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The Over-reliance on State Classifications: “Employee” and “Shareholder” (Mises 2008)

Mises blog:

The Over-reliance on State Classifications: “Employee” and “Shareholder”


The state takes over and corrupts many institutions and aspects of life–roads, communications, law and justice, healthcare, money, defense, police, finance and banking, and education (see, e.g., Hoppe’s Banking, Nation States and International Politics: A Sociological Reconstruction of the Present Economic Order. In so doing they gradually infiltrate language and even our concepts with official state classifications.


An example of this is the idea of “employer” and “employee”. In a free-market economy people are market actors and interact with each other, in a division of labor. Firms arise, in part to overcome transaction costs, though there is an upper limit to their size (see Klein’s Economic Calculation and the Limits of Organization). But just as a firm may outsource some functions to other companies, it may purchase the services of individuals in a variety of arrangements. Some are called “employees” if they work repeatedly and extensively for the firm; though there can be part-time employees, and full-time employees who moonlight. Others are called contractors or consultants, even if they have only the employer as their client.

In a free market the labels employed would be relatively unimportant. In fact these are really just examples of a contractual relationship where the firm has agreed to pay a fee to the employee or contractor in exchange for performing specified services. There is no sharp distinction between them. But as the phenomenon of “employment” has become prevalent, it presented itself as a juicy target for state regulation, e.g. minimum wage, fair labor standards (overtime pay, maximum hour, etc.) legislation and the like. What this means is that if a firm has an “employee” as defined by the state, then certain legal rules apply to the “employer.” Naturally a firm might want to just re-classify its “employees” as “independent contractors,” but the state will not permit this, since it defines reality.

Not only that, but the state defines the employee’s actual position and job title, in determining whether the worker is “exempt” or not from certain FLSA requirements. Companies might try to give a mid-level employee a “manager” title to classify him as “exempt” and evade overtime requirements, for example, but the Department of Labor won’t permit this–it defines reality.

Besides being an unfortunately effective tool that the state uses to control market actors, another problem with this state of affairs is that the’s state’s own (artificial, arbitrary, decreed) classifications become accepted unquestioningly and used in normative and even economic reasoning. For example, libertarians tend to take for granted the idea that “employers” are “responsible for” the torts of their “employees”–the doctrine of “respondeat superior.” They take for granted the legitimacy of the doctrine of respondeat superior in part because it has become ingrained in our legal system (which the state has monopolized), but note that in any event, this doctrine requires one to be able to objectively identify that someone “is” or “is not” an “employee” or “employer.” If the state does not decree what this means, then the question would arise, should a company be responsible for the torts of other individuals it profitably interacts with? What about torts committed by its contractors and consultants? What about torts committed by the employees of a company it uses for outsourcing? Why does it make sense that I would be personally liable if my “employee” harms someone while delivering a package for me, but not if a FedEx truck driver does it when delivering my package? And so on.

(I discuss some of the problems with respondeat superior and shareholder liability for the torts committed by employees of companies they own shares in, in my comment to Long on the CorporationIn Defense of the CorporationSean Gabb’s Thoughts on Limited Liability; and Legitimizing the Corporation.)

Similarly, some libertarians rely on the classification “employee” when discussing issues like conspiracy or joint liability for a crime (see my Causation and Aggression for elaboration). According to some, if A “merely incites” B to perform a crime, A is not liable; but if A is B’s “employer,” this changes matters. And so on. In other words, the libertarian determination of A’s responsibiltiy turns on the state‘s own arbitrary, non-objective classification–a classification which is selected solely for purposes of allowing the state to control market actors for labor regulation purposes, etc.–that is, a classification that is not significant, rational, or objective for purposes of normative reasoning.

(We might add here a similar observation: some would argue that if a woman merely persuades her lover to murder her husband, she is not responsible; but if she “agrees to pay” him money, she is–note that the latter case rests on the state’s own definition of “contract”, and is unscientific because while the state might only define contracts for money or monetarilly valuable objects or services as “counting” for this purpose, the Austrian knows that value is subjective and motivates all actions–the lover who kills his girlfriend’s husband to obtain her love or sexual favors is engaging in human action just as a hired hitman is; just because the law focuses on monetary transactions (mostly so that it can tax them) is really irrelevant to the proper classifications and distinctions that the ethicist should employ and draw.)


Another category–related to respondeat superior and “corporations” (see links above)–is shareholder. Even though “corporations” could exist on the free market with no state privilege or backing, the state has monopolized this too, and sharply defines who a “shareholder” is. Libertarians, who of course believe in private property and ownership, and know how to buy shares on the free market, accept this category as some holy writ. They do this implicitly when they oppose the idea of corporate limited liability–whereby owners of shares in a corporation are not personally liable for contractual debts of the corporation, nor for damages caused tortiously by the corporation’s employees. Now the contractual debt part is easy to dispose with; Hessen has done so. What about torts committed by the corporation’s employees, that damage third parties? Why shouldn’t the corporation be liable? Why should’t its shareholders be liable?

