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Source link: http://archive.mises.org/9070/left-libertarians-on-corporations-expropriating-the-efforts-of-stakeholders/

Left-Libertarians on Corporations “Expropriating the Efforts of Stakeholders”

December 8, 2008 by

Over at Mutualist Blog, Kevin Carson replies to, inter alia, Peter Klein’s response to Roderick Long. I replied at length in the comments, but let me just note here a few of the comments, expressions, and assumptions that caught my eye as being problematic from a libertarian and Austrian point of view. First there is the repeated complaining about “vagueness of ownership rights in the corporation,” and “the ambiguous division of control between management and shareholders.” There is a “pretense that management represents shareholders or that the latter are the owners in any real sense“. “Corporate management, in fact, is a self-perpetuating oligarchy in control of a free-floating mass of unowned capital.” “It uses its purported representation of shareholders as a legitimizing ideology to insulate it from accountability to internal stakeholders.” “More generally, hierarchy and the separation of labor from residual claimancy are inherently prone to incentive and agency problems.” And finally, corporations “expropriate” the “efforts” of “internal stakeholders” “because of the vaguely defined property rights in the organization. … much of the value created by internal stakeholders is expropriated by management.”

Carson also relies on “Rothbard’s threshold of calculational chaos“–to argue that “the predominant oligopoly firms in the existing manufacturing sector” must be artificially large since they “are already demonstrably above” this threshold.(He goes on: “Rothbard argued, specifically, that rational calculation becomes impossible whenever no external market exists for an intermediate good. Since, in fact, the majority of intermediate goods used by the typical manufacturing corporation are firm-specific, their transfer prices must be assigned internally rather than based on outside markets.”)

One hardly knows where to begin in responding to such reasoning. But as I noted in my response–libertarianism does not require any “pretense” that “management represents shareholders or that the latter are the owners in any real sense.” It only requires respect for property rights and not interfering in capitalist acts between consenting adults. That is, if you can somehow show that “management” does not “represent” shareholders, or that they are not “the owners” in “any real sense”–so what? Whose rights are being violated? If you don’t like the way a firm is organized, don’t work there; don’t invest in it.

Beyond that: in a libertarian society we need only identify who has the right to control a given resource; and who is responsible for the commission of various torts or crimes. If a collection of people (shareholders, directors, managers, creditors) whatever all agree to some complicated internal set of rules that specify their right to control a set of private assets, then *their* rights are not violated (they all agreed to it), and outsiders have no business complaining, any more than they would have a right to complain about the “messiness” of ownership claims within a neighborhood that has an ambiguously drawn set of restrictive covenants. For example if I buy a share of Wal-Mart stock I am in some sense an owner, but only in specified ways–I don’t have the right to use the Wal-Mart HQ for a picnic etc. I have agreed to a contractual set of rules that divide control–day-to-day control is given to managers; and a set of procedures determines how changes to the rules or to the decision-makers is made. From the perspective of an outsider, Wal-mart property is owned by a set of people (shareholders plus directors plus managers).

In response to Carson’s claim that corporate property is “a free-floating mass of unowned capital”–hogwash. Walmart’s inventory and factories and stores are not unowned by any stretch of the imagination. Just because some anti-market or anti-capitalist types don’t like the messiness and complexity of the internal rules governing rights of control (ownership) of these assets is utterly irrelevant. You don’t have to work for them, or invest in them. This “unowned” comments has a whiff of Georgism about it.

As for yammering about “stakeholders” — this leftist concept is routinely used by governments to justify infringing property rights. Again: in libertarianism, the corporation does not need to justify anything–so it does not need to pretend it “represents” anyone. If a group of people agree to pool their money and become shareholders, this just means they have agreed to collectively purchase some things with their money, and to have specified rights of control and rights to gain or dividends, that is their business. The consent of the parties is all that is needed to justify it.

As for “stakeholders,” it depends on who this means. For people that are employed by, or contract with, or invest in, or sell to or buy from the company–their rights are defined by contract already. The only other people left would be those who have torts committed against them by employees of the company. A libertarian theory of causation (as I noted here) is what is needed here, to determine who should be vicariously responsible for the actions committed by employees–should anyone else be? Should the corporation as a whole? The managers? Executives? Directors? Shareholders? Creditor? Vendors? Customers? Consultants? Contractors? “Stakeholders”? Whoever it should be, they should of course not be exempted from liability. But most people, including bad-lefties and libertarian lefties (and most libertarians in general) seem to simply assume that vicarious liability and respondeat superior are valid, and that absent state law, shareholders ought to be liable for torts committed by employees. But to my knowledge no one has shown that they should be. This has has to be established before one can bluster in outrage at the failure of the state to hold shareholders personally liable for such torts.

As for the comments about management “expropriating” the “efforts” of “stakeholders”–here we have what appears to me to be Marxian reasoning: the “expropriation of efforts”? What? I’d like to see exactly whose “labor” is being “stolen”? An employee? Hey, he isn’t compelled to work for them. The comments indicate that the value of the stakeholders’ effort is stolen from them–but you can’t “expropriate” value. People do now own value. There is no property right in value. Workers do not have any ownership claim to a company they have worked for–they have a claim to whatever they have contractually agreed to, that’s all.

As for the complaints about the separation of labor from “residual claimancy.” Libertarianism does not require labor to not be “separated” from XYZ; it does not base property rights on whether there are or are not “incentive” or “agency” “problems”. If incentive or agency problems that arise when using a given firm structure, presumably people over time will invest in or employ more efficient structures. If they don’t–hey, it’s their money.

{ 124 comments }

Mashuri December 9, 2008 at 3:37 pm

JA,

Let’s start with something a little more direct. If a corporation’s President orders his employees to pollute a populated river because a majority of shareholders voted in support of this action, should only the acting employees be held accountable by the river dwellers or should the President and supporting shareholders also share in the liability?

Stephan Kinsella December 9, 2008 at 3:38 pm

whittaker:

“Please, pretty please, with sugar on top…explain to us WHY investors SHOULD be held personally liable for employees or managers?”

Certainly. Such a rule would foster closer communication between shareholders and employees, and probably discourage the growth of inefficient mega-corps.

So… we should be against corporations, because they should not have limited liability–which is because the shareholders should be liable… which is because it would be one way to prevent large corporations. Nice circular argument.

PLUS, it’s utilitarian–sounds like a wealth-maximization coasian types saying we should pick legal rules to maxmize [some given social value]. Terrible. Tsk tsk.

… Do I have all the answers to how far the chain of liability should extend, and how it should depend on the negligent/intentional and tortious/criminal nature of the injury? No.

Until you have a sound theory of libertarian causation and responsibility, you cannot criticize the failure of the state to attribute vicarious liability to shareholders for actions of others.

These are the kinds of things that can be (and have been) worked out, case by case, over the years in the development of the common law. The real question is, why should the state make an arbitrary exception to these common-law rules,

Show exactly how the common law estalibhses that shareholders are vicariously liable for actions of others–and how this rule is compatible with libertarianism.

JA:

Which “workers”? How do you define who is a “worker”? What is the “full value” of labor and how do you measure? What is “low cost” and how do you measure? Are “labor” and “capital” referring to real people or abstract concepts?

Is it possible that some “workers” are really exploiting the capitalists…or more likely, other “workers”?

Yes–the concepts above are largely state classifications–who is an employee, etc. As for exploitation–the state reduced overall prosperity, in general. Everyone is harmed by everyone; this is the problem with the state. In a free market we would be so much richer, there may well be more big AND more small companies, and more diverse types.

