One issue that does not appear to have provoked a lot of discussion, at least not yet, is how the government bailouts and encouragement of mega mergers between struggling banks has created a banking industry that is, if not monopolistic in its structure, then pretty damn close to so being. Now – as I once argued four years ago (gulp!) – the fact that a firm such as a computer software house or bank is big is not, by itself, harmful. One should not confuse bigness with control over the consumer. A lot of anti-trust laws – which I believe often create more harm than they supposedly solve – are based on the mistaken idea that a firm’s being big is somehow proof of malign intent and that bigness, is, ipso facto, harmful. Well it all depends how the firm got to be big in the first place, and whether it retains its market size by continuing to offer good products that people want. For a firm to stay big at a time when barriers to entry in certain fields are being slashed by new technologies such as the internet, confusing bigness with lack of competition is a serious mistake.
Now turning to the banks, it is clear that the mergers between the likes of UK’s Lloyds and HBOS, or Bank of America and Merrill, or Wells Fargo and Wachovia, have produced a number of large banking groups with the state acting very much as the encourager of such mergers, rather than, as might have been in the case when anti-trust lawyers were on the prowl, hostile to them or at the very least, skeptical. As free marketeers like to point out, monopolies that are supported by state powers and privileges are harmful, while those that arise out of a dynamic market process tend not to be, since state-backed monopolies are the least likely to fall prey to new, nimbler competitors. Without state support, even supposedly invincible big firms, such as IBM, Ford or for that matter, Microsoft, can find their market share eroded by a newcomer.
One of the reasons why I actually favour free banking and competition in money is that it might create more banks and give the established banking sector a much-needed dose of competitive pressure. I am pleased to see that the likes of Tesco’s, the supermarket chain, is getting into banking. That is good news for the consumer, hopefully, although the haters of Big Retail might complain.
In the UK, for example, Lloyds Group, after its acquisition of HBOS, controls almost 45 per cent of the UK mortgage market. Any new entrants that can put that behemoth under pressure are to be welcomed.
I most certainly agree.
Barriers to entry, if shielding sufficient riches, will eventually be undermined or bypassed unless the State steps in.
More regulation for banks will raise and shore up barriers – a small operation will need significant inertia to break in or even to keep up with the changes. State mandated barriers are not ones that can be either undermined nor bypassed – they become compulsory and so forcing the newcomer to play by the incumbent’s rules. Damnable.
I’d be interested to know if anyone can find an example of when a “corporation” has exploited people without the dereliction, connivance or corruption of the State or its representatives. I have yet to find one!
Tim, I think the answer to your last point is that, as it is the state which creates corporate personhood and limited liability status, which are the most dangerous tools corporations have, it’s almost impossible for exploitation to occur without the state playing a very significant part.
I don’t ever recall hearing anybody complaining about exploitative sole traders or unlimited liability partnerships, which have to operate on a more equal legal footing with their customers.
What Paul L says.
If you think about it, there are very few ‘natural’ monopolies. Most arise through government-sponsored intervention, regulations, restrictions etc. And where they are absolutely necessary (for whatever reason) it seems fair play to me to subject the resulting monopolists to a higher rate of tax (rather than subsidising them!).
PS, banks are never too big to fail, that’s another myth put out by the corporatists and the interventionists.
It offends the sensibility of the citizen (or, in the UK, subject) to say:
We have to bail out these banks–they’re too big to fail!
So let’s make sure no one gets too big to fail. No one gets to hold the world economy hostage.
So whiskey tango foxtrot!!! What is the gummint doing in coercing or encouraging large banks to merge?
Making more banks that are too big to fail.
Idgits.
A common fallacy. There is nothing about limited liability which cannot spring from private contract and in fact only the state can prevent such conditional relationships from springing up. if I am willing to do business with a company on the basis that their liability is limited, who are you to say I cannot?
Adding to Perry’s point, here is a post(Link), over at the Ludwig von Mises Institute, arguing in partial defence of limited liability. It is, as Perry says, a myth that a strict adherence to markets requires one to shun LL. Unfortunately, certain “left-libertarians” like Kevin Carson are in danger of disappearing into an intellectual black hole on this issue.
That said, some banks, such as Swiss private banks, operate unlimited liability structures and these banks have done okay.
Further to my first comment, I’d just like to add that people operating in free and open competition without any particular state protection should be subject to a lower rate of tax (or preferably none at all).
Mark, the problem there is it’s hard to think of any business that aren’t affected by government, either by being supported/protected or being harmed. Many are affected by both simultaneously. Even Patel’s shop is affected by the state, in terms of various temperance taxes that harm his sales of booze and ciggies. He doesn’t get any protection from the state; they’re effectively trying to shut him down. Same for the chippie next door. So we have some (big) businesses operating thanks to state largesse, and lots of other (mainly small) businesses, operating despite the best efforts of the state to ruin them.
