Stephan Kinsella has an interesting blog post quoting a short debate between him and Thomas Knapp.
I think Kinsella makes the incisive point that the whole limited liability discussion boils down to a theory of responsibility and thus causation. I can see both sides: a minor shareholder has minor control, if any, over the workings of the firm and so should not be liable if a driver mows down a few people but he is still technically employing the management, in his ownership capacity, and is so liable.
I think the way to resolve this problem is create a sphere sovereignty style (this is orignally a theological concept created by Dooyeweerd) concept of liability. Essentially every role in a company has a certain remit of authority and if exercised correctly then you could not be held liable for tortious actions because of a subordinates failure. So supposing the van driver mows down a few people whilst working if his manager has done that which he ought to within his role then he could not be held liable. If on the other hand complaints had been ignored and other less serious incidents have occured and not been dealt with then he could.
The obvious problem with this is deciding on to what extent each sphere should be described. Clearly a fully a priori account would be impossible but I think it could serve as tool for the judiciary and serve the creation of common law.
Thoughts?
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I was very much pro free market solution for liability, and still am so, but I think that Kinsella's argument (among others) avoids the point, as follows.
Privilege by definition is a limitation of liability. Sure, we can agree to limit liability in the market, but we cannot create blanket liability limitation, and without that the corporate model is of very limited utility.
I'd love to have a conversation with Kinsella about this one day.
liberty student:I was very much pro free market solution for liability, and still am so, but I think that Kinsella's argument (among others) avoids the point, as follows. Privilege by definition is a limitation of liability. Sure, we can agree to limit liability in the market, but we cannot create blanket liability limitation, and without that the corporate model is of very limited utility. I'd love to have a conversation with Kinsella about this one day.
To build on this, I think a business's owner(s) would be different from the shareholders in a free-market society. Shares are issued by businesses in order to raise financial capital. When a share is initially purchased, the shareholder now owns the shares while the owner(s) now own(s) the money that the shareholder used to purchase the shares. The expectation of the shareholder is that, in the future, he'll be able to sell the share for at least as much as he bought it for. "Fringe benefits" like voting rights are added to shares to make them more attractive to potential investors.
Responsibility for the actions of the business ultimately rests with the owner(s) of the business. Given the above, note that these are necessarily separate from the shareholders, despite any voting rights or other forms of control granted to the latter by the former.
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To answer the OP directly, I wonder whether a theory of implied insurance or implied suretyship might arise. By that, I mean an employee would be held directly liable for any harm he commits in the course of his job, but his employer would be liable for whatever liability costs the employee cannot cover himself. Of course, that leaves open the possibility of the employer being allowed to (try to) recover those costs from the (former) employee.
Brainpolice which spelled it out clearly for me- "it occured to me that limited liability suffers from some of the exact same problems that social contract theory does. In particular, the concept of the social contract is problematic because it implies that the terms of a contract can be enforced onto 3rd parties of people who never explicitly agreed to it. Corporate limited liability as a state legal construct functions in the exact same way as this, as the limited liability is uniformly applied to everyone within the society rather than being restricted to those who explicitly agreed to the contract."
I don't really want to comment or read anything here.I have near zero in common with many of you.I may return periodically when there's something you need to know.
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I agree with Kinsella and those that say it all boils down to responsibility for torts. I think 'Limited liability' as a body of state law is bad for the reason that it presupposes that in its absence, (in its repeal say..) suddenly minority shareholders would have 'unlimited liability' for the torts committed by individuals somehow related to the company regardless of the shareholders responsibility for the tort (or more precisely there being a flat assumption that holding a share guarantees that one is responsible for crimes committed by other human beings, whether they 'act independantly' or otherwise, by virtue of their being an 'associate' with the organisation in which you are a stakeholder.)
If you need an analogy to help, imagine there being a body of positive law passed in which was titled 'limited liability of the family union' under which family members are granted limited liability for the acts of their relatives. There is a big problem with this. The problem is that in the absence of such a law, if your brother commits a crime, pay up. your in the family.
