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Source link: http://archive.mises.org/8924/long-on-the-corporation/

Long on the Corporation

November 10, 2008 by

The current issue of Cato Unbound features Roderick Long’s critique of “Conflationism,” defined as the “pervasive conflation of corporatist plutocracy with libertarian laissez-faire.” As Roderick rightly points out, in the mixed economy large corporations are among the prime beneficiaries of government largess, such that a wholesale defense of “big business” is silly and counterproductive for libertarians. However, Roderick spoils (for me, anyway) an otherwise excellent summary by jumping to the unwarranted conclusion that today’s corporations are, on average, larger, more hierarchical, and more diffusely owned than the firms that would emerge under laissez faire:

In a free market, firms would be smaller and less hierarchical, more local and more numerous (and many would probably be employee-owned); prices would be lower and wages higher; and corporate power would be in shambles.

As I’ve pointed out many times (1, 2, 3) to Roderick and to Kevin Carson, from whom Roderick draws much of his analysis on this point, this is a purely speculative counterfactual, and an unconvincing one at that. Roderick and Kevin do a fine job documenting a slew of government policies that favor large, complex, vertically integrated firms: direct subsidies, of course, but also indirect benefits from intellectual property law, bootlegger-and-baptist-style restrictions on market entry, transportation subsidies, various aspects of the tax code, etc. From this they conclude that smaller, more “egalitarian” enterprises, such as worker-owned cooperatives, would tend to flourish under the free market.

The problem is that their argument cuts both ways. Certainly large firms benefit from the state. But so do small firms. Corporations are under stricter antitrust and regulatory scrutiny, are more likely to be the victims of political rent extraction (in Fred McChesney’s sense), and are subject to stricter disclosure requirements (SOX being only the most visible, recent example) than their smaller competitors. Small firms benefit from state-funded incubators, SBIR awards, regional development grants, and a host of other interventions designed to foster “entrepreneurship.” Trade barriers, war, state control of education, and a host of other interventions retard the international division of labor, reduce stocks of human capital, and lower the marginal product of labor, all of which reduce the scale and scope economies that favor large-scale production.

Which set of effects outweighs the other? It is impossible to say, ex ante. The firm on the purely free market could be larger, more vertically integrated, and more hierarchical than the typical corporation under the mixed economy. Moreover, the worker-owned cooperative, the partnership and proprietorship, the decentralized “open-production” system, all suffer from serious incentive, information, and governance problems, almost none of which are mentioned in the anti-corporation libertarian literature. I suspect this literature’s preference for small-scale production is based primarily on aesthetic, rather than scientific, grounds.

{ 59 comments }

jp November 13, 2008 at 1:38 pm

“Of course, I agree with Kinsella’s remarks above (Nov 11, 10:45pm) about limited liability and legal person status; it’s not at all clear to me that these convey special, and illegitimate, benefits on one particular form of organization.”

So if limited liability and legal person status don’t confer benefits, you’d hold that an unincorporated company with unlimited liability circa 1750 would be indifferent if the king offered to incorporate it without cost and grant it limited liability?

Peter G. Klein November 13, 2008 at 1:56 pm

1. It depends on the common-law status of shareholders, absent legal incorporation, relative to that of proprietors, partners, guild members, and so on. If proprietors are legally liable for torts committed by their employers, while the (legally incorporated) company is not, then yes, I would take the deal. I think you missed Kinsella’s point, which was that limited tort liability, for all kinds of employers, might obtain even in the libertarian utopia.

2. I assume when you say “limited liability” you mean limited liability against torts, but you aren’t specific on this point. Limited creditor liability is purely a contractual issue and is totally legitimate on the free market.

3. Roderick’s original claim was that on the free market, there would be fewer corporations and more proprietorships, partnerships, and patron-owned firms. Whether limited tort liability and legal person status result in more corporations than would otherwise be the case is an empirical question. It depends on the relative magnitudes of these “special benefits,” relative to the state-granted privileges enjoyed by other forms of organization, the burden of intervention on firms with various characteristics, and so on. We are talking about marginal effects, not whether limited liability and legal person status have _any_ effect.

jp November 13, 2008 at 4:19 pm

“Whether limited tort liability and legal person status result in more corporations than would otherwise be the case is an empirical question. It depends on the relative magnitudes of these “special benefits,” relative to the state-granted privileges enjoyed by other forms of organization, the burden of intervention on firms with various characteristics, and so on. We are talking about marginal effects, not whether limited liability and legal person status have _any_ effect.”

If you want empirical evidence, there is plenty demonstrating the relative benefits of crown-conferred incorporation encouraging switches from the unincorporated unlimited liability format to incorporated limited liable firms and not vice versa ie. that the marginal effects of incorporation were sought after.