Surely the main issue is that the money system is itself a monopoly, operated by government, who also then licenses those who can participate in delivering its monopoly good. There is a sense in which regulating these licensed participants could in the long run be good – if it encourages this monopoly to be dependent on a few only very large licensed participants and those fail, they could take the money system with them and force it to open up.
In that context Tesco’s entry is not terribly significant – it’s just a new license holder in the same old monopoly, though I recognize that it increases the choice over which licensee to use and (negatively for proponents of real free banking and free money) spreads the risk of reliance on one or two mega-licensees.
Anyway – on Limited Liability – I do think it is more of a problem than some have suggested. In a completely free – market-anarchist – type society, would you have a Companies House type thing to provide even the flimsy oversight it currently does that such bodies granted that privilege are solvent?
I think there is always going to be more moral hazard with limited liability unless the counterparty “consenting” to trade with such an entity is prepared to do a thorough investigation of the LLC’s financial status before trading with them.
I think an acceptable compromise in a market-anarchist model could be a default of unlimited liability, but with a thriving market in offering liability insurance to businesses whose owners want to limit their liabilities. That still would increase the incentive for shareholders, as owners, to take a greater interest in overseeing the financial health of the company in which they are invested.
People say that only limited liability enabled big projects to happen that we would not want to do without, but many of Victorian Britain’s biggest infrastructure developments – most of Brunel’s enterprises for example, were before limited liability.
Surely limited liability itself causes a need for more regulation and more laws to try and prevent businesses doing things that might if not prevented, create liabilities that in failure they could not cover. So if we want to do away with as much regulation as possible, and allow a more level playing field on which counterparties can trade with a business, we’d be better with a market (insurance) version of limiting liability in any event.
All that said, the alternative banking model for asset financing I am trying to develop at the moment will likely be implemented as a set of LLPs – so I’m not one to talk I suppose!
First of all, to echo Parry’s point, the legal attributes of corporate status (fictitious “personhood”, limited liability, perpetual life, free transferrability of ownership) say nothing about whether the entity is colluding (with others or with the government) in restraint of trade. They are completely unrelated matters.
Second, as to Mark’s last comment concerning taxation, a corporation is a fictitious person for certain legal purposes, but it is not an actual person. It is merely a vehicle through which to conduct certain activities, a conduit for capital and cash. A corporation does not pay taxes in the sense that it truly bears their burden. That burden is ultimately passed through to the only three constituencies which do, in fact, pay taxes: its owners (in the form of lower profits), its employees (lower wages), and its customers (higher prices). How that burden is allocated among those constituencies is a function of market forces: which is best able to deflect it onto the others? That is unknowable in the abstract, and this is what makes a corporate income tax so pernicious. Its true burden falls differently, and unpredictably, in different industries and at different times.
There is no economic justification for a corporate income tax at all. It should be abolished.
Laird, the problem I have with arguments about taxes is that they all end up as either equally unfair or equally fair. The different taxes simply tax at different arbitrary points in a trading cycle- at producers, or wholesalers, or retailers, or customers, or arbitrarily on goods imported. It’s why I find bizarre arguments that some taxes are “taxing things that have already been taxed”. Every tax is doing that, taxing over and over again every time things move in the economy. Who is getting taxed by a sales tax? The producer, the seller, the buyer? All and none. If 20% of my income is taxed, or 20% of my purchases are taxed, it makes no practical difference to me.
It thus seems to me that the only criteria for judging taxes is that they should be as low as possible, as easy to administrate as possible, and interfere least with the private person. Possibly the most “honest” tax would be a flat rate charged to every citizen for payment for public services (we don’t want many of them but somebody has to pay for the courts and the prisons). More of a subscription than a tax, effectively. I doubt anyone would vote for that though and, since it requires state record keeping of every person (though not of their private financial dealings) it would be somewhat intrusive.
Back to the main topic at hand, there does seem to be an inexorable movement toward larger mega-banks, and in the current crisis the government is certainly encouraging[1] that trend[2]. However, I don’t think that is as much an evolutionary development as it is routine “churning”. The (modern) history of banking is as follows: small banks combine or merge with medium-sized ones (to achieve efficiencies of scope and scale, and to offer their customers a wider range of services); medium-sized institutions are acquired by larger ones (which desire to expand their market share and give the previous owners an opportunity to “cash out”); the large ones become part of the few behemoths (generally due more to ego on the part of senior management than any true economic benefit); and along the way executives displaced by the mergers take their capital gains and start new local banks in order to be “closer to the customer” and give more personalized service, so the cycle begins again. Sort of a banking “food chain”.
But I do agree that no bank should be allowed to get “too big to fail”. That only happens with governmental concurrence, which is true for all cartels that survive for any extended period of time. The anti-trust laws are an economically irrational joke.
[1] I note, however, that the Wells Fargo-Wachovia merger was done over the objections of the FDIC, which had already brokered a “sweetheart” deal to merge Wachovia into Citibank. When Wells came in with a better deal for the shareholders the government was suitably embarassed. I don’t think they’re over it yet (as is evidenced by their refusal to accept Wells’ profferred refund of the TARP money).