One's 'liability' should be limited by ones involvement...ones degree of responsibility for the tort having occurred. indeed one struggles to find a better word for it and ends up having to say that ones 'liability' should be limited to ones liability.....:-p ya know what I mean.....
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nirgrahamUK:One's 'liability' should be limited by ones involvement...ones degree of responsibility for the tort having occurred. indeed one struggles to find a better word for it and ends up having to say that ones 'liability' should be limited to ones liability.....:-p ya know what I mean.....
This is the sticky bit though. Whether I am a minority shareholder or a majority shareholder, I am a shareholder and have a voice in the management of the firm. If that management guides the firm to create injury, loss or damage, I put them in position and gave them the means to do so.
Certainly there is a difference between accident and negligence, but that is not easy to prove.
But ultimately, we have to ask if it is so necessary to have large firms, that we must create some sort of moral hazard (the inevitable outcome) through limiting liability. A critique from leftists is that Austrians are pro-corporation, because Austrians tend to spend a lot of time lavishing praise on successful business people, and little time discussing the state forms and protections these people have adopted and utilized to get to the top. It's a sin of omission not commission, but people with an axe to grind will use that point to drive a wedge.
It would be great for AE if someone broke down liability. This area looks (to me) to be neglected in Austrian analysis of the entrepreneur.
The issue of limited liability has more to do with responsibility for managerial acts than the actual shareholder's responsibility. Supposing a perfectly individualistic judicial regime, then only individuals who act would be liable for their actions. So if for example a plant manager is found guilty of poisoning a river, he will be prosecuted for his act and not the company. However, this introduces moral hazard where the company can reward managers who violate laws where it is profitable for them to do so, and some managers will find the risk worthwhile since they do not have any assets to risk themselves anyway. This is why the corporation as a whole has to be made liable for damages. Beyond that, however, there is no reason to pursue shareholders any further. They are not in a position to decide anything as shareholders.
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Stranger:They are not in a position to decide anything as shareholders.
Sure they are. Typically shareholders choose a board, the board chooses officers.
That makes the shareholder at most an elector.
And electors decide things by election. Thus your claim is incorrect.
There are very few straws in your grasp. Electors elect people, not things or acts.
liberty student:This is the sticky bit though. Whether I am a minority shareholder or a majority shareholder, I am a shareholder and have a voice in the management of the firm. If that management guides the firm to create injury, loss or damage, I put them in position and gave them the means to do so.
First off, not all shareholders are created equal. If by "shareholder" you mean "someone who owns one or more shares of a company", then owning shares doesn't prima facie entitle you to any voice in the management of the company.
Second, I think an analogous situation can be drawn with the following. Let's say you let a friend borrow your truck so he can haul some things. However, what he wants to haul is the dead body of his former girlfriend. He had killed her in a jealous rage earlier and needed a way to dispose of her body. You don't know anything about this. Now while it can be said that you technically enabled your friend to dispose of the body, did you do so knowingly? Hardly. So why should you bear any liability for your friend's actions?
Other scenarios can be used, such as whether a gun manufacturer is liable for injuries or damages committed with a gun he manufactured. After all, by manufacturing the gun, he technically enabled those crimes to be later committed, didn't he?
Bah. I read half of Kinsella's blog post and got fed up of all the shoulds, woulds, coulds and oughts. Nobody can predict the market and nobody knows what people will want once they are faced with paying for it themselves.
Consumers will have to pay for the level of liability they want. They will pay that in insurance / security premiums. Security and insurance companies will decide whether meeting the demand of liability protection is worth their while.
I can feel/should/ought/could/believe/whatever that the butterfly flapping its wings on the other side of the planet is liable for my poor harvest that I predict will occur next year but the chances of me being able to pay to resolve that liability dispute in a truly free market are slim ---- however, I could, should, would or ought to pursue my esoteric claims if I had enough money, right???? Yes, this is sarcasm but I am serious in my analogy.
