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Corporations on the Free Market

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Austen Posted: Tue, Jan 15 2013 5:39 PM

Michael Shanklin posted this video today, due to a disagreement I had with him on his facebook page. He doesn't understand the point of corporate personhood. He also claims that corporations would never exist on a free market. What would stop entrepreneurs from pooling resources and dispersing liability through private law? I think corporations would still exist on the free market; the only difference being that they wouldn't be granted special privileges by government in the form of tax loopholes, subsidies, cost-prohibitive regulation, etc. What do you think?

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Mens Rea replied on Tue, Jan 15 2013 5:52 PM

Good question and something I've been wondering about myself. It seems to me that without the state there could be no way for corporation in a free market to limit their shareholders liability making a corporation a lot riskier than they are today. You mentioned that there wouldn't be anything stopping investors from pooling resources and dispersing liability through private law but how exactly would that work?

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First of all, a "tax loophole" is basically nothing more than a way to legally keep more of your own money.  The idea that being allowed to keep more of your money and not be thrown in a cage for it is somehow a "special privilege", kind of assumes that the violent expropriation of one's property is legitimate.  Trust me, it's not.

That being said, see here:

Corporations

Statism, Obsolescence, Waste, and the Modern Corporation

How Does Laissez-faire Capitalism Account Corporate Responsibility?

 

:EDIT:

Tex2002ans reminded me:

Production, Capital, Entrepreneurship

 

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Austen:
He also claims that corporations would never exist on a free market. What would stop entrepreneurs from pooling resources and dispersing liability through private law? I think corporations would still exist on the free market; the only difference being that they wouldn't be granted special privileges by government in the form of tax loopholes, subsidies, cost-prohibitive regulation, etc. What do you think?

Peter Klein has a lot to say on Corporations.  Here is his talk at Mises University 2011, "Production and the Firm":

https://mises.org/media/6522/Production-and-the-Firm

If I remember correctly, he also covered this when he answered some questions from the Austrian Economics subreddit:

http://bastiat.mises.org/2012/05/peter-klein-answers-questions-from-the-austrian_economics-reddit/

He even had an entire Mises Academy course on the topic, "Big Business and the Market: Friends or Foes?".  Perhaps if you contact Peter Klein, he may be able to point you to the lectures he gave:

http://academy.mises.org/courses/big-business/

My long term project to get every PDF into EPUB: Mises Books

EPUB requests/News: (Semi-)Official Mises.org EPUB Release Topic

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Bogart replied on Tue, Jan 15 2013 9:20 PM

A corporation or contractual agreement between partners would exist in a free market.  It would not exist as a legal mechanism to limit liability as there are no limits to liability in a free market.  There is nothing preventing a bunch of folks from grouping together and writing a contract that would limit liability to the value stipulated in the contract with customers, vendors or others willing to enter the agreement.    The critical word here is WILLING.  There may/will be others who refuse to enter into such an agreement.  So despite the group liability, there could be damage claims against the group and the individuals in the group as there is no mechanism in a free market that would protect the individuals of a group from having to personally absorb some/all of the liability for the group.  Now in the case where there is no contract then the members of the group would have to make claims among themselves after the claims of the injured are taken into account.

So why make the group if you as an individual have a chance to be included in these claims when you individually could write the same contract.  The simple answer is that you would not enter into any partnership where you would share liability unless regulated by some contract.

And the beauty of the free market is that consumers would be able to include the ability to make damage claims in the prices of the goods.

Now there are reasons to enter into a contract forming an entity like a corporation.  One is that some problems in business require large organizations to solve where there are large economies of scale to take advantage of.  Another is that people are wanting to consolidate finances as collateral. 

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