[2] Undoubtedly having fewer, larger institutions plays better into Obama’s long-term strategy of nationalizing the entire banking system.
ALCOA became the virtually monopoly producer of aluminium in the USA, entirely by good business practise, without government support.
…the US government dragged them through the courts with the anti-trust laws, where it was confirmed that a business that dominates the market entirely by being the best in the market and acting entirely appropriately in its commercial interest is still breaking the law. Ho hum.
Corporate liability is LIMITED. In practice today (at least in the US) limited liability usually refers to trade indebtedness and mostly tort issues that didn’t have a clear disregard for safety. If acts are criminal or patently disregarding safety the “corporate veil” will be pierced.
Taken back to its root, actions from one party toward another have been cleared through a system of justice with the weight of enforcement behind it, which takes a some form of State. A counterbalance was introduced to protect risk takers from endless attack via the previouisly set paths of action. Basically once a State is created and force is appliable, counterbalances will be sought. When things swing too far the other way, another weight will be put on the scale. This is all well and fine in a minarchic framework.
But soon Romantics come out of the wordwork and the counterbalancing DEFENSIVE forms of force (the endeavor to balance fair allocation of combined efforts that lead to indiviidual equity) is commandeered by people who engage in OFFENSIVE forms of force, – taxation flowing to the treasuries for public works (e.g. the buiding of railroads in the 1850’s in the US) and all the previous efforts of counterbalancing go out the window. Now we have OFFENSIVE force attacking and eliminating the good done by justly balanced defensive forms of force. We have anti-market forces at work that bolster favored industries. We have the beginning of the corpora-fascistic models we see every advanced economy moving toward. In a few decades the Chinese model and the US model will be indistinguishable.
So the major paradigm change from anti-trust monopoly busters to today is that then they had at least some semblance of trying to counterbalance the already burgeoning benefits created from previous interference in the market (ill conceived and executed, but anyway). Today to government grants consolidation privelege to those entities that allow themselves to be directly controlled. Those with even a hint of independence are denied consolidation rights by the Department of JUSTICE. So the seeds planted by the Federalists in the early half of the 1800’s are coming to fruition. And those who wish to control are engaging in an end game for mastery.
Jefferson said the revolution was essentially necessary every 70 years because regardless of original intent, the State will endeavor to break free existing merely as a means to provide defensive forms of force over several different interests and philosophies. It will eventually reach out offensively and will have to be defeated. The US founded itself with some permenancy in the 1790’s. We had a civil war in the 1860’s. The 1930’s brought the devastation of government overreach, but instead of a reset we got a mass doped by unfunded entitlements. And we are now at the end of another 70 year cycle. We will either break free or find ourselves in a complete command economy with all its inefficiencies and unjust favoritisms and the triangulated minorities scapegoated out of existence to make the Five Year Plans work.
Ian B, no argument from me on your last paragraph. As to the first one, I agree in part and disagree in part, but that’s a huge subject and off-topic here, so I will forbear. Let’s visit that another day.
Ian, obviously me last comment was in reference to your post of 4:16 PM.
There have always been limited liability organizations (charities, churches, trading companies, and so on) the mistake that is sometimes made it to think that there was no such thing as limited liability till the specific limited liabilty Acts of the 19th century.
However, no doubt trade (including the trade in lending savings – which is all banking should be) would continue (to some level) if limited liability was not allowed and all shareholders in a enterprise were as expossed as “Names” in a Lloyds insurance syndicate.
Both the above and the argument over whether banking should be 100% from savings or (to some extent) fractional reserve, are really side issues at the moment.
Bad tempered and dogmatic people (like errrr me) are really hung up on these debates – but they are not of primary importance right now.
What matters now is the following:
Are you for the bailouts or against them?
If a person is for the bailouts we need not be interested in what their other opinions are.
As for those bankers (and other corporate managers) who have accepted the bailouts.
Some were forced to (threats ammounting to extortion), but many went along with the idea in the hopes that they can manipulate and control the govenment via the corrupt means they have such faith in.
They are fools – they are riding a tiger, and it will eat them.
Trying to remain reasonably on-topic, let me repeat, banks are not too big to fail, it’s a simple question of maths – the bigger the bank, the more widely the losses can be spread (so the loss-per-investor is much the same for a teeny-tiny bank as it is for a mega-bank), and as far as bank losses are concerned, the losses are already there, what we thought was money has disappeared, it’s gone.
It’s all just a question of having a reality check, divvying up the losses under tried-and-tested, commonsense debt-for-equity swap and insolvency rules and getting on with our lives.
All the government bail outs do is a) encourage moral hazard and b) spread the losses more widely than otherwise.
