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Source link: http://archive.mises.org/10631/defending-corporations-block-and-huebert/

DEFENDING CORPORATIONS: Block and Huebert

September 9, 2009 by

Great new law review article by Walter Block and Huebert, Defending Corporations, Cumberland Law Review 39:2 (2009): 363-85. They demolish the anti-corporation argument of Van Eeghen published in the Journal of Libertarian Studies in 2005 (The Corporation at Issue, Part I: The Clash of Classical Liberal Values and the Negative Consequences for Capitalist Practices and The Corporation at Issue, Part II: A Critique of Robert Hessen’s In Defense of the Corporation and Proposed Conditions for Private Incorporation).

For other discussion of this issue, see my Legitimizing the Corporation and Other Posts.

Update: See also Bill Anderson’s Economic Calculation and the Courts: A Theory of Hoaxes, in the same issue of the Cumberland Law Review (then-Cumberland law student Brad Edmonds was instrumental in helping to place these articles with the journal).

Abstract:

Government courts often are subject to hoaxes in which false crimes are reported and then pursued by prosecutors. From the Salem Witch Trials of 1692 to what was called the “Duke Rape Hoax” in Durham, North Carolina, not to mention the numerous child molestation hoaxes of the 1980s and 1990s, people were charged and sometimes convicted on what nearly everyone today realizes were false charges. In this paper, I examine two court-induced hoaxes from an Austrian point of view. I apply the economic calculation analysis as developed by Mises and Rothbard as well as more general principles of Austrian Economics to explain why hoaxes would be prevalent in government courts, and why they continue.

{ 13 comments }

iawai September 9, 2009 at 12:06 pm

Delaware’s Corporate law is a picture perfect example of a competitive justice system: low entering costs make the geographic monopoly a non-issue, and promoters looking to start a corporation can choose from a good number of distinct State law environments to incorporate under.

Far from being the proverbial “race to the bottom”, Delaware’s success in maintaining order, legitimacy, and efficiency has great potential to be the example needed to decouple geographic monopolies from the security, justice, and governance systems: Just let people choose which State’s law they wish to incorporate themselves under.

There certainly might be far-reaching consequences of allowing such a radical departure from tying a “law-maker” to “his kingdom” – but the underlying basis for such a construct has long since disappeared from modern jurisprudence, and needs to be replaced with one respecting each human as a law-maker for his own castle.

happylee September 9, 2009 at 12:20 pm

Exciting! I will read it as soon I am done barfing. ;-)

Vincent Cook September 9, 2009 at 2:00 pm

This pro-corporate argument seems a bit strange from a laissez-faire perspective. If corporate equivalents, such as joint-stock companies or business trusts, can be contractually created in such a way as to exactly duplicate the legal status of corporations, then the corporate form is entirely redundant. Indeed, it would be difficult to justify following the rules for forming a corporation, even in Delaware, when the alternative is a complete freedom of contract without the hassle of state fees or of compliance with complex state corporate codes.

On the other hand, the limited liability privilege cannot be contractually manufactured in situations where there are non-contractual obligations involved–the notable example being obligations arising from torts committed by a business against non-customers. If someone hasn’t chosen to do business with the owner, they obviously they haven’t waived their tort claims against the owner either. Thus, using the state to extend the limited liability shield beyond the relationships that are covered by privity of contract is manifestly unjust. In this respect, the legal fiction of a separate corporate personality has a real potential for harming individual rights.

Stephan Kinsella September 9, 2009 at 2:35 pm

Cook: “This pro-corporate argument seems a bit strange from a laissez-faire perspective. If corporate equivalents, such as joint-stock companies or business trusts, can be contractually created in such a way as to exactly duplicate the legal status of corporations, then the corporate form is entirely redundant.”

so what if it is? Who said the state’s laws make sense?

But it’s not redundant. In fact the stat’s way of treating it (with logic that the anti-corporatists deny) is based on the idea that it needs the state to grant it legal personality, so it uses this as an excuse to seprately tax and regulate them.

“Indeed, it would be difficult to justify following the rules for forming a corporation, even in Delaware, when the alternative is a complete freedom of contract without the hassle of state fees or of compliance with complex state corporate codes.”

I have no idea what this is supposed to show.

“On the other hand, the limited liability privilege cannot be contractually manufactured in situations where there are non-contractual obligations involved–the notable example being obligations arising from torts committed by a business against non-customers.”

Read the paper.

