I had an exchange on the C4SS site on Thomas Knapp’s post The Thin Black Line:
State chartering of corporations should of course be abolished but I’ve yet to see a careful argument that explains on libertarian grounds why passive shareholders/investors of a contractual firm ought to be vicariously responsible for torts committed by employes of that firm. Most argument I see just assume this liability, based on some kind of very broad implicit theory of causation, one so broad that it would make employees, vendors, creditors, even customers all vicariously responsible for those torts. And a lot of the arguments I see are confused about what limited liabiilty is–they think it has to do with the managers, not the shareholdres. THey also often assume that a shareholder is necessarily an investor–this is not true; if you buy your share from another shareholder, you pay him, not the company. Anyway, if giving them money is enough to make you vicariously liable, lenders, customers, employees, vendors all aid and abet the firm too. If voting to elect directors is enough, then banks, unions, big customers, etc., also influence the makeup of the board. There is just no careful theory that I’ve seen.
You write: “State chartering of corporations should of course be abolished but I’ve yet to see a careful argument that explains on libertarian grounds why passive shareholders/investors of a contractual firm ought to be vicariously responsible for torts committed by employes of that firm.”
Why is such an argument necessary? Usually an argument for Claim X is only necessary when someone has made Claim X.
Tom, if you don’t want to defend X, fine. But it is often maintained by left-libs that limited liability is a grant of a privilege; this is based on the claim that absent the grant, the shareholders would be liable for torts of shareholders.
What is your stance on this?
It is not just “maintained by left-libs that limited liability is a grant of privilege.” That is an indisputable fact of actually existing capitalism — limited liability is dispensed through state fiat.
What would things look like absent that grant of privilege? I don’t claim to know. I’d like to find out.
Tom, that’s a good way to look at it: we can all agree that the state ought to get out of the incorporation business. Then we’ll see what happens.
Still, one reason many left-libs make such a big deal about this–saying it causes distortions and more risky/less responsible decisions on the part of shareholders, etc.–is the assumption that in a free market the shareholders would be personally liable. If they would not be, then it’s hard to see what significant damage the state is doing by its limited liability rules.
Consider IP. Under a free market there would be no patent law at all. The existence of patent law therefore causes much waste and distortion and redistribution that would not otherwise occur. The same is true of copyright.
However, trademark would exist in some form–there would be at the least a fraud claim on the part of customers that a seller defrauded by selling them bootleg goods. So there would be differences–the cause of action would be that of the customer, not the trademark holder; there would be no ridiculous state extensions of TM law such as antidilution rights–but a seller of fake goods would have legal consequences under a free market, *similar* to those he faces now. So, we can see that state trademark law, while not good, is probably not as harmful and distorting as patent and copyright law are.
WE can only make such statements and determinations if we have an idea of what would and would not exist on a free market, so that we can contrast the state law with what private law would be. And I do believe the left-libs have to be assuming that the shareholders would be vicariously responsible for employee torts in a free market, in order to claim that state limited liability is distorting.
To be honest, I”m surprised the left-lib critics of incorporation don’t point to the real problem. Maybe it’s because of ignorance of exactly how lim liability works. Maybe it’s unfamiliarity with Hessen’s work on this topic. Maybe they think limited liability protects managers and board members and corporate officers, not just shareholders. But here is my thinking on this. To determine whether passive shareholders ought to be liable you need a libertarian compatible theory of causation and responsibility. (See this post for more background: Rothbard on Corporations and Limited Liability for Tort). As Hessen, Pilon, rothbard and others argue, the shareholders are usually passive and there is little grounds to hold them responsible for others’ torts. So the state’s failure to provide a cause of action for the victim of a tort to sue the shareholder is not really taking away any cause of action they would have had on the free market anyway.
However, one could see an argument that certain managers in the company are vicariously responsible for the torts committed by employees whose actions they direct. Now, as far as I know, state limited liability/incorporation laws do not exempt managers. why is this? Well as far as I know, there is simply no cause of action in the first place for a tort victim to sue the manager of the tortfeasor. So there is no reason to exempt the manager from liability–he is not liable anyway. Under the state’s law. But arguably he should be liable. It is the state’s failure to provide a cause of action to sue managers (and board members etc.) that is the real injustice here. but it has NOTHING to do with incorporation and limited liability grants; this applies to any firm at all–partnership, “coop,” JV, whatever. If you guys want to go after a problem why don’t you go after THAT? I can only think it’s b/c of massive confusion about causation and responsibility theories, and the way corporate actually works.
See also: Legitimizing the Corporation and Other Posts; Defending Corporations: Block and Huebert; Pilon on Corporations: A Discussion with Kevin Carson; Corporations and Limited Liability for Torts; In Defense of the Corporation.