On corporate personhood and limited liability

Published Sun, Jan 16 2011 8:32 PM
So it is time to clear up some of my thought about corporate personhood by putting them into writing. There seems the be a growing critique against corporate personhood and limited liability in libertarian circles some even claiming that it is incompatible with capitalism and libertarian ethics.

The state guaranteed limited liability corporation is incompatible capitalism and libertarian ethics, because it is protected by a coercive institution and it's regulatory framework has not been designed by the free markets. If we look at the historical origin of the European corporation the concept of a corporation itself also starts to become more dubious. Some of the first corporations in Europe where public entities like the office of the Pope and the municipal government of London and then there was the East India companies which where basically privateer charters with rights to trade monopolies and making war.

Given this background we must be very skeptical about corporate law since at least in it's early stages it seem to have been purely a state device to provide benefits to itself or selected interests. The question is how much of this remains today and how different our modern corporate law is from what the the free market would have produced.

Firstly limited liability without state protection is fully compatible with libertarian ethics as long as it does not extend to third parties. Creditors and trade partners can sign contracts about whatever they want as long as it only affect themselves, including limiting liability in case something goes wrong in their dealing. As for shared ownership it is an essential aspect in many things in a free market, if one hasn't written a contract between the owners it can be a very tricky thing and even lead to infinite disputes over property but if there is a contract there usually isn't much of a problem. So the company would be fine in this regard. Another organisation that might be more questionable is the trust or foundation that isn't owned by anyone or who's owner is long dead, but under the current tax-codes we would do well not to investigate this further.

In other regards then liability there should be no problem for an organisation to have the same rights as an individual. We base all rights in the right to own ourself and the company is just an extension of the property right of the owners that they choose to exercise collectively under a specific agreement. There have been some talk about right to privacy and so forth, but individuals does not really have such a right. Information is free and any private individual is free to spy on me as much as they want as long as they don't violate my property, it is up to myself to not tell people what I don't want them to know.
For "rights" such as privacy this is only relevant in the sense as a right against the state. For there to be any social order at all there are certain things that must illegal for the state to do to us that extends beyond what can be derived from property rights. That is because the state has granted itself certain monopolies and we need special protection against the possibilities for abuse that comes with that. Without these safeguard we degenerate into a situation of total and absolute government like Nazi Germany and Soviet Russia.
I see no problem in giving corporations the same protection against government abuse as private individuals so they should also have guarantees for freedom of speech and barriers against government surveillance and such otherwise these protections won't mean much for individuals. They can just go and extract the information on us from the companies we trade with instead.

When it comes to damages against third parties the corporate personhood gets tricker. But we need to consider that just because a physical person is liable for the damage doesn't mean he can actually pay for it, nor is it reasonable to demand that everyone be 100% insured for any damage they might potentially cause to there surroundings. The value of damage that hasn't happened yet must be offset by risk and also it can be argued that every property that is situated amongst other peoples property comes with some degree of accepted risk when you buy it.

In practice I do not think what liability there may be today in regards third parties have much practical meaning. There are rules concerning neglect or criminal behavior today where a physical person will become responsible rather then the corporate entity, and as far as restitution goes most corporations have a higher probability of being able to pay then physical persons anyhow. There are a few cases where limited liability against third parties (often with state granted insurance, like nuclear power or excavation of natural resources) might cause the corporation to become more reckless then it otherwise would. For such activities the government courts protect the corporation from people demanding compensation for the abnormal risk there property might be subjected to by these activities and it might be possible to get away with less expensive safety precautions then it would on a free market.

Still I do not think this is enough to have much of an impact on the economy. I think the larger economic issue with corporate personhood would be in the credit market.

Someone trying to get a loan against a limited liability should of course expect to pay a higher interest rate then someone who is willing to offer full liability for the loan. Today we have central banking and the fractional reserve banking system manipulating the supply of credit and keeping it artificially high. In a free system without this manipulation of credit a limited liability corporation would be worse of in the credit market and it might not be such an attractive form of incorporation if you are looking to borrow capital.

I think this would have an impact for how companies are organised in a free market. We might have some companies who are accepted as limited by all there trade partners and never need to do trade with anyone who wouldn't accept this but I think there would be fewer limited companies. For companies who only need direct investment capital and who's activity will not cause massive damages to there partners if they go under could work very well as limited, while other companies might opt to gain capital by public bond offering then by going public with there ownership and maintain fully liable owners. If trade partners are concerned about getting damages when the limited company mess up they could put demands on liability, one way to solve this and still accept direct investments from owners that don't become fully liable would be for instance to have different owner classed where another entity such as an insurance company guarantees the limited liability for certain owner groups. In general I think we would get a better reflection of the costs involved with the risks of doing business with a limited company if the state protection for corporations where to be removed.

The market will come up with various solutions for contracts that can be made to allow easy investments into companies. Besides the government trying to stimulate investment by limited liability laws is a bit dubious when they stimulate consumption by causing inflation with the other hand.

Ramblings concluded, if some thoughts they are appreciated.