In “The limitation of liability in British joint-stock companies, 1720-1844″ Freeman et al say the most important motive for seeking incorporation was the ‘great prize’ – the legal personality that incorporation afforded the company. The British Fisheries Society, incorporated in 1786, stated that it was:

“apprehensive that difficulties may arise, as well in recovering debts which may grow due to the Joint Stock, as in defending suits or actions which may be
commenced or brought against the subscribers for any matter or thing relative to the Joint Society, as by law, all the several subscribers and proprietors in the Joint Society must, in such cases, both sue and be sued, implead and be impleaded, by their several distinct names and descriptions, and to prevent the
several subscribers from becoming liable to the payment of any sum or sums beyond their respective shares in such Capital Joint Stock; therefore, for the more easily carrying into execution the several undertakings herein-before mentioned, and for avoiding the difficulties aforesaid, the said Society are desirous of being incorporated…”

ie. without legal personhood it was difficult to sue, and incorporation granted limited liability.

Furthermore, there is evidence that unincorporated companies pursued non-state granted forms of limited liability by transferring property to trusts. The costs of conveyance were high though, and taken only because competitors were already being granted these benefits by the state. Negotiating limited liability into all the company’s contracts including debt contracts was very expensive, both in time, effort, and cost. Much cheaper to be incorporated by the crown and have statute law take care of things in perpetuity.

Shotts Iron Co, an unincorporated company, decided to seek incorporation when it ran into troubles suing for damages and unpaid debts in 1835. Without legal personhood, Shotts lawyers found they needed to get the consent of all shareholders to proceed against defendants. Finding this cumbersome, they spent 7 years pursuing incorporation. (From “The limitation of liability in British joint-stock companies, 1720-1844″)

There are just a few cases out of many. I can’t find any examples of incorporated limited liability companies returning to the unincorporated fully liable format, leading me to believe that on the margin the special benefits of state-granted incorporation outweighed any benefits conferred on the unincorporated company. If you know of any examples of switches I’d be interested to hear.

P.M.Lawrence November 13, 2008 at 5:10 pm

Although the empirical matter relating to Long’s assertions is arguable – at any rate, it is still being argued – I think the point is settled that there is plentiful and material empirical evidence and that those assertions are not just hypothetical, counterfactual and/or speculative.

Tristan Mills November 17, 2008 at 4:48 pm

On Wal-Mart:
I have read some rather long winded arguments over Wal-Mart.
You cannot seriously say that Wal-Mart is a creation of the free market when a free market does not exist.
It is also silly to bury your head in the sand when it comes to evidence of collusion with the state on the part of Wal-Mart.

That said, it does seem to me that Wal-Mart has for the most part merely used the situation it finds today to grow to its size.
It has benefited from tax funded infrastructure. It has benefited from many other interventions, but most of these it did not lobby for.

So, whilst it is not as bad as many other companies and is rather unfairly singled out for attack by many it would never have become the beast it has become in the free market.
Surely that’s uncontroversial?

Its a mistake to praise or condemn it as much as people do.
The left should not criticise it in the way they do since it provides a valuable service, but a services which would be unnecessary (or less necessary) in a free market.
The right should not praise it as an example of free market business as it manifestly is not operating in a free market.

quasibill November 20, 2008 at 7:17 am

Stephan:

“Until it is established that shareholders ought to be personally liable for the torts committed by others, there is no need for a special exemption in the first place.”

I take it you never internalized the point you conceded when we last discussed corporations? In summary:

1) You conceded that one can be liable for merely lending property negligently.

2) You conceded that the standard for respondeat superior liability casts a wider net than piercing the corporate veil. This is true no matter how “hands off” and uninvolved the owner is in non-corporate forms.

3) Therefore, whether or not you agree with respondeat superior’s liability standard, corporate forms receive a privilege that is not inherent to non-corporate ownership under current law.

Have you rescinded your concessions, or are you merely being disingenuous?

Roderick T. Long November 25, 2008 at 11:51 am

I’ve had follow-up pieces here, here, here, and here. In the last one I respond to some of Peter’s comments.

Tony Deden December 2, 2008 at 3:23 am

Kudos to all of you for engaging in a truly meaningful discussion on a most important topic. As a securities analyst and investor for 24 years, and notwithstanding the scholarly disagreements, I find Long’s and Peter Klein’s comments equally perceptive and valuable. I have actually long admired Klein’s work in general. Allow me however to contribute three comments to this debate that may, in fact, be useful to the debate:

(a) the general arguments on the corporation that have been raised here are genuine American articles, while, in fact, the European corporate model (ex UK), or the Japanese one; are far more distinct (if not merely different) in their competitive and nature, their enduring substance and their response to as malevolent government intervention as exists in the US.

(b) The issue of money and the rate of interest as a contributing factor has not been raised. Clearly, firms of a larger size (or political connections) have access to capital (hmm, credit) dissimilarly to that of others. The cost of capital ultimately bears considerable damage to the business equation and distorts competition. There are hundreds of examples in America that are clearly products of such distorted economics. On the same topic, the considerable increase in the oligopolization of many markets and industries which we observe throughout the world today, despite all the monopoly czars out there, is a direct result, in my view to issues of money and credit rather than innovation or competitive advantages.

Thank you again for such consequential discussion.

Steve Call November 15, 2009 at 6:06 am

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