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Rothbard on Corporations and Limited Liability for Tort

As I’ve noted elsewhere (see posts appended below), the left-libertarian (and other) critics of corporate limited liability are off the mark. As far as limited liability for contractual obligations and debts, this is a contractual matter. As for limited liability (of shareholders) for torts (committed by employees of the corporation), there is simply no reason for the shareholder to be vicariously liable for acts committed by the employees merely by virtue of owning stock in the company. As Hessen argues:

The proper principle of liability should be that whoever controls a business, regardless of its legal form, should be personally liable for the torts of agents and employees. Thus, in partnerships, vicarious liability would fall upon the general partners only, while in corporations, the officers would be liable.

It should be no surprise that Rothbard was good on this issue as well. In Making Economic Sense, ch. 19, he writes:

None of this means that tort law itself is in no need of reform. The problem is not really quantitative but qualitative: who should be liable for what damages? In particular, we must put an end to the theory of”vicarious liability,” i.e., that people or groups are liable, not because their actions incurred damages, but simply because they happened to be nearby and are conveniently wealthy, i.e., in the apt if inelegant legal phrase, they happily possess “deep pockets.”

Thus, if we bought a product from a retailer and the product is defective, it is the retailer that should be liable and not the manufacturer, since we did not make a contract with the manufacturer (unless he placed an explicit warranty upon the product). It is the retailer’s business to sue the wholesaler, the latter the manufacturer, etc., provided the latter really did break his contract by providing a defective product.

Similarly, if a corporate manager committed a wrong and damaged the person or property of others, there is no reason but “deep pockets” to make the stockholders pay, provided that the latter were innocent and did not order the manager to engage in these tortious actions.

To the extent, then, that cries about an insurance crisis reflect an increased propensity by juries to sock it to “soul-less corporations,” i.e., to the stockholders, then the remedy is to take that right away from them by changing tort law to make liable only those actually committing wrongful acts.

Let liability, in short, be full and complete; but let it rest only upon those at fault, i.e., those actually damaging the persons and property of others.

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.

{ 17 comments… add one }
  • DJF February 9, 2010, 6:30 pm

    “””but simply because they happened to be nearby and are conveniently wealthy, i.e., in the apt if inelegant legal phrase, they happily possess “deep pockets.””””

    But its not because they are “nearby and are conveniently wealthy”, its because they are the collective owners of the property and ultimately have full authority over that property including the right to buy, sell, give away, hire the board of directors, management and workers, have the property used for whatever purpose they want, etc etc. So its not strangers pulled off the street because they are wealthy but individuals who joined a collective and bought stock which represents ownership in that collective

    The fact that they are lazy, ignorant, or only interested in counting their profits does not take away the fact that the stockowners are the collective owners of the property. By their declaration of ownership they demand the right of total control over that property. Yet when there are costs involving this property they suddenly want to pass responsibility onto others. They want the right to maximize their profits using this property but minimize their loses and transfer as much of these loses onto others.

    If someone want to say for example that they only own $1,000 of the stock and therefore their losses should be capped at $1,000 then lets even things up and say that their profits can only be $1,000? But no, they want to have unlimited profit from that $1,000 stock but only have liability of $1,000.

    • Drepa Rugl April 21, 2014, 2:47 pm

      What costs are they passing onto others? The person allowing costs being passed onto others is the individual employee of the corporation that committed the tort.

      Those that should be held liable for the tort are the ones that committed the tort and at the most commissioned the tort to be committed. The officers of the corp. that commissioned the individual employee to act should be held liable to a small degree, but that is weak at best.

      The shareholders will pay all that they have put into the corp. and earned from that money if the actions of the tortfeasor cause bad enough damage to the reputation of the corp.

      The unlimited profit from that $1,000 stock would allow then unlimited loss to the damaged reputation of their holdings. This will motivate them to make sure good officers hire good employees to take care in their actions.

      On the other hand, why would their lack of action make them liable for something they simply did not do? I think you have some deep-pocket-envy.

      • illogic May 7, 2016, 3:43 pm

        In a free market, you should pay for what you get. Limited liability is currently a form of insurance for which the beneficiary does not pay.

        Just because you own a small portion of something doesn’t mean you have ZERO responsibility. Your responsibility is proportionate to your ownership. So if you own 1% of a corporation, you are owed 1% of profits, and are responsible for 1% of liabilities.

        This is not complicated. Owners should pay for their own limited liability protection, just like any insurance. Why should I pay for something you get?

  • Peter September 27, 2013, 10:07 pm

    So we should stop blaming the deep-pocketed state and focus on the activities of individual bureaucrats. Rothbard reconciles with the Man.

  • Dmitry Chernikov September 28, 2013, 9:14 pm

    But with public companies whose stock any person could buy or sell at any time on Scottrade or whatever, there is a separation of ownership and control. An economist might even worry about a “market failure” wherein shareholder-owners have no say in anything the company they’ve invested into is doing. So, if you decide to do away with limited liability, you will have destroyed the entire modern investment system. You’d better think extra hard before taking a step that radical. Just as owners do not control the officers, neither might the chief executives “control” middle managers. For example, Mises considers “a manager [to be] a junior partner of the entrepreneur, as it were, no matter what the contractual and financial terms of his employment are.” Every worker, no matter how lowly, exercises some decision-making power. A company hires a consultant to help it “solve a problem.” The consultant or contractor is clearly responsible for his own actions. But even a janitor, as an employee, decides by and for himself how best to use a broom. If the janitor in the course of performing his duties (vacuuming the floor, say) breaks a vase on loan to the company, how is it just to blame the CEO or shareholders, except indeed their “deep pockets”?

    • illogic May 7, 2016, 3:47 pm

      There is no separation of ownership and control. If you own the stock, you have a vote. It’s not complicated.

      Who is advocating getting rid of limited liability? It obviously serves a purpose, just like any insurance. All I ask is that YOU pay for what YOU get, and stop asking me to pay for you. Limited liability is free insurance for corporate owners. They should pay for their own insurance.

      • Stephan Kinsella May 7, 2016, 5:58 pm

        “Limited liability is free insurance for corporate owners.” No it’s not. Did you read and understand my article?

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