Corporations Are Not Free Market

Here are some brainstorming ideas. I'd be interested in knowing what you think. The purpose of this page is to have a discussion that prompts participants to think more clearly about exactly what is involved with a government's chartering of a corporation, providing limited liability to the corporation's shareholders (and, possibly, employees, directors, and officers, when acting on behalf of the corporation). I don't mean to say either that LimitedLiabilityIsaGoodThing? or that LimitedLiabilityIsaBadThing?, only that a government's charter of limited liability is entirely interventionist and the extreme opposite of a free market.

Contracts between individuals, without the government being involved, could be used to obtain three out of four features of corporations:

1. Freely transferable ownership interest; 2. Centralized management; 3. Continuity of existence.

The only thing a government can add is the fourth characteristic of a corporation:

4. Limited liability.

Limited liability means that the executive branch orders the judicial branch to not enter any judgement against corporate owners beyond the extent of the capital owners risked. As BuckminsterFuller pointed out, the corporate structure was developed to further the European AgeOfExploration? by allowing investors and ship owners to have their risk of loss limited to the capital they contributed to exploratory voyages; while the sailors, some of whom were conscripted against their will, had unlimited liability as they could lose their lives on the voyage. In effect, a corporate charter is an insurance policy issued by the executive branch: in exchange for the premium (corporate filing fees, taxes paid by corporations, legislative oversight, and other alleged benefits to society as a whole), the executive branch assumes all risk to society of the corporation's activities when the cost of those activities exceeds the capital contributed by owners.

In a completely free market (as in TheMoonIsaHarshMistress), courts would be decentralized and ad-hoc, so it would be impossible for anyone to issue a grant of limited liability.

A world of CorporateGovernment is certainly NOT the Nth degree of a free market; it is the Nth degree of a government in which the executive has greatly limited the ability of the judiciary to hold individual people responsible for actions they undertook as a part of, or on behalf of, a group chartered by the state.

See also the TheoryOfSecondBest for why corporations and the free market and society don't mix.

Well, suppose the government supported total literal contract law. Under such a system, if a contract says something and you're stupid enough to sign it then you have to do it. On the other hand, you can trust contracts to mean what they say - you don't have to worry about a corporation promising to do something in a contract while secretly laughing that some law they know, that you don't know, makes that part of the contract void...

Suppose corporations started including a clause that said by having any dealings with that corporation whatever, you agreed to indemnify the shareholders against any damages.

Then you'd be right back where you were before, no?

(I'd sign this but I got the idea from someone else on Usenet and I can't remember who.)

Not quite. That would, in theory, protect the corporation from those who signed contracts with the corporation, or at least did business with them. If you run a pizza shop, and your delivery boy runs me over, I am holding you liable even though I have never had a business dealing with you. -- RobMandeville

Well, that would be a way that ordinary contracts could be used to limit the potential liability of the company owners, to people who had chosen to deal with the company. (A similar clause, for binding arbitration and a waiver of legal action, can be found in many USA health insurance plan contracts with patients; although new legislation could overrule that clause, or maybe already has.) However much the company could get contracting parties to agree to waive their potential claims against the company's owners, your system would still expose company owners to unlimited liability against any unwitting or unwilling victims who could obtain a judgement.

For example, consider a minor too young to sign a legally binding contract, but who was injured for life by the negligence of the company; or the neighbor of the toxic waste dump, when the neighbor lived there first and never agreed to have the toxic waste placed next door (and leaking into the shared groundwater table); or an explorer who lost their life on a corporate expedition (if Fuller is correct, this last was the original reason for creating the corporate system). These are people who might have a winnable case against the company. Under your system, these kinds of cases would still result in judgements against the company's owners, potentially for all the owners' assets and future income, because there is direction to the court to limit the liability it will assess against the owners.

What the government can do, that nobody else can do, is to instruct the court to never enter a judgement against the owners that is greater than the amount of capital each owner chose to place at risk.

