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Mutualist Blog: Free Market Anti-Capitalism

To dissolve, submerge, and cause to disappear the political or governmental system in the economic system by reducing, simplifying, decentralizing and suppressing, one after another, all the wheels of this great machine, which is called the Government or the State. --Proudhon, General Idea of the Revolution

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Monday, April 24, 2006

Corporate Personhood

In "The NRA Gets It Wrong," Sheldon Richman cited with favor Robert Hessen's argument, in In Defense of the Corporation, that all the legal privileges associated with the corporation can be achieved by free contract without any special grants or concessions from the state.

It is certainly true that a corporation per se is not a real person. No group is. But that does not stop us from conveniently referring to a group’s rights. This is acceptable as long as we remember that a group has only the rights that the individuals composing it have.

The big question is: are the corporation’s distinctive features derivable from the common law and contract, or do they depend on a grant of government privilege?...

The upshot is that, first, corporations are not creations of the state but networks of contracts among individuals, and, second, as a consequence they have the same rights as those individuals...

Not long afterward, in a post to the LeftLibertarian yahoogroup, he explained that he'd reconsidered his stance under the influence of a two-part article by Piet-Hein Van Eeghen in Journal of Libertarian Studies: "The Corporation at Issue" (that post, incidentally, resulted in several weeks worth of debate on the nature of corporate legal status).

A couple of stipulations here. First, I have not read the Hessen book. Second, I repeat my frequent disclaimer that as a layman, I am hopelessly lost in the maze of corporation law, and am in over my depth in counterfactual speculation as to the general effects of removing this or that feature of it. In following the fascinating debates on LeftLibertarian, I have generally agreed with the last opinion stated.

That being said, the argument in Van Eeghen's article is well worth reading. In Part I, "The Clash With Classical Liberal Values and the Negative Consequences for Capitalist Practice," he introduces the subject:

While it is common to list various typical corporate features, such as entity status, limited liability and perpetuity, there is really only one defining feature: entity status. Entity status means that certain legal rights and duties are held by the corporation as a separate, impersonal legal entity. In the case of the private business corporation, entity status implies that title to the firm’s assets is held by the corporation in its own right, separate from its shareholders. Illustrative of the fact that the corporate form of private enterprise deviates from traditional forms of private property, entity status renders the legal position of both corporate shareholders and managers (directors) awkward and ambiguous. As for corporate shareholders, they are commonly regarded as the owners of the corporation, but they are owners only in a limited sense. Shareholders do not have title to the assets of the corporate firm, but merely possess the right to appoint management and to receive dividends as and when these are declared; title to the firm’s assets reverts back to shareholders only when its corporate status is terminated. The lack of ownership rights over assets is illustrated by the fact that, in contrast to partners in an unincorporated partnership, corporate shareholders cannot lay claim to their share of the assets of the corporate firm nor do they have the right to force their co-partners to buy them out. Corporate shareholders can liquidate their investment only by selling their shares to third parties. In short, the ambiguity in the legal position of shareholders lies in the fact that, while certain traditional ownership rights rest with them (profit accrual and power to appoint agents to manage the firm for them), other traditional ownership rights are exercised by the corporation as a legal entity separate from them (title to the firm’s assets).

As for corporate management, their legal position is equally ambiguous. Managers are appointed by directors who are the representatives of shareholders. Ultimately, management is thus the agent for shareholders, managing the corporation as their representative. This, however, is only part of the picture. While management is the agent for shareholders in the sense of being ultimately appointed by and accountable to them, it is also the agent for the corporation itself. After all, in order to manage the corporation’s assets, management must legally represent the corporation as the titleholder to these assets. And because the corporation is an impersonal legal entity, agency for the corporation lends a significant degree of autonomy to the position of management, which is precisely why it has proved so difficult to make shareholder control over management more effective, despite the many legislative measures aimed at enhancing management accountability to shareholders. The significant degree of autonomy inherent in the legal position of corporate management was, of course, the main theme of Berle and Means’s (1932) seminal work on the corporation. To sum up, the position of management is ambiguous because management acts as agent for two principals, the shareholders and the corporation.

Other typical features of the corporation like limited liability and perpetuity are not independent, original attributes, but are derived from its entity status.

Shareholders possess limited liability because they do not own the corporation’s assets and are, consequently, also not liable for claims against these assets. Responsibility for corporate debt rests with the corporation in its own right rather than with them....

The corporate feature of perpetuity can also be traced back to the corporation’s entity status. It is because assets are owned by the corporation in its own right rather than by shareholders that the death or departure of shareholders does not affect its continued existence. While unincorporated partnerships need to be legally reconstituted each time partners leave, die, or are added, corporations continue irrespective of who holds their shares. The corporation’s entity status thus gives it a life independent of the life of its shareholders, which is the sense in which it is commonly said to possess perpetuity or immortality.

Above all, Van Eeghen objects to the corporate form as illiberal because entity status gives the corporation statelike features:

Originally only state institutions (central, regional, and local government) possessed corporate status, which seems entirely natural and appropriate. If we wish to escape Louis XIV’s infamous dictum “l’état c’est moi” (“I am the state”), which is the starkest, most chilling expression of state absolutism from which even ardent monarchists at the time recoiled, the state should indeed be given a legal entity separate from its officials. Only if such a separation exists can state power be vested in the office rather than the person; and only when state power is vested in the office can it be circumscribed by law. All this is the ABC of liberty and the rule of law. But if it is essential to the preservation of liberty and the rule of law that the state has a natural right to corporate status (entity status), it should equally be essential to the preservation of liberty and the rule of law that private individuals, when pursuing their own interests, are denied such a right and act in their personal capacity, which obviously does not exclude the possibility of private individuals acting as agents for each other....

Free incorporation for private business is objectionable from a liberal point of view because it grants a distinctive feature of the public sector, namely entity status, to private concerns without the accompanying restraints of democratic and legal control. As such, the private corporation constitutes an illegitimate mixing of the legitimate domains of the private and public sectors. If it is agreed that entity status is indeed a typical attribute of the state, then anarchocapitalists who advocate a stateless society have even more reason to oppose private firms taking on state-like attributes such as happens when they acquire corporate status.