Vincent Cook September 9, 2009 at 4:26 pm

Responding to my raising the problem of limited liability for torts, Stephan responded: “Read the paper.”

The paper, unfortunately, attempts to address the issue by offering an overly vague analysis of vicarious liability that doesn’t really address the point I raised. What the paper fails to acknowledge is that under libertarian principles, there always has to be some person or persons responsible as principals of the business, and therefore personally liable for torts committed by the firm.

The general rule for corporate-like contractual business organizations is that liability is attributed to owners of the equitable interest–that is, the people who have a vested right to directly or indirectly hire and fire the managers and agents of the firm. In a joint-stock company, that would be the shareholders who have voting rights (the directors, in that case, functioning as their agents). In a business trust, the shareholders only have a beneficial interest, so it is the trustees (the equivalent of directors) who are the principals. While it is possible to shield shareholders, such a shield can exist only if the shareholders give up control over the directors and the directors themselves become responsible as principals; the directors acting as fiduciaries for and not as agents of the shareholders.

The basic problem with the modern corporate form is that neither the shareholders nor the directors are held personally responsible as principals–the corporate principal being a mere legal fiction, a franchise created out of thin air by the state. This tempts potential malefactors to create thinly capitalized corporate entities for the express purpose of transferring most of the risk of losses away from themselves.

Such behavior in turn tempts anti-capitalist political activists to demand intensive government regulation of businesses where there is a significant potential for torts, breaches of fiduciary duties, etc. because the owners happen to be shielded from responsibility for taking risks at other people’s expense. The solution, of course, is not more regulation; it is to make the relevant decision makers personally liable for the harm they cause.

I do recognize that the limited liability/tort exemption privilege is not an inherent part of the corporate form. At other points in history and in other countries, corporations and their equivalents have had various forms of shareholder or director liability. Likewise, I recognize that the tort system itself has many problems that are frequently unfair to business owners. Nevertheless, the elimination of personal liability for acts of the corporation (for both shareholders and directors) is the main reason why corporations are preferred over business trusts and joint stock companies today. Even granting that vicarious liability need not flow to the shareholders (as is the case with business trusts), the question remains: how can an organization without any personally-responsible principals be consistent with libertarian legal principles?

Stephan Kinsella September 9, 2009 at 5:13 pm

Cook: “Responding to my raising the problem of limited liability for torts, Stephan responded: “Read the paper.”

The paper, unfortunately, attempts to address the issue by offering an overly vague analysis of vicarious liability that doesn’t really address the point I raised. ”

And see the link I added too for my posts.

Mike Stahl September 9, 2009 at 11:55 pm

I’ve been a consistent critic of limited liability, and while I think that the market distortion created by corporate “personhood” is understated in the paper, I would be absolutely satisfied if the alterations to tort-law offered by Block and Huebert were to come about.
The change in the nature of corporate operations by such an adjustment would be….epic.

I’m a bit unclear as to what Vincent Cook’s complaint is all about-if true individual liability were brought about…there is no more complaint. The paper calls for just that.

TokyoTom September 10, 2009 at 1:14 am

Stephan, we have extensively discussed this matter previously, focussing mainly on the point that Vincent Cook raises, namely, the consistency with libertarian principles of the state grant of limited liability as against parties who become unwilling “creditors” of the firm as a result of being injured by the actions of the firm.

You continue to dodge this point just as Block and Huebert have explicitly begged the question in their latest effort:

“As long as there is no fraud, as long as all those who deal with corporations know full well that in case of any dispute, they will only be able to sue for an amount up to the full capitalization of the corporation and not have access to the shareholders’ personal assets, there can be no problem with the libertarian legal code.”

It goes without saying that injured persons don`t choose ahead of time who will injure them, much less the whether the liability of their tortfeasors will be limited to corporate assets.

I have commented extensively myself on the consequences of this grant – which I see as fuelling risky corporate behavior and a cycle of “rent-seeking” fights with private interests seeking to use the state as a check against corporations –
in a number of blog posts.

Since too many links apparently triggers the spam filter here, I have copied this comment to a blog post, with links to earlier discussions at the Mises Blog and to my own thoughts, here:

http://mises.org/Community/blogs/tokyotom/archive/2009/09/10/kinsella-revisits-corporations-begs-qs-of-grant-of-limited-liaibility-towards-persons-involuntarily-injured-and-resulting-fight-to-influence-state-action.aspx#

K Ackermann September 10, 2009 at 4:51 am

A well-written criticism.

