Sunday, September 29, 2013

Gary North and Murray Rothbard on Corporations

In Rothbard's Defense of Contractual Limited Liability, Gary North writes:
Rothbard affirmed “the absolute right to exchange or give away the ownership to such titles to whoever is willing to exchange or receive them.” This is the foundation of the right of contract in his system.
He placed no limits on these rights, just so long as the exchange does not involve aggression against anyone else. He then makes this observation:
While opposing any and all private or group aggression against the rights of person and property, the libertarian sees that throughout history and into the present day, there has been one central, dominant, and overriding aggressor upon all of these rights: the State.
He saw nothing good coming out of the State. I mean nothing. If any policy or practice had its origin in the State, Rothbard opposed it, both axiomatically and operationally. This is what is unique about his social and ethical thought. For him, this is an axiom: State = bad, both morally and operationally.
For Rothbard, the right of contract means immunity from the State. It also means immunity from violent action by others. If two people decide to make an exchange in terms of a set of non-violent principles, no third party has the authority to interfere. The terms of exchangeare established by the contracting parties, not by a third party. This is fundamental in Rothbard’s defense of contract. In The Ethics of Liberty, he writes:
In contemplating the law of a free society, therefore, the libertarian must look at people as acting within a general framework of absolute property rights and of the conditions of the world around them at any given time. In any exchange, any contract, that they make, theybelieve that they will be better off from making the exchange. Hence all of these contracts are “productive” in making them, at least prospectively, better off. And, of course, all of these voluntary contracts are legitimate and licit in the free society.
There is no legal appeal beyond these contracting parties. What the doctrine of the divine right of kings attributed uniquely to kings, and what the divine right of the British Parliament in 1688—89 substituted for the divine right of kings, Rothbard assigns to the non-coerciveindividual, and by implication, to voluntary contracts made by autonomous individuals.
In Rothbard’s system, individuals possess the legal privilege of specifying their mutual obligations. There is no higher appeal beyond them. His discussion of limited-liability laws rests on this moral and judicial foundation.
Rothbard denied that limited liability is a grant of privilege by the State. He wrote the following in Power and Market (1970), which had originally been in the original manuscript of Man, Economy, and State.
Finally, the question may be raised: Are corporations themselves mere grants of monopoly privilege? Some advocates of the free market were persuaded to accept this view by Walter Lippmann’s The Good Society. It should be clear from previous discussion, however, that corporations are not at all monopolistic privileges; they are free associations of individuals pooling their capital. On the purely free market, such men would simply announce to theircreditors that their liability is limited to the capital specifically invested in the corporation, and that beyond this their personal funds are not liable for debts, as they would be under a partnership arrangement. It then rests with the sellers and lenders to this corporation to decide whether or not they will transact business with it. If they do, then they proceed at their own risk. Thus, the government does not grant corporations a privilege of limited liability; anything announced and freely contracted for in advance is a right of a free individual, not a special privilege. It is not necessary that governments grant charters to corporations.
The State possesses no original ownership in Rothbard’s system. It does not even possessdelegated ownership.
Any argument that challenges the legal right of contract between autonomous individualsmust of necessity invoke a higher law than the right of self-ownership and a higher court than the mutually contracting parties. For Rothbard, there is no higher law or higher court.
If limited liability contracts are prohibited by law, then there is a major limitation on the right of voluntary contract.

In  Limited Liability and the Right of Contract, North writes:
Limited liability is a means of risk-sharing. By placing “Inc.” or “Ltd.” — which stands for limited liability — in the organization’s name, investors are telling the public that this entity is not a partnership. In a partnership, the investors’ entire net worth is at risk. If your partner goes bankrupt for any reason and still owes money, the creditors or plaintiffs can take your assets in settlement of the claim.

Partnerships are exceedingly risky. They are also small. Nobody wants to pool his assets in a partnership that includes poor people or strangers whose net worth statements are not shared with everyone in the partnership. A partnership is the economic equivalent of a co-signed debt: if the borrower defaults, the co-signer must pick up the tab. This arrangement used to be called “surety.” About 3,000 years ago, the author of the Book of Proverbs warned:

He that is surety for a stranger shall smart for it: and he that hateth suretiship is sure (Prov. 11:15).