Another objection is that the corporate form

contravenes the basic liberal (and common law) principle of personal responsibility..... Andrew Fraser... remarks in this vein: “Corporate law has been designed to facilitate a legalized flight from responsibility by those who nominally own the corporate system.”

Corporate shareholdership is a licentious and irresponsible form of ownership because it is granted privileges of ownership (accrual of profits and the appointment of agent-managers) without carrying the obligations of ownership (payment for losses). If shareholders receive the full benefit of enterprise when things go well, why should they not also carry the full cost of enterprise when things turn awry?8 Similarly, corporate management is licentious because it enjoys the privileges of ownership (control over assets by virtue of being the agent for the corporation) without having to face the burdens of ownership (payment for acquisition or loss bearing) and without being accountable to natural persons who do carry the full extent of these burdens, as shareholders don’t do either. As already mentioned, insofar as management is accountable to shareholders, such accountability is difficult to make effective especially when shareholdership has become highly diluted.

It's also worth noting that the immortality that goes with corporate entity status was, in the past associated with illiberal concentrations of power. For example, the Church (whose precise legal status as a quasi-public agency varied from country to country) was able to accumulate property from one generation to the next without ever lacking an heir, which meant that the process of accumulation was never reversed. The mass of property accumulated in its "dead hand" ratcheted steadily upward over the generations, and became the source of ever-greater political influence. The statutes of mortmain ("dead hand") were specifically designed to counteract this process. In modern society, the immortal corporation becomes a comparable concentration of wealth and political influence.

In Part II, "A Critique of Robert Hesson's In Defense of the Corporation and Proposed Conditions for Private Incorporation," Van Eeghen addresses Hessen's denial that the corporation "obtains legal status as owner of the firm’s assets separate from its shareholders." In contrast to the concession theory, which "regards incorporation as a government concession," Hessen advocates

the inherence theory. According to this theory, the corporation has come into being as the product of contracting between private individuals for which no state involvement (active or passive) is needed beyond the enforcing of contracts in general. In consequence, the corporation is simply the product of the freedom of association, and any criticism of the corporate form is regarded as an attack on that freedom....

First, Van Eeghen challenges Hessen's argument that concession theory assumes a background of monarchical absolutism, in which assorted rights of property and contract are denied without a specific grant of privilege.

It is indeed an instance of monarchic absolutism when the king seizes all the land, prohibits private citizens from trading internationally unless they have his express permission, or appropriates the right to grant incorporation to local government at his discretion. Private agents should already have the right to own land or trade internationally, for which they should, therefore, not be obliged to seek the king’s favor. And local government should already have the right to corporate status, which is therefore not the king’s business to grant or withhold. On the other hand, though, if we accept that private agents do not have a natural right to assign the ownership of their assets to impersonal, state-like entities, it is not at all evidence of arbitrary state absolutism when the state grants incorporation to private agents only as a privilege and only under certain conditions, provided the state is democratically elected and the relevant conditions for incorporation do not otherwise clash with liberal principles—to be discussed below. Hence to argue that the concession theory is rooted in state absolutism is to beg the question whether private parties have a natural right to free incorporation or not; state absolutism can be shown to exist only if private agents do have such a natural right, which is exactly the point at issue here.

In response to Hessen's denial of entity status--that is, his argument that the legal rights of the corporation are only a contractual amalgamation of the individual rights of the shareholders--Van Eeghen writes

As far as entity status is concerned, Hessen starts out by giving it a subtly altered meaning. Entity status no longer refers to the fact that the corporation is a legal entity separate from shareholders, but merely to the fact that shareholders act as a unified collective in a court of law... The implicit suggestion is that the corporation is the undifferentiated collective of shareholders rather than a legal entity separate from shareholders. It is alleged that this view of entity status, which seems to confuse the joint-stock principle with corporate status, neither implies any fundamental difference from unincorporated business forms, nor does it amount to the privileged treatment of corporate shareholders vis-à-vis the outside world since the advantage of suing as a unity is neutralized by the disadvantage of being sued as a unity....

Hessen’s assertions in this regard seem contrived. First, the fact that shareholders have no legal title to the assets of the corporation, even when they seek to exercise such rights collectively (provided the corporation is not thereby broken up), clearly suggests that the corporation is a legal entity separate from the collective of shareholders and that title to these assets rests with the former. Second, if entity status refers to the collective of shareholders and it is the product of private contracting, there should be private contracts between individual shareholders in existence which stipulate their collective ownership in respect of the firm’s assets. But these contracts are simply not there....

Elsewhere Hessen criticizes the idea that the corporation is a legal entity separate from shareholders on the grounds that it introduces metaphors or fictitious entities into the discussion... But a legal entity is most certainly not fictitious or metaphorical by virtue of not referring to a natural person or a group of natural persons. The state (e.g., the Republic of South Africa, the United States of America) is also not fictitious even though it most certainly constitutes a legal entity separate from its citizens as natural persons.

If it is agreed that the corporation is a legal entity separate from shareholders, then Hessen’s claim that it can be the product of private contracting is obviously severely weakened if not dismissed. It is clear that private contracting can achieve only joint ownership of the contractors’ assets (a partnership); it cannot establish a legal entity separate from the natural persons of the contractors themselves to which they assign their assets. Not surprisingly, Hessen does not offer any meaningful explanation of how this can happen, beyond the naïve suggestion that private people can create a corporation simply by writing their own incorporation contract and lodging it with the relevant state authorities.... It is not remarkable that state involvement seems absent here, because the legislation that authorizes free incorporation is already on the statute books. The point is that free private incorporation does require special legislation, as history in fact has shown, because to allow private people to freely create impersonal legal entities for the furtherance of their own personal interests is in clear violation of common law tradition, not to mention basic liberal principles.

Van Eeghen also responds to Hessen's argument that the corporation and the partnership differ in degree rather than in kind, and his comparison of the corporate shareholder to a non-managing partner:

But there does seem to be a fundamental difference between partnerships and corporations. Whereas in the case of modified partnerships the rights and responsibilities of ownership are rearranged between nonmanaging and managing partners, these rights and responsibilities are partially cancelled for all corporate shareholders. There are no longer any managing shareholders in a corporation; instead all corporate shareholders are silent partners. From a liberal point of view, such modified partnerships are perfectly in order (e.g., the limited partnership or the Italian commenda), provided that some partners carry the full rights and responsibilities of ownership and that accountability towards third parties is thus not compromised.