I think a hostile takeover is not always a viable option after the damage is done.

I also think that the corporation very much behaves as though it is its own entity. The officers and management in corporations very much assume different roles than those in “real life”.

I don’t think the people who falsified the reports on Vioxx would stand to see a loved one prescribed Vioxx.

They are subject to corporate pressures that remove, to some degree, a sense of personal responsibility. It’s not limited to fraud.

Many companies sponsor an atmosphere of indoctrination. We’ve all seen the Enron emails where they talk about ripping customer’s faces off. We don’t do these things outside of work. We don’t often seek asymmetrical advantage in our personal lives. We have a natural sense of fairness that might be suppressed at work. I’m not saying all corporate jobs are like that, but plenty are. I’m not saying it’s wrong either, but let’s not pretend the actors in a company behave the same as they do when at home.

If you doubt it, go to the DMV for a reminder. If those people acted the same out of work, they would be crime statistics.

Vincent Cook September 11, 2009 at 1:55 pm

Stephan responded to my latest post: “And see the link I added too for my posts.” In these posts, Stephan argues, in effect, that vicarious liability shouldn’t apply in the field of torts, maintaining instead that one must show that one actually caused the tort according to “sound principles of causation.”

But in the field of libertarian law, what is a sound principle of causation? In the realm of purposeful human action, we don’t merely move our muscles, we also think about the future state of affairs we want to bring about and govern our voluntary muscular movements based upon these thoughts. When we act, we engage in a special form of causation that involves thinking as well as doing, which greatly multiplies the ways in which we can coordinate our actions for a common purpose.

Specifically, the intellectual dimension of human action means that, in the context of organizations, individuals who supply the intention are just as much a causal factor as the individuals who do the physical deed. Indeed, it is difficult to imagine how vicarious liability could work in the context of authorizing agents to enter into contracts, and not in the context of causing a tort. Don’t contracts also require causation, namely of an act of consent? How can it be just for another to consent on your behalf, unless in some manner you caused it to happen?

The key to understanding the proper scope of vicarious liability then, whether it involve the creation of tort obligations or the creation of contractual obligations, is to analyze who has the ultimate authority to direct or authorize others to engage in a particular action. If you are granting powers to others to act on your behalf, or giving orders that they should act in a certain way, then their actions are in part a manifestation of your intentions–you are just as much a causal factor as they are. When directors act as agents of the shareholders, the shareholders are bound by all the obligations created by these acts, not just by the acts that happen to be contractual obligations.

Stephan Kinsella September 11, 2009 at 2:13 pm

Cook:

Stephan responded to my latest post: “And see the link I added too for my posts.” In these posts, Stephan argues, in effect, that vicarious liability shouldn’t apply in the field of torts, maintaining instead that one must show that one actually caused the tort according to “sound principles of causation.”

But in the field of libertarian law, what is a sound principle of causation? In the realm of purposeful human action, we don’t merely move our muscles, we also think about the future state of affairs we want to bring about and govern our voluntary muscular movements based upon these thoughts. When we act, we engage in a special form of causation that involves thinking as well as doing, which greatly multiplies the ways in which we can coordinate our actions for a common purpose.

Yes, I know, this is why I linked my article Causation and Aggression which goes into all this in further detail.

Vincent Cook September 11, 2009 at 7:59 pm

Stephan, responding to my latest post, wrote:

Yes, I know, this is why I linked my article Causation and Aggression which goes into all this in further detail.

It is an interesting article, but I don’t understand how it contradicts my argument. Since you endorse the view that one human can serve as an instrument for realizing another’s intention, then surely directors who act according to the intentions of shareholders are creating shareholder responsibility for those acts.

AustroContrarianCapitalist March 12, 2011 at 10:39 pm

Can anybody here address the assertion that we as individual human sentient beings, are allegedly “agents” of the “legal person” e.g. corporate entity created by the birth certificate that our parents may have applied for us? The “freeman-on-the-land theory” as it were, is that everytime you receive a document addressed to what you consider your name (in all capital letters) is actually addressed to the legal corporate entity (e.g. FIRST NAME, LAST NAME) that you as “agent” are a representative for. Apparently there is some legal principle called “capitis diminutio maxima” which means any time a “name” is in all capital letters, it is referring to the legal person, that is, the corporate entity, and not you, the living flesh and blood sentient human being. Can anybody comment on this “rabbit hole?”

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