Charles Anthony:I can feel/should/ought/could/believe/whatever that the butterfly flapping its wings on the other side of the planet is liable for my poor harvest that I predict will occur next year but the chances of me being able to pay to resolve that liability dispute in a truly free market are slim ---- however, I could, should, would or ought to pursue my esoteric claims if I had enough money, right???? Yes, this is sarcasm but I am serious in my analogy.
This ^.
In a free market, the cost of proving "who knew/did what and when they knew/did that" will affect the propensity/incentives for tort and will be reflected in the cost of insurance against it.
Z.
Stranger:There are very few straws in your grasp. Electors elect people, not things or acts.
Non sequitur.
I enjoy watching you cover your butt. Honestly, it never gets old.
Stranger, "I declare X. I blogged about it!" LS "Uhm, X is wrong because reason, reason, reason" Stranger,, "X is obfuscate, obfuscate, obfuscate"
Stranger, "I declare X. I blogged about it!"
LS "Uhm, X is wrong because reason, reason, reason"
Stranger,, "X is obfuscate, obfuscate, obfuscate"
Autolykos:First off, not all shareholders are created equal. If by "shareholder" you mean "someone who owns one or more shares of a company", then owning shares doesn't prima facie entitle you to any voice in the management of the company.
But if your shares allow you to vote, then you do have a voice in the management of the company because you can elect directors who elect officers. It comes down to the operating agreement of any particular business. A fairly normal form is that the shareholders elect directors who elect officers. Shareholders can typically serve as directors and officers.
Autolykos:Second, I think an analogous situation can be drawn with the following. Let's say you let a friend borrow your truck so he can haul some things. However, what he wants to haul is the dead body of his former girlfriend. He had killed her in a jealous rage earlier and needed a way to dispose of her body. You don't know anything about this. Now while it can be said that you technically enabled your friend to dispose of the body, did you do so knowingly? Hardly. So why should you bear any liability for your friend's actions?
It would be helpful if people understood how corporations are formed, under what sort of structures etc.
Charles Anthony:Consumers will have to pay for the level of liability they want. They will pay that in insurance / security premiums. Security and insurance companies will decide whether meeting the demand of liability protection is worth their while.
Chaz, you hit the nail on the head.
liberty student:But if your shares allow you to vote, then you do have a voice in the management of the company because you can elect directors who elect officers. It comes down to the operating agreement of any particular business. A fairly normal form is that the shareholders elect directors who elect officers. Shareholders can typically serve as directors and officers.
Right, I understand all of that. My point was simply that owning shares does not necessarily lead to any other entitlements. This is true even if other entitlements are the norm.
Also, how much of the modern-day corporate form came about because corporations have historically enjoyed blanket liability limitations?
liberty student: Autolykos:Second, I think an analogous situation can be drawn with the following. Let's say you let a friend borrow your truck so he can haul some things. However, what he wants to haul is the dead body of his former girlfriend. He had killed her in a jealous rage earlier and needed a way to dispose of her body. You don't know anything about this. Now while it can be said that you technically enabled your friend to dispose of the body, did you do so knowingly? Hardly. So why should you bear any liability for your friend's actions? Non sequitur.
I'm sorry, but I'm at a loss to understand where the non-sequitur is in the above. My understanding is that the liability issue we're dealing with in this thread concerns a person's actions that involve another person's property. Am I mistaken here?
liberty student:It would be helpful if people understood how corporations are formed, under what sort of structures etc.
I think I do have an understanding of that.
Charles Anthony:Nobody can predict the market and nobody knows what people will want once they are faced with paying for it themselves.
You're right, of course. But as I've asked you before, does that mean no one should ever engage in speculation on the differences between a completely free market and what we live under today?
For example, it seems clear that blanket limitations of liability would not exist in a completely free market. The question is: what are the implications of that? Why not pursue those implications?
Autolykos:Right, I understand all of that. My point was simply that owning shares does not necessarily lead to any other entitlements. This is true even if other entitlements are the norm.
I am cooking dinner. You say, "you probably won't make chicken teriyaki because you're only the cook, not the menu planner" and I reply, "don't forget who buys the groceries around here."