40 Comments:

Blogger Sheldon Richman said...

Timing is everything, isn't it? Had I seen van Eeghen's articles earlier, I would have written the NRA article differently.

April 24, 2006 4:37 PM  
Anonymous Lady Aster said...

What I want to know is how Objectivistic authors like Hessen can so freely defend the (state-granted) collective identity of corporations yet froth at the mouth at any hint of collective idenity or action in class, race, or gender politics. I have been called a collectivist and a tribalist for describing my experience and perspective of life as that of a woman, a queer girl, or a sex worker. Yet I've never asked the state to back up my idenity or give me anything but equal rights, and I'd never dream of supporting the tie-choked conformity of corporate culture.

Objectivists claim to be against collectivism, but it seems Rand's endorsement of the work ethic overwhelmed the spirit of individualism in her followers. Perhaps this should teach us something about the work ethic. And human psychology.

April 24, 2006 4:39 PM  
Anonymous Anonymous said...

Mad that corporations will still exist in a free society, huh Kevin?

April 24, 2006 5:59 PM  
Blogger iceberg said...

Kevin,

I don't know if you saw this before, but there is a blog post by Stephan Kinsella over these very articles over at Mises.org: http://blog.mises.org/archives/004269.asp

Just to briefly quote:
I found most of van Eeghen's arguments to be beside the point, at least for what to me is the basic question, which is: does respecting corporate status violate anyone's rights?

Van Eeghen implies it does, because of limited liability. It seems to me that the corporation basically says shareholders are not liable for contractual obligations of the corporation. Obviously this could easily be recreated solely using private contracts. The person or company who does a deal with ABC Corp. is in effect agreeing not to pursue the assets of the shareholders if the company owes him money. So whose rights are violated?


I think I agree with S.N. Kinsella-- regardless of how corporations were formerly brought into being, the lack of the state will not preempt their existence.

I'll leave it up to you to argue whether free individuals will choose such arrangements, as you seemingly argued against in the last JLS, Pg 105:

The answer, of course, is the latter. With Benjamin Tucker, I say that, if the worker can manage to accumulate such a stockpile of goods through his own efforts, unaided by state-enforced monopolies; and if he can find a borrower willing to deal with him on such terms—in that case, more power to him! But in the absence of a usurious monopoly premium on credit brought about by the state’s market entry barriers in banking, with the availability of cheaper credit alternatives through mutual banks, and with far less steep time preferences in a society with wider distribution of property ownership, I think he’ll have a much harder time finding a taker for such a deal than do present-day lenders.

April 24, 2006 9:44 PM  
Blogger colorless green ideas said...

could corporations exist without state priviledge? i guess that's a midly interesting question, but i think the more interesting question is - has anything like this every actually happened, or been attempted?

it wasn't always easy to get a corporate charter, in fact, originally they were granted for very specific projects. they were seen by business people and the state as efficient tool for economic growth so they gradually became more prominent.

but in that time that corporate charters were scare, and they were seen as a beneficial economic tool, where are the examples of people setting up corporate entities voluntarily through contractual agreements? seriously. it was a highly desirable, efficient way to do business, and charters were rarely given through te state. am i to believe that this great economic tool that could have been created voluntarily was not?

somehow i doubt it. i think it is a fantasy that a corporate entity could be created entirely voluntarily, but even if it could it is even more doubtful that it woudld be able to run efficiently.

April 24, 2006 10:41 PM  
Blogger Sheldon Richman said...

Iceberg, that Kinsella quote deals with only the easier problem, limited liability with creditors. What about torts, where the harmed person is not a party to a contract with the corporation? Since the state declares the corporation to be a "person" separate from the natural persons who are the shareholders, a harmed party can only go after the corporations's assets, even if liability is reasonably attributed to a particular shareholder. There is something troubling about an artificial person, legally separate from the shareholders, being able to hold title to assets. I don't see how this can be created purely through private contract. The state seems necessary.

April 25, 2006 2:21 AM  
Blogger iceberg said...

Sheldon,

You asked:
"What about torts, where the harmed person is not a party to a contract with the corporation?"

Kinsella addressed that point too in the following paragraph:

As for tort liability--well, I am not aware of corporate law limiting the liability of any person, shareholder or otherwise, for torts he commits. In libertarian law, if you have a complex organization or business, you need to show some given person is responsible for the tort committed by someone else if you want to hold them responsible. It's a causation question (Pat Tinsley and I go into the issue of causation and responsibility in Causation and Aggression).

If the FedEx truckdriver negligently runs over you, is the shareholder responsible? Well, why would he be responsible in the first place? Because he gave a bit of money to the company? But so do customers! And banks. And suppliers. (And actually, most shareholders never gave money to the company--they bought the shares from a previous shareholder.) Because they control the company's actions? Well they had no more influence over the concrete decisions of the truck driver, or his direct supervisor, than an influential creditor or customer. The point is if you can make a case that a given person other than the one directly responsible (the truck driver) is causally, jointly liable, fine--then under libertarian principles this person is also liable. In such a case I am not aware that corporate law grants them immunity from suit; and if and to the extent it does, then it should not (I don't think it does but would need to check this).

If there is a problem with the law in this regard, it is with the law's failure to assign liability according to sound principles of causation. If some critic of the corporation thinks some managers, and perhaps some directors, in a given incident are causally responsible for the tort, then fine, say so, and make the case. I would not oppose this in general. I believe it's very difficult in most cases to connect the actions of the shareholder to damage caused by an employee of a company in which the shareholder holds stock. But if it could be shown in a particular case, then fine, he is liable. What has this to do with corporate law, which as far as I know primarily is aimed at limiting the liability of shareholders for contractual debts of the company--which is perfectly libertarian.

April 25, 2006 4:05 AM  
Blogger Sheldon Richman said...

This leaves unaddressed the question of whether one is at all responsible for what happens with one's property. It's not a matter of merely giving money to the company. Unlike creditors, shareholders supposedly own the corporation, but if their "property" injures someone, they are out of the liability picture altogether. This is a strange notion of property. The real owner is a fictitious person, while the real persons are not real owners. If one has no liability, one has no incentive to pay attention to how "one's property" is being used. This lack of incentive and hence authority is then used to justify limited liability -- a circular argument.

