I was having a discussion with a liberal friend of mine the other day, and I was speaking about the efficiencies of the free market versus the state. I interchangeably used the terms companies, businesses and corporations. He felt that corporations were often very inefficient. But, he made it clear that he was talking about corporations and not simply just any business in a free market economy.
This started me thinking and I apologize if this topic has already been discussed to death on here before. I do not know very much about the legalities of a corporation, but it seems they function to protect the owners of a company from risk. Meaning if the company goes under, their personal assets are not at risk. This does not seem to be in line with a Mesian or Rothbardian vision of the free market. Once again, it appears that the state, through legislation, has created a moral hazard where people can take actions with severely reduced risk when compared to them operating in a purely free market.
Wolf:I do not know very much about the legalities of a corporation, but it seems they function to protect the owners of a company from risk. Meaning if the company goes under, their personal assets are not at risk. This does not seem to be in line with a Mesian or Rothbardian vision of the free market. Once again, it appears that the state, through legislation, has created a moral hazard where people can take actions with severely reduced risk when compared to them operating in a purely free market.
Rothbard's Defense of Contractual Limited Liability by Gary North
I don't know how mises.org looks on a bit of necromancy, but here goes...
Yes, corporations are 100% constructs of the state. This talk of limited liability is a bit of an unrelated distraction. What makes a corporation a corporation isn't limited liability (although limited liability IN ONE FORM is a knock-off effect of incorporation), but rather an artificial legal personality separate from the owners of the corporation. Common law courts established long before the Bubble Act that incorporation was not a permissible act unless done with a charter from statutory authorities. Business people responded by taking up all the aspects of incorporation they could (joint-stock ownership, limited liability, etc) and going from there. Each feature didn't work EXACTLY as it had in an incorporated form*, but they were used and accomplished, more or less, the ends they had accomplished under a corporate charter.
In a theoretical laissez faire society, there would be a general enabling law that allowed anyone to incorporate their organization for any reason, but corporations would be subject to a list of regulations governing their behavior with respect to other people (kind of like how they are today). This would force people to only incorporate when they had an extremely good reason to, because otherwise regulatory compliance costs would make their venture unprofitable.
*(for instance, since common law courts didn't usually recognize limited liability, limited liability was given to shareholders by having them be anonymous in their capacity as owner of a share -- they still received dividends and could vote at share-holder meetings, but they couldn't take anything to do with their share to court without revealing their identity and giving up limited liability)