There is nothing wrong with normal libertarians, and left-libertarians having different predictions about what the free market landscape would look like; the problem is the latter are too confident that their very sketchy opinions are firmly established, and b/c of their “thickism” they tie it in too much with political principles. This is their central error. So it’s no longer just a disagreement over predictions–to them, their shaky predictions and personal preferences inform their politics, so it becomes something more.

whittaker:

“Now, if you want to object to the inability to sue shareholders for vicarious liability for the torts of another, you need to show that the victim *should* be able to sue the shareholders. Should he? If so, why? What exactly is your theory of causation and responsibility?”

This kind of thing is addressed in great detail in judicial opinions that form the common law. I’m not saying the common law is perfect, but great effort is expended on trying to explain and justify it.

First, you haven’t even shown that the common law clearly requires this. And second, even if you do–we are libertarians, are we not? Show that a given common law rule is justified.

By contrast, there is very little explanation or rationale for the mountains of arbitrary corporation statutes that you appear to endorse.

I’m an anarchist. I don’t endorse any statutes. I simply believe that as Hessen has shown people could arrange their affairs similarly in a free market; and that the criticisms of corporations are too often uninformed, confused, or based on mistaken reasoning. I readily agree with the left-libertarians that the state’s granting of an easy way to form corporations might skew the form of entity that direction–who knows. I am as opposed to this as they are. The market is indeed distorted. I am less confident than they of exactly how it’s distorted, or what it would look like absent state intervention; and I certainly disagree with them that we can be confident large corporations could not exist without the state, and that therefore those that exist are illegitimate, their property “unowned” or “expropriated” and the like.

By what logic does holding regular board meetings entitle a firm’s shareholders to exemption from vicarious liability — whereas neglecting such formalities suddenly revokes this exemption?

Very little–well, it is based on the type of utilitarian, conseqeuntialist reasoning some anti-corporatists here have been trotting out. But this is not what the anti-corporatards based their reasoning on. They keep yammering about size, and separation of ownership and control, inefficiencies, and limited liability.

JA December 9, 2008 at 3:46 pm

If a corporation’s President orders his employees to pollute a populated river

But how can an executive or investor “order” anyone to do anything? A business is not like a military, where a lawful order is backed by threat of deadly force. Instead, it’s a voluntarily relationship of service for money.

In this case, a person chose to pour chemicals into a river for money. I agree with an earlier comment that “employee” is a made-up classification by the State.

JA December 9, 2008 at 3:56 pm

Because partners in a partnership would.

non sequitur…this does not answer my question.

Mike December 9, 2008 at 4:11 pm

“But how can an executive or investor “order” anyone to do anything? A business is not like a military, where a lawful order is backed by threat of deadly force. Instead, it’s a voluntarily relationship of service for money. ”

Stephan’s actually written pretty extensively disagreeing with this claim.

I’m not sure either side has actually come to a satisfactory libertarian theory of agency and culpability. Stephan has claimed that deliberately inciting a riot would make one culpable for the actions of the rioters, so it’s difficult to see how managers paying employees to pollute would be any different.

I think he’s wrong on the first count but right on the second, but I’ve not fully formed my opinion as to why.

I think, for example, if you pay someone to murder you are culpable, while if you merely convince them to murder you are not. Obviously the murderer would still be responsible in either case.

Why is the first different from the second? I think in the first condition you have granted the murderer agency, while in the second you have not. This could, in theory, be extrapolated to hold shareholders accountable for corporate torts, though not in all instances.

Like I said, I’m still working the idea out. I’d appreciate any criticism/feedback.

JA December 9, 2008 at 4:21 pm

This could, in theory, be extrapolated to hold shareholders accountable for corporate torts, though not in all instances.

One question is if they have any liability at all. You make some good comments that they do.

Another question is if any accountability goes beyond the shares owned in the company by the investor…hence the LIMITED liability part.

Mike December 9, 2008 at 4:51 pm

“Another question is if any accountability goes beyond the shares owned in the company by the investor…hence the LIMITED liability part.”

Again, I think it depends. If I loan my brother-in-law $1000 to go bet in Vegas, and make it explicit that I am liable only for this $1000, I am not indebted to the casino to cover his gambling debts.

If, however, I contribute $1000 to a fund to help my brother-in-law murder his boss, if and when the police come to arrest me, I cannot explain to them “But wait! My brother-in-law and I agreed that my contribution was one of limited liability! I can only be held responsible for my part of the contribution!”

There is no dispute among libertarians that someone must be fully liable in the case of torts (government does grant limited tort liability, in the name of “tort reform” or “forgiveness,” though I am not familiar enough with corporate law to say whether this is bundled as part of the LLC package). Surely, the agent is liable, for his misdeeds, but the question is when (and if) the principle can also be liable. Or, if you prefer, whether it is accurate to call a shareholder a principle at all, though this opens a can of worms when dealing with the corporate form.

whittaker December 9, 2008 at 5:04 pm

“Do these people speak individually with the rank-and-file, as in two-way dialogue?

Yes.”

OK. Please post their names and addresses so I can send them my résumé. ;)

whittaker December 9, 2008 at 5:06 pm

Mr. Kinsella:

“I readily agree with the left-libertarians that the state’s granting of an easy way to form corporations might skew the form of entity that direction–who knows. I am as opposed to this as they are. The market is indeed distorted.”

If we agree on this much, I’m satisfied. That’s my main point here anyway.

Stephan Kinsella December 9, 2008 at 5:33 pm

Mike:

“Another question is if any accountability goes beyond the shares owned in the company by the investor…hence the LIMITED liability part.”

Again, I think it depends. If I loan my brother-in-law $1000 to go bet in Vegas, and make it explicit that I am liable only for this $1000, I am not indebted to the casino to cover his gambling debts.

If, however, I contribute $1000 to a fund to help my brother-in-law murder his boss, if and when the police come to arrest me, I cannot explain to them “But wait! My brother-in-law and I agreed that my contribution was one of limited liability! I can only be held responsible for my part of the contribution!”

Sure, but note that your example characterizes your action as using your brother in law as a means to kill someone–you are intending to and trying to commit a crime.

But is that how you can characterize a shareholder’s act of becoming or being a shareholder? In fact, please note that it’s possible for a corporation to be owned by shareholders, NONE of whom have invested a DIME in the company–they might have bought the shares from original investors.

Surely, the agent is liable, for his misdeeds, but the question is when (and if) the principle can also be liable.

And who IS the principal. Is a shareholder a principal? Why?

Or, if you prefer, whether it is accurate to call a shareholder a principle at all, though this opens a can of worms when dealing with the corporate form.

You’re getting it.
whittaker:

“I readily agree with the left-libertarians that the state’s granting of an easy way to form corporations might skew the form of entity that direction–who knows. I am as opposed to this as they are. The market is indeed distorted.”

If we agree on this much, I’m satisfied. That’s my main point here anyway.

Fine, but all but the most vulgar of libertarians realize this fairly trivial point.

MJP December 9, 2008 at 5:57 pm

JA:
“There is nothing wrong with normal libertarians, and left-libertarians having different predictions about what the free market landscape would look like; the problem is the latter are too confident that their very sketchy opinions are firmly established, and b/c of their “thickism” they tie it in too much with political principles. This is their central error. So it’s no longer just a disagreement over predictions–to them, their shaky predictions and personal preferences inform their politics, so it becomes something more.”

Tell me – what do you think of those punk roxxor anarchist teenagers who support anarchy because it’s “chaotic”? Is that just a “difference in predictions?” Of course your “prediction” that anarchy can be orderly informs your politics, and is something more than a mere prediction.

That’s how we left-libertarians see anarcho-capitalists who insist that the free society would continue to be dominated by large hierarchical corporations. It’s like taking pride in believing that things will get worse after the revolution and you’re badass enough to support it. Either that, or you believe that things would get better because the few who amass great sums of wealth would be super-productive economic Ubermenschen one thousand times more productive than the pathetic average joe can ever dream to be, in which case the burden of proof is on you to show that these Ubermenschen exist. Here’s a hint: they don’t, and the Libertarian Left doesn’t have to prove that they don’t.