April 25, 2006 5:57 AM  
Blogger Nick Manley said...

Lady Aster,
Excellent points on objectivist thought.

Rand's attraction to me has always been about her promotion of individuals pursuing their passions and potential.

Don't see any contradiction between that and noting your gender,sexual orientation,etc as part of your individual idenity

As for the work ethic,different folks define what work is in different ways.

For me,chess instruction/playing is a job but the environment is hardley a traditional one ( :

Just my two cents.

April 25, 2006 7:01 AM  
Blogger iceberg said...

Sheldon,

Why do you suppose that the owner of property must always be held responsible "for what happens with one's property."?

If I swing your baseball bat (stolen or borrowed) at Kevin's mailbox, why should the responsibilty to remunerate Mr. Carson the loss of one mailbox lie with you?

April 25, 2006 7:21 AM  
Blogger quasibill said...

Iceberg beat me to it, but I agree that Kinsella's article is hard to refute, as far as it goes.

The only valid criticism I can come up with on it is that reality is a little more complicated when dealing with juries/factfinders and apportioning liability in a corporate setting.

The reality is that management DOES get directives from the shareholders, in the form of a demand for greater dividends/share prices. Management does respond to this directive, sometimes at the expense of innocent third parties. And management does present this situation as a defense - "I would've been fired had I paid for a proper truck driver for that route!" and often juries/factfinders will buy that defense - implicitly finding that it was the shareholder's demands that caused the negligence.

Now, I don't think there's an easy way to fix that, other than ending the obfuscation caused by calling a corporation a "legal person". It may in fact act in that manner with respect to those with contracts with it, but it cannot be considered such in a tort environment. In torts, only "real" people act, not "legal" ones. As such, shareholders should be amenable to suit under standard negligence principles - there shouldn't be a blanket immunity that shields them unless they've taken a more active role in management. If a jury/factfinder determines that the shareholders (or a certain subset, such as a majority block) created a corporate culture that put the bottom line ahead of any consideration for the safety of third parties, those shareholders should be liable regardless of whether all they did was vote their shares.

April 25, 2006 7:52 AM  
Blogger Jeremy said...

Many thanks for addressing this issue, Kevin. IMHO this is one of the issues at the forefront of the left libertarian agenda (in so far as it exists concretely, or should). It goes to the heart of what "human action" actually means, and why it - and not artificially created decision making mechanisms like the state or the corporation - is the basis of free market economics. In other words, the critique of the corporation is just another positive argument for free market economics: it’s incumbent upon defenders of any proposed subsystem within the theoretical free market to show their system uses market mechanisms to operate within it. To the extent they have attempted this, I appreciate it.

But it still remains to be seen whether corporate “entities” conform to the same principles of human action within the economic sphere that normal humans do (this gets to the whole issue of the “FedEx truck driver”). To presume that corporations and these particular types of situations would “just exist” in a vacuum of privilege is conceivable but not worthwhile, IMHO. That’s why for some of us, this corporate defense by libertarians seems awful close to a defense of government privilege: there’s no simple and convincing praxeological explanation for why investors would surrender control of an asset in the absence of a magically divesting liability. Additionally, there’s no model explaining why anybody would deal with limited liable entities… save the model represented by the history of state domination. I mean, it’s conceivable in a free market that all the people would give 30% of their income freely to a person calling themselves “king”… but it’s not likely.

Since corporate personhood is my pet issue, I’ve seen this type of debate between libertarian corporatists and libertarian anti-corporatists over and over, and it always winds up on third party torts. The arguments are predictable, usually resting in how much complexity truly free economic actors are willing to engage (such as private insurance schemes for shareholders, effectively limiting their liability). But I find it hard to see where the level of legal complexity inherent in the corporate doctrine is ever anything but an attempt to obfuscate the costs and benefits of an enterprise. When, again, is this ever in the interests of truly private economic actors with their own money and reputations on the line?

The modus operandi of actually existing corporations is to externalize costs and internalize profits. What would these particular forms of human association and action look like in a truly free market? Sure, I can be even handed: let’s see what corporations look like in a free market. I’m also willing to see what a military industrial complex, a space program, and centralized energy market would look like without government interference. Let’s see what fiat currency – or a monarchy - looks like in a free market, while we’re at it!

We can play this whimsical game of “what if” all day, but the fact remains: corporations are vehicles of state privilege. Whether or not this is a defining characteristic of them is really, truly besides the point: in practice, we certainly don’t get too caught up in complex arguments about whether state compulsion is a defining characteristic of government or not when we call for its abolition. We simply recognize an unjust system – the state – and propose that in a free market things would be different, whatever the constituent arrangements within that market. What matters is whether these new arrangements conserve all the principles of human action that serve to balance interests in a truly free market fashion, and not in some artificial and arbitrary legal environment es, because that's the essential feature that makes a free market work! In other words, I see corporations do things ALL THE TIME that a living, breathing person would never do of their own accord. Even if these collective entities wanted to act in a way a fully human actor would (similar to the saying states try to act as impartial moderators of the economy like fully actualized individuals would in a free market), they simply can’t: collective organizations don't have the characteristics of individual human beings, period. Insofar as a market is a system of human actions and interests, where exactly do corporations fit in if their express purpose is to tinker with the mechanisms of genuine individual economic responsibility?

I’m sure there’s a sophisticated answer for that. But it’s impossible for me to be anything but skeptical towards the utility of purposeful, arbitrary complexity for its own sake. Everywhere I look in the economy, I see profound organizational complexity only as measures designed to circumvent legal obstacles or in the execution of outright deception – I never see it serving to protect and honor legitimate, honest agreements between informed, self-interested parties. Maybe it’s an unreasonable extension of Occam’s Razor, but it seems like a way simply to preserve the superficial appearance of “actually existing capitalism” in a free market, and to that extent, it deemphasizes what makes a free market so absolutely essential.

April 25, 2006 9:35 AM  
Blogger iceberg said...

Jeremy,

To paraphrase a bit:
"To presume that corporations and these particular types of situations would “just exist” in a vacuum of privilege is conceivable but not worthwhile, IMHO... I mean, it’s conceivable in a free market that all the people would give 30% of their income freely to a person calling themselves “king”… but it’s not likely."

Why so unlikely?

