the result of actions that they did not specifically endorse? If I hire a person to mow my lawn and he uses my mower (my capital) to rampage through the neighbor's yard, I am certainly not liable, since that was not what I hired him for. An exception to this might be if I knew the person I was hiring to be dangerous, in which case, perhaps I could be sued for negligence. I am not omnipotent concerning the intentions of the people that I hire nor is everything they may or may not do the result of my personal instruction. The same goes for the shareholders of a corporation.

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    3. Is it you--the individual--who has contracted with A to limit liability or you--the corporation--that does this? If you contract with someone to limit liability on a loan, you haven't created a corporation. You've only created a contract between two individuals, with certain terms. The corporation remains a purely fictitious legal entity that is created by governmental fiat. You can easily create a contract between lender and borrower that limits liability, but just limiting liability between two contracted individuals, a corporation does not make. You can even create a massively complex system where shares are issued and terms made where shareholders are given certain rights and managers are given certain protections from shareholders. But this too does not make a corporation. Any person not contracted within the "entity" could potentially sue any and all shareholders for wrongs done to them by the "entity". Because persons outside of the "entity" retain all their rights, they can potentially ruin every manager and/or shareholder, if the tort is of a large enough size. There is no governing body that protects shareholders from carrying full risk and responsibility for the actions, impact and externalities of their property--the "entity".

      What makes a corporation is the document, issued by the state, that originates its existence as a legal entity. In an anarchic system there would be no central authority and thus no "legal" authority (I use legal in its most specific and rigorous sense). Therefore, there would be no government to issue birth certificates for citizens to prove their existence, and there would be no government to issue corporate charters.

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  2. I read the article and agreed with it. Then after reading the comments I had some concerns. Thanks for responding. I suppose insurance could deal with the limited liability concerning lawsuits from vendors or customers.

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  3. The purpose of incorporation is to limit shareholder liability and encourage investment. There are no corporations in a free market. Period. Any form of limited liability is a public subsidy.

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    1. Jerry, how does the public get involved? Can't the general public simply mind its own business when corporations fail?

      Can you be explicit and elaborate why exactly "a limited liability is a public subsidy"? Lay your premises and arguments out in the open.

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    2. Cos Jerry thinks of it as as Fat Cats in Spats who have cooked up a deal with a cove they sailed with at Groton who has somehow become Senator in spite of 'the incident', to chisel the faces of the poor.
      A movie that shows how bad partnerships can be, see Lock Stock and Two Smoking Barrels

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    3. It's a subsidy because it is a protection given to the corporation (its managers and shareholders) by the government. The government creates a fictitious entity that has a legal standing. This way, when the corporation does something illegal, wrong, or destructive of other people's lives or property, the only recourse injured persons have is to sue the corporation and not the managers and shareholders who own and control the capital of that fictitious legal entity. (That is to say, shareholders and managers have extremely limited liability for their actions because they act within a framework administered and guaranteed by the authority of the State... It's not hard to see where very bad decisions--or decisions based solely on immediate profit maximization rather than a full understanding of the externalities and liabilities created by a specific decision--come from. Think TEPCO, Exxon, Royal Dutch Shell) Without the 'authority' of the State determining who, or in this case, what, is granted legal standing, anyone harmed by a corporation would be within their full rights to sue the managers and shareholders as individuals, to an unlimited amount. No contracts they create amongst themselves change the fact that a corporation is not a person and thus requires individuals to decide what is done with its resources. Furthermore, contracts created amongst themselves do not change the relationship the shareholders, managers and corporation in general have with people outside of their complex contract construct.

      There certainly could be complex contract systems that define terms between individuals in respect to shared capital, entry/exit of the contract system and management of the contract system itself (a 'free market corporation', let's say). However, without the grant of the state making the corporation a legal entity--equal to an individual--they would be very risky to enter into because shareholders would be always potentially liable for the actions and impact of their capital. That is to say, the government arbitrarily decides to lowers costs to 'incorporated' contract systems by applying their monopoly over violence and creating a false legal status. Conversely, a situation without the government lowering costs (risk) would better incentivize shareholders to exert proper control over management due to the very real risks carried by shareholders.

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    4. Just because there is nothing saying a group of investors can't contract to limit their liability, there is nothing to stop one from from suing somebody whom one believes has caused harm even if that harm was done under the contract.

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  4. You would all do well to read Robert Hessen's "In Defense of the Corporation (Hoover Institute Press, 1979). Bob derives limited liability, both historically and logically, from contract and free association.

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  5. As a business owner, I fully agree that I would seek to limit my liability through whatever means are available - government or not. What I think is interesting about this natural market phenomenon -- demand for limitation of liability in business affairs -- is that this is a perfect place to observe the regulatory aspects of the free market in action. Today, if I want to limit my liability I simply fill out some government forms and am granted the limitation. Nobody checks to see if my business model is sound or if there are risky actions that my business is planning to take. However, in a free market if I went to find a provider of "liability insurance" for my business, surely there would be a much greater level of scrutiny by the firm providing the liability-limiting policies to ensure that my business was not unduly risky or harmful.