Dan Mahoney December 9, 2008 at 6:01 pm

MJP’s response indicates that, like all leftists, left-libertarians’ argument isn’t so much with particular institutions like corporations, but with human nature itself.

MJP December 9, 2008 at 6:20 pm

“MJP’s response indicates that, like all leftists, left-libertarians’ argument isn’t so much with particular institutions like corporations, but with human nature itself.”

So if I deny the existence of demigods, I am arguing against human nature? What is this nonsense?

Mike December 9, 2008 at 6:48 pm

“And who IS the principal. Is a shareholder a principal? Why?”

Well, my understanding is that the shareholder is generally thought to be the principal, as he is typically referred to as the “owner” of the company. I tend to agree with you that this is problematic, but surely, then, you can understand Carson’s complaint that the ownership of a corporation is poorly defined.

Corporate ownership is not a bank loan. The investors didn’t “give” money to the corporation, as you put it earlier, because they are the corporation. At least, that is how it is generally understood.

If you’re arguing that, in a free market, individuals may loan money to a corporation as a sort of “qualified, indefinite loan,” with dividends being replaced by “interest,” well, that seems possible. But somebody has to own the corporation, and at least be responsible for the official acts the corporation does.

When we invest in a corporation, as owners, we are essentially granting agency to the managers to manage our money in our best interest. If a company’s business model is to make shoes, and they take that money and use it to kill their competition, then of course they are not using your money or your agency as in a way you had agreed to, and you should not be held responsible. If, on the other hand, their official business model is in some way aggressive, and you invest in them anyway, hoping to profit from their aggression, then I think you should be held responsible, without limit when liability was not contractually limited with third parties.

So, yes, I think the shareholders are the principal, and employees are the agent, at least most of the time. The question becomes, then, was the employee acting in an “official” capacity when committing the offense in question (a similarly problematic term, I know), or was he acting outside of his official capacity? Or, when is an agent not an agent? When he uses company property in a way that was clearly not permitted by the owners, he is not an agent. When he uses it in a way that clearly is, then he is. The problem, as always, lies in the margins.

Mike December 9, 2008 at 6:52 pm

Wow. I apologize for apparently having terrible grammar. But I stand by my assertions.

whittaker December 9, 2008 at 7:32 pm

MJP, very interesting formulation. As one who has been a hard-core conservative Republican for over 20 years, I am amazed to find my views now being described as “left-libertarian”.

I think that there are certainly individuals who are demi-gods in their fields and revered by some people, but they should not be treated as such in a political, economic or legal sense.

Dan Mahoney December 9, 2008 at 7:46 pm

MJP,

If you had used the word “demigod” in your original post, I’d have known you’re not be taken seriously, and wouldn’t have bothered responding. My mistake.

Stephan Kinsella December 9, 2008 at 7:59 pm

Mike:

“And who IS the principal. Is a shareholder a principal? Why?”

Well, my understanding is that the shareholder is generally thought to be the principal, as he is typically referred to as the “owner” of the company.

Yes, they are generaly thoguht to be, b/c the state labels them this way. That’s the state’s classification. But ownership is the right to control–here, control is divided between a number of people and subject to private rules that themselves are subject to change by specified procedures. Ownership is relevant here only b/c of the ability of the “owners” to control what is going on–but in this sense, there are any number of people who have influence–from lenders, to customers, to suppliers, employees, unions, local “stakeholders,” and so on.

I tend to agree with you that this is problematic, but surely, then, you can understand Carson’s complaint that the ownership of a corporation is poorly defined.

I don’t think it’s poorly defined–it’s just complex. Sorry. I don’t think it’s problematic. Life is complex. Causation is a complex, fact-bound matter. Sure, it’s easy to just rely on the state’s classification of ownership as a black-white way to distinguish, but why is this fair or objective?

Corporate ownership is not a bank loan. The investors didn’t “give” money to the corporation, as you put it earlier, because they are the corporation. At least, that is how it is generally understood.

Shareholders are not necessarily investors at all. What if the company gives you stock? What if it’s a gift from an aunt?

So the shareholder has limited rights: the right to a pro-rata share in assets upon liquidation; and the right to vote for directors. That’s about it. Is this “influence” enough to give them responsibility? What if it’s less significant than the influence of a host of other market actors?

If you’re arguing that, in a free market, individuals may loan money to a corporation as a sort of “qualified, indefinite loan,” with dividends being replaced by “interest,” well, that seems possible. But somebody has to own the corporation, and at least be responsible for the official acts the corporation does.

I’m arguing that lenders are often more influential over and helpful to a company than is shareholders. Are they responsible too? What about its vendors? customers?

When we invest in a corporation, as owners,

Owners are not investors. Invesotrs ae not owners. I might buy IBM stock and give IBM $20. Then I sell the stock. I am the investor, but not an owner. The buyer of the stock is not an investor in IBM (he never gave them money).

we are essentially granting agency to the managers to manage our money in our best interest. If a company’s business model is to make shoes, and they take that money and use it to kill their competition, then of course they are not using your money or your agency as in a way you had agreed to, and you should not be held responsible. If, on the other hand, their official business model is in some way aggressive, and you invest in them anyway, hoping to profit from their aggression, then I think you should be held responsible, without limit when liability was not contractually limited with third parties.

agreed, as should be clear from my Causation and Responsibility article. but most shareholders don’t own shares in companies whose official mission is to kill people. We are talking about accidental torts committed by employees of the company, when they are instructed and trained *not* to do this.

P.M.Lawrence December 9, 2008 at 9:01 pm

I have slightly edited, rearranged or repeated quotations for continuity, always indicating breaks.

Stephan Kinsella wrote ‘…let me just note here a few of the comments, expressions, and assumptions that caught my eye as being problematic from a libertarian and Austrian point of view… As for the comments about management “expropriating” the “efforts” of “stakeholders”–here we have what appears to me to be Marxian reasoning: the “expropriation of efforts”? What? I’d like to see exactly whose “labor” is being “stolen”?’.

That “stolen” is made up (and the scare quotes wrongly suggest that Kevin Carson used the term in his post). It would all be a lot clearer to anyone who digested the part where Kevin Carson first introduced it:”… a major problem is that much if not most of the value of the ostensibly shareholder-owned corporation results from the human capital contributed by internal stakeholders, but that this value is not reflected in formal ownership rights. The result is that much of the value created by internal stakeholders is expropriated by management, thus undermining the incentives of human capital to invest its efforts in the organization.” It’s not formally “stolen” because there are no formal ownership rights, and it is unethical to the extent that the constrained lack of choice forced people into that vulnerability (see above about all corporations being the same). “Appropriated” might have been clearer in this respect, but “expropriated” also conveys the idea that these things are taken from people who would otherwise have had them. This also implicitly defines “stakeholder” – a person who would otherwise have had some of that, who contributed to its being there. That doesn’t take tracking through several posts. So “If someone can give me a dictionary to translate it might be helpful” probably wouldn’t work. He had that right in front of him, but a dictionary would just be something else he wouldn’t chase up.

‘…libertarianism does not require any “pretense” that “management represents shareholders or that the latter are the owners in any real sense.” It only requires respect for property rights and not interfering in capitalist acts between consenting adults. That is, if you can somehow show that “management” does not “represent” shareholders, or that they are not “the owners” in “any real sense”–so what? Whose rights are being violated? If you don’t like the way a firm is organized, don’t work there; don’t invest in it… I’d like to see exactly whose “labor” is being “stolen”? An employee? Hey, he isn’t compelled to work for them… If [there are] incentive or agency problems that arise when using a given firm structure, presumably people over time will invest in or employ more efficient structures. If they don’t–hey, it’s their money.’

That’s very “let them eat cake”. The problem is that, with the distortions favouring that, the usual “choice” is as between different firms that are like that. Any colour you like so long as it’s black.