Just like other aspects of the division of labor that defines modern civilization, I think that the free-market corporate model could be the optimal solution for the problem of "time-poor" shareholders whom will hire and elect a management team to work the shareholder capital without the requirement of the shareholders to be actively involved in day to day management.

April 25, 2006 9:56 AM  
Blogger Sheldon Richman said...

Why do you suppose that the owner of property must always be held responsible "for what happens with one's property."?

Corporate employees have neither stolen nor borrowed the property. They are working for the corporation's owners (or the people who should be regarded as owners). Employees are agents; owners are principals. If corporate property used in the course of the employees' duties harms someone, why shouldn't at least some of the owners have some liability?

April 25, 2006 11:34 AM  
Blogger iceberg said...

Sheldon,

It makes absolutely no difference whatsoever regarding the ownership (or lack thereof), permission to use the property*, that was the tool/agent of the tort.

I think it's analogous to the ol' quip; "Guns don't kill people; people kill people."

I agree with Kinsella on his stance of determining causation being the main issue in regards to third-party liability.

*Of course excepting the scenario where a lender accepts responsibility for the borrowers-caused damages.

April 25, 2006 12:11 PM  
Blogger Sheldon Richman said...

I am not arguing for an automatic assignment of shareholder liability. I am arguing against an automatic immunity from shareholder liability. Limited liability derives from the corporation's entity status. That is the tree on which the poisonous fruit grows.

April 25, 2006 1:44 PM  
Blogger iceberg said...

Sheldon,

No argument here -- "The point is if you can make a case that a given person other than the one directly responsible (the truck driver) is causally, jointly liable, fine--then under libertarian principles this person is also liable."

It is not conditionary to accept all the baggage that accompanies the (extent of unlimited liability in a) state-created corporation when discussing a version compatitble with free-market ideology.

To do otherwise is to throw out the baby with the bathwater.

April 25, 2006 2:00 PM  
Blogger Jeremy said...

Why so unlikely?

Because bureaucracy tends to be less efficient, period (IMHO). You *can* hire people to do your work for you, but they'll never be as motivated as a single entrepeneur who does the work AND reaps the full benefits. Bureaucracies simply don't internalize the kind of psychology that is found in a fully realized market of human actors. The compulsion that is exhibited directly by the state (and indirectly by corporations) is only one more market destroying aspect - but it's not the sole one. There's an alienation factor involved... sorry, that probably betrays my current deep involvement in Studies in Mutualist Political Economy. :-)

But moreover, I was pointing at how speculative all of this predictive modelling is. We'd do better to critique actually existing corporatism and let whatever happens in the free market (should it ever arise) happen. This is part of what I was getting at in a previous post of mine, reflecting on some of Kevin's prescriptions for a mutualist economy and - more to the point - whether his advocacy for a truly free market was conditional on it taking the shape he wanted it to assume.

Just like other aspects of the division of labor that defines modern civilization, I think that the free-market corporate model could be the optimal solution for the problem of "time-poor" shareholders whom will hire and elect a management team to work the shareholder capital without the requirement of the shareholders to be actively involved in day to day management.

Sure: I just think those time-poor shareholders are at an obvious disadvantage in a market where nobody is denied access based on arbitrary agendas. And don't get me wrong: I think it's completely valid to question how pervasive the effects of state intervention are. BUT no matter what our analysis, we need to be open to whatever shape a truly free market takes. I try to couch my criticism in that spirit (not the "I H8 WALMARTZZZ" spirit).

April 25, 2006 3:23 PM  
Blogger Jeremy said...

Incidentally, I think that psychology of market dynamics is a critical reason why corporations "don't work" for me, and why some of the examples of harm to third parties (such as the fedex truck running somebody over) warrant a bit further examination than simply blaming the driver soley. We here are not concerned with finding every little rights violation possible, but in analyzing the full effects of an interventionist market.

It's funny: I don't see people witholding blame from the gov't for welfare's part in creating ghetto conditions in our cities, yet that's not a direct cause-effect relationship. It's the difference between institutional (and, dare I say, dialectical) analysis and the typical libertarian analysis based on principles alone.

BTW, thanks for reading these comments (sorry so long). I appreciate having people to talk to about this, and once again, thanks so much for addressing this, Kevin.

April 25, 2006 3:28 PM  
Blogger Sheldon Richman said...

Advocates of the corporation are still obliged to explain how an artificial "person," separate from the shareholders and able to hold title to property, can arise purely through contract and without the state.

April 25, 2006 5:24 PM  
Blogger iceberg said...

Sheldon,

Entity, or personhood is just an abstraction; a convenient mental construct. Let not the statist baggage cloud the free market variety which could accomplish the same function. The real owners are, and have always been the shareholders.

If by definition corporation means "artificial personhood", then maybe free market supporters just have to find a better term to describe a limited liability construct based on free contracting. But otherwise I think we are just engaging in a dispute of semantics.

Jeremy,

I wholeheartedly agree with you to engage in criticism of the policy of existant state-capitalism, but I cannot always do the same when the criticisms of a particular firm are based on our hypothetical constructs of what might be otherwise in the free market. To say we know with great certainty is a bit too pretentious for my comfort in many scenarios.

April 25, 2006 6:15 PM  
Blogger iceberg said...

As an addendum, I want to point out that the immortality question isn't an issue once we recognize the shareholders (and to whomever they sell or bequest their property) as the real owners.

We must all be thorough in distinguishing the elements of corporatism under state-capitalism which would have no bearing in the functionality of the free market variant instead of conflating the two.

April 25, 2006 6:50 PM  
Blogger Sheldon Richman said...

Entity, or personhood is just an abstraction; a convenient mental construct.

Iceberg: This is incorrect. As van Eeghen shows, the law treats the corporation like a literal person with rights. It holds title to the corporate assets. The shareholders do not. Holding shares entitles one only to a vote for the board and a claim to dividends.

April 26, 2006 2:17 AM  
Blogger iceberg said...

Sheldon,

I dont know why you insist on conflating state capitalism's form of corporation, and it's convenient legal fictions, with a free market version which is based on libertarian principles, in which the only recognized form of ownership is clearly vested in the shareholders, and not some fictitious entity.

A corporation under libertarian law would be recognized as a relationship where persons are under the acting orders of the ownership to steward some property, and under which any tort liability would have to be aimed strictly at the parties involved in causing the damages.