Everything in a corporation flows from the shareholders on down. They are the absolute authority and have the power to delegate their authority. The directors and officers cannot take that power from them.
Autolykos:I'm sorry, but I'm at a loss to understand where the non-sequitur is in the above. My understanding is that the liability issue we're dealing with in this thread concerns a person's actions that involve another person's property. Am I mistaken here?
Your example had nothing to do with formal legal contracts. Corporations are not based on ad lib relationships.
>>Everything in a corporation flows from the shareholders on down. They are the absolute authority and have the power to delegate their authority. The >>directors and officers cannot take that power from them
They have the power to commit a tort without the shareholders permission...if by 'power' you mean 'ability' rather than 'right'.
nirgrahamUK:They have the power to commit a tort without the shareholders permission.
Did I claim otherwise?
nirgrahamUK:.if by 'power' you mean 'ability' rather than 'right'.
of course.
I am not arguing against you... my point is that shareholders hardly require a 'positivistic' legal statute imposing a 'blanket' liability immunity in their capacity as mere shareholders, which does not extend to cover them in their other respects.... it is as redundant as imposing a 'blanket' liability immunity on relatives within families. its just silly. First of all, for epistemological reasons we have assumption of innocence, secondly we have (or could have!) court systems which determine peoples liabilities based on their responsibilities for harms caused, so on.
If you are a mere shareholder, and you have never performed any action in your capacity as a shareholder to connect you with a tort caused by some employee or employees aside from the mere possession of some shares, you are by default not liable, since owning shares does not of itself cause harms or cause others to do harms for you. if a tort has occurred and some shareholder has a degree of responsibility (and this is certainly possible), this is always because the shareholder did something in addition to the mere ownership of shares which colours him responsible to some degree.
Either that or I have completely lost the plot. (always a possibility)
liberty student:I am cooking dinner. You say, "you probably won't make chicken teriyaki because you're only the cook, not the menu planner" and I reply, "don't forget who buys the groceries around here."
By the same token, if you burn the house down in the process of cooking dinner, does it really matter who buys the groceries?
liberty student:Everything in a corporation flows from the shareholders on down. They are the absolute authority and have the power to delegate their authority. The directors and officers cannot take that power from them.
How can the shareholders have authority above that of the corporation's owners? The shareholders don't own any of the corporation's assets, they've simply invested in the corporation in exchange for shares, which may or may not give them additional privileges.
liberty student:Your example had nothing to do with formal legal contracts. Corporations are not based on ad lib relationships.
I understand that they aren't. But how can a formal legal contract be binding on outside parties?
For example, let's say a person is hired as CEO of an industrial corporation, with a contract stipulating that he won't be held liable for more than $10,000 in damages. He then directs lower-level employees to dump industrial waste into a residential water supply. This pollution ends up sickening thousands of people. However, no one above the CEO knew that this was done. Why should the CEO be liable for only $10,000 in the damages he presided over? The people who were sickened weren't privy to the contract.
nirgrahamUK:I am not arguing against you... my point is that shareholders hardly require a 'positivistic' legal statute imposing a 'blanket' liability immunity in their capacity as mere shareholders, which does not extend to cover them in their other respects.... it is as redundant as imposing a 'blanket' liability immunity on relatives within families. its just silly. First of all, for epistemological reasons we have assumption of innocence, secondly we have (or could have!) court systems which determine peoples liabilities based on their responsibilities for harms caused, so on. If you are a mere shareholder, and you have never performed any action in your capacity as a shareholder to connect you with a tort caused by some employee or employees aside from the mere possession of some shares, you are by default not liable, since owning shares does not of itself cause harms or cause others to do harms for you. if a tort has occurred and some shareholder has a degree of responsibility (and this is certainly possible), this is always because the shareholder did something in addition to the mere ownership of shares which colours him responsible to some degree. Either that or I have completely lost the plot. (always a possibility)
Thanks for this, NirgrahamUK. I don't think you've lost the plot at all. Rather, you've made the same arguments I've been making, just more eloquently.