“If a collection of people (shareholders, directors, managers, creditors) whatever all agree to some complicated internal set of rules that specify their right to control a set of private assets, then *their* rights are not violated (they all agreed to it), and outsiders have no business complaining… Just because some anti-market or anti-capitalist types don’t like the messiness and complexity of the internal rules governing rights of control (ownership) of these assets is utterly irrelevant. You don’t have to work for them, or invest in them….” But that’s not a corporation, it’s a partnership. A corporation has outside (state) help as well, which makes it unlibertarian and outsiders’ business – partly from that restriction of alternatives I just mentioned.

‘Again: in libertarianism, the corporation does not need to justify anything–so it does not need to pretend it “represents” anyone’ – oh, yes, it does. It needs to justify all that intervention that brought it into being.

“If a group of people agree to pool their money and become shareholders, this just means they have agreed to collectively purchase some things with their money, and to have specified rights of control and rights to gain or dividends, that is their business. The consent of the parties is all that is needed to justify it.” But that’s not a corporation, it’s a partnership.

DixieFlatline writes “…in an anarchist society, anything (including a corporation) can exist if it is voluntary”.

Actually, a corporation can’t, unless it’s the sort like a monastery or a sports club which has its own internal dynamic to hold it together. Today’s corporations mostly have that state-provided legal fiction stuff to do that.

“It’s a myth that people will not pool their capital, and create organizational structures and forms to handle management, compensation, and liability” – but the most they can achieve that way is a partnership.

“…what the state does, can be done contractually and voluntarily in the private market (the basis of Anarcho-Capitalism)… There is a demand for limited liability investment structures…” – almost, but it would be a partnership with de facto limited liability for partners who could lie low (and not all could). So Evan is mistaken too.

“Now whether you choose to deal with such a firm is up to you. In fact, most people can choose in this society whether or not they will be patrons of corporations. Most do… In a free market, if you don’t like dealing with a firm that limits it’s liability to you, then you won’t engage with them. That’s your right. But in a free market, investors can structure themselves anyway they want, as long as they come to it voluntarily… You are under absolutely no obligation to shop at WalMart, so do not. Very simple. If you don’t like their structure, policies, management, or state privilege, stop shopping there. That is how the market works. Punish them by withdrawing your patronage.” See my earlier remarks about restrictions on choice.

“Carson and Long fail to be precise in their criticisms of business” – do please go and look. You will find, for instance, that they are not criticising business.

“The onus is back on the Mutualists to define what is and is not a big business” – rubbish, since that was not what they were talking about.

“…I think at least a few of us would concede that a one man corporation is not likely to be a significant recipient of state privilege” – then you really should go and check your history. You would soon find out the significance of the “corporation sole” in state establishment of religion.

Stephan Kinsella mischaracterises partnerships: “You do realize that as soon as there are at least 2 people involved in a firm–eg., a 2-person partnership–each partner has incentives to waste that do not exist in a sole proprietorship. If I own my own shop, then every dollar I spend on a business meal comes off my bottom line. But if I’m 1 of 5 partners, then I might as well order the best steak on a business meal, since I get all the benefit but only 1/5 the cost.” He is confusing the cash flow of paying for that with the drawing down of that partner’s share of the business. That drawing comes off that partner’s entitlements, and shows up in the books. His “summary of the discussion so far” is also a mischaracterisation. Rather than sisk making confusion worse confounded, I suggest people go and read it for themselves.

Dan Mahoney writes “Carson has a pretty unblemished record of misunderstanding and misapplying Rothbard’s extension of Mises’ calculation argument; I’ve lost track of the number of times he’s done it. This is the issue: a large firm engages in several stages of production, call them A, B, C. It has to ask the question: is it cheaper to buy capital goods of type A, to produce capital goods of type B, to be used in the production of good C, as opposed to buying capital goods of type B directly in the market? As long as the firm is not so large as to preclude markets in capital good type B, it will not suffer from calculational chaos.”

That is an accurate description of the conditions that would head off the problem – only, Kevin Carson has actually pointed out how large firms do get into that sort of thing. It happens whenever a firm has to decide a transfer price for itself. The very fact that there are problems for tax authorities from transfer pricing means that the tax authorities often don’t have independent reference values they can use to argue with firms’ own claims about prices.

Stephan Kinsella writes “I simply believe that as Hessen has shown people could arrange their affairs similarly in a free market…”; up to a point, that is correct; however, they would actually be partnerships, which would make a material difference from time to time.

Dan Mahoney December 9, 2008 at 9:16 pm

“Transfer price”? Rothbard must be turning in his grave.

I’m guessing this is something different from an ordinary price (the meaning of which is clear to most intelligent people)? Seems like a good example of what Stephan pointed out earlier, that the left-libertarians like to use conventional terms (e.g., exploitation), until someone points out a flaw in their reasoning, then more esoteric meanings are claimed to be intended.

The arrival of P.M. Lawrence signals that there is no more need to follow this debate.

P.M.Lawrence December 9, 2008 at 9:30 pm

The charitable meaning of that would be, “the authority has arrived”, and the uncharitable meaning of that would be, “my mind is made up, do not confuse me with the facts”, with a dash of ad hominem. Either way, you should follow the discussion if only to learn what transfer prices are: prices used between departments or subsidiaries when goods or services move between them but stay within the larger entity. They usually come up these days when they have an effect on tax calculations.

Jerusen December 9, 2008 at 10:11 pm

On a side note,

My brain hurts trying to keep up. One doesn’t have to wonder why libertarianism will always be an obscure minority among political ideologies. Words are boring. Visual stimulation is the preference of the masses….and the socialists have cornered the market!

Mike December 9, 2008 at 11:54 pm

“So the shareholder has limited rights: the right to a pro-rata share in assets upon liquidation; and the right to vote for directors. That’s about it. Is this “influence” enough to give them responsibility? What if it’s less significant than the influence of a host of other market actors?”

This is a good point. Maybe I do need to reanalyze the notion of corporate “ownership,” in cases where it is separate from the right to control resources. If this is the case, though, then it would have ramifications further than just corporations. If I rent my car to you, granting you the right control it for a limited duration of time, do you become the “owner” of that car for that time? Ownership then reverts to me upon the expiration of the contract?

Setting that aside for a moment, I’d like to explore the notion of agency and culpability a bit more. If A employs B to commit aggression, clearly A is culpable for B’s aggression. If A employs B for some non-aggressive act, but B then uses A’s resources to commit aggressive act, A, it would seem, is not culpable.

What, however, if A employs B to do whatever C tells him to do? If C commands B to commit aggression, who is culpable here? Clearly B and C are. I know that you would argue that A is not because he lacked intent, but I am not sure intent is necessary for culpability. I can surely commit aggression against you on accident. So what then? What if A suspects B and C are committing aggression, but says nothing because the profits keep rolling in? What if C informs A that he has instructed B to commit aggression, but A says nothing?

I may have gone off on a tangent here, but these are not rhetorical questions. I’m genuinely curious.

Stephan Kinsella December 10, 2008 at 1:46 am

Mike:

“If A employs B for some non-aggressive act, but B then uses A’s resources to commit aggressive act, A, it would seem, is not culpable.”

You have just joined the pro-corporation side, since this view would totally eviscerate the notion of respondeat superior and vicarious liability that makes the company responsible for the torts of its employees committed while in the scope of performing their duties. I am not even sure I would go this far.

“What, however, if A employs B to do whatever C tells him to do? If C commands B to commit aggression, who is culpable here? Clearly B and C are. I know that you would argue that A is not because he lacked intent, but I am not sure intent is necessary for culpability. I can surely commit aggression against you on accident. So what then? What if A suspects B and C are committing aggression, but says nothing because the profits keep rolling in? What if C informs A that he has instructed B to commit aggression, but A says nothing?”

this is all academic because in almost all cases, the company never wants or orders an underling to commit a crime, or even a tort. They try to get them not to, to avoid liability. The questino is whether the company, or its shareholders, managers, etc., ought to be liable for the torts performed accidentally by one of its employees, even if the company has taken steps to try to prevent him from doing this. For the general framework I would use to analyize particular cases, see my Causation piece linked above.