Is this a good thing? If a limited company's owners instruct the employee's to do an illegal act, the employee's have signed a contract to do what the company says, or be subject to the company's kangaroo court, and keep quite about it in any case. The owners can't be prosecuted beyond their shareholding, they can't have past dividends confiscated. So who is responsible? -- AndyMorris

Suppose, in a country without limited corporate liability, a stock exchange announces the following rule: if you want to be listed on our exchange, you have to require all your customers to indemnify the shareholders of any company listed on our exchange, and furthermore, you must require your corporate customers to impose the same restriction on their customers. A company that didn't participate in such a pool would probably had a really hard time getting investors. How many people could get by without ever doing business, directly or indirectly, with a company listed on that exchange? -- SethGordon

My question: do we still need (or have we ever needed) the government to limit the liability as they do with corporations? IANA economist, but my guess is that liability-limiting incorporation stimulates the (US) economy by making it more likely that companies will be formed. People would be less likely to invest in a company when doing so renders all their life savings subject to judgements on the company. I can live with Firestone stock (no, I don't actually own any) that may turn worthless due to the recent SUV tread debacle, but if they go too far under, I need that limited liability to prevent people from sucking my retirement accounts dry. --RobMandeville

Besides, there are US laws that allow CEOs and other board members to be charged with directing their company to perform criminal activities. The limitation of liability is primarily applicable to civil liability. (Warning: IANAL.)

Yes. but my understanding is that corporate manslaughter convictions are rarer than hens teeth.

Corporations are in the unique position of having human rights without human responsibility. They can sue governments for their human rights, but cannot be effectively punished. If they are fined the cost is passed onto customers or results in someone's pension getting stuffed. Corporate management can use the excuse of serving shareholder interests to duck any moral responsibility. They can make sure that everyone in the company knows that safety rules are to be got round, without leaving any documentation. Once they get big enough the threat of job losses and financial stability is enough that the company's problems become the government's problems.

I think my beef is with the idea that large corporations are in some way similar to small privately owed enterprises. It seems to me that the executives of corporations rarely risk their own money in the same way that the owner of a small enterprise would. ? AndyMorris (UK Lefty)

Is your point that large corporations should be owned by their executives, or just shouldn't exist at all?

Large corporations allow people to act in ways they would not act as individuals, they can distance themselves from responsibility for their actions and hide behind the imperative of shareholder value.

As I understand it, company law obligates a company to take the most profitable path even if that path is unethical. If the executives were to say they will not take an opportunity because of ethical considerations they could be sued by the shareholders.

If the executives of a tobacco company decided that selling cigarettes to 3rd world children was something that was evil and decided to stop their company doing so, they would find themselves at best subject to a hostile takeover, at worst subject to a law suite from their shareholders.

So who is responsible for selling cigarettes to kids? The executive have no choice, the share holders are just saving for their pension.

Corporations are obligated to act without considerations for the communities where they operate, without which the corporations could not exist. They have stopped being the tools of society and have become the masters. -- AndyMorris

"As I understand it, company law obligates a company to take the most profitable path even if that path is unethical." This in my view is the essence of the problem, and it doesn't only apply to limited liability companies but also to trust funds and suchlike. The legal fiction is that a corporation is a person, but a particularly nasty sort of person with only one ethic, that of the profit motive. It is not bad for an individual to act for their own benefit, but it is bad if an individual only ever acts for their own benefit; but a corporation is acting illegally if it does anything else.

In a free market of autonomous individuals, each is able to make decisions based not only on economics but also on morality, taste, etc. In a free market dominated by corporations (of the current kind) the decisions are constrained to the strictly monetary domain. This is therefore not a free market -- RiVer

The only thing a government can add is the fourth characteristic of a corporation:

In fact, the government (ie, thugs) are crucial in establishing the first property of corporations. Government is necessary to establish property of corporations. Without ownership of corporations (as distinct from the possession of corporations by their workers), it is impossible to have the freely transferable ownership interest. The government is crucial in establishing the "free market" of stock. The same holds for any other "free" market since the "free market" is a social institution with underlying rules backed by government. Free markets do not exist naturally. -- RichardKulisz

The only thing a government can add is the fourth characteristic of a corporation:

4. Limited liability.

Actually, it is the government that creates the concept of liability. Without government, there is really no mechanism in place to provide reparations for dangerous products, etc.

Without government, we have this fine time-tested social institution called the lynch mob. Not exactly reparations but deterrence all the same. Oh, sure. Lynch mobs acted as a deterrent against all kinds of things. Like having dark skin, for example.

Lynch mobs do tend to act in the interests of the rich and powerful, a defining characteristic of a lynch mob is that, the state turns a blind eye, if the state isn't there the rich and powerful will turn a blind eye to the lynch mob when it suits them. If the mob threatens the interests of the state or the powerful, it is a riot and is suppressed.

Now, why shouldn't I be held responsible for the actions I support with my own resources? More importantly, why is it necessary to have the type of large organization otherwise made possible by such protection? --WilliamUnderwood

See TheTwentyFirstCenturyCorporation WhyIsLeadershipImportant