Autolykos, I think under Rothbardian Title Transfer theory of contracts, the limitation of liability would not be enforceable , it would be a mere promise, a test of the honesty of the board of directors who's promise to the CEO is put to the test, and whose customers are looking to see the Company make good on the bad PR of having employed a 'bad' CEO. So the board of directors could say, its a mere promise, and let the CEO hold the bag, or they can act to keep their promise and pay the excess above 10,000£ on the CEO's behalf.
Liberty Student,
Are corporations comparable to representative democracy in their process to select a managerial board?
If so, would this comparison make sense; voters have liability, no matter who they voted for, for actions of the president or congress? I don't feel voters are liable for the war in Iraq, as an example.
I think I confused myself thinking about the liability upon shareholders of managerial inaction...
You can't hurry up good times by waiting for them.
Autolykos: Charles Anthony:Nobody can predict the market and nobody knows what people will want once they are faced with paying for it themselves. You're right, of course. But as I've asked you before, does that mean no one should ever engage in speculation on the differences between a completely free market and what we live under today?
Autolykos:For example, it seems clear that blanket limitations of liability would not exist in a completely free market. The question is: what are the implications of that? Why not pursue those implications?
nirgrahamUK:Either that or I have completely lost the plot. (always a possibility)
Not completely. I think we're talking past each other. You're not addressing my point, and I have no interest in addressing yours.
Autolykos:By the same token, if you burn the house down in the process of cooking dinner, does it really matter who buys the groceries?
Irrelevant to the discussion.
Autolykos:How can the shareholders have authority above that of the corporation's owners?
The shareholders are the owners. I thought you said you understood how corporations are formed.
Autolykos:I understand that they aren't. But how can a formal legal contract be binding on outside parties?
I never claimed it would be.
I'm starting to lose interest in debating with you again. I think we'd get much further along if you spent more time thinking about what I have written, then asking question after question asking me to explain myself for you. I don't have any interest in that.
mahall:Are corporations comparable to representative democracy in their process to select a managerial board?
They can be.
When Rothbard discussed it in The Ethics of Liberty, he noted that by engaging in contract with a LLC, one is implicitly recognizing their limited liability, but this cannot cover third parties not a part of the contract. I think a libertarian order would require limited liability insurance for those situations, if the stockholders desired LL, and then the industry would benefit from the regulation of insurance companies. It would also be a factor that tended to decrease the size of corporations too.
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gocrew:but this cannot cover third parties not a part of the contract.
What I am getting at here is that insurance companies and companies can organize any convoluted scheme they want to justify why group A in the corporation SHOULD be held liable and group B (say, employees working on the assembly line) SHOULD NOT be held liable. However, that all means nothing if third parties believe that the assembly workers are liable. The attempted libertarian limited liability model in question will have to adapt to the market whether they like it or not.
That adaptation might POSSIBLY involve hiring more security guards to protect laborers at work and while they travel and maybe while they retire in their homes. That will affect the costs of insurance. If those costs are too high, the insurance company may refuse to cover that limited liability and then the model is out the window.
Limited liability models are meaningless if the public ( or anybody for that matter ) challenges them with the threat of violence.
liberty student: Autolykos:By the same token, if you burn the house down in the process of cooking dinner, does it really matter who buys the groceries? Irrelevant to the discussion.
How is it irrelevant, exactly? You seemed to imply that, in your dinner example, the person buying the groceries is entirely responsible for the cook's actions in making dinner. Did I misunderstand? If so, please help me to understand -- I'm not a mind-reader.
liberty student:The shareholders are the owners. I thought you said you understood how corporations are formed.
Who owns the corporation before the IPA? That is to say, who owns the assets?
liberty student: Autolykos:I understand that they aren't. But how can a formal legal contract be binding on outside parties? I never claimed it would be.
It seemed otherwise. It seemed like you were claiming a contractual liability limitation would hold in the case of damage to third parties. That's why I came up with that pollution example. I can't help but notice you didn't address this exmaple at all. Why is that?