TokyoTom December 10, 2008 at 7:43 am

Stephan, thanks for your comments.

1. Me: “one of the chief purposes and effects of the corporate form is that through it, the state allows owners to sidestep any personal liability for the wrongful acts that their corporation commits”

You: It’s only sidestepping if they should have this liability in the first place. Should they?

Again, you are shifting the burden of proof on the issue. Is there any libertarian argument that the state OUGHT to step in and allow investors to unilaterally shift a portion of the risks of their business venture to others who might be damaged by the activities of the business?

I don’t believe that there is any such libertarian justification for limited liability. Without the act of state in creating limited liability for shareholders, such limited liability would not exist – except perhaps vis-a-vis creditors and business counterparties who might otherwise agree to limited their claims to the assets of the company, in exchange for agreed methods of risk control or higher prices. However, such limited liability could not otherwise exist as to Involuntary (or “tort”) creditors who without their consent are injured by the corporation, who have not agreed to assume the risk of corporate insolvency and shareholders’ limited liability, and who have neither received ex ante compensation for doing so nor had the opportunity to bargain for contractual safeguards.

This result seems to be entirely outside of libertarian principles that require voluntary exchanges and eschews takings by force (including by the state), particularly if uncompensated.

2. Me: “with the result that liability for such wrongful acts is limited to the assets of the corporation.”

You: This is untrue. Liability on the part of the *person who committed the wrongful act* is unlimited. If an Exxon employee robs your house, you can sue him for all he’s worth.

Me: My point is that limited liability lets investors entirely off the hook for damages that the wrongful acts of the corporation and its employees. While a few employees might individually be held responsible for their actions, this still may leave many injured persons uncompensated for injuries cause by a corporation’s business activities (many of which it many be impossible to identify a single bad/responsible actor inside the firm: defective products, pollution, etc.).

Before limited liability corporations were established, the common law doctrine of respondeat superior required investors to bear responsibility for the acts of a business, just as individual proprietors and partnerships remain so liable today.

3. Me: “Very clearly, limited liability to investors is an act of state, and not something that investors could contract for in advance with the as yet unknown victims of their future torts.”

You: Now, if you want to object to the inability to sue shareholders for vicarious liability for the torts of another, you need to show that the victim *should* be able to sue the shareholders. Should he? If so, why? What exactly is your theory of causation and responsibility?

Me: Again, you simply fail to answer my question, and presume that the state action that leaves shareholders free to shift business risks to others is valid and justifiable. Even as you remain unwilling to make your case, I am happy to expand my argument that limited shareholder liability is an unlibertarian grant by the state to shareholders.

The chief point, of course, is that the creation by the state of corporations limits tort liability to
individual tortfeasors (if any) and to the corporation itself – up to the value of its assets (after sharing with all other creditors), and frees the owners from liability. This reduces the likelihood that victims will receive full compensation for corporate acts. Unlike an unincorporated entity, the act of the state in authorizing investors to act through corporations thus places the owners (and managers, who are similarly free from liability except for torts they may individually commit) in a position to shift some of the social costs of their business activity on to members of the public who have not agreed to bear those costs.

Because the shareholders (and employees and managers) bear no responsibility for the full magnitude of costs that coprorate activites may impose on others, as an activity holds some promise of increasing shareholder wealth, limited liability for tort claims creates a moral hazard problem by leaving shareholders (and managers) with the possible upside benefits to such activities without regard for the full magnitude of possible social costs (which might greatly exceed the benefits).

This results in not simply in an unjust and uncontracted for shifting of risks from tortfeasor corporations to victims, but also inefficient resource allocation decisions – by shifting risks to those least positioned to anticipate or manage them, and by encouraging excessive entry and aggregate overinvestment in hazardous industries while not fully incentivizing investment in precautions.

Further, the limited liability of the corporate form greatly reduces incentives of shareholders to monitor corporate risk-taking, and frees executives to act in ways that further their own interests without bearing full responsibility for risks that are posed to third parties and to investors (which is quite evident in the activities leading up to the ongoing financial crisis).

The subject of limited liability has been much discussed recently; may I recommend the following?

Hansmann, H and Krackman, R, Towards Unlimited Shareholder Liability for Corporate Torts, 100 Yale Law J. 1879 (1991).

Hansmann, H and Krackman, R, Do the Capital Markets Compel Limited Liability?, 102 Yale L.J. 427 (1992).

Nina A. Mendelson, A Control-Based Approach to Shareholder Liability for Corporate Torts, 102 COLUM. L. REV. 1203, 1205-06 (2002).

Timothy P. Glynn, Beyond “Unlimiting” Shareholder Liability: Vicarious Tort Liability for Corporate Officers, 57 Vanderbilt L.Rev. 330 (2004)
.

fundamentalist December 10, 2008 at 8:12 am

TokyoTom: “I don’t believe that there is any such libertarian justification for limited liability.”

The justification would be the issue of control. Common sense says that people who don’t control events aren’t responspible for the results. Look at the LLC, which is a partnership giving limited liability to certain partners, those without control over operations. The partners with control also assume responsibility for the company.

The fact that the state authorizes limited liability doesn’t mean it’s right or wrong. We haven’t had the opportunity to test whether limited liability would develop without a state. So until an anarchist state appears, it will be a totally theoretical issue. But I see no reason why courts wouldn’t allow contracts in which some parties had no control over operations. Then, when someone tried to sue a partner or stockholder who had no control, the judge and jury would consider it rather ridiculous to sue someone who had not control over operations. In fact, I doubt that reasonable people would even try to sue such partners. They would look at the situation and ask how it is different from a bond holder. A bond holder has invested money in the company but has no liability for the actions of management. The stock holder, or LLC partner, has no guaranteed income like the bond holder, so in exchange for the extra risk, he gets to vote on who will manage the company, but like the bondholder he has no control over management decisions.

JA December 10, 2008 at 8:30 am

I don’t believe that there is any such libertarian justification for limited liability.

Please see here:

http://en.wikipedia.org/wiki/Corporation

“The defining feature of a corporation is its legal independence from the people who create it. If a corporation fails, shareholders only stand to lose their investment, and employees will lose their jobs, but neither will be liable for debts that remain owing to the corporation’s creditors. This rule is called limited liability, and it is why the names of corporations in the UK end with “Ltd.” (or some variant like “Inc.” and “plc”).”

Please explain how any of above is NOT libertarian?

What I find confusing is how this whole conversation started with a promise that “free markets would lead to a prevalence of organizational structures that mutualists like…co-ops, worker-owned firms, etc.”

But suddenly, when the deficiencies of such organizations are pointed out…that human nature and economics indicate such a “Workers Paradise” isn’t likely…the conversation is shifted toward limited liability for murder-for-hire or polluters-for-hire. Never mind all of the rest of us are talking about normal free market businesses…enterprises which trade on a voluntary basis for profit, violating the rights of none.

There is also suddenly a shift to the justification for partnerships and sole proprietorships. But this leaves out all the problems of partnerships — what if one partner dies, what if one partner wants to leave, what if all partners want to sell out, what if new investors want a fast exit strategy — the solution is to create a corporate structure and issue shares of the business. This has nothing to do with limited liability. Such a structure can be created without State intervention.

“The defining feature of a corporation is its legal independence from the people who create it” — i.e. joint stock companies. Again, how is such a form NOT libertarian?

My point is that limited liability lets investors entirely off the hook for damages that the wrongful acts of the corporation and its employees.

