≡ Menu

Left-Libertarianism on Corporations and Limited Liability

I had an exchange on the C4SS site on Thomas Knapp’s post The Thin Black Line:

Kinsella:

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.

Knapp:

Stephan,

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.

Kinsella:

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?

Knapp:

Stephan,

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.

Kinsella:

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.

For more, see: extensive quotes from Hessen and Rothbard in Block and Huebert’s article. Sheldon Richman also, at least as recently as 2005, seems to hold similar views.

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.

Share
{ 10 comments… add one }
  • Thomas L. Knapp January 24, 2011, 10:08 am

    Stephan,

    You write:

    “one reason many left-libs make such a big deal about [limited liability for corporate shareholders via state fiat] –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.”

    Fair cop. That does accurately describe “many left-libertarians,” and until recently it would have accurately described me. It no longer does, however, due to a process of self-re-evaluation I’m engaging in, which I’ll describe as briefly as possible.

    I believe you’re aware (because I seem to recall you objecting to it) of my recent assessments of something I call “bourgeois libertarianism.” In my definition bourgeois libertarians are those who “simply can’t get their heads around the idea that a real free market or a real free society might produce outcomes or phenomena that they aren’t already familiar and comfortable with.”

    There’s a flip side to that coin, a failing on the left, subsisting in assumptions as to how existing distortions produced by state fiat/state privilege would “wash out” of a freed market economy.

    Until recently, my assumption with respect to an end of state fiat “limited liability” was that it would play out something like this:

    – Former corporations would likely continue to exist. They’d simply be large partnerships, joint stock companies, without any of the state-dispensed stuff like limited liability, artificial personhood, etc.

    – Those firms would likely act to re-create, as best possible, some of the conditions which they believed benefited them.

    – “Limited liability” would likely be re-created in the form of portfolio insurance — to the extent that one anticipated the possibility of being sued for the actions of a company one owned stock in, one would simply pay a monthly premium to an insurer for coverage against that possibility.

    – The insurers, not having the ability to arbitrarily limit claims, etc., would probably rate companies and stocks, and adjust premiums to risk (or, in some cases, perhaps simply refuse to insure). So, companies which acted “responsibly” would be more attractive to invest in, since the cost of insurance, or the risk of not insuring, would be factored into the cost of investing.

    While I don’t think any of that prediction is unreasonable, however, I’m trying to give up the habit of engaging in such speculations. I think a sound argument can be made that state fiat limitation of liability is wrong, so the morality of ending it is not conditional upon any particular projected outcome which would result from ending it.

    • Stephan Kinsella January 24, 2011, 10:15 am

      I believe you’re aware (because I seem to recall you objecting to it) of my recent assessments of something I call “bourgeois libertarianism.” In my definition bourgeois libertarians are those who “simply can’t get their heads around the idea that a real free market or a real free society might produce outcomes or phenomena that they aren’t already familiar and comfortable with.”

      There’s a flip side to that coin, a failing on the left, subsisting in assumptions as to how existing distortions produced by state fiat/state privilege would “wash out” of a freed market economy.

      Right.

      – Former corporations would likely continue to exist. They’d simply be large partnerships, joint stock companies, without any of the state-dispensed stuff like limited liability, artificial personhood, etc.

      Yes.

      – “Limited liability” would likely be re-created in the form of portfolio insurance — to the extent that one anticipated the possibility of being sued for the actions of a company one owned stock in, one would simply pay a monthly premium to an insurer for coverage against that possibility.

      Yes. This is already done now for directors and officers with D&O insurance (but usually it’s for liability arising from lawsuits *by shareholders* for malfeasance or whatever… though the “business judgment rule” protects them already).

      – The insurers, not having the ability to arbitrarily limit claims, etc., would probably rate companies and stocks, and adjust premiums to risk (or, in some cases, perhaps simply refuse to insure). So, companies which acted “responsibly” would be more attractive to invest in, since the cost of insurance, or the risk of not insuring, would be factored into the cost of investing.

      yes.

      While I don’t think any of that prediction is unreasonable, however, I’m trying to give up the habit of engaging in such speculations. I think a sound argument can be made that state fiat limitation of liability is wrong, so the morality of ending it is not conditional upon any particular projected outcome which would result from ending it.

      If I understand you, I agree. But that does not mean it’s useless to speculate as to what the free market situation would be. Though we do have to avoid excessive armchair reasoning and consequentialist, results-oriented reverse engineering.

  • Thomas L. Knapp January 24, 2011, 10:24 am

    Stephan,

    I agree that it’s not useless to speculate. I’m just going through a process of re-evaluating HOW I speculate, precisely because I see danger in the possibility of falling into the habit of, as you say it, “consequentialist, results-oriented reverse engineering.”

    So, you’re probably not going to see a lot of “here’s what X will look like if Y” from me for awhile. My past speculations are certainly fair game, of course, and I might even decide they’re worth defending just by way of exercise to see how well the defense holds up, and I won’t disclaim responsibility for having promulgated them … but at the same time, I’m interested in moving past them.