Mere ownership of the property does not necessarily include the owner as part of the cause-- to accept otherwise would be a knee-jerk response by someone who only recognizes the whole package deal of state-capitalism's corporatism.

Also lets not forget what the point of this entire discourse; the question of whether a corporation, or something functioning quite like it can operate strictly on free market principles. The laws that pertain to state capitalism's corporation such as entity or limited liability have no bearing, other than in the result of libertarian corporations having similar function.

April 26, 2006 4:16 AM  
Blogger Sheldon Richman said...

Libertarian defenders of the corporation have typically defended the corporation as we know it today. What you may be describing is not a corporation (with entity status) as it has historically existed but a partnership or joint-stock company. This is quite different.

April 26, 2006 6:14 AM  
Blogger iceberg said...

Sheldon,

I have no disagreement here, other than I would think that under anarchy people would be free to form voluntary arrangements, for example to live communally under socialist principles.

Such society would allow people to suffer the illusion of having a distinct personhood for fictional entities, something that some might say we have that today with the concept of god as expressed by religion.

Of course such illusions will be strictly subjective to that group, and any other individual or group dealing with the corporation would deal with it's owners or management under the libertarian condition of determining causation.

April 26, 2006 7:01 AM  
Blogger Sheldon Richman said...

Iceberg: Agreed.

April 26, 2006 11:43 AM  
Blogger Jeremy said...

To say we know with great certainty is a bit too pretentious for my comfort in many scenarios.

I can live with that, Iceberg. Clearly we need to reform the system, not the individual corporations.

April 26, 2006 1:34 PM  
Blogger Jeremy said...

I'd just like to mention one other idea about corporate personhood I read somewhere. The basic point was that for much of human history, humans had sought to make property out of people (slavery). And it is quite funny that just as slavery was coming to a close in the mid-19th century, the 14th amendment - meant to give former slaves equal rights - was instead appropriated by elites to turn property into a person.

I don't mean for that to be an exhaustive analysis of the situation, but it resonates with me intuitively what is going on there. Iceberg seems to be saying the same thing we are: don't put limits on human association, but withdraw the doctrine that property can be treated as a person.

However, Brad DeLong had an interesting post on corporate governance at Pfizer. It's interesting to see how the politics of a corporation tend to mimic those of a state. This problem of agents running roughshod over the entitlements of principles is not going to go away when they're no longer propped up by the state, I should think.

April 26, 2006 1:44 PM  
Anonymous Wild Pegasus said...

Some various points:

* Limited Liability is not at all absolute, as many libertarian detractors seem to imply. In cases of fraud, or where the corporate does not have sufficient independence from its shareholders, courts will "pierce the veil". When courts pierce the veil, plaintiffs against a corporation can indeed hold the shareholders directly liable. This often happens when the corporation is undercapitalised, that is, when the corporation obviously doesn't have enough assets to cover its liabilities. This happens surprisingly frequently, and more often in torts cases than contracts cases.

* I'm not sure what part of libertarian theory compels a unity of ownership and control. Libertarian theory allows interest, for example, which is profit without control.

* It's flatly wrong to say that shareholders do not suffer when corporations fail or are successfully sued. Shareholders see a loss in the value of their assets. They lose their dividends, if they were receiving any. Looking at the interest analogy, if the venture you lend to ends up failing, you the creditor suffer.

- Josh

April 26, 2006 2:53 PM  
Blogger Sheldon Richman said...

* Limited Liability is not at all absolute, as many libertarian detractors seem to imply. In cases of fraud, or where the corporate does not have sufficient independence from its shareholders, courts will "pierce the veil". When courts pierce the veil, plaintiffs against a corporation can indeed hold the shareholders directly liable. This often happens when the corporation is undercapitalised, that is, when the corporation obviously doesn't have enough assets to cover its liabilities. This happens surprisingly frequently, and more often in torts cases than contracts cases.

True. But fraud usually needs to be found and it's left to the discretion of a judge.

* I'm not sure what part of libertarian theory compels a unity of ownership and control. Libertarian theory allows interest, for example, which is profit without control.

Libertarian theory compels responsibility for one's property. An owner is certainly free to hire an agent to manage his property, but control and responsibility remain with the owner, except for in a corporation, where an artificial person becomes the owner of record.

* It's flatly wrong to say that shareholders do not suffer when corporations fail or are successfully sued. Shareholders see a loss in the value of their assets. They lose their dividends, if they were receiving any. Looking at the interest analogy, if the venture you lend to ends up failing, you the creditor suffer.

Whoever held otherwise? But loss does not come from liability, it comes from entrepreneurial risk. As Frank van Dun points out, "limited liability" is really a misnoner. There is no shareholder liability at all. There is only investor risk.

April 27, 2006 4:36 AM  
Blogger Kevin Carson said...

Lady Aster,

I'm probably missing something, but my casual impression has been that there's a hidden collectivism in Ayn Rand's ethics. Her ethics seems to be based on what promotes the rational self-interest of human beings ("Man") as a group, and rather than the rational self-interest of the individual human being (which can be entirely different). It might be in the interests of "Man" that nobody steal, but very much in the interests of an individual. Sounds almost like she relies on some sort of (gasp) implied categorical imperative.

Now, it might be possible to argue from something like Stirnerite self-interest to something like Tucker's "law of equal liberty"--that it's in the long-term rational self-interest of an individual to treat others as equals. But that's not very Aristotelian, is it?


Anonymous,

You're sort of begging the question, aren't you--assuming, without having demonstrated, that corporations CAN exist in a free market.

Not wanting to disappoint you, but before I read Sheldon's arguments and followed his link to Van Eeghen, I leaned more or less toward Hessen's position myself. I still don't take a dogmantic position either way, but it seems to me after reading the arguments above that it would be very difficult to create an owning entity, separate from the stockholders, through purely private contract.

The exchanges between Sheldon, Josh and iceberg raise a lot more technical questions than I can possibly resolve for myself without a lot more study. But the existence of a separate corporate identity, at least, would probably require some sort of social consensus, recognized and enforced under a libertarian law code. I don't have any problem in principle with this, if it can be done on the basis of local consensus without the initiation of force. Some sort of entity might be implied in community ownership of a commons, for example. But whether the advantages of such entity status would be worth the transaction costs of negotiation recognition of corporate identity in a variety of local venues, in a society based on bottom-up federation of voluntary communities, is a different question. I suspect the transaction costs of establishing such an identity over a wide geographical area would be prohibitive in most cases, without a central state authorized to extend recognition.