But the investor IS on the hook to the limit of their investment. They potentially lost all the value of their shares. How is this different than employees losing their jobs or bankers losing their loans or customers losing their service (all of these being LIMITED exposure)?

You still need to answer WHY the investor is on the hook for more than than the value of their shares, given that some employees were the actual perpetrators (agents) of the violation of others’ rights. Should the other, non-perpetrator employees also be fully responsible simply because they worked there? Why not also other associates — suppliers, customers, lenders? What makes “investment” so special that it requires the investor to bear the full responsibility of other people’s violation of other people’s rights?

Further, the limited liability of the corporate form greatly reduces incentives of shareholders to monitor corporate risk-taking, and frees executives to act in ways that further their own interests without bearing full responsibility for risks that are posed to third parties and to investors

Which is why many executives are given shares as part of their incentive packages. Nobody here has claimed that the corporate form offers an “Owner’s Paradise.” Like all things in the real world, there are trade-offs in all circumstances, or it varies market to market. The argument is that A) The corporate form is libertarian, and B) As shown by many here, the corporate form also has advantages — not based on state intervention — over partnerships, sole proprieterships, workers collectives, communes, etc. in MOST cases, which means they will likely still be the prevalent organizational form in a real free market. No doubt other forms will also (still) be common. Even in our statist world, law firms are usually partnerships, there are credit unions and other patron-owned firms, communes, etc.

fundamentalist December 10, 2008 at 8:30 am

PS, to clarify the issue even more, give bondholders the right to elect the board in the bond contract. Bondholders have natural limited liability. With the right to vote on board members, they have become just like owners of preferred stock. So how would a bondholder with the right to vote be any different from a stockholder with limited liability?

Mike December 10, 2008 at 8:34 am

“You have just joined the pro-corporation side, since this view would totally eviscerate the notion of respondeat superior and vicarious liability that makes the company responsible for the torts of its employees committed while in the scope of performing their duties. I am not even sure I would go this far. ”

Well, no, not necessarily. If I pay you to drive my car to the gas station and get me a gallon of milk, I may not be liable if you get into an accident. But if I pay you to drive my car around all crazy-like, and you get into an accident, I might be. Whether my liability would be “limited” in this case assumes I am only liable to you, but I am not sure this is clear. You seem to be saying that my liability is a matter of due diligence, but this seems subjective.If I did not do due diligence in hiring someone to go get me a gallon of milk (say I hired someone with a known bad driving record) could I then be held responsible? If so, what is the logic in limiting my responsibility?

JA December 10, 2008 at 8:41 am

It’s like taking pride in believing that things will get worse after the revolution and you’re badass enough to support it. Either that, or you believe that things would get better because the few who amass great sums of wealth

Sorry…but as a libertarian, I don’t really care if “society” or the “working man” or “average Joe” or “labour” gets better or worse.

My libertarianism is based on a moral duty to not violate the legitimate rights of others. It’s not based on a promise of Utopia or a Worker’s Paradise.

Further, I think for some of the “working class,” a free market will be a bad deal. Many self described “workers” don’t want the risks of ownership, they want benefits and high wages, guaranteed by the State. They want to pollute a river and blame someone else for it, because “it’s not their fault, they were just following orders.” Having to compete on skill or service alone is scary to them, which is probably why most “working class” folks are socialist to the bone.

Mike December 10, 2008 at 8:51 am

“Sorry…but as a libertarian, I don’t really care if “society” or the “working man” or “average Joe” or “labour” gets better or worse.

My libertarianism is based on a moral duty to not violate the legitimate rights of others. It’s not based on a promise of Utopia or a Worker’s Paradise.

Further, I think for some of the “working class,” a free market will be a bad deal. Many self described “workers” don’t want the risks of ownership, they want benefits and high wages, guaranteed by the State. They want to pollute a river and blame someone else for it, because “it’s not their fault, they were just following orders.” Having to compete on skill or service alone is scary to them, which is probably why most “working class” folks are socialist to the bone.”

See, this is why people don’t like us. Libertarianism does not require that you be a solipsist.

JA December 10, 2008 at 8:58 am

See, this is why people don’t like us.

Indeed. That’s why I asked if left-libertarianism was a really just a marketing ploy to sell normal libertarianism to leftists, using socialist-sounding language. If that’s the case, it isn’t going to work for many of the reasons I described, but I wouldn’t be so suspicious.

My gut tells me it’s the other way though…a marketing ploy to sell real socialism to libertarians, especially when I read comments on the Carson blog to the effect that “left-libertarians believe corporations = companies, and left-libertarians are anti-corporation.”

Mike December 10, 2008 at 9:36 am

You’re assuming some nefarious motivation behind the ideology. Can’t it just be that this is what some people believe? I don’t think anyone’s trying to sell anything.

JA December 10, 2008 at 9:43 am

You’re assuming some nefarious motivation behind the ideology. Can’t it just be that this is what some people believe?

Why is selling considered nefarious? I already admitted it’s possible that they just have weird beliefs, but it isn’t possible to take Mises and Rothbard’s premises and come up with mutualist conclusions. The only people who seem to be doing it are just two people (Long and Carson), so it doesn’t seem to be a intellectual (dialectal?) tradition.

Vulgar Libertarian December 10, 2008 at 10:00 am

Klein and Kinsella,

While I admire your patience, please stop taking these “left-libertarians” seriously. Their arguments are atrocious (“Dilbert”, “Walmart is the state”, etc). Why give so much attention to these guys? They’re clearly not worthy of your time.

A lot of people have an aesthetic revulsion to “bigness”. It doesn’t matter if the bigness is moral and efficient; it’s still bigness. These left-libertarians are a subset of these people who will manipulate any argument to suit their anti-bigness aesthetics. The very word “vulgar” betrays the aesthetic motive.

They call the Mises Institute “vulgar libertarians”. When has the MI ever support tariffs, subsidies, bailouts, etc? If anything, the MI has been the strongest critic of managed trade, always supporting true free trade. Yet the MI is vulgar?

Seriously, why bother? Kevin Carson believes in the Labor Theory of Value. He thinks interest wouldn’t exist in a free market. The entire left-libertarian “movement” ignores the fundamental assumption of modern economics, Austrian or otherwise: methodological individualism. They really and truly believe the economy is a battle between bosses and workers.

Why take the time to argue against these obviously obselete ideas? It’s 2008, not 1850. Economics has moved on. They haven’t. Most biologists don’t give the time of day to Lamarkians, and you shouldn’t spend another minute arguing against “Mutualists”.

Mike December 10, 2008 at 10:05 am

“Why is selling considered nefarious? I already admitted it’s possible that they just have weird beliefs, but it isn’t possible to take Mises and Rothbard’s premises and come up with mutualist conclusions. The only people who seem to be doing it are just two people (Long and Carson), so it doesn’t seem to be a intellectual (dialectal?) tradition. ”

First of all, I doubt Long would refer to himself as a mutualist. He wrote a pretty thorough critique of the mutualist “use and occupancy” theory of ownership.

Second, there was something about your phrasing, “trying to sell X to Y,” that implied intellectual dishonesty on the part of the seller.

Mike December 10, 2008 at 10:26 am

Stephan,

I’m starting to come around to your notion of the individual tortfeasor being responsible for torts, with any collaborating agents being responsible as well, and non-collaborators being responsible only so far as they have agreed to be. I suppose in this sense shareholders can almost be seen as insurance providers for the acting agents.

The problem is with the way corporate personhood distorts claims in our current market. Bob Murphy wrote a piece on this, but I can’t remember where I saw it.

If a UPS truck driver’s brakes go out and he hits me with his truck, and I try to sue him, he says “Don’t sue me! My boss ordered a faulty truck! Sue him!” I try to sue the boss and he says “I didn’t know the truck was faulty! Besides, I was only acting as an agent of the UPS corporation! Sue them!” If I then try to turn around and sue UPS, they say “But our liability is limited!” But somebody’s got to pay. In our current market, limited liability can result in absolution of liability (I’m thinking specifically of pollution cases, airplane crashes, etc.), which is surely not libertarian.