Mark, while I agree with you that no bank should be allowed to get so large that it is considered too big to fail, you’re missing the point about the “too big to fail” doctrine. It has nothing to do with the shareholders; they can suffer their losses with no concern on the part of the regulatory authorities. The problem is the systemic risk to other institutions throughout the interconnected world of financial services. The major banks all have financial ties to each other, and most have relationships with smaller “correspondent” banks. They are counterparties to innumerable interest-rate and currency swap transactions, inter-bank loans, shared credits, etc., all of which would be affected by the failure of one of the parties. The fear is that a bank which is viewed as “too big to fail” were, in fact, to fail, it would have a domino effect throughout the system and topple other financial institutions. That risk is real, and the fear legitimate.
That’s why I differ with you in my formulation of the problem. The regulators are right to panic at the thought of a Citigroup or National City collapsing, and to do anything they can in order to prevent it. Their error lies in permitting the bank to grow that large in the first place. Such growth is not organic; it is achieved by acquiring and merging with other institutions, always with the regulators’ blessing (who often approach large banks to take over smaller “troubled” ones). That is where the problem must be “nipped in the bud”.
Perry: “A common fallacy. There is nothing about limited liability which cannot spring from private contract and in fact only the state can prevent such conditional relationships from springing up.”
I disagree.
Firstly, not all liabilities could be covered by private contract. Torts arise out of non-contractual relationships.
Secondly, just because something similar can be achieved through private contract doesn’t make it identical. With a private contract, I have to reach an explicit agreement with each person I deal with and if we were in court, I would have to show that we have an agreement in place. With LL status, the burden is taken off me completely – it is in effect a subsidy on externalising risk.
It’s similar to the argument that’s made about copyright. In theory, a contractual agreement made at the point of sale is the same as copyright protection. In practice they are very different. With copyright, all I have to show is that someone copied a piece of work I produced. With a contractual arrangement, I would have to show that I had a specific agreement with the person I was taking action against.
True but irrelevant. A tort can implicate a decision-maker regardless of liability being limited elsewhere. So what?
Yes, that why why we call it…similar.
Nope. Implied contract works just fine. When you go into a restaurant, there is an implied contact you will pay for the food you order and consume. No explicit contract is required regardless of the nature of the ownership of the place. There is also an implied contract the patron will not be given food that is unfit for human consumption. No explicit contracts requires. This all has nothing to do with limited or unlimited liability.
True but irrelevant. A tort can implicate a decision-maker regardless of liability being limited elsewhere. So what?
I think that trying to describe a state granted limitation on liabilities arising non-contractually as irrelevant is stretching the bounds of credibility, but, if I’m wrong and it is irrelevant, there’s no reason not to make liability for torts unlimited.
Nope. Implied contract works just fine.
It does for the example of a restaurant which you gave, but the same doesn’t apply for limited liability and copyright, because the protection that the state grants goes further than could be achieved by contract, as it extends beyond the scope of the two people who are trading with each other.
If you dispensed with the idea of an implied contract at a restaurant and obliged the two parties to sign a contract at the door, then, aside from a bit of inconvenience, the end result would be the same. The same cannot be said of LL as it stands now or copyright.
If LL status offered no limitation on non-contractual liabilities, I acknowledge that the situations would be broadly comparable.
Far from it. ‘State granted limitations’ is simply not the issue as said limitations can and indeed would come about from contractual relationships.
That depends. If a tort ‘pierces the corporate veil’ (to use the US legal term) due to gross malfeasance then it is individual decision makers who become liable regardless and there is no limit to liability anyway because it is people, not a limited liability company, that are being sued. So it depends on the context.
Far from it. ‘State granted limitations’ is simply not the issue as said limitations can and indeed would come about from contractual relationships.
I’m afraid not. We’ve agreed that those limitations which arise out of trade relationships could, but surely you can see that torts are a completely different matter, because they don’t arise exclusively from pre-exisiting relationships. I can have a claim in tort against a corporation I’ve never done business with. The only way they could avoid unlimited liability for it before the fact is to go out and get everybody in the country to agree to waive any future claim against them. It would be very costly for them and if just one person refused to enter into a contract with them, there would still be unlimited liability.
but, if I’m wrong and it is irrelevant, there’s no reason not to make liability for torts unlimited.
If what you said is true and limited liability for torts is irrelevant, it can’t depend. If it depends, then you are effectively saying that in some circumstances, the state granting limited liability for torts isn’t irrelevant.
If you really believe that limiting liability by contract would offer as much protection as limiting liability by corporate charter, the logical response to the suggestion of scrapping limited liability status would be to shrug your shoulders and say, “Oh well, it doesn’t matter, we can replace it using contracts.”
Laird.
No bank should be “allowed” to get “too big to fail”.
Some sort of anti trust stuff? Of course the word “stuff” is not what I am actually thinking.
In any case Citibank (for example) was not “allowed” to get so big – it was propped up (again and again) by the government over the decades and got bigger and bigger becase of that.