    In other words, the whole reason state corporations are in fact evil is that they've suppressed a critical regulatory function of the free market. In a free market, incorporation would entail rigorous review and regulation of my business activities so that the provider of the limitation of liability doesn't wind up losing a ton of money! I would also have stipulations and an ongoing contract such that continued viability of the contract between the insurance provider and my company would require that I adhere to a code of conduct, and if I violate those terms (aka, do something risky, harm others, etc) my policy would be dropped and I'd be personally liable for any bad behavior.

    My overall point here is that not only should we look at limitation of liability as a normal market demand, meaning that there is an opportunity to supply it, meaning that corporations absolutely would exist on the free market...beyond that, this is the EXACT place where the vast bulk of free market regulation would occur, and it should be obvious that the degree of "prior restraint" here is massive -- very few people would go into business with their own assets on the line, and very few other companies or individuals would want to do business with a "naked" company that proved to risky to insure.

    This needs to be a key part of the free market argument -- stop with the blanket limitation of liability and move to a more dynamic model that will allow regulations to be appropriate and customized to the need.

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  6. The issue of corporations has been one of the bigger hurdles I've had to overcome with people when advocating a free market. In my experience, saying that corporations are a product of state intervention has been quite effective in dealing with objections from the Left. That said, I'm still a relatively new student of economics (Austrian School in particular) and I want to be sure I'm telling people the Austrian view as best I can. Would Mises say that the Europeans aren't socialist today by virtue of the existence of stock markets in Europe? I would tend to say they are (but then again, Mises may have had a different idea of how to define "socialism", given his historical context). And in stock exchanges, are shares of corporations necessarily the only thing traded? Could there be some other alternative in a private property society?

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    1. The problem with large corporations now is not that they are corporations but that they are in cahoots with the government.

      I think Mises point was more that if there are no stock exchanges, it is a point of no return, rather then a indication that there are lots of interventions. or not, in an economy.

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    2. I agree 1000%!

      I love Lew Rock and RW, but I think they miss the point W/R/T corporations as STATE created entities.

      If I have created no contract with such an entity, and said entity harms me (via pollution, for example) and is able to escape without making my loss whole then the Anarchoacap framework dies. If anyone can shield themselves from damages by creating LLC/Corps then liberty and responsibility become estranged.

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  8. Yes Richard, there will be a test tomorrow. It will be both multiple choice and essay.

    So that we may all be adequately prepared, the first question is: Explain in 100 words or less, how this forum continues to attract such informed and interesting minds that find and share insites into the most vexing issues of the day...

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  9. Robert confuses "corporation" with "company" -- companies would exist, corporations would not. Only humans are persons despite government lies. This does not mean that companies would not be capable of limiting liability and creating structures that corporations normally take advantage of -- but they would not be persons.

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  10. The pivoting of economic paradigms from liberalism into authoritarianism began on October 23, 2013, with the failure of credit, seen in the Interest Rate on the US Ten Year Note, ^TNX, rising higher in value, and the failure of currencies, seen in the EURJPY trading lower in value.


    The apostle Paul reveals in Ephesians 1:10, that The God, that is The Sovereign Lord God, has appointed His Son, Jesus Christ, as heir of all things and has tasked his with dispensation, that is the household administration of all things economic and political, as well as all things moral, that is virtuous, and ethical, that is relationally, to effect political government by kings in empires and to effect economic government in those empires by monetary priests, and to bury institutions of one age in graves and tombs, as He brings forth new empires and institutions of a new era.


    Collectivism was a part of liberalism, and is seen in transfer payments such as social security disability under crony capitalism, national wage laws under European socialism and pork and patronage under Greek socialism. Now under authoritarianism, there is a tyrannical collectivism at work, as is seen in the Troika technocratic governance, and in Obamacare regulatory capture, with the WSJ reporting A New Survey Shows That Employers Will Drop Coverage And Cut Hours. One of President Obama's proudest boasts about the Affordable Care Act is that it helps small business. The White House website says the health law "makes it easier for businesses to find better coverage options" and "stops insurance companies from taking advantage of you, giving the consumer and business owner more control and making health-care coverage more affordable."


    The aim of regionalism is to transfer the means of production, and all economic matters, from private ownership to the ownership of the region. While credit and currencies were the operative dynamic of liberalism, debt servitude and statist diktat is the operative dynamic of authoritarianism, where private property and private property rights are being replaced by regional property and regional property rights. While liberalism featured capitalism, European Socialism, and Greek Socialism, authoritarianism features regionalism where capital, resources, and property, are overseen by nannycrats for regional security stability, security, and sustainability. Under liberalism, Energy Limited Partnerships, AMJ, such as NGLS, WES, MMP, SEMG, TRGP, SE, ENB, ETP, and PBA, rewarded investment choice. But under authoritarianism, such will, like banks, be integrated into the government as a collective resource.


    Jesus Christ, acting in the economy of God, Ephesians, 1:10, terminated the British Empire, and

    is now terminating the US Dollar Hegemonic Empire, as He brings forth the Ten Toed Kingdom of Collectivism, seen in Daniel 2:25-45, via the destruction of both Credit, AGG, and Currencies, such as the Japanese Yen, FXY, the Euro, FXE, the Australian Dollar, FXA, the Swedish Krona, FXS, the Indian Rupe, ICN, and the Brazilian Real, BZF.

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