If the question becomes “Who is at fault, and to what extent did other parties agree to cover his fault?” then this does seem libertarian. Oftentimes, however, this is not how these cases play out.

JA December 10, 2008 at 10:40 am

If I then try to turn around and sue UPS, they say “But our liability is limited!” But somebody’s got to pay.

This is a weird scenario. People sue companies all the time. The question is if UPS investors or shareholders should bear liability BEYOND what they own as shares.

Limited liability does NOT mean “100% Free from Liability.” It means liability is LIMITED to the owners’ ownership in the company. Just as lenders are limited in that they only lose their loan, and employees are limited in that they only lose their jobs.

Even in today’s world, an attack on corporations because “limited liability = absolution of liability” is a straw man, since this isn’t the case.

Now, there might be circumstances where the company’s damages exceed the total assets of the firm (a company explodes an entire town by accident, to keep in the vein of the “realistic examples” cite here by many), so liquidating the firm won’t be enough to cover the debt. In these cases, I’m not sure if it’s libertarian to go after the shareholders beyond their share ownership. Ultimately all liability…for individuals, as well as partnerships and co-ops, are limited by the ability to pay.

Mike December 10, 2008 at 10:52 am

“In these cases, I’m not sure if it’s libertarian to go after the shareholders beyond their share ownership.”

I’m not either. In fact I’m starting to come around to the idea that it’s not. Still, someone has to have unlimited liability.

“Ultimately all liability…for individuals, as well as partnerships and co-ops, are limited by the ability to pay. ”

This is not really true. If an individual actor accidentally blows up a city, he is liable for all the damage he causes, whether he can pay it or not. There are different approaches as to how he should pay it back, but an inability to pay does not excuse one from responsibility (yes, I am aware that this is an absurd hypothetical, but absurd hypotheticals are worth exploring when they can help us form our analysis).

TokyoTom December 10, 2008 at 11:14 am

Roger,

The justification would be the issue of control. Common sense says that people who don’t control events aren’t responspible for the results. Look at the LLC, which is a partnership giving limited liability to certain partners, those without control over operations. The partners with control also assume responsibility for the company.

It appears that you are confusing LLCs (limited liaibility corporations that are treated as partnerships for tax purposes) with Limited Partnerships, but it seems you are agreeing that the managing partner ought to have unlimited liability (to “assume responsibility for the company”). In corporations, by government fiat none of the owners has unlimited liability, and the lack of control that investors or their transferees typically have is a reflection of that limited liability. Of course it is possible for shareholders to have actual control, whether in the case of close corporations or even large public ones, and courts sometimes “pierce the corporate veil” (very sporadically) to hold shareholders responsible for bad acts despite legal niceties.

The fact that the state authorizes limited liability doesn’t mean it’s right or wrong. We haven’t had the opportunity to test whether limited liability would develop without a state. So until an anarchist state appears, it will be a totally theoretical issue. But I see no reason why courts wouldn’t allow contracts in which some parties had no control over operations.

Corporations are creatures of the state that could not exist in their current form without a transfer of risk that is neither voluntary nor fully compensated.

There is nothing objectionable in excluding bondholders or other voluntary creditors from unlimited liability; they can bargain for limited risks and certain controls over corporate action. The question is whether it is consistent with libertarian principles to limit the liability of ALL investors to those who are subjected unwillingly to damage resulting from the torts of the corporation.

While I am sympathetic to common investors in public corporations, who have bargained for the situations they find themselves in, and not for unlimited liability, the question of where we go from here is logically distinct from the question as to whether the course to the present situation is one that comports with libertarian principles.

It seems to me that it does not, and that we face any number of undesirable consequences as a result – not merely a shifting of risks to citizens that finds its counterpart in citizen pressure groups, but in a bifurcation of ownership and control that provides ample opportunity for executives to loot their firms. These come on top of the problems with rent-seeking and politicization that tie in with the growth of big government.

Mashuri December 10, 2008 at 12:00 pm

JA wrote,
“But how can an executive or investor “order” anyone to do anything? A business is not like a military, where a lawful order is backed by threat of deadly force. Instead, it’s a voluntarily relationship of service for money.”

All authority carries a threat behind it. Authority in business threatens insubordination with termination. Question, since our military typically punishes insubordination with court marshall, and not death, should a commander who orders the execution of what he knows are innocent people, but does not participate in the action himself, not be held accountable?

JA December 10, 2008 at 12:05 pm

What is missing from all this is:

Very few firms fail because of damages from torts.

Nearly all firms fail because they are unprofitable.

So it’s fun to speculate about killer UPS drivers and Mr. Burns polluting rivers…but nearly all of the “limited liability” is about limited exposure to those voluntarily connected with the business.

When a corporation goes out of business, the shareholders are limited to their investment when paying off all contractual obligations. A banker can’t go after an investor’s personal assets to pay off the corporation’s loan. Someone with an employment contract can’t go after an investor to get the rest of the contract, or a customer with a service contract, or a supplier who is owed money. All of these examples voluntarily took the risk of doing business with the corp. though contacting with the entity.

It’s really this simple. The huffing and puffing of on torts and “bifurcation of ownership and control that provides ample opportunity for executives to loot their firms” etc. is really just that.

JA December 10, 2008 at 12:10 pm

Authority in business threatens insubordination with termination.

A dissolution of a voluntary relationship by one party is not the same as the violent threat within the structure of military dicipline. Neither is an order from a policeman holding a revolver against your head the same as a request from a manager to an employee to not lick the french fries or else find other employment.

The employee can always quit. Hence, a request from an employer to an employee is not an “order.”

Stephan Kinsella December 10, 2008 at 12:13 pm

TokyoTom:

Is there any libertarian argument that the state OUGHT to step in and allow investors to unilaterally shift a portion of the risks of their business venture to others who might be damaged by the activities of the business?

No, and the state should not exist. But people criticize corporations as being *mere* creatures of the state on the grounds that the state gives them privileges that would not exist in the free market.

I don’t believe that there is any such libertarian justification for limited liability. Without the act of state in creating limited liability for shareholders, such limited liability would not exist – except perhaps vis-a-vis creditors and business counterparties who might otherwise agree to limited their claims to the assets of the company, in exchange for agreed methods of risk control or higher prices. However, such limited liability could not otherwise exist as to Involuntary (or “tort”) creditors who without their consent are injured by the corporation, who have not agreed to assume the risk of corporate insolvency and shareholders’ limited liability, and who have neither received ex ante compensation for doing so nor had the opportunity to bargain for contractual safeguards.

Again: the question is, absent the state, should shareholders be vicariously liable for torts committed by employees, or not? The presumption is they should not, since they did not commit the acts–unless you can come up with a sound argument for why they should (and pointing to the way it’s been done before doesn’t cut it).

My point is that limited liability lets investors entirely off the hook for damages that the wrongful acts of the corporation and its employees.

While a few employees might individually be held responsible for their actions, this still may leave many injured persons uncompensated for injuries cause by a corporation’s business activities

You are assuming the “business activities” are “the cause”. This is question begging.

Before limited liability corporations were established, the common law doctrine of respondeat superior required investors to bear responsibility for the acts of a business, just as individual proprietors and partnerships remain so liable today.

Why should they be? Because the common law says so?

You: Now, if you want to object to the inability to sue shareholders for vicarious liability for the torts of another, you need to show that the victim *should* be able to sue the shareholders. Should he? If so, why? What exactly is your theory of causation and responsibility?

Me: Again, you simply fail to answer my question, and presume that the state action that leaves shareholders free to shift business risks to others is valid and justifiable. Even as you remain unwilling to make your case, I am happy to expand my argument that limited shareholder liability is an unlibertarian grant by the state to shareholders.