    • Stephan Kinsella January 24, 2011, 10:45 am

      Gotcha. It does seem to me that the more one is a “thick” type libertarian, and more of a consequentialist–that is, the more your *reasons* for being libertarian hinge on your more basic desire for certain end results you predict would be achieved in a free market, then the more prone you are to need to make these kind of claims.

  • Thomas L. Knapp January 24, 2011, 10:57 am

    I confess to not really understanding this whole “thick” versus “thin” distinction I’ve been seeing around for the last few years.

    I can see a certain role for prediction/speculation, but it’s easy to let the tail start wagging the dog: That is, if I have predicted that morally correct course X will produce outcome Y, it’s easy to then start assuming that anything that seems to redound toward outcome Y must perforce be aligned with morally correct course X. That’s not necessarily true, and it lends itself to losing sight of morally correct course X in the rearview mirror while off on a wild goose chase after outcome Y.

  • Brock Lorber January 24, 2011, 3:47 pm

    Libertarian compatible theory of causation and responsibility:

    Purchasing shares is not purchasing ownership in the company. A stock purchase is a purchase of a non-severable percentage of an accumulated capital stock and, sometimes, rights to vote on the company officers. The managers and employees of the company act as agents of the shareholders to employ the capital stock.

    This is true whether the shares are purchased from a previous shareholder or directly from the company. That is, each shareholder is in exactly the same position re: liability, if any, regardless of who they purchased the shares from.

    How can shareholders be said to be passive when they actually employ the company, as agent, to employ the capital stock for an explicit purpose (whether explicitly benign or explicitly malicious)? Would the shareholders purchase shares without the promise of the agents to shield, to the best of their ability (or, at least to a reasonable degree), the accumulated capital stock from tort claims?

    To the extent that they would not, doesn’t this demonstrate admission of at least partial shareholder liability and the existence of a contract between the supposedly passive shareholders and the company as their agents?

    If so, doesn’t the portion of liability for damages to third parties that falls on the managers and employees of the company depend on a determination of the extent to which they were acting outside of their agency? And, vice versa, if the action which resulted in damage was completely in the course of employment of the capital stock for which the agent is specifically employed, doesn’t the liability fall squarely on the capital stock and its owners?

    What, then, is the basis for limiting the amount of liability to the accumulation of capital stock when the damages have no top boundary? All of us are at risk, at all times, that the actions of another or their agent will cause more damage to us and our property than the other’s ability to make us whole. In this case, however, the whole-making ability is artificially limited; I suppose that, in the absence of a corporate veil, shareholders _will_ be held to personal liability beyond the accumulation of capital stock.

  • Morey January 27, 2011, 11:54 am

    I had always assumed that waivers, reasonably applied, would be a defensible act of limited liability in a free market.

    Reasonable would be signing “this product or service, used as directed, may cause harm”. Unreasonable would be a sign hanging in the corner of the window of the diner advising you that you may be shot upon entry.

  • Thomas L. Knapp January 27, 2011, 12:17 pm

    Morey,

    Presumably waivers would support limited liability — toward those who were asked to accept them and did.

    This is not unknown even in the existing un-free market. When I worked as a miller, one of the machines I used (a machine for filling bags to weight with mustard flour) had a plaque on it with a warning that the manufacturer did not carry liability insurance and would not allow itself to be held responsible for damage or injury from the machine’s use.

    No problem — my use of the machine in full knowledge of that disclaimer did, to my mind, absolve the machine’s manufacturer of liability if the machine blew up and killed me or whatever, even if that explosion was due to some negligence, etc. on the part of the manufacturer.

    If, however, the machine blew up due to some negligence, etc., on the part of the manufacturer, and that explosion blew out the wall of the factory and injured some innocent passerby on the street, I don’t see how the waiver would have any impact at all. That passerby never saw the warning, never even knew the machine was there until it smacked him upside the head. Whoever was responsible for that happening would be responsible to the full cost of restitution, regardless of what a plaque on the side of the machine said.

  • AleG January 29, 2011, 8:53 pm

    Thomas,

    In your example of the milling machine and the injured innocent passerby, it seems to me that there could be some debate over the relative culpability of the manufacturer who supplied the machine with liability disclaimer attached, and the operator who read the disclaimer, then powered on and used the machine. After all, the machine represented (approximately) zero risk to that passerby until it was turned on. I do concede that this might be more of a problem for the example than for the principle.

    AleG

  • Thomas L. Knapp January 29, 2011, 9:15 pm

    AleG,

    I agree that there could be some debate over relative culpability. The narrow point I’m making is that it’s not obvious that a disclaimer of liability for X automatically relieves one of liability for X.

Cancel reply

Leave a Comment

Next post:

Previous post:

Bad Behavior has blocked 2413 access attempts in the last 7 days.

© 2012-2018 StephanKinsella.com CC0 To the extent possible under law, Stephan Kinsella has waived all copyright and related or neighboring rights to material on this Site, unless indicated otherwise. In the event the CC0 license is unenforceable a  Creative Commons License Creative Commons Attribution 3.0 License is hereby granted.

-- Copyright notice by Blog Copyright

%d bloggers like this: