The Origins of Limited Liability in America

Data for a perennial libertarian debate

There's a short list—maybe not so short a list—of subjects that libertarians love to argue about among themselves. Some of these are major topics of public debate, such as abortion. And some of them are more arcane, such as limited liability laws.

The libertarian historian and economist Jeffrey Rogers Hummel tackles the topic of corporate limited liability in a post at EconLog, drawing on David A. Moss' book When All Else Fails. Hummel doesn't offer any policy conclusions, but he shares a lot of interesting historical data, including the surprising fact that the last state to adopt limited liability, California, didn't do so until 1931. Worth a look.

Bonus link: I touched on the issue of limited liability in this old piece.

Comments

[Death Rock and Skull]

Investing would be bullshit without limited liability. Limited liability just means that you are only responsible for the amount you have already invested, it doesn't shield people from liability if they are actually directly responsible for some damage.

[BakedPenguin]

I generally agree about the "bullshit" comment, although I suspect that insurance would become available. It still would make investing far less attractive than currently, though.

[Randian]

I mean, if I give a homeless guy a nickel and he uses it to buy a rusty switchblade and stab some other bum in a fight over a piece of bread, am I responsible for murder now?

I know that you agree - I'm just skylarking here.

[Redmanfms]

I mean, if I give a homeless guy a nickel and he uses it to buy a rusty switchblade and stab some other bum in a fight over a piece of bread, am I responsible for murder now?

Yes.

/HazelMeade

[pmains]

What? Has Hazel gone over to the dark side?

[Redmanfms]

What? Has Hazel gone over to the dark side?

Of a fashion.

She blundered into several of the post-Sandy Hook gun threads arguing that government mandating the purchase of liability insurance by gun owners because of the potential risk of criminal misuse after a weapon is stolen. She argued that gun owners are at least partially responsible for supplying the weapon because they were robbed.

It was some Spaces-level dipshitery.

[Proprietist]

Government shouldn't mandate it, but it would be a good thing to have and suggest. Assuming Adam Whatshisname didn't murder his mom, the victims would have sued her for irresponsibly keeping guns unsecured in her house with a son she was supposedly trying to get committed and posed a threat to others (whether she saw signs of a threat or not - you don't want to have that burden of proof in a court setting against a nation and jury out for blood.)

It's a little different from other "stolen guns" cases, and a good argument for gun insurance - which still could have granted some compensation for the victims suing the estate, and would have protected her personal property if she hadn't been killed.

[Randian]

Assuming Adam Whatshisname didn't murder his mom, the victims would have sued her for irresponsibly keeping guns unsecured in her house with a son she was supposedly trying to get committed and posed a threat to others

A case that wouldn't have survived summary judgment.

[Robert]

I've been against a requirement of liability insurance vs. criminal misuse as a condition of owning firearms, but when I look at it coldly, it doesn't seem like it'd harm society. It's not as if it'd create moral hazard increasing the amount of gun crime, providing that criminal punishment would remain with the wrongdoer; it'd just redistribute the damages done in terms of money.

[Proprietist]

You need a better analogy. If you own a pitbull and it escapes and mauls the next door neighbor's 5-year old to death, will you be held personally liable?

I've also used the analogy of traffic. If I'm driving without insurance and my brakes fail and I plow into a bunch of cars, should I only be liable for the damages I caused up to the value of the current value of my wrecked car? After all, I didn't intentionally or directly cause the accident, my car did. It's illogical to say "if you are "responsible" for a wreck, you only need to hand over the scraps and can walk away indemnity-free". In a free market, investors should purchase investment liability insurance for themselves or else be held personally liable for any damages in excess of corporate value just like drivers should purchase car insurance or be held personally liable for the actions of their car in excess of the value of the car.

[Randian]

A corporation isn't a car, and a shareholder is not the driver.

There are free agents (i.e. people) in charge of the corporation. It isn't a dangerous animal or an inanimate object.

[Proprietist]

A corporation, like a car and a pitbull, is something you own for a reason that can go awry and harm someone else. That's why it's logical to insure oneself from damages in advance in all cases. Stockholders own the corporation and should be responsible for recompensating victims for it's actions. If they are smart owners, they will add contractual agreements for responsible executives and workers to bear the first personal burden of liabilty, but to a third party victim, how you internally divvy up the liability cost is irrelevant.

[Randian]

A corporation, like a car and a pitbull, is something you own for a reason that can go awry and harm someone else

No, a corporation is not an actual 'thing'. A car is a thing, a pitbull is a thing. A corporation is a legal fiction. The people of the corporation are responsible for what they do.

[Proprietist]

Yes, I am asking for the people of the corporation to be responsible for what they do. The best way to do that is to put the onus on stockholders to clarify contractually who is responsible for damages instead of simply saying all liability responsibilities end for the owners once the value of their legal fiction hits zero. Usually the people that are punished currently are stockholders who didn't even own the stock when the actions occured, much less the individuals responsible. There is no incentive to determine responsibility internally if losses are artificially limited by the state.

[Randian]

Yes, I am asking for the people of the corporation to be responsible for what they do.

Good. Now if you would just realize that a passive shareholder =/= a "person of the corporation", we would be all set.

[Proprietist]

They are owners who choose the board of directors. Agency flows downwards from ownership. Shareholders are only considered passive because limited liability has generally encouraged them to not be active or care about operations and personal risk from the operations. If owners can get infinite profits, they also deserve infinite risk unless they internally contract otherwise with the other owners. The point is that 100% of total potential corporate liability needs to be internally contracted - either in proportion to ownership, outsourced to insurance companies or by some other internally agreed upon division that can be used. Currently, liability is only contracted internally up to value of the corporation.

Why do you want to socialize anything beyond that onto victims and taxpayers before the owners that are responsible for the agents?

[Randian]

The point is that 100% of total potential corporate liability needs to be internally contracted

Uh, what? "potential corporate liability"? What is that? How would you measure that?

Why do you want to socialize anything beyond that onto victims and taxpayers before the owners that are responsible for the agents?

I'm not socializing anything. Sometimes shit happens and there is nobody to blame. In this case, I find the shareholder's relationship to the day-to-day operations of the firm to be so attenuated (and frankly, with your "mights" and "mays" and "potentials" and such, so do you) for it to be just to hold him/her accountable for the intervening negligence, recklessness, or even maliciousness of another.

[Proprietist]

Uh, what? "potential corporate liability"? What is that? How would you measure that?

The maximum cost of potential damages a risk assessor could foresee from corporate actions past, present and future. I have infinite liability if I hit someone with my car - I could lose my house and everything I own. My risk is attenuated by insurance, but if my insurance isn't enough to cover the damage I may be personally sued. So the rational person gambles that the insurance rate they purchase will cover any costs and adjusts their driving to try to get lower rates and reduce risk.

By the logic of limited liability, why not say that the driver is only liable to the victims for the value of their wrecked car (like a depleted corporation after the stockholders cash out following a legitimate lawsuit filing by victims of corporate fraud or actions.) The difference between the value of my car and the value of the damages is socialized when the victims have to bear the burden instead of the driver. Limited liability on cars would incentivize irresponsible driving, just like limited liability on corporations incentivize irresponsible business decisions.

[Randian]

A car isn't a corporation. Seriously, the stockholders are not the drivers. There is intervening agency between the stockholder and the corporation, so stop making that comparison.

By the logic of limited liability, why not say that the driver is only liable to the victims for the value of their wrecked car

This analogy makes absolutely no sense whatsoever.

The difference between the value of my car and the value of the damages is socialized when the victims have to bear the burden instead of the driver.

It isn't "socialized", it's called life. Sometimes bad things happen to good people and there just isn't the money there to compensate them. Stripping a 1% shareholder of all of his personal possessions is such a disproportionate response that it's fundamentally unjust.

[Proprietist]

A car isn't a corporation. Seriously, the stockholders are not the drivers. There is intervening agency between the stockholder and the corporation, so stop making that comparison

There is an intervening agency between a driver and a car. A perfect driver can still be legally responsible for a wreck if a car malfunctions due to improper maintenance. If it was properly maintained, maybe you have a tort against the car manufacturer, but that's not the problem of the victims of the wreck. One could insist on a liability contract for malfunction from a car manufacturer I suppose. If your teenage son is driving your car and kills twenty people, you will bear the liability costs even though you weren't the driver.

This analogy makes absolutely no sense whatsoever.

Limited liability capitalism doesn't make sense either. That's my point.

[Proprietist]

Sometimes bad things happen to good people and there just isn't the money there to compensate them. Stripping a 1% shareholder of all of his personal possessions is such a disproportionate response that it's fundamentally unjust.

I don't get how hard this is for an otherwise smart guy like you to grasp - I'm not calling for "stripping 1% shareholders of all their personal property." I'm calling for 1% shareholders to attenuate their liability risk internally with the other stockholders, the board and/or the insurance companies instead of expecting society to pay for the excess costs of the businesses they chose to own and profit from. If attenuated via insurance or contract, nothing gets "stripped." A passive stockholder held responsible for actions they were only indirectly related to makes them something of a victim of corporate fraud too, which is why removing the state-created moral hazards will encourage stockholders to not only choose more responsible corporations, but also better clarify and assign the liability burden so that burden doesn't have to get passed on to innocent third parties.

People drive a car despite infinite liability potential, just like people will still invest in businesses despite infinite liability potential. Responsible driving reduces risk and insurance costs, as would responsible business practices.

[Michael Ejercito]

Limited liability on cars would incentivize irresponsible driving, just like limited liability on corporations incentivize irresponsible business decisions.

So let us remove limited liability for the CEO, who actually makes the decisions.

[Proprietist]

a.) It's not the government's responsibility to make corporate ownership convenient or prioritize profits over risk mitigation. That's a market distortion.

b.) If you remove state limited liability protection, the only thing that will change is that corporations will have to buy insurance to protect their stockholders' risk, or else stockholders will want to protect themselves in the event a legal action exceeds the value of the corporation. This stops the socialization of risk inherent in corporate capitalism, and makes true risk mitigation a much more important to an investor than it is today.

c.) Libertarians have a motivation to remove this moral hazard: the regulatory state exists primarily to limit its effects. Without the moral hazard, incentives to make risky gambles drop, insurance costs lead to better self-regulation and investors have more incentive to get involved in their corporations' actions. As long as the moral hazards of state-limited liability and bankruptcy exist, the regulatory state will have perfectly logical justification despite its flaws.

[Stormy Dragon]

A removal of limited liability would also increase competition: the larger a corporation is, the more its liability risk as it becomes harder and harder for the management to actually know what's going on. Thus the optimal size for a company would shrink, resulting in a market composed of more smaller orgs and than a couple really big ones.

[Proprietist]

Exactly, it would be more like the "nation of shopkeepers" than a megacorporate oligopoly.

[Randian]

That's just fantastical whimsy without proof.

[Proprietist]

Actually, other than the big transnational corporations, liability was much less limited back in Victorian England, when it was the "nation of shopkeepers" than today.

[Randian]

Who ever said that it is just that a shareholder with a .05% stake be liable for the actions of others?

Answer that premise, the both of you, and then we can talk. Otherwise limited liability is the enshrinement of justice and fairness, not convenience or socialization.

[Proprietist]

You should be responsible for .05% of the damages in excess of the corporation's value. And you have a contractual tort against the executives and workers responsible for the actions, unlike a third party victim of the corporation's damages. Remove the government moral hazard, such things will have to be more deeply clarified.

[Randian]

You should be responsible for .05% of the damages in excess of the corporation's value.

Why? There are people, actual people, who committed the tortious actions, not me.

And you have a contractual tort against the executives and workers responsible for the actions, unlike a third party victim of the corporation's damages.

Just what in the world is a 'contractual tort'?

[Proprietist]

Why? There are people, actual people, who committed the tortious actions, not me.

They were your agents or agents of your agents tasked with providing you profits. If I own a shop, and my worker senselessly beats a customer to death, you really think I won't be sued by the customer's family for hiring that worker?

Just what in the world is a 'contractual tort'?

A grounds for suing on the basis that you internally divided the liability costs in excess of corporate value. The fact that one party is unable to pay their contractual burden and puts more on your shoulders gives you a legitimate tort.

[Randian]

They were your agents or agents of your agents tasked with providing you profits. If I own a shop, and my worker senselessly beats a customer to death, you really think I won't be sued by the customer's family for hiring that worker?

You might be sued, but the plaintiffs have no case. The simple fact that I hired somebody doesn't make me responsible for every criminal action that person commits, whether they are on the job or not. Do you think if a free moral agent makes a choice to murder somebody that somehow creates an obligation on the behalf of his employer? Should it? I think not.

[Proprietist]

The fact that they were acting as your direct agent at the time of the criminal action does put you at liability risk, especially if there were warning signs that this guy was crazy/dangerous/etc.

And no matter how much you dodge, I'm still waiting for you to answer why the taxpayers and victims should assume the burden of excess uninsured liability risk before the owners that profited from the business and hired the board of directors. Also, owners should already have pre-arrangement contracts for excess liability so they know exactly what burden the owe if not insured. If business actions are insured well beyond any likely tort settlement beyond the value of the corporation and if corporations have an additional profit incentive to practice best practices/safety procedures, this won't even be an issue for anyone. It will just mean that infinite growth will no longer be subsidized by society and risky industries will be forced to balance the full costs of the liability burden with the profit motivations. Removing limited liability is the best protector of individual rights possible.

[Randian]

And no matter how much you dodge, I'm still waiting for you to answer why the taxpayers and victims should assume the burden of excess uninsured liability risk before the owners that profited from the business and hired the board of directors.

If that had anything to do with limited liability, I would have responded. The fact is that, unfortunately, the victims of malfeasance sometimes aren't made whole as a matter of reality. The fact that you think that a passive shareholder with .01% of "ownership" is somehow responsible for a boiler operator blowing the stack off at a factory is just so outside of reality that I have to wonder.

[Proprietist]

The fact that you think that a passive shareholder with .01% of "ownership" is somehow responsible for a boiler operator blowing the stack off at a factory is just so outside of reality that I have to wonder.

The passive stockholder had the potential to internally contract liability risk and had a say in hiring the board of directors, who hired the executives, which might have made a decision not to properly maintain the boilers because the cost was too high and would hurt profits. While the stockholder did not order the executives to scrimp on safety, they undeniably hold more responsibility than the next door neighbor who lost his house and family in the fire that resulted and had no internal contract with the corporation.

[Randian]

The passive stockholder had the potential to internally contract liability risk and had a say in hiring the board of directors, who hired the executives, which might have made a decision not to properly maintain the boilers because the cost was too high and would hurt profits. While the stockholder did not order the executives to scrimp on safety

At some point, the causality chain breaks down, which by the bolded language, even you yourself have to admit.

they undeniably hold more responsibility than the next door neighbor who lost his house

Yes - the amount of their investment.

[Proprietist]

I was responding to your hypothetical scenario with hypothetical assumptions.

Again, you continue to ignore the central point that the passive stockholder's risk can be voluntarily pre-mitigated with contractual agreements between the passive owners and the board, or the stockholders and an insurance company, or the board and an insurance company. If a court holds the stockholders responsible to a third-party victim in proportion to their stock ownership, they can sue the first-party actors under the premises of their contractual agreement.

Unless you are for all corporations contractually pre-mitigating voluntarily with every potential third party victim on Earth or in their neighborhood (also a free market option to mitigate responsibility costs), you haven't explained why victims should bear the costs of doing business before owners should. "Life's not fair" is not a libertarian answer.

[Randian]

Serious question, Pro - should Bushmaster be sued for negligently selling its weapons to Nancy Lanza? Why or why not, using your own arguments?

[Proprietist]

Nope, unless the corporation inaccurately represented their product to Nancy Lanza, resulting in the deaths or faulty manufacturing resulted in manslaughter. Otherwise, victims of a product's owner or his/her agents have no tort claims against the product manufacturer or victims could blame Kellogg's and Red Bull for providing nourishment to Adam Lanza before his rampage. (I don't know if that was Adam Lanza's breakfast of champions or not, just made that up.)

In corporations, stockholders ARE the product owner and thus are legally responsible for the actions or inactions of the corporation and its agents acting in their name or on their premises/clock.

[Randian]

you haven't explained why victims should bear the costs of doing business before owners should.

For the same reason that Bushmaster isn't responsible for Newtown. because at some point, a person's involvement in the causality chain is so attenuated that it would be fundamentally unjust to strip them of their worldly possessions for the acts of others.

[Proprietist]

Bushmaster did not own Nancy Lanza's Bushmaster. Stockholders of Nuke Corp X own Nuke Corp X.

[Randian]

The fact that they were acting as your direct agent at the time of the criminal action does put you at liability risk,

Everything puts you at 'liability risk'. You can be sued for anything in this country. The notion that a judge or jury is going to find you responsible in a civil trial is absolutely asinine. As a matter of law in the circumstances you describe, an employer is not responsible for the beating to death of the customer.

There is a reason rhofulster was right to ask whether the employee's actions had anything to do with furthering the interests of the employer, because that's part of the legal test.

[Proprietist]

If the business is a proprietorship, that is simply not true. Corporations are successfully sued all the time for their employees' actions in the name of the corporation or otherwise. In a business that is not incorporated, the owner pays this cost of their own pocket. And you continue to neglect the point that maybe the owner should have seen warning signs that this employee was a danger to their customers.

[Randian]

Corporations are successfully sued all the time for their employees' actions in the name of the corporation or otherwise.

But not for the beating death of customer. I would like to read the case where the court and/or jury found that the employer ordered or in some way would have benefited from that extravagant fact pattern.

And you continue to neglect the point that maybe the owner should have seen warning signs that this employee was a danger to their customers.

Because it wasn't in your original fact pattern presented, and even further, you said "especially", which means you were essentially saying "Even WITHOUT 'warning signs', the employer is responsible", which is *ahem* especially wrong.

[Proprietist]

http://www.nolo.com/legal-ency.....29638.html

[Proprietist]

Negligent hiring and retention certainly increases your liability, but you are still exposed to the risk of lawsuit even if you weren't negligent. This is why proprietors and partnerships tend to purchase liability insurance and contract liability responsibilities with all contractors.

[Randian]

From your link:

If the injury caused by the employee is simply one of the risks of the business, the employer will have to bear the responsibility.
But if the employee acted independently or purely out of personal motives, the employer might not be liable.

and

("negligent retention"). This rule applies even to what your workers do outside the scope of employment -- in fact, it is often used to hold an employer responsible for a worker's violent criminal acts while working, such as rape, murder, or robbery.

However, under this theory you are legally responsible only if you acted carelessly -- that is, if you knew or should have known that an applicant or employee was unfit for the job, yet you did nothing about it.

Seriously, it is right there in black & white - you are not going to be held responsible if your employee beats a customer to death unless you 'knew or should have known'. Which, I might add, you original hypothetical did NOT have as a fact.

[Randian]

Shorter response: just because a shareholder has slightly MORE responsibility than the injured party does not mean that ALL of the responsibility that is left should fall on the shareholder.

[Proprietist]

You are might not going to be held responsible if your employee beats a customer to death unless you 'knew or should have known.' Read your first bolded sentence again. Reading comprehension is hard sometimes.

[Randian]

That's just standard lawyer hedging, Pro. Trust me, I'm a lawyer. There might be a rare pattern out there where an employee's independent choice to beat a guy to death is the employer's fault without a negligent retention claim, but I can't think of one and I bet you $100 you won't find one.

[Proprietist]

I pointed out the Sizzler employee lesbian customer beatdown. What should I do with my $100?

[Robert]

As long as gov't operates courts, it's gov't's responsibility to determine what law applies in court. Same issue with marriage: You can't get away from it and have gov't assume a stance of neutrality as long as a gov't judiciary exists; some things have to be decided.

[Stormy Dragon]

Investing would be bullshit without limited liability.

If limited liability is violation of rights, how is this relevant? Rights violations don't become okay just because someone else has figured out how to make a lot of money off of it.

[Robert]

How do we decide what rights should exist? Or are you one of those people who thinks that, starting with the evidence from objective reality, we can infer that there exist certain rights irrespective of human values and thinking?

[Fist of Etiquette]

Limited liability seemed to work out well for British Petroleum. Or did it?

[some guy]

Abortion is ok because the rights of the mother outweigh the rights of the fertilized egg.

Adulthood starts the moment an individual takes responsibility for himself.

Taxation is theft even when it is used to pay for general defense.

Limited Liability is just a way of protecting individual property that was not initially put at risk.

Capital punishment is always unacceptable because it is a permanent punishment inflicted by an imperfect system.

Immigration should be free across all borders.

Intellectual property is not real and should not be recognized.

Discuss.

[Juice]

Adulthood starts the moment an individual takes responsibility for himself. ... and others generally recognize the individual's independence.

[robc]

Capital punishment is always unacceptable because it is a permanent punishment inflicted by an imperfect system.

All punishments are permanent. Ask the guy who was falsely jailed for 25 years if the state gave him his 25 years back.

[some guy]

That post was meant to be a joke...

[robc]

Im well aware.

But that particular argument annoys me.

[some guy]

Then I shall consider it a success.

[Robert]

It annoys me too. But it leads to interesting thoughts. Here's a thought experiment: What if all jail terms were served under the influence of a drug like Versed that causes anterograde amnesia, such that after it was done, you couldn't remember any of it? Would that be an improvement or a disimprovement either for the justly or the unjustly jailed?

[Proprietist]

Yes, and often people who are improperly jailed and exonerated due to corrupt prosecution get beaucoups of compensation, as they should. It doesn't make up for the time spent, but better than being murdered by the state and seeing no justice.

[Proprietist]

Looking forward to this book. I think advocacy for limited liability and bankruptcy laws are the place where many libertarians shoot their own philosophy in the foot by doing the same exact thing everyone else does - expecting government to give preferential treatment certain things they like (profits, growth, wealth) even if that creates unintended consequences.

I also think criticism of limited liability would be the best way for libertarians to reach out to the Left and prove that free markets are not at all about corporations roaming the earth, destroying everything they touch, poisoning our water and feasting on our children. If anything, it is more progressive than the Left. Privatizing liability risk means the biggest and most dangerous corporations will no longer be able to socialize their individual and environmental damages in the name of infinite growth. Ending the need for a regulatory state by removing the moral hazards that justify it means that the most powerful and politically connected corporations will no longer be able to bribe politicians and bureaucrats to legislate and enforce smaller competitors out of competition.

[Randian]

The only alternative to bankruptcy is debtor's prisons. It's a necessary evil.

I also think criticism of limited liability would be the best way for libertarians to reach out to the Left

They aren't interested, and as it stands, there is nothing wrong with Limited Liability from a libertarian perspective. All limited liability does is proportionally assign responsibility.

[Proprietist]

I'm ok with debtors prisons if the debtor defrauded the lender. Bad faith contracts should not be rewarded.

Limited liability forces third party victims of corporate actions to accept the state's limits on liability and corporate value, regardless of the cost of the damages. If Nuclear Plant X commits mass manslaughter due to crappy practices and goes bankrupt, society and the victims eat the cost.

[Emmerson Biggins]

I'm ok with debtors prisons

well, left wing libertarians have to earn their monocle somehow.

[Proprietist]

Frankly, I don't see why even right-wing libertarians wouldn't support criminal enforcement against fraud.

[Juice]

Why prison? Why not double restitution or something like that?

[Proprietist]

I think the assumption of debt prison is that the debtor fails in good faith to follow a court order to pay back debts. Also, the risk of debtor's prison, like infinite liability costs for stockholders, could be attenuated with insurance on debts. If one has taken out debts in good faith based on current financial assumptions, and the debtor's financial situation changes (death, loss of job, etc.), insurance might kick in under those events so the debtor doesn't lose their property.

I think people should buy more insurance for things they do (voluntarily) instead of paying taxes. Risk should be completely internalized and attenuated for both debts and liability, and socialization of these things merely creates moral hazards that hurt individual rights and lead to carelessness and more debt.

[Juice]

I think the assumption of debt prison is that the debtor fails in good faith to follow a court order to pay back debts.

Ok, but why is imprisonment a solution?

[robc]

If Nuclear Plant X commits mass manslaughter due to crappy practices and goes bankrupt, society and the victims eat the cost.

If some guy goes nuts and shoots up a school then offs himself, society and the victims eat the cost.

Tomato, tomato.

[Randian]

Exactly!

[Proprietist]

In your scenario there are no indirect actors the shooter was acting as agent for to hold responsible.

[Randian]

The gun company is an indirect actor. And earlier, you said that Nancy Lanza was an indirect actor.

[Proprietist]

I said a court MIGHT hold her as an indirect actor (high burden of proof that she didn't know her son was a danger to others when she was trying to get him committed), which is why it would have been WISE for her to buy gun liability insurance.

I said nothing about Bushmaster, who unless their product was faultily manufactured or misrepresented and that directly resulted in the deaths, have no liability for how the owner uses the gun as they are not the owner. Stockholders ARE owners of the corporation and have direct control over the agents. How much they have is up to them internally.

[buybuydandavis]

I agree. It's obvious that libertarian principles don't lead to limited corporate liability.

There are a lot of so called libertarians who would be better called propertarians - they want to enforce status quo property arrangements of government, but without the government.

Why do we tax income instead of property? Where is the justice of some people owning the planet, and others being obliged to pay rent for the privilege of sticking around?

How many of these "libertarians" have read Thomas Paine's "Agrarian Justice", and could offer any kind of refutation if they don't agree?

It's a vanishingly small percentage.

Of course, the left is not in a position to complain about justice. Progressivism is simply theocracy in action. Force your neighbor to live as you want him to live.

There are libertarians who aren't just pro corporate interests. I suppose there might be a Progressive somewhere that isn't just a theocrat. I haven't met him yet.

[Rick Santorum]

Limited liability is crony capitalism. If you support limited liability, you are supporting cronyism. The free market must prevail...UNLESS IT INTERFERES WITH MUH PROFITS.

[Juice]

Are courts part of the free market? Some say they could be, but I don't think free market adjudication would be very practical for every situation.

[Proprietist]

Absolutely, and it's one of my central arguments for miniarchism - because third parties harmed by the actions of an individual or group hold no contractual means to demand private and equitable arbitration for violations of their rights in the event there were no courts. Relying completely on private arbitration that one party can't compel the aggressor or is involuntarily forced into by the aggressor would lead to aggressors violating rights with impunity. Thus there needs to be a consistent legal basis for enforcement of rights and determination of what constitutes "rights" and "responsibilities".

[T o n y]

The free market is impractical for every situation.

[Redmanfms]

The free market is impractical for every situation.

You really are a statist, liberty-hating fucking stooge aren't you?

Yes, choice and lack of coercion are so terrible!!!!

Fucking die.

[rhofulster]

I pretty much agree with everything Proprietist and Stormy have said. The only point Randian has made that I would think about is how to distinguish between an employee choosing to beat the hell out of a customer that in no way is related to advancing the enterprise and an employee doing something wrong that does advance the enterprise.

[Proprietist]

My point is that it doesn't matter. Wal-mart gets sued if a Wal-mart worker beats a customer to death on duty and on location, especially if there were signs should have known better.

If the actions are in advancement and under direct orders of the board of directors to beat the customer to death, Wal-mart should bear an even bigger risk. Right now, there is no more personal risk to me beyond the cost of investment if I invest only in BP, Tokyo Electric and other companies that have committed dangerous acts historically vs. if I invest in only in tiny, ultra-responsible environmentalist Jainist vegan hippie organic food microcorporations. The risk burdens are not equal but since the profit reward is higher on the dangerous companies and my potential losses to repay third party victims are mitigated by the state, I would choose the nuke companies when maybe I wouldn't in a real free market.

[Randian]

Wal-mart gets sued if a Wal-mart worker beats a customer to death on duty and on location, especially if there were signs should have known better.

Not with a winning case, they don't. How in the world as a matter of justice is Wal*Mart responsible if one of their employees beats a customer to death? I have to ask if you know anything about tort law at all.

[Proprietist]

Sizzler manager and employees beat lesbian customer. Sizzler pays $25000 by court order.

http://www.huffingtonpost.com/.....94151.html

I'm a total ignoramus when it comes to tort law.

[rhofulster]

1) this is actually a liability issue, not a limited liability issue

2) I don't think stockholders should be held personally liable unless the woman was dragged on to Sizzler's property unwillingly.

3) Need to know more facts before I believe Sizzler should be held liable.

[Randian]

Sorry, but the anti-limited-liability folks want to live in a world of perpetual and neverending guilt for things people aren't even remotely responsible for. If a man invests $100 into a multibillion dollar corporation, he is so far attenuated from any sort of responsibility that it is facially unjust to drag him into it.

It's akin to holding United States taxpayers personally responsible for the Bales' massacre in Afghanistan.

[Proprietist]

The US taxpayers are MORE responsible for the Bales massacre than the family of Bales' victims. After all, a majority of Americans voted for the politicians that sent the military over there.

That's my point - in the sequence of liability, it should be: directly liable party, indirectly liable party then victims and taxpayers when all options have been exhausted. In capitalism, the state sets absolute limits the indirectly liable party's burden which means it falls of the victims and taxpayers far faster than it would.

Every single one of your complaints would be solved via voluntary internal contracts of debt and liability burden between all owners and their actors, and the risk of damage can be mostly mitigated with insurance. You still fail to explain why non-contractual victims should bear the cost for potentially infinite damages instead of the corporate owners and how a system that subsidizes this legal distortion has anything to do with libertarianism or free markets. You are claiming the negative right to have someone else to subsidize your ownership of risky property.

[Randian]

You clearly are not reading what I am writing.

That's my point - in the sequence of liability, it should be: directly liable party, indirectly liable party then victims and taxpayers when all options have been exhausted.

Which is what it is now. The problem you have is that you seem to think that someone with a very small role has infinite liability. As a matter of justice, they do not. What you are basically saying is that if I am a 1% shareholder, then you should be able to take my home, my car, my savings, my possessions, basically strip me of everything I own, because of my 1% ownership.

That's what justice looks like to you? a 1% shareholder is too attenuated from the day to day operations to be that kind of responsible.

And yes, I get it that the next-door neighbor isn't responsible, either. That doesn't mean you go looking for people to punish.

[Proprietist]

Somebody has to pay for the cost of infinite liability. If it is not the corporation and their owners, it is victims and taxpayers. Thus, you support socialization of risk. Attenuation is an INTERNAL contract and has ZERO RELEVANCE to third party victims. Attenuation should NOT be limited by the STATE, but by the internal parties.

[Juice]

A poor man wrecks his car into a rich man's marble statue valued at $20 million dollars. The rich man sues the poor man for $20 million dollars and wins. The poor man pays every penny he has at the time, $1000. He also pays every penny he will ever earn to the rich man for the rest of his life. It will amount to $500,000. The poor man dies. Was the remaining liability of $19,490,000 socialized? If so, was the socialization unjust?

This is just one on one liability, so maybe you can change the scenario to a humble corporation with $10 million in assets, 100 shareholders with a total of another $10 million in assets. The corporation starts a massive fire that results in $1 billion in damages. Again, the corporation and all its shareholders are completely wiped out. How will the costs be paid?

Is there some way in which all risk can be mitigated or restituted? I say no. Shit happens and sometimes it sucks.

[Proprietist]

"The poor man dies. Was the remaining liability of $19,490,000 socialized? If so, was the socialization unjust?"

The excess costs were socialized onto the victim (the rich man). However, this was de facto and not de lege, and the rich guy claiming from a guy walking his dog nearby who was not directly responsible for the poor driver's accident and had zero control over the situation would be unjust as well.

The guy walking the dog is not at all analogous to a corporate owner that owns and profits from the corporation that caused the accident/fraud/whatever and hired the agents of this action.

If a truck company hires a trucker with sleep apnea and he falls asleep and plows into a $20m statue (or in the real life example, a family and kills them), the business is liable. In a free market, perhaps the truck company would have insured themselves in case damages caused exceeded the value of the corporation so the stockholders don't get held liable, and the insurance company has a profit incentive to raise the rates on a company that doesn't test its drivers for sleep apnea.

[Proprietist]

There will always be de facto socialization of risk because each person will only earn so much money in our lifetimes and may never make back enough to pay back our legal and financial debts. That, there's nothing we can do about.

My criticism is when the STATE socializes risk by setting an arbitrary cutoff to one's unattenuated liability burden. It's exactly like if the state had a special license that drivers can buy that limits their total liability to the current value of their car. Who would buy driver's insurance? You wreck your car, the value is shot - hand them the smoldering wreckage and let the rich guy pay $20m for his statue, minus the cost of your scrap metal. Is that better or more just? I think not.

Likewise, stockholders abandon a sinking ship with a legit lawsuit and the corporate values might drop below the legal penalty levied to recompense the victims. State socialization of risk is the unlibertarian moral hazard, not natural socialization of risk based on de facto inabilities to pay back debts and indemnities.

[Juice]

Are all arbitrators and adjudicators necessarily part of the state? Any decision to make someone "whole" requires an impartial third party arbitrator. There is no "natural" decision maker that can determine what a plaintiff's damages are, what a defendant's liabilities are, and the mechanism by which the plaintiff is to be made whole. If a judge/jury decided that it would be unjust to wipe out all the assets of a poor man just so a rich man can replace his expensive statue, then would that also be an arbitrary cut-off? Of course. Would it be just? Maybe. What's considered "just" is always someone's opinion.

[rhofulster]

"If a man invests $100 into a multibillion dollar corporation," I believe he should be held responsible for 1/100,000,000 of any third party liability above the value of the company.

[Juice]

It's akin to holding United States taxpayers personally responsible for the Bales' massacre in Afghanistan.

The dead in the massacre and the taxpayer are both victims of the same organization. A taxpayer is not analogous to a voluntary investor.

[Stormy Dragon]

If a man invests $100 into a multibillion dollar corporation, he is so far attenuated from any sort of responsibility that it is facially unjust to drag him into it.

If he doesn't want the responsibility, then he should be investing via debt insturments rather than equity instruments. The other outcome of eliminating limited liability is that more people would invest via bonds rather than stock.

Responsibility follows control; if you don't want responsibility for what a corporation does, than don't claim control over it (as one implicitly does by claiming ownership of it). The problem is investors want to have thie cake and eat it to. They want all the benefits of equity ownership without having to accept any of the liabilities of it.

[Proprietist]

Stockholders don't want any socialization of their profits, but they love any socialization of their risk the government will give them.

[Juice]

Control? Some random average joe investor with a mutual fund has no real control of the corporations he's indirectly invested in.

[rhofulster]

This reminds me of an interview I saw during the aftermath of the BP spill with a couple of the "victims" of BP's malfeasance. This was a retired couple who had the bulk of their retirement fund wrapped up in BP. The tone of the interview was that they were also victims of the heartless corporation. These people (and the interviewer), who were totally unaware of the stuff going on in their name, who probably knew nothing about the enterpriseother than its P/E, who were damn lucky that all they stood to lose was their BP stock, just left me cold.

[Juice]

Those heartless bastards. They should have requested daily safety reports from every oil rig operated by BP and then divested the second they learned of anything amiss. I know I do that with every stock in the mutual funds in my 401k.

[Robert]

This is news to me. I was taught that the coloniz'n of America by the British was facilitated by the development at that time of the limited liability corp.

[Kant feel Pietzsche]

Serious Question: A sole proprietor business is sued. If damages exceed the value of the business, are the personal assets of the sole proprietor fair game? Can the proprietor declare bankruptcy in order to protect some personal assets?

Same question, only this time the business is a three person partnership.

[buybuydandavis]

Limited liability - profits without responsibility.