A man void of understanding striketh hands, and becometh surety in the presence of his friend (Prov. 17:18).

A corporation has the potential to become large through the addition of new capital, not just through retained earnings. If a company requires more capital for expansion, it can invite investors to purchase a portion of ownership. Nobody hesitates to invest because of a threat of being jointly involved with people of limited means.

That’s what it boils down to: limited liability or unlimited means. A corporation reduces the risk of associating with “the likes of them.” For those of us who are “them,” this opens up investment doors that would otherwise be closed to us. Lloyds of London, a series of high-return partnerships, does not want us around. We’re just too risky. But the New York Stock Exchange thinks we’re great. (Frankly, I’m not sure I want to associate with the New York Stock Exchange.)

A general principle of life is this: responsibility accompanies power. With greater wealth or benefits comes greater responsibility. But it is possible to transfer some of this responsibility to others by means of a contract. A risk-aversive individual may be able to persuade another person to accept some of his responsibility for a price. A person who is willing to accept more risk — at the margin, of course — can enter into an agreement with someone who is trying to avoid risk — again, at the margin. They exchange assets/risk at a price. The risk-aversive person sells some of his risk — risk that offers a possibility of future gain — to the risk-buyer.

[Let's say] I agree to sell you a ticket to a Broadway show. You agree to pay me in advance. The performance we agree to is a month away.

Let’s talk about risk. The star may sprain her ankle. You will see an understudy. The understudy may turn out to be something less impressive than the understudy in 42nd Street. Do I owe you a partial refund? I can spell out the details in a long contract, which you will sign and perhaps have notarized at your expense, or we can go by court decisions in the past as to who owes whom what, if anything, or we can go by tradition, which is appropriate if the show is a revival of Fiddler on the Roof.

What if the electrical system goes kaput in the middle of Act 2? Do I owe you anything? By tradition, I owe you a replacement ticket. We have a name for this: a raincheck. But you will have come back to New York City to see the show. To return to the show in a month will cost you a bundle. Do I owe you the cost of another round-trip plane fare plus hotel and food?

And so it goes. Case by case, contract by contract, there is an exchange of risk. Buyers bear some of it; sellers bear some of it. We have a phrase for this: “Let the buyer beware.” In short, don’t count on limited liability if you’re a buyer.

To speed up transactions, societies rely on tradition, which in turn rests on court decisions and possibly legislation. The lengthier the contract, the fewer the transactions. The more the paperwork, the higher the cost per transaction. The more the details must be spelled out to buyers, the higher the cost per transaction. The more lawyers involved, the more likely that the deal will fall through.

So, instead of going through reams of paperwork that spell out the details of risk-allocation, modern society has an alternative: incorporation papers. The rules are known in advance in much the same way that the rules of New York Broadway show ticket sales are known. The rules boil down to these: (1) “Let the buyer [from the corporation] beware.” (2) “Let the seller [to the corporation] beware.”

Corporation law is all about the allocation of risk. It is about making deals possible where fewer deals or no deals at all are likely. It is all about “let’s make a deal.” It is therefore quintessentially American.

Instead of reams of paper to read and sign in triplicate, we have corporation law. Whatever a corporation achieves in terms of risk-allocation, a contract could achieve. But it is cheaper for everyone concerned to file incorporation papers and put “Inc.” on the company’s letterhead stationery than it is to fill out all those forms every time there is a transaction.

Critics of incorporation usually invoke a higher morality — undefined and undefended — to challenge the corporation’s right to exist. But every criticism boils down to this one: “The right of contract has limits when it comes to risk-allocation.” Every criticism of the corporation is inherently and necessarily a criticism of the right of contract.

This is why it is so strange to read critiques of the corporation written by people who affirm their commitment to libertarianism. They say, sometimes openly, that the corporation is immoral and therefore should not be allowed to exist because people who invest in the corporation do not bear all of the risks associated with doing business. The critics never admit, let alone praise, the economic fact that such a legal prohibition is discriminatory against outsiders who want to make a deal and who are willing to bear some of the risk associated with the deal.