In criticizing this form of limited liability, critics make several ungrounded assumptions: (1) the validity of respondeat superior (so that the corporation is responsible for the employee’s actions in the first place); (2) the objectivity and relevance of the “employee” classification; and (3) that shareholders are causally and legally responsible for damage the company is (indirectly) liable for (which itself requires an assumption that the classification “shareholder” is objective and relevant).

I’ve already pointed out some flaws with (1) and (2), but what about (3)? Austro-libertarians realize that ownership is simply the legal right to control. Shareholders have a legal right to receive a pro-rata share of assets upon winding up; and the right to elect directors, who appoint officers, who hire managers, who direct employees, who carry out daily tasks. They don’t have the right to, say, enter the headquarters and use a conference room. Their rights are distributed, conditional, and limited. They basically have some rights to receive money, and some tenuous rights of influence over the company. But there are any number of market actors who have such influence, or even more–employees, vendors, customers, lenders, and so on. (And don’t even get me started on the artificial concept “stakeholder” also pushed by the state.)

The point is: why is the shareholder just assumed to be “the” “owner” of the company, for purposes of responsibility for actions caused by its “employees”? Because the state classifies it this way? A sound theory of libertarian causation and responsibility would look at the underlying reality, not the state’s labels and arbitrary classifications.


This one, too, is abused–mainly today by “vandarchists“–see my links above.

More needs to be done on all this–we libertarians have to be wary of the state’s takeover of our conceptual way of understanding the world.


Of course, many other examples can be found: “education” (the state doesn’t count practical things like working on a farm); “citizen”; “adult” (18 years old, or maybe 21, so sayeth the state); “marriage” (the whole gay marriage debate would be moot if the state didn’t define marriage and classify people as “married” or not..

Archived comments:

Comments (7)

  • iceberg
  • Great post. I have to say that sometimes Austrians or Post-Austrians try too hard to be hip with the leftist crowd, to the extent that because they wish to denounce the statist corporate form, they prove too much in the process, more than is justified by the facts– or counterfactuals.

    For example I have to be convinced whether the state’s roads are an example of a transportation subsidy that props up the megacorp form over smaller, and more numerous geographically-distributed manufactories. Because of the limits of our historical knowledge, a thymological approach seems to be quite difficult.

    In order for Carson or Long to make such a claim, they will have to show that the state intervention of providing transportation subsidies (in the form of road, railroad, airports, etc) exceeded whatever private actors would have assembled in the counterfactual example.

    But can they do this?

    I don’t know how. In Thomas DiLorenzo’s “How Capitalism Saved America”, if I remember correctly, he wrote about how there was over 200 companies located in some New England state alone that were engaged in the private road (turnpike) business at the turn of the last century. Who is to say that a continental-wide series of interconnected private turnpikes would have proved impossible if the state didn’t intervene? Maybe we can’t imagine it today because of current housing densities (also created by the state nationalizing 1/3 of the country’s landmass), but who is to say that it would have been impossible?

    I don’t know too much about the NYC subway system, but what I do know is that it was constructed by private companies. It might be fruitful to learn whether this was done with state intervention to force homeowners to allow the subway’s underground easements. If someone could point me to such a resource, it would be highly appreciated.

  • Published: November 20, 2008 1:30 PM

  • Ken Zahringer
  • Excellent post, Stephen. This is a critically important principle that applies across the board – for instance, the whole concept of “foreign trade” is absurd in the absence of the State. You are right. There is much to be done in this area. Thanks for a great contribution.
  • Published: November 20, 2008 2:08 PM

  • Ken Zahringer
  • Some details on what I meant about foreign trade:

    Here’s my line of intuition/insight: I’m a piano technician, full-time for the last 15 years or so, part-time now that I’m back in school. When I buy parts, tools, etc. I sometimes use a supply house in Chicago, sometimes one in Clawson, MI, and sometimes one in Vancouver. Each has their own niche, each has some products the others don’t. My purchases from the first two are “domestic trade” and from the third, “foreign trade”. Yet from my point of view, it’s all trade. I’m just buying stuff I need from a supplier that has it to sell. Why should these transactions be treated differently?

    The answer, obviously, is the existence of the State. As Hoppe (one of my intellectual idols) pointed out, the State claims a territorial monopoly on taxation, and must enforce this claim as a matter of survival. Thus the State must define internal and external transactions for tax purposes, and then encourage internal and discourage external transactions. Even in a regime of more or less free trade between the US and Canada, there are still administrative requirements that increase transaction costs for foreign vs domestic trade. Likewise, the central bank must also claim and enforce a territorial monopoly on money as a precondition for conducting monetary policy and controlling the banking industry. Thus we have a distinction between transactions that can be completed with one government’s fiat currency vs transactions that require exchanges of different fiat currencies. None of this would apply without nation-states and their currency and trade interventions.