You need to explain why shareholders should be liable. You keep calling them investors–shareholders are usually not investors.

The chief point, of course, is that the creation by the state of corporations limits tort liability to
individual tortfeasors

It limits state-imposed vicarious tort liability. If the state stops taxing you, this is good, because it should not be taxing you in the first place. If the state stops imposing vicarious tort liability on shareholders, this is also good, if it should not be doing this in the first place. You seem to assume they should. why?

This reduces the likelihood that victims will receive full compensation for corporate acts.

If a FedEx driver negligently crashes into you, why arey ou calling it a “corporate act”? He was not directed to do this by FedEx, was he? Why is his negligence theirs?

In any event–this whole critique is ridiculous. Whenever a corporation’s employee commits a tort, the victim is compensated by the corporation or its insurer. IT’s almost always irrelevant that he can’t sue shareholders individually. Even if they could, shareholders could simply purchase shareholder-liability-insurance, no biggie.

fundamentalist:

PS, to clarify the issue even more, give bondholders the right to elect the board in the bond contract. Bondholders have natural limited liability. With the right to vote on board members, they have become just like owners of preferred stock.

Yes, this is my point about overreliance on state classifications. What it means to be a “shareolder” is (a) a right to receive a pro-rata share of assets upon liquidation, and dividends, IF they are paid; and (b) a right to vote for directors.

Why does having these two rights automatically mean vicarious liability?
Mike:

“In these cases, I’m not sure if it’s libertarian to go after the shareholders beyond their share ownership.”

I’m not either. In fact I’m starting to come around to the idea that it’s not. Still, someone has to have unlimited liability.

Yes–the guy who commits the tort. Who would have insurance/indemnity from the compamy. The company would have insurance too if it’s vicariously liable. If you hold shareholders liable,they would start obtaining insurance too. And presumably most people would have “uninsured motorist” type insurance in case a deadbeat, uninsured corporation harms them and can’t pay for their damages.

Tokyotom:

The question is whether it is consistent with libertarian principles to limit the liability of ALL investors to those who are subjected unwillingly to damage resulting from the torts of the corporation.

You keep calilng shareholders “investors”. They need not be. And the question is whether they should have vicarious liabiltiy or not.

fundamentalist December 10, 2008 at 12:26 pm

TokyoTom: “It seems to me that it does not, and that we face any number of undesirable consequences as a result – not merely a shifting of risks to citizens that finds its counterpart in citizen pressure groups, but in a bifurcation of ownership and control that provides ample opportunity for executives to loot their firms. These come on top of the problems with rent-seeking and politicization that tie in with the growth of big government.”

I agree with you completely that the behavior of executives in a lot of corporations is disgusting. I just don’t agree that such behavior is caused by the corporate structure. Some of it is just the natural inclination of people to greed. But much of it is caused by the state’s control over the economy. If you get the state out of the economy, corp execs will have little reason to bribe them for special treatment. Anyway, your argument is based on the disgusting behavior of some execs and not necessarily on principle.

As for following libertarian principles, I don’t see why limited liability violates any of them. I think some of the problem comes from people getting hung up on the word ownership. Stockholders are not owners in the normal sense of the word. Ownership means control; without control their is no ownership. As a result, stockholders do not own a corporation. They have none of the control of owners. They are no more owners than are bondholders. Stock ownership is a hybrid type of ownership somewhere between a partnership and a bondholder.

As I mentioned, libertarian principles underscore the right of contract. Promoters and investors can draw up any contract that doesn’t violate the property of others. Even in anarchy, stock in a corp would be just such a contract. The stock ownership contract only removes control of the company from the investor. It does not guarantee limited liability.
Whether or not the stockholder has limited liability has nothing to do with the contract. It is a law issue and natural law has never held people responsible for actions they had no control over. So under libertarian concepts of contract and natural law, I don’t see why some type of corporation with limited liability wouldn’t develop.

Peter Drucker once said that boards of directors are asleep at the wheel. I’m no expert in business law, but it seems to me that the board has fudiciary responsibility to protect the interests of shareholders, but they do a poor job of it. In addition to going after execs, like those at Enron, the law ought to go after all board members when management commits crimes.

But you can’t stop people from committing crimes, even managers of corporations. That’s part of human nature that can’t change. As with Enron, the market punishes stock holders for such criminal behavior and the law punishes the execs. Stockholders should be diversified in case execs commit such crimes.

The question is whether or not the corporate structure causes the crime, or at least encourages it. As it currently stands, I think it does encourage it because boards of directors are asleep at the wheel. If board members did their jobs, there would be a lot less disgusting, immoral and illegal behavior on the part of execs. The solution is to punish board members along with the execs.

At the same time, let’s put the situation in perspective. We have tens of thousands of corporations. How many have been guilty of immoral or criminal behavior? Just a handful. We need to compare the behavior of corporations with that of privately owned companies to see if corporations are worse. And do we really want to resort to group punishment, as SOX does, for the behavior of a few?

jp December 10, 2008 at 12:54 pm

I’d love to deal with a bank with full liability because in case of failure shareholders would have to repay me for the full amount I deposited. Unfortunately I can’t deal with a fully liable bank because (in Canada at least) the government has legislated that all banks must take on the limited liability corporate form.

Canada has a long tradition of fully liable banks, but by the late 1800s these were being forced to officially incorporate and adopt limited liability. Kinsella, the eternal apologist for limited liability, seems to characterize today’s LL dominance as the end result of natural market processes. He doesn’t understand that in situations like the one illustrated, limited liability nature was forced on banks by the state and by extension on those who dealt with them, the depositors.

This huge subsidization of LL for banks is unfortunate as it has cut down on consumer choice. Where are the double liable banks we’d prefer to deal with? Where are the fully liable ones? They’ve been cut out of the picture by government LL legislation. Not by natural market forces.

Mashuri December 10, 2008 at 3:11 pm

JP Wrote:

A dissolution of a voluntary relationship by one party is not the same as the violent threat within the structure of military dicipline. Neither is an order from a policeman holding a revolver against your head the same as a request from a manager to an employee to not lick the french fries or else find other employment.

The employee can always quit. Hence, a request from an employer to an employee is not an “order.”

A one-sided threat to dissolve a voluntary relationship has coercive power over the party that does not want that relationship to dissolve. The policeman holding a revolver to my head is coercing me by threatening to take something of value from me: My life. A company owner telling a contractor, who wants to keep his contract active, that he will be terminated if he doesn’t do as ordered is also being coerced via threat of having something of value taken from him.

JA December 10, 2008 at 3:24 pm

A one-sided threat to dissolve a voluntary relationship has coercive power over the party that does not want that relationship to dissolve.

You are distorting the word coercive. The essence of a voluntarily relationship is that either party can decide to dissolve.

The policeman holding a revolver to my head is coercing me by threatening to take something of value from me: My life

No, he is threatening (coercing) you with a revolver. In such as case, you have no rational choice but to comply.

The rest of your post is a Non Sequitur, as you haven’t proved that violent threats are the same as voluntary dissolution of a relationship. A child understands voluntary relationships are different than threat of deadly force, yet you can’t get it?

Further, contracts have nothing to do with value. By definition, any party can dissolve the contract at any time for whatever reason (though the dissolution may include final contractual obligations).

Mashuri December 10, 2008 at 3:31 pm

I assume JP and JA are the same person?

Before I get into a semantic battle over the meaning of coercion, I want to clarify your position. The system of accountability you seem to be preaching would make a nice loophole for cult leaders to operate with impunity. Charles Manson, whose “Family” followed his commands without being threatened should still be a free man, correct?

JA December 10, 2008 at 3:49 pm

Charles Manson took an active (planning) role in murdering people.

He is guilty of murder. Being a “cult leader” is not a crime.

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