“The regulators should” – the regulators should not exist (period).
“But if a mega financial institution goes bankrupt it will drag d down others with it and create a terrible depression”.
Am I right in thinking this is your position?
Do not fear – the terrible economic time is going to happen anyway.
Distorting the capital structure (on top of all the previous distortions) with the vast bailouts, may have put it off (yet again) – but it is comming and comming soon.
People who choose to discard principles (and no bailouts is a rather basic principle) out of fear of the consequences of keeping to principle tend to get the consequences anyway.
This is how it should be. Those who give up liberty for fear of losing security end up with neither – and deserve neither.
The unfortunate thing is that everyone else suffers to – but that can not be helped.
Once you have a credit money boom you are going to have a bust – and all the corrupt bailouts of the “too big to fail” will not stop that.
Regarding the limited liability issue, forgive me if I’m speaking out of turn here, but it seems that the fundamental concept behind LL is being missed. The entire point is to limit the liability of the owners for the actions of the company. Accordingly, the owners need not be concerned that owning a few shares of IBM (or whatever) could cost them their entire wealth. Moreover, it also allows them to diversify their holdings thus reducing their overall risk and increasing their ability to create wealth. Those with capital (no matter how little) are also more likely to risk it on new companies rather than padding their mattresses or attempting to buy into larger “safer” companies. The end result is a larger pie for everyone.
The alternative would mean much less capitalism in that firms would only allow owners who take part in the business, and about whose finances they can be reasonably certain. This is because, as with a partnership, all assets of the owners are stake in the business venture, regardless of whether they are actually used in the business. And because of joint and several liability, successful claims against the partnership/firm/whatever can be satisfied against just one of the owners (if, for example, the other owners were too poor, bankrupt, etc.). This scenario is much more like crony capitalism, and not desirable IMHO.
As for whether LL would arise by contract without state interference, it’s hard to say. In some cases, yes, and other, no. It would greatly depend on the bargaining positions of the parties. And, as was pointed out, tort victims come ex contractu and would not be bound by any such LL, nor would they have any reason to agree to such. Without LL, such tort victims (if successful) could satisfy judgment against one, some or all of the owners. If you were to own just a few shares of IBM, and one day had a judgment entered against you because some company delivery man ran over someone’s kid, you would be expected to pay up regardless of whatever anyone else had paid. Such a reality would result in very few people taking the risk of capitalizing a company in which they were not at the helm of control.
Just my $0.02.
MichaelW, I would tend to agree with most of that, but the flip side of the potential benefits is the situation we’re in now. By allowing the people who have ultimate control to limit their non-contractual liabilities, it becomes easier to take bigger risks and build bigger enterprises, which the owners have no chance of managing closely.
The banking system seems to me to be one of the worst examples of limited liability, because almost everybody involved can pass on their risks; the banks themselves have limited liability, the depositors benefit from government deposit protection schemes and borrowers are increasingly able to get their debts written off. It’s a system which is almost perfectly designed to encourage maximum risk taking.
MichaelW:
Wouldn’t you rather be expected to pay up only that portion of the liability that is proportional to your stake in IBM?
Paul:
Sort of. The banks themselves don’t have LL in the sense that they are fully liable for any judgments against them, while the owners’ liability is limited to their investment. We are in agreement that such a scheme increases risk taking, but I don’t think it does so to any inordinate amount. It’s when government steps in and “guarantees” business risks that the risk-taking gets out of hand. Absent that guarantee (whether implicit or explicit) I think risks are well contained. The optimal solution IMHO is to create a legal rule allowing for a designation of LL but expressly denying any bailout if one does so. Actually, I’d rather there be an express prohibition against bailouts altogether (like in a Constitution designed to limit government power or something), but that’s a another conversation for another day 😉
Alisa:
Yes, I would rather that, and that’s essentially what LL provides. It can be the case that a company has within its bylaws (operating agreement, partnership agreement, etc.) a provision that permits the officers to demand a “cash call” from the owners (which would be in proportion to their interests), but most companies are not structured that way. I they were, however, then owners would be expected to pay up in proportion their interests, which would be increased for each owner that drops out for an inability to pay. IOW, if only one owner has the ability to pay, then that one owner will be obligated to do so, regardless of how much interest s/he might have in the company.
If you are asking about whether one owner can be saddled with the entire payment of a judgment, regardless of his stake, the answer is “yes, but …” While a claimant can claim his pound of flesh from any one owner (typically the one with “deep pockets”), that owner will then have a claim against all the other defendants for what’s known as “contribution.” However, the owner who paid will likely have the same problems collecting as the plaintiff did, as well as the added expense of pursuing the claims. From a legal rule perspective, it’s a zero sum game, but actual enforcement of rights requires resources which could be put to better uses (assuming one has them to begin with) than chasing deadbeats.
