(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.

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Have you rescinded your concessions, or are you merely being disingenuous?

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.

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.

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.

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?

Even if government was responsible for the lowered transportation costs (which of course only benefits big businesses, rather than individuals who like being able to drive …) that still doesn’t mean Wal-Mart is a partner of the State in the exploitation. Rather, the road networks were created, and *then*, having had nothing to do with them, market conditions changed, and the Waltons wisely adapted. Even today, public roads are built, whether or not Wal-Mart wants them.

So this is not a case of, “hey, we built up a stupid business model, bail us out by starting a large scale infrastructure project!” It was not a case of “hey, we want to make big profits, build roads so we can start an otherwise-stupid business model”. It was a case of, “Hey, transportation costs are lower now, let’s use the same access rights everyone else has to make better stores.”

Does anyone here really think that if roads weren’t subsidized, the Waltons would have had a complete mental shutdown due to their brains not functioning in “non-cheap-transportation” environments? That’s impossible; the genetic code simply doesn’t have enough information to build brains with that kind of blind spot. If market conditions were different, they would have — wait for it — responded differently. If I notice fancy clocks becoming popular and so I build fancy clocks to sell, my success is not “due to a subsidy from fancy clock lovers”.

Yes, I’m sure you can point to ways that Wal-Mart does genuinely exploit, but the example of “They use implicitly rely on roads they never asked for and which they have no privileged access to!” is a very poor one.

If you’re still not convinced, imagine that some wise entrepreneur was unjustly imprisoned and then, once in prison, uses his brains to operate a profitable trading business therein due to smuggling goods from the outside and otherwise brokering trades between other prisoners. Would you say that, once he has all that prison wealth, that “his success is due to the STATE!” ? Would you say that he’s responsible for the oppression of the other prisoners? That he’s exploiting them by selling them stuff? Of course not. Because that would be really stupid.

Wal-Mart’s position isn’t much different.

Because…and wait for it… Wal-Mart is NOT the State. It depends on voluntary relationships with it’s customers.

What’s vulgar is that good men like Bill Gates and Sam Walton, who did their best to use their minds and non-coercion to trade with their customers in an EVIL system, are sneered at as “evil”…while the average IWW union thug is placed on a pedestal.

Let me also be up front in that I am not an Objectivist and disagree with Rand on many, many things, but it is vulgar (and dishonest) to single her out as an “apologist for big business” based on one comment taken out of context. As anyone who read her novels in high school knows, she had no tolerance for businessmen who used the State for their immoral gain.

I commend Mr. Klein and Mr. Kinsella for their rational take on this issue. That left-libertarians resort to dishonest pop-shots and populist window-smashing (to borrow from Mr. Kinsella) make me suspect of their position.

But that’s taking the eye off the ball. The crucial thing is that the British Industrial Revolution was mostly carried by sole proprietorships, partnerships, family businesses and so on. It worked.

But hey, we can all agree that the ideal situation would be to remove all special privilege, for firms large and small, and let entrepreneurs decide. (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.)

Yes, but one must differentiate between different sorts of joint stock companies. Unincorporated versus incorporated and limited liability versus unlimited liability.

Looking at British history, the first joint stock companies were merely large partnerships, unincorporated, voluntary, and each member fully liable.

The first incorporated joint stock company was created in 1553 when the British crown granted it a royal charter. Joint stock companies could now operate as separate legal persons if the Crown saw fit. By the 1600s, the Crown sometimes included limited liability as one of the features of incorporation. Later on an Act of Parliament would allow for the creation of an incorporated joint stock company, bypassing the King.

In 1844 the Joint Stock Companies Act bureaucratized the technique of granting charters so that all joint stock entities could incorporate. Prior to Joint Stock Act, incorporation required expensive lobbying of king or parliament. In 1856 limited liability was granted to all incorporated joint stock companies. By 1862 unincorporated joint stock companies were declared illegal by statute, overriding common law.