Now we get into the blatantly personal stuff. I suppose I could respond over in Member Issues but since you brought it up here, I feel obliged to respond in kind.
liberty student:I'm starting to lose interest in debating with you again.
Oh dear. Am I supposed to feel bad from this? Or intimidated?
liberty student:I think we'd get much further along if you spent more time thinking about what I have written, then asking question after question asking me to explain myself for you.
Translation (as I see it): "Shut up and don't challenge what I write."
liberty student:I don't have any interest in that.
I don't care. I will continue to ask questions as I please. You're still free to evade them, of course.
Charles Anthony:In this particular topic, I say no one should speculate but frankly, I do not care what you want to do. If confused anarchists want to walk around with flower pots on their head and discuss how a libertarian society would welcome their new fashion sense, they can have all the fun they want in their discussion. What bothers me is that I can understand the esoteric models but the layman reads this crap and laughs at us. In my opinion, the proper way to approach this nonsense is to simply say: "Governments should not be assigning special privileges. I do not care what happens to the corporations nor to their shareholders. They do not deserve MY MONEY to arbitrate their greedy disputes. Let them fight it out on the streets for all I care. Period." That way, the average socialist is on our side, the average neo-confuso-con is put in his place and the core values of anarchism are made clear.
This.
I guess people just can't resist speculating. Also, people hate uncertainty, so they want at least some comforting scenario to latch onto. Not only that, the debates that stay current are the ones that go on and on forever. The ones that are over so quickly because the answer is easy, no one sees.
Anyway, these crystal-ball scenarios are a weak reed to rely on for trying to win people over to a stateless way of seeing things. More importantly, as you mention, they are inherently divisive. This is one reason libertarianism is so needlessly splintered.
Why anarchy fails
AJ:I guess people just can't resist speculating. Also, people hate uncertainty, so they want at least some comforting scenario to latch onto. Not only that, the debates that stay current are the ones that go on and on forever. The ones that are over so quickly because the answer is easy, no one sees.
Yes, people do hate uncertainty. Especially statists. That's why they have all those questions that start with "But what about..."
AJ:Anyway, these crystal-ball scenarios are a weak reed to rely on for trying to win people over to a stateless way of seeing things. More importantly, as you mention, they are inherently divisive. This is one reason libertarianism is so needlessly splintered.
In my experience (which may differ from yours and Charles Anthony's), statists are wholly unconvinced by simply hand-waving and saying that "the market will take care of it somehow". To them, that kind of thing simply shows faith in the market vs. faith in something else. And faith can't be debated.
I think that why many libertarians believe "the market will take care of it" is because they have seen how this can and does happen, through theory/reasoning and actual examples in history and in the present. The conjectures about the future are fine as long as they are kept in the context of enlightened conjecture. Whenever they are presented outside that context, the argument immediately takes on needless weakness, rigidity, and divisiveness.
I mean, who's going to get offended or object about crystall ball predictions? If they regarded them simply as predictions they wouldn't react in the way they do, calling themselves left libertarians and such. The argument could then be limited to a rational discussion of likely outcomes in the absence of central authority.
AJ:I think that why many libertarians believe "the market will take care of it" is because they have seen how this can and does happen, through theory/reasoning and actual examples in history and in the present. The conjectures about the future are fine as long as they are kept in the context of enlightened conjecture. Whenever they are presented outside that context, the argument immediately takes on needless weakness, rigidity, and divisiveness. I mean, who's going to get offended or object about crystall ball predictions? If they regarded them simply as predictions they wouldn't react in the way they do, calling themselves left libertarians and such. The argument could then be limited to a rational discussion of likely outcomes in the absence of central authority.
Thanks for writing this. I agree with it and consider myself to engage in the kind of "enlightened conjectures" you refer to. However, I think discussions like these can also be treated juristically, if that makes sense. When treated that way, the idea isn't to make predictions about how things will work in the future. Rather, the idea is to determine which legal frameworks are consistent with libertarian principles.
On a related note, I think one of the biggest "schisms" in the libertarian movement today centers around this question: which came first, the law or the market?