Sorry if my answers are pedantic. You all may very well know this stuff already. Hopefully I’ve answered the questions that were actually asked 😉
I think MichaelW has it right. It is the state support for banks via bailouts and compulsory deposit insurance that creates the sort of moral hazard issues that people rightly identify as being a driver of this crisis, not limited liability per se. After all, shareholders of banks such as Lloyds TSB have seen a huge amount of their equity holdings destroyed by mad mergers and government activity. LL has done them no favours whatever.
I think that some Rotbhardian libertarians or “left-libertarians” are in danger of taking the issue of LL to such extremes that it loses all reason. If you have equity stakes in a firm and the shares clearly state that the holder has a limited liability, while creditors can lose all their capital if a debtor defaults, and this is spelled out under the terms “Ltd” or “LLC” in a firm’s terms of incorporation, then what is the issue? So long as a counterparty knows that he is dealing with a LL, he is giving his consent to the limited ability to persue the company in the event of a claim. End of story.
I think it is a mistake to think of LL firms as some sort of wicked statist perversion of “pure” capitalism; I think there is something to be said for different jurisdictions enabling different forms of legal structure for business enterprises; this provides us with a sort of laboratory test for what types of business structure can work most effectively. Nevertheless, it is good that libertarians do not just play the role of treating the existing corporate legal framework as a given, particularly as the alignment of ownership and control of business is a key issue in trying to figure out how we get markets to work for the common good.
MichealW: this is exactly the sort of pedantic answer I was looking for – thanks:-) I have to take time to think about it, as I find the topic very interesting.
From the perspective of a counterparty, that’s fine. The real issue is limited liability for non-contractual liabilities. If I’ve not entered into a business relationship with a corporation and it does some harm to me, I don’t think it can be claimed that I’ve agreed to grant limited liability, either explicitly or implicitly. I really don’t see how that can be a matter of contention. You mentioned Rothbard, who could be considered one of the foremost supporters of corporations and even he acknowledged:
Paul makes a fair point concerning “non-contractual liabiliies” (i.e., torts), but the counter-argument is that the current legal environment (at least in the US) has degenerated into a lottery mentality, and it can’t be adequately insured against (all insurance policies have payment limits). We have effectively eliminated the old common law doctrine of contributory negligence (which historically was an absolute bar to recovery, later evolved into a relatively reasonable proportionate fault allocation approach, and now is all but gone; stick a pen into your eye and the manufacturer can be held liable); juries are more than happy to grant outrageous awards wholly disproportionate to the injuries sustained; the system encourages “punitive” damage awards without even any pretext of 4th Amendment protections; companies with at best a remote and tangential relationship to the injury are routinely dragged into protracted and expensive litigation, and if they are the “deep pocket” bear most of the cost of any award; mendacious lawyers operate on contingency fees and so have a direct pecuniary interest in the outcome and no incentive whatsoever to seek a reasonable settlement before trial or to decline to prosecute weak or non-existent cases (look up “champerty” and “barratry” sometime; there’s another pair common law doctrines which no longer exist); and judges permit all of the foregoing because they are creatures of the political system and essentially in the pocket of the trial bar. One runaway jury can bankrupt a company, and even if the award is ultimately reduced or overturned on appeal the risk is significant. So unless and until there is a serious redesign of the tort award system, the elimination of limited liability would absolutely destroy our economic system.
Entities possessing limited liability (corporations, LLCs, etc.) are required to be capitalized at a level deemed adequate for the business they’re in (a flexible standard). Failure to do so is one basis for “piercing the corporate veil”. That, and routine liability insurance, should be adequate to protect the general public in the case of “non-contractual liabilities”. The system seems reasonably fair and balanced to me (except, as Johnathan points out, when the government intervenes).
I think MichaelW has it right.
I think your point about the legal environment is reasonable, but I don’t view it as a counter-argument; in fact, I view it as the opposite. I think the worst thing you can do to deal with bad laws is to start exempting people from them. I’m of the school of thought that says that one of the essential safeguards against bad laws is that the laws apply to everyone.
Limited liability protects people when they are acting through a corporation, but as joe public, we are still left at the mercy of those bad laws.
So, on your point:
I’d say that might actually be an argument in favour of doing it. The prospect of bad laws causing total economic meltdown would make reviewing those laws a much more pressing consideration than it is at present.
We’re so fundamentally far apart on that point that I see no benefit to debating it further.
Paul:
The way I see it, ideally this should not be a matter of your agreement with them, but their agreement among themselves. A person driving a company’s car for a living can do so under several possible forms of employment contract. He can agree to be held liable in case of an accident, taking higher pay with the understanding that the extra pay will be used towards private insurance premiums. Or the company may assume any or certain kinds of liability, and purchase insurance for all its drivers if there are enough of them to get lower premiums. The same should go for harmful chemicals dumped into a water source.