April 27, 2006 9:19 PM  
Anonymous P.M.Lawrence said...

Sorry for the delay posting - I had to chase up some references as well as get the time for a full reply.

KC, I've told you before that there is no such thing as "a commons". What happened was that each common (singular) was not owned at all, let alone collectively or communally, but that each commoner had individual property rights over certain privileges in regard to the common. These were not transferrable, and so to the wiki editors they don't count as property (I've tried to correct this misunderstanding a number of times, but they insist on reinstating this today-centric perspective and ruling out other forms of property). Considering the common itself as property is the first step to making it transferrable and then alienating it.

A priori, a group only has the rights of its component individuals, but certain groups are more than that. They may (say) have a religious or cultural connection. In this case they have rights that are expressed by their members but those members in turn don't get them from themselves as individuals but rather - freely - give expression to the ideas that the groups represent.

See, for instance, the part in the Screwtape Letters where the elder devil describes how the Church Militant looks to him and how mere mortals don't see all of it. Or, in particular, look at monasteries and such - or towns (with "mayor and corporation") or even countries. Under Byzantine Law, such entities were considered "moral persons", in contrast to "natural persons" - and not all of our corporations, "legal persons", would have counted. Of course, that doesn't translate into these moral persons having claims over natural persons any more than one natural person does over another.

One thing to notice is that moral persons are not inherently state creations; consider how many monasteries were founded in the Dark Ages with no states around (even if some claimed authority). It's just that, with states coming in, it was more convenient to use their legal structures.

I have used examples like these to show ultra-Georgists the flaw in their argument that states have a right to tax corporations (including monasteries) "because" states created them; they point to state legal structures and claim that these show that the state created them and retains rights to tax, while I point out that often the corporations existed before their particular state, and sometimes even before any state - i.e., the state simply muscled in and pushed them into its own framework.

But it's pretty obvious that moral persons are the emanation of ideas given expression, resulting from "networks of contracts among individuals". On the other hand, unless the underlying ideas and concepts - a monastery, a football club or whatever - are somehow compelling enough to bring and keep people together, they are only artificial and sustained from outside, mere legal persons.

Some of the usage confuses ordinary use of "fictitious" with what lawyers use it for as a technical term. "Fictitious", in law, doesn't mean false or unreal but rather made up and constructed, an artificiality that is real enough in its abstract way.

The issue of "time poor" shareholders is the obverse of a world in which people are unable to work except for employers because resources are routed through them. In this case, people cannot apply their own capital resources under their own direct control since they have to devote so much of their effort and time to working in that very system. The system itself provides the time poverty.

Where corporations do gain is in two ways. One is assembling large amounts of capital fast enough to get in business ahead of the competition, rather than accumulating it more slowly (not necessary if there are rich individuals who can act as partners - as Rolls was to Royce - or where there is family money already accumulated over generations). The other is in economies of scale - but corporations aren't the only framework for that. Only, today's system has crowded out those other, more natural ways.

Here are some materials showing how capital markets were once arranged, i.e. how people concentrated it. I first came across this some time back by googling for some technical terms I knew, like "antichretic" and "vivgage" (contrasting those with mortgages will also bring out some of the issues of what corporations do these days, in contrast to natural persons). I was particularly struck by how diversifying holdings of annuities reduced risk and increased leverage in preventing repudiation - it works outside the formal framework.

For what it's worth, I believe that many advantages of corporate status can be obtained by individuals partnering with moral persons who exist anyway, for instance a local municipality. Then the former would be a sleeping partner doing fleet leasing of equipment, usually of a non-trade-specific nature so it can be repossessed and reused elsewhere if need be. That would mean that individuals need only provide expertise, effort and specific capital (including perhaps working capital in conjunction with non-working partners), and the local "state substitute" would not be gaining revenue merely from tax-like behaviour like leasing its own lands but also increasing the revenue base it drew on.

May 05, 2006 5:15 AM  
Blogger iceberg said...

P.M. Lawrence,

"The issue of "time poor" shareholders is the obverse of a world in which people are unable to work except for employers because resources are routed through them. "

The "time poor" reason may or may not be a valid explanation for why corporations might be formed in the free market, but it was never intended to be the sole justification. I happen to like your reason stated that it's a quick method of assembling capital, a lot better than my own.

May 05, 2006 6:19 AM  
Blogger Jeremy said...

After reading P.M. Lawrence's analysis of the matter (very insightful, thank you) I think the fulcrum of the back and forth lies here in Carson's words:

But the existence of a separate corporate identity, at least, would probably require some sort of social consensus, recognized and enforced under a libertarian law code.

That last part about the libertarian law code - as opposed to the current code where artificial entities can be created by fiat (this undeniably does occur even if other, natural factors are in play) - is key. If these entities arise as natural phenomena, then fine. But then they are not fictional persons because they are not artificial (in the sense Lawrence means). And somebody has a lot of explaining to do on the whole conspiracy of Santa Clara vs. Union Pacific Railroad.

Personally, I'm much more interested in the praxeological implications of having different "kinds" of persons. I think this cuts to the core of the debate. What the natural market relations will be is inextricably determined by the nature of humans. If other artificial natures are injected into it, the rules must somehow change. The evidence suggests the purposefulness of action did change in some key way. For that reason, we should be extremely careful about how we define our persons - much more careful than simply assuming contracts are some sort of "metaperson".

May 16, 2006 11:20 AM  
Anonymous Anonymous said...

The point is if you can make a case that a given person other than the one directly responsible (the truck driver) is causally, jointly liable, fine--then under libertarian principles this person is also liable.

Novartis is currently doing R&D on xenotransplantataion or organ harvesting. Without getting into too much more detail, scientists around the world are concerned that xenotransplantation could create something equivalent to AID's. Suppose shareholders invest in the Novartis subsidiary that sells harvested organs. Suppose the AID's-like virus is created. Should the shareholders have full liability? If not the shareholders then who? The scientists? Who paid the scientists? The manager's? Who paid the manager's? Can't you see that it is precisely this confusion and shifting of responsibility that makes corporations appealing. Under limited liability principles the Xenotransplantation invester has little incentive not to invest, absent the possible governmnet regulation. The probabilities of this AID-like virus is very low, the harm incredibly high, and the possible profits incredibly high. The corporate invester's stands to gain all the benefits of her risks, and bear very few of the costs.