So in response to Klein I would say that the banding together of shareholders in the joint stock structure was a natural outcome of market forces, but the move to incorporation and limited liability was much influenced by the state. Given that incorporation and limited liability make it much easier to raise capital and transfer ownership, a tendency to the emergence of large rather than small joint-stock entities has occurred than would have in a scenario in which the state did not encourage these features.

So what? Go and look at the typical arrangements for mills and mines, say.

‘You are confusing “corporation” and “large state-connected enterprise.”‘

Rubbish. As a matter of historical fact, with a few exceptions, these were then the same thing, due to needing to arrange for special Acts of Parliament; however, corporations were around from before, or were created when they had other pull – I am not confusing the two categories. What is significant, though, is the large number of enterprises that were neither – and that gives us our historical precedent.

“Perhaps you didn’t get a chance to read the earlier comments in this thread, or to follow the links in the original post. Please see…”

The point I was trying to bring out was about “facts not in evidence”, in the article as written. Those things should have appeared in the body of this article, if they were material enough to be relevant, at least in headline or summary form; anyone can hand wave. It’s a valid thing to say about comments that use links, but not the right way to structure an article. But let’s use that material…

Despite a claim in the linked stuff to the contrary, those objections do not apply more generally than to structures, e.g. co-operatives, operating in contexts where they are not suited. We can easily see this from the historical success of those other things in Britain in the Industrial Revolution, and from actual outcomes for co-operatives where they are well suited (I already gave my observations on that).

I’m sorry, I don’t find this a convincing argument at all. Even during this period in England there were a substantial number of “joint-stock companies.” You are confusing “corporation” and “large state-connected enterprise.” More generally, the corporate form of organization has proliferated over long periods of time, across a wide variety of legal and political environments that varied greatly in what legal rights were granted to corporate entities. As Henry Hansmann and others have pointed out, the English corporation long predated limited (tort) liability and other privileges granted by the Crown.

“Klein further asserts that ‘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’. If there is anything to this, he should come right out and describe them, at least at the level of adverse outcomes.”

Perhaps you didn’t get a chance to read the earlier comments in this thread, or to follow the links in the original post. Please see

http://organizationsandmarkets.com/2007/04/04/vaguely-defined-property-rights/

The arguments are explained there and the appropriate references are provided.

For some reason this point seems to have been missed by many of you, so please let me know if I am in error and why.

Klein thinks that Long’s description “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” “is a purely speculative counterfactual”.

It isn’t. We have actual historical evidence on the point. Between the South Sea Bubble and the late 19th century, Britain shunned corporate structures except for special cases and holdovers from before. There was no standardised method of incorporation for new corporations, and exceptions like railway companies needed to justify getting their own special Acts of Parliament (banks also had some special arrangements – see below). Britain got the Industrial Revolution largely on the backs of other structures like sole proprietorships and partnerships, e.g. Boulton & Watt, with some mutual societies like the Building Societies around as well. (Jumping ahead, this why Jeremy is wrong about ‘In other words, nobody’s saying “It’s not a free market unless there are no giant corporations”. It’s simply a speculative prediction…’ – the only giant corporations were holdovers like the East India Company and special cases like the Great Western Railway.)

This period does indeed bear Long out. Britain did not give up this approach because it was worse, but because of subsidised competition from rising countries like France and Germany with their own state-assisted corporate systems; it was a race to the bottom.

Klein’s view that “The problem is that their argument cuts both ways. Certainly large firms benefit from the state. But so do small firms.” is also mistaken. He has two broad misunderstandings:-

- ‘Small firms benefit from state-funded incubators, SBIR awards, regional development grants, and a host of other interventions designed to foster “entrepreneurship.”‘ In general, no. In general, only small corporations that are also in compliance with state requirements do – it is a huge additional overhead for sole proprietorships and partnerships to set up the paperwork, audit trails, and so on, if indeed anything but a corporation is ever invited to apply. This is a hidden conflating of “firm” and “corporation”.