Suing a corporation makes absolutely no sense to me. There is always an individual (or several individuals) that actually performs the damaging action, whether by accident, or deliberately by the authority of his employer, and as far as the damaged party is concerned, that is the individual that should be liable. He can then take it with his bosses, according to the terms of his employment contract. Of course this means that people should consider these matters carefully before taking jobs with employers, but it stands to reason that such employment contracts would quickly standardize, so an average Joe wouldn’t have to go through law school to make an informed decision before taking a job.
The same approach seems appropriate as far as partners or shareholders are concerned. Again, people would be expected to consider these matters seriously before entering into business partnerships/purchasing shares in corporations.
In any case I don’t see the need for government regulation, including any laws limiting liability, except from issues arising in a period of transition from the current system to a saner one, as Laird’s next to last comment seems to imply. Now what am I missing here?
Alisa, I’d pretty much go along with that completely. The one thing I’d add is in response to:
If they did come to some agreement between themselves, that would be fine, as I would still be able to pursue somebody who ultimately has full liability to me. However, they could do it by agreement with me and that would be fine too. For example, if somebody sets up a chemical plant next to my home and none of the operators is happy with the potential liability to me, they could come to me and offer me a big pile of cash in return for me signing a waiver.
The problem that Laird so well describes can be traced to events like what happened here in Wisconsin on Tuesday. I wrote an article about it on February 12.
The most recent figures I heard are that more than a third of a million $s of her support came from lawyers and law firms and of that, 10% came from lawyers with cases before her right now!
As asommer said in the thread, “It turns out that rent-seeking is extremely lucrative, and some of the rent-seekers are intelligent enough to re-invest the proceeds.” Tort lawyers reinvested a lot of money in renewing their lease of the Chief Justice.
Sure, but then we are back to the easy case where you are a party to a contract. The relatively difficult cases are the ones where you are not, while at the same time are a damaged party, such as a pedestrian hit by a track owned by a corporation.
I was responding to Paul.
Of course no society can function where equality before the law that protects life and property is not maintained.
Alisa, I appreciate that you’re arguing (in your post of 8:13 PM) for “what should be”, but just so you understand the world of “what actually is”, the reason one sues the employer in such cases is the common law doctrine of respondeat superior. Legally, the employee is the “agent” of his employer, and if he is acting within the scope of his employment when the accident occurs it is the responsibility of the employer. (The “master” is responsible for the actions of his “servant”.) Of course, you can get into all the old “frolic and detour” arguments to decide whether it was, in fact, within the scope of his employment, but for the most part the employer will lose unless the employee’s conduct was pretty egregious. After all, you’re still dealing with a jury interested in soaking the deep-pocketed corporation, not punishing the “little guy” no matter how culpable he may be.
Alisa:
Absolutely. I suppose the point I was trying to make was that, even without state granted limited liability, corporations could still reduce the risk of difficult tort cases arising by negotiating agreements in the riskier areas before the fact, turning them into simpler contractual arrangements.
Well yes, Laird, I’d pretty much figured how things work when someone got rich by spilling hot coffee in her lap. And since when is SI only concerned with the way things are?:-)
My main larger point is that corporations should not be treated as persons for tort purposes (and possibly for some other purposes as well). The practical outcome of this will not be very different from what it is now, except for cases such as the hot coffee one. There is nothing wrong per se with owners of the deepest pockets ending up with the bill, we do it all the time by rolling responsibility onto insurance companies. The moral problems arise when this is done without the deep pockets owner’s consent, consent being the key principle in this whole issue, as far as I can see.
Just on the point about champerty above, I’d always thought that such a practice would be an essential part of a “private law” society, in that some victims would otherwise suffer from not having the means or understanding to seek arbitration or have not purchased such insurance. So a body of lawyers or specilist insurance firms dealing in uncovered claims in particular would find it profitable to fund compensation in return for the rights to take the case to arbitration. With competition in that market it would keep the costs down. Just like factoring does for credit management.
And presumably the problem of run-away juries awarding disproportionate damages and so on is a function of the state’s monopoly on that arbitration. In a private law society competition amongst arbitration services would tend to ensure that those arbiters with a reputation for making fair and reasonable judgements would succeed. In such circumstances then, liability insurance would be feasible as an alternative to state protected, and state regulated, limited liability.
The problem of judges in the pockets of lawyers may still arise but it would be inconsequential as people would be able to choose a different arbitration service if they thought one had too great an interest with either party in the case. Again, competition should ensure that eventually the cost of maintaining your pet judges would be greater than accepting some more sensible judgements against you.
Since it is the monopoly of arbitration that gives the state all the other powers it has accumulated, surely it is absolutely key to dismantle that monopoly, and to find market alternatives for all the things, like limited liability, that are contingent upon it.
Jock, in the US (I can’t speak to other countries) private consensual arbitration is generally supported by the courts. That’s fine in a contract setting. The problem arises in the case of torts: it would be difficult to get both parties to agree on a non-judicial arbitrator if the interests of the plaintiff are served by finding one who gives large awards while the interests of the defendant are the opposite. So while I agree with you that private nonjudicial dispute resolution would be preferable, in reality there has to be some “default” body with mandatory jurisdiction, and that is going to be the state.