September 06, 2006 6:19 AM  
Blogger Stephan Kinsella said...

I just came across this thread. I am very impressed at iceberg--very very sound and sober. I'm not surprised others keep missing the point, except for Sheldon... I cannot understand this bizarre condemnation of corporations. I think iceberg handled all the isuses well. It is bizarre that there is this notion that owners of property are automatically liable for crimes done with their property... Moreover, property just means the right to control. This right to control can be divided in varied and complex ways. If you think shareholders are "owners" of corporate property just like they own their homes or cars--well, just buy a share of Exxon stock and try to walk into the boardroom without permission. Clearly, the complex contractual arrangements divide control in various ways: the managers, etc., really have direct control; subject to oversight by the directors... etc. But even here--to get a loan, the company has to agree to various covenants w/ the bank, that condition its right to use property. Even though the law would not call the bank an "owner" praxeologically it of course has a partial right to control the property. If you have a contract allowing rentacops to patrol the building--hey, they are partial owners too. If you are leasing from a landlord--so do they. If you allow the plumber in to fix the building--he has temporary right of control too. So what?

September 20, 2006 11:48 AM  
Anonymous Anonymous said...

It is bizarre that there is this notion that owners of property are automatically liable for crimes done with their property...

It is telling that you say crime not tort. I think you are conflating the two. Specifically, you seem to think that torts are (or should be?) tied very closely to moral blameworthiness. For how otherwise could you relieve the property owner who directs the agent to undertake risky activities from liability. I take it for granted we are not taking about what thieves do with stolen property. We are talking of the run of the mill sitution in which teh employer directs teh employee to take risks of a greater or lesser degree. In my replay, I want to first clarify the law of respondeat superior which your statement contradicts; second, I want to explore this interseting notion that torts are (or should be) very closely tied to moral blameworthiness, to wit, I will show that tort liablity is not closely tied to moral blameworthiness; finally, I will offer a brief justification for the current state of tort law.

You seem to reject the common law doctrine of respondeat superior altogether wholly apart from its application or rather non-application to limited liability scenario:
"If the FedEx truckdriver negligently runs over you, is the shareholder responsible? Well, why would he be responsible in the first place?"

According to the doctrine of respondeat superior a master is liable for the torts of the servant when that servant is acting in the scope of the agency/employment. therefore, the master's liability would turn on whether the truckdriver was negligently driving while delivering packages, i.e. while in the scope of his employment.

one court rationalized the rule like this: agency liablity "attempts to link risks to benefits and hold accountable for risk-creating activities the enterprise that stands to benefit from those activities." lange v. national biscuit company

The key here is risk. Those risks are costs of doing businss, of generating revenue, of reaping benefits. It can safely be assumed that everyone is negligent sometimes even oftentimes. It just so happens it doesn't result (fortunately) in harm.

civil law or tort law does not punish people (that's criminal law), it only requires the tortfeasor to make the injured party whole. So, a tortfeasor could only be just a little bit negligent (but negligent nonetheless) but unlucky for him his tort victim has an egg-shell skull. He is liable for the full extent of the damages. On the other hand, someone might be acting very negligently (less than gross or reckless) and lucky him it only causes very minimal harm to the tort victim. He is liable only for the damage done. So there is not a one to one realtionship btw blameworthiness and liability. So when we say someone is negligent we are not attaching a stigma to that person (that would be punishment), rather we are sayign you're human, you messed up, but you're going to have to pay for the damage.

the point is an employer should not be able to shift all the risks away from himself and yet reap all the rewards of an activity. Or so I would argue. So lets say that we're talking about a dangerous activity, like powerful machinary. Now we're talking about large machinary, so the potential for harm is very great. A little negligence with powerful machinary can cause a lot of harm. This greater potential for harm can be seperated from the negligence as a risk all by itself. Because if the employee is just a little bit negligent that causes serious injury, there is liable for all the damages. This is greater risk of the magnitude of harm is completely tied up with the employer's business. It is a risk of doing business. This is all employer.

Now what you seem to be suggesting is that notwithstanding that the employer has created the risk of the magnitude of harm for her own benefits, she should be relieved of any of the liability if he has enough forsight to hire someone else to undertake the risky activity.

Only by strictly tying tort liability to moral blameworthiness could you agree to such a proposition. And, it follows, you would limit damages awards to the amount blameworthiness, an imprecise measure indeed.So what you seem to be saying is that peope should not be liable for the risks they take. Unless I suppose, you might argue, they take unreasonable risks. Well, that opens up a whole can of worms in itself. But if you are doing something useful (or you might prefer profitable) then you should be able to take any and all risks whatsoever, and as long as you were not negligent, in the sense of being morally blameworthy in some way, you're totally off the hook?

Your position, in other words, rejects strict liability completely. The law, and I think this was true of the common law, says that anyone that engages in "ultrahazardous activities" should be strictly liable for any harm they cause. This means you could be as careful as humanly possible and you are still liable for the harm you cause.

Needless to say, your position would encourage risk-taking. For I'm only on the hoof for the combo of negligence with my risks. If I over-exaggerate my own non-nelgigence. Whether I pay someone to take the risk or take the risk myself, the result is the same. This is to say nothing of the axiom that you a person should be liable for the risks they take.

June 28, 2007 9:41 AM  
Blogger Marshall said...

I know this is a couple years late, but after reading this discussion and the one by Kinsella about Gabb's thoughts on limited liability, it struck me that I had a very hard time reconciling basically anything Kinsella has to say about tort with reality. Every post of his I read made my brain hurt, not for lack of understanding but out of a sense of "where the hell do you come up with this stuff?"

Not until reading this final comment by Anonymous did my problem with Kinsella's thought coalesce into something coherent.

Suffice it to say, anonymous has succinctly articulated my extremely hostile gut reaction to Kinsella's reasoning, before it had formed itself into cogent thought.

Bravo.

August 21, 2009 6:49 PM  
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