Critics of the corporation are necessarily critics of contracts. They are promoters of legalized restraints on trade. They are saying, not simply that limited liability for corporations is wrong, but that limited liability is itself wrong. “The seller cannot legally transfer responsibility to the buyer.” Why not? “It’s just not right!”[...]

Risks are a fact of life. Someone must bear them. Contracts are capitalism’s way to enable buyers and sellers to come to terms regarding the allocation of risks. The free market principle of the right of voluntary contract is the principle governing liability.

There is no way to legislate risk out of transactions. It is possible to reduce the transaction costs of allocating risks. The most cost-effective way is by contract. Incorporation is a shorthand form of contract.

(ht The Libertarian Zamboni) 


  1. The elephant in the room is that a "corporation" is, and always has been, a CONTRACT WITH GOVT for special treatment and exemptions. A grant of incorporation could not be more non-libertarian and non-austrian.

    There should be one set of business laws that applies equally to all individuals. And business partnerships should be nothing more than contracts between individuals.

    1. "There should be one set of business laws that applies equally to all individuals."

      A fan of one-world government, are you?

      Talk about un-libertarian....

    2. Have you heard of contract law? And how it would be enforced by private courts in an ANCAP society.

      Maybe you don't read enough. ;)

    3. Just like it is enforced now by arbitration in the vast majority of commercial disputes.

      Maybe you need to read Rothbard. His theory of contracts (and thoughts on how to enforce them) is explained in "The Ethics of Liberty". Available for free online at

    4. BioMisq-

      Have you been hacked! That's such an out of character reply. Please elaborate.


  2. Why does Gary always quote the bible in his economic analysis?

    1. Because he reads more than one work, then he applies all that he has gained from reading those works into his thinking. The Bible colluding with Rothbard's work and others is the unique perspective that you will get from North.

    2. Gary's mission in life (since he was young, 19 or 20 maybe) is documenting the economic principles found in the bible. I believe it is over 30 volumes so far.

    3. This is like asking why a man breathes. Agree with him or not, and like it or not - he has written over 30 volumes on a verse-by-verse analysis of the economic principles in the Bible. He concludes that anyone who analyzes Biblical commentary on economics can only conclude in favor of free markets.

      After spending 40 years on this work, I suspect it influences much of what he writes.

  3. The fact remains that incorporation is a statutory grant by the state. As far as I know, there was no incorporation under the common law. Modern corporations are a bastard child whose parents were the joint-stock company (a partnership) and monopoly grants by the crown.

    Perhaps an example would help. Partners A, B, and C form Widget Corp. and each invest $1,000. According to limited liability, their losses are each limited to this $1,000. They hire three engineers to come up with widget designs. Each engineer provides a design and they vote and pick design #2 for production. But alas, design #2 is faulty. A widget blows up and injures a bunch of people. The injured people sue Widget Corp. Are you trying to tell me that, under libertarian principles, A, B, and C are only liable for $1,000 each?

    1. Under current law, they would be liable if they did not have proper insurance. This is what my lawyer told me when I set up my corporation. It seems reasonable to assume that similar requirements would be set in place in a private system or else fraud would be rampant.

    2. This argument of statuary grant sounds equally valid if applied to marriage.
      I doubt, though, that you'll get many people to agree that there are no valid marriages without State sanction.

  4. It's important to note that the limitation of liability for corporate officers (and corporate assets) does not extend to tortious aggression against third parties (or even against shareholders, in the case of fraud for instance). In a free society, the individuals who comprise a given corporation are not shielded from responsibility for their actions if they agress against the property of others.

    Those concerned over the way corporations might use their access to greater resources ("lawyers, guns and money") as a way to shield themselves from financial responsibility should understand that in a libertarian society these resources are fully at risk if aggression against others can be demonstrated in court. Rothbard and Block both outline the functional framework for how this can be achieved.

    Some who express moral reservations about corporations are in essence concerned about their ability to bully individuals. The State, enabler of cronyism, does very little to stop this, and when it does intervene it does so by becoming a bully itself (the alphabet soup of executive agencies daily provide more than enough evidence to support both these assertions). It's long past time to ditch the State, and establish a society where greater wealth or benefits are truly accompanied by greater responsibility. A libertarian society offers this, for individual and corporation alike.