Alisa, FWIW, the doctrine of respondeat superior far predates the widespread use of corporations and other limited liability entities. Its roots are deep in Anglo-Saxon jurisprudence, and I don’t see it changing any time soon.
Laird:
Well, yes, and I don’t see any contradiction between my point and the respondeat superior principle. The only difference is that the driver would be seen as employed by his direct superior (an actual person), rather than by a corporation.
OTOH, after reading Jock’s comment I realized that the hot coffee problem does not necessarily have to do with the point I was making, not that Jock’s suggestion necessarily presents a solution either. An interesting topic to ponder, my sloppy reasoning aside:-)
Laird says:
If I may expand slightly:
Imagine that I get called to a fight. Upon arrival, I discover two people fighting. I separate them and temporarily detain per Terry v. Ohio, while interviewing witnesses. I determine that Alan was the predominate aggressor, that Bob was defending himself, and that Bob suffered bodily injury but not serious bodily injury.
I arrest Alan for third-degree assault, a misdemeanor. (Trust me, it’s the correct charge in this case.)
Under the current system in my state, the criminal case will be heard in the county court. Bob has a right to sue Alan to recover any actual losses or damages, like medical bills or broken eyeglasses. This will also be heard in the county court, but in a separate civil proceeding.
(In the case of medical bills, Bob, if insured, will assign his right to sue to his insurer. I believe this is called ‘subrogation.’)
Let’s say that Alan and Bob want to work out the civil side for themselves in mediation or arbitration: perfectly legal here. If they can agree on a referee, then it’s their business.
Now, let’s say that we’re in some libertarian parallel universe where Alan and Bob can’t agree on which of a dozen competing private courts.
What then?
(To say nothing of whether there would be a statute prohibiting assaults, or a police department to arrest people under said statute, in such a world, but I don’t know how hot I am to spend all day developing this story line)
It’s also a perverse form of the American Dream. If you think you’ve been wronged by a state actor (say, me) you also go after his employer, and his supervisors and managers. The actor himself will likely be able to claim qualified immunity (basically meaning that you can’t sue a cop because he did his job and you don’t like the result) but the real deep pockets (the city itself) can’t claim QI.
It’s often called the Ghetto Lottery.
Alisa, the direct superior is himself an “agent”; trace the lines of responsibility to the top and the ultimate principal is the corporate entity.
Right, and my thinking was that there would be no corporate entity, but a number of individuals who all share in liability proportionally to their stake in the corporation. But, it is irrelevant to the “frivolous lawsuit” problem, because of the respondeat superior, which I didn’t take into account (and which incidentally I don’t like).
On limited liablity I agree with what I think is Alisa’s position.
If a person chooses to do business with an enterprise controlled by “Mr Scumbag” who has millions in personal wealth but controls a corporation with no assets at all – this is a matter for the choice of the person choosing (or not choosing) to do business with Mr Scumbag’s corporation.
As long as the person knew in advance.
That is what the letters “Ltd” in Britain and “Inc” meant in the United States.
“This is a business enterprise where you can not touch the personal wealth of the owners of the business – now choose whether or NOT you want to do business with it”.
Nothing unlibertarian in that – as long as it is not hidden.
However, I am disturbed by the dropping of the old clear indication that a business enterprise was limited or incorporated.
For example AIG should have been AIG Inc – and the title “AIG” should never have been used on its own.
And RBS should only have been called RBS Ltd.
As for “insurance” of bad business judgement (in banking or anything else) as Rothbard was fond of explaining – such a concept is absurd.
By the way, in case anyone guesses that the true name of Mr Scumbag (who is, up to his neck, involved in the debt games he denounces so loudly) is “Warren Buffet”.
“You might say that, but I could no possibly comment”.
No real disagreement from me, Paul, except that a corporation “with no assets at all” wouldn’t provide any protection for its owners. Such an entity would be deemed a “fraud on creditors” and the corporate veil pierced without difficulty. I agree that “Inc.”, “Ltd.”, etc., should be displayed more prominently. Still, the use of such business forms is so prevelant these days (in the US, anyway), that probably everybody expects that any business entity is of a limited liability type anyway.
I would still like it formally stated – as a reminder (but then I am old fashioned and remember the times when everyone said “inc” after a limited liability company title, even in a cartoon).
Of course a big problem with choice in currency – whilst allowing the govenment to produce its, is that the government will say “of course you will pay your taxes in our currency – you know, the one we are debauching”.
Time to make “nothing but gold or silver coin” apply to the Feds as well as the States – or they will play these games.
As history has shown us.
For once I am being empirical – then is nothing a priori about stating government can not be trusted with the currency.
They have shown us they can not be trusted.
Let the Liberty Dollars (of Indianapolis) and so on, take over.
And the true forgers (the government) be removed from these matters.