    Here’s the practical result: When I order from Chicago or Michigan, I make my order, pay with my credit or check card, and get my stuff usually in 3 days. When I order from Vancouver, the supplier has to fill out customs paperwork, pay a small duty that he includes in his prices, and it ends up taking 7-10 days to get my stuff. Distance only accounts for part of this. In addition, he prefers that I pay by check because this incurs less cost for him in converting $US to $CD. So he ends up waiting another week after I get my shipment, with invoice, before he gets paid. This happens only because of the existence of the State.

    The economics profession accepts the existence of these monopolies pretty much unquestioningly. We talk about national income accounting. The US isn’t a firm or a household. In fact, there are a myriad of firms and households in the US, and each one has its own priorities and set of accounts. The only reason anyone thinks about national income accounting is because we are all bound up in the same political and monetary monopoly. Balance of payments is also an issue. But would it be a valid concept at all if there weren’t a central bank with a central repository of foreign assets (even including a little gold) to gain or lose because of current account imbalances? And would we care about an imbalance if it didn’t mean “foreigners” (political them vs political us) were gaining “our” assets? Add to this, of course, the fact that we wouldn’t even be in our current economic situation without the assistance of our central bank and its monetary monopoly.

    A more complete and, I hope, more coherent essay is in the works.

  • Published: November 20, 2008 7:25 PM

  • happylee
  • Even though “corporations” could exist on the free market with no state privilege or backing, the state has monopolized this too, and sharply defines who a “shareholder” is.

    Au contraire, mon frere, a corporation is, by definition, a creature of the state.

    Perhaps you mean to say that free men can freely set up business ventures in any manner that suits their needs; and that ventures with capital lenders being treated as capital equity partners sans liability is possible. A “corporation,” however, with its pernicious concept of diffused decision making via (sacre bleu!) the ballot box, of centralized grants of immunity and separation of capital and control, could not arise in a free market.

    But why? It’s because, I think, that when a corporation arises under current law it becomes an individual. In Rothbardia commercial cooperation, especially the present exchange of future goods via contract, would not depend on or require the birth of something independent from the contracting individuals. Nor would the “laws” of liability. And if there’s no reason for something to be created, it will not be. The entire history of corporations is merchants begging the state for something. In Rothbardia the individual begs no one for anything, least of all from a wanna-be king.

    There is, I think, no large-scale, complex and capital intensive commercial venture that would in any way require “incorporation” to achieve all that “corporations” purport to achieve, even in our current system, let alone in Rothbardia.

  • Published: November 20, 2008 7:58 PM

  • JA
  • Why does “incorporation = large-scale”? Small enterprises from hot dog carts to your local handyman are incorporated. Why? Taxation, primarily.

    Second, is it the word “corporation” that trips up these left-libertarians? I remember a whole chapter in Rotherbard’s Man, Economy and State on joint-stock companies. Somehow this chapter isn’t cited in Carson’s manifesto, for example.

  • Published: November 21, 2008 8:41 AM

  • Mike
  • Iceberg:

    In order for Carson or Long to make such a claim, they will have to show that the state intervention of providing transportation subsidies (in the form of road, railroad, airports, etc) exceeded whatever private actors would have assembled in the counterfactual example.

    I don’t think Carson and Long necessarily claim that a private road system would never have developed to the extent that public roads did. Rather, their point is that with a private road system businesses that rely on high-volume long distance transportation would have to internalize these costs. It is not the extensiveness of public roads but the fact their costs are socialized that amounts to a subsidy for the most frequent users.

  • Published: November 22, 2008 11:36 AM

  • Chronos
  • Considering that road wear follows a fourth power law with respect to weight, the vast majority of road wear is caused by the trucking industry. Almost every federal highway dollar is a direct subsidy of the trucking industry over rail and other shipping industries; the fact that individuals happen to use the same roads for their cars has such a small impact on the system as to be irrelevant.

    What does “fourth power” mean? Well, a single axle on a car has, say, 1,500 lbs / 680 kg of weight on it. A semi truck, OTOH, has 10,000 lbs / 4500 kg of weight per axle. The semi:car axle weight ratio is thus in the neighborhood of 6.67. 6.67 to the fourth power is 1,980. So a single semi axle does as much damage to the road as 1,980 car axles. A semi truck has four mass-bearing axles, whereas a passenger car has only two, so that’s 3,960 cars to equal the damage done by one truck.

    The end result is that the trucking industry would fall apart overnight if they were forced to pay for the highway repair costs that they’ve successfully externalized via lobbying.

  • Published: November 25, 2008 3:21 PM

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