- “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 [of] economies that favor large-scale production”. This affects the competitiveness of mega-firms with large firms. It has no bearing on the competitiveness of smaller firms with these. It also begs the question of whether there are any material economies of scale and scope at those levels anyway; it’s something that would have to be established on a case by case basis unless some general principle could be found.

Klein further asserts that ‘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’. If there is anything to this, he should come right out and describe them, at least at the level of adverse outcomes. To the best of my knowledge, the only things like this are precisely the things that make diseconomies of scale and scope. That is, they are what stops firms like this from being large, but they do not stop them working cost effectively on the correct scales, interfacing via the market. Far from being a criticism of this sort of firm, it merely backs Long’s point quoted above.

Stephan Kinsella asks “What is [wrong] with defending Wal-Mart as an exemplar of the free market? They are! This is despite state interventions.” Kevin Carson has observed Wal-Mart in action in Arkansas. He has come to the conclusion that it actively lobbies for state support, and gets it at material levels.

Araglin is missing an important distinction in “…there’s no reason to think that the legal-personality of groups requires some sort of ‘privilege’ or contravention of libertarian rights in order to arise. Even cooperatives, labor unions, guilds, and traditional villages are corporations in the etymological sense that they are legal bodies made up of members, and that once constituted, the body as a whole has certain legal rights and duties both as to its members and as to others with whom it may deal.” He is right in what he describes, but it’s not a general thing. That is, we can’t say “a corporation is a corporation is a corporation”. What he has actually done is, set the scene for the distinction between entities that arise “naturally” (i.e. as a consequence of ordinary outworkings) as opposed to ones that only exist under a supporting structure. Byzantine Law recognised the former sort as “moral persons”, e.g. monasteries, and it didn’t recognise any that were mere artefacts without some inherent core existence of their own. Araglin is not wrong, but it would be very easy for a casual reader to slip from agreeing with this into thinking that “corporations are natural not artificial” as a general statement. Some corporations are natural; I think “moral persons” is a good term to help us get to grips with this.

Stephan Kinsella argues that ‘…to argue the shareholders are personally liable for torts committed by (state-defined) “employees” of a company the shareholder happens to own shares in requires an argument–a causal one. I have yet to see one. 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.’

The situation largely depends on the chain of responsibility. At some point, the company was turned loose on the world. If shareholders retained effective control, it’s still down to them. If they didn’t, those particular shareholders that released the hounds, as it were, are responsible for what came after (as are the “hounds”). Shareholders who are not culpable are those who bought shares from previous shareholders after those let go; responsibility remains with the latter even though they are no longer shareholders. For this matter, controlling what the hounds do is what counts. Shareholders in name, e.g. through pensions funds, aren’t the controllers, the fund managers are. And so on. It’s worth reading James Buchan’s Frozen Desire to see what happened to an ancestor of his, a lawyer who was a trustee for a shareholder in an unlimited liability bank that went bust. He had to pay up.

For what it’s worth, my informed opinion is that corporate structures are of value in getting capital together quicker and easier in the first place (which really only matters in scenarios like the late 19th century race to the bottom described above), but only in special cases for actual operations; and, co-operatives are most constructive when they are producer co-operatives adding downstream value and sharing it with upstream producer/owners, e.g. Italian wine making co-operatives or the Australian Rice Growers (I did a major assignment on that one for my MBA – it had already done everything the government later wanted to do to “help”, which got the government’s nose out of joint). And you can achieve de facto limited liability even in partnerships, with anonymous partners who retain their own documentation, effectively bearer shares; they wouldn’t stick their heads up unless there was net positive value in it for them, regardless of any de jure liability. It also gives some defence against “sovereign risk”, i.e. when the government changes the rules on you, which is why continental Europe had to allow that form of corporation – the Anonymous Society – to encourage people to invest.