Corporations

Good points, Arnold. However, in my opinion (and perhaps I just need to read the previous post) you missed one of the more important discussion points when it comes to corporations: Is limited liability immoral due to the protection of shareholders from damages caused by actions they (as a group) sanction, or management sanctions on their behalf?

I agree with you on the point that corporations are just legal entities allowing a group of people (shareholders) to act collectively under a certain legal regime.

The neglected point in the debate seems to me to be about the problems of rent seeking in general. Many people seem to ascribe the problem of rent seeking solely to corporations. As if only incorporated shareholders had the power to petition governmet for special treatmet at the expense of society!

The fact is that the prisoners dilemma of asking for special treatment at the expense of society as a whole exists regardless of the possibility of acting as a corporation.

The real focus for political reforms should be consitutional ameds making sure that the government would not be able to give out special favors at any group of citizens at the expense of society – regardless of their being incorporated or not. Such politac reforms being a stregthening of federalism with the increased power of individuals/groups to remove themselves from exploitative legislation, or a non-discrimination-clause as Buchanan and Hayek favored as a tool to limit rent seeking.

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One difference in the idea that a “corporation == a person” is ownership. Can one corporation own another? Yes. Can one person own another? No.

With corporations owning other corporations, that leads to a concentration of power that may bother many. If a pyramid of ownership is constructed with multiple layers of holding companies, it seems like that distillation leads to the top-most corporation far from its base.

The corporations themselves don’t have limited liability – all of their assets are fully available to creditors, just like individuals.

Limited liability of investors is a necessary part of a modern economy (and, by the way, is a feature of all government activities as well as corporate activities). Passive investors will not put their money into businesses they are not running if putting some money in exposes all their assets to unknown potential liabilities.

Thus if you think it better that cars are produced in large factories by machinery rather than in small shops by hand labor, you should support limited liability of investors.

The limitations to liability affect two classes of creditors. The contractual creditors (lenders, suppliers, etc.) know that liability is limited to corporate assets when the debt is created, so they have no complaint about not being able to go after the shareholders.

Tort creditors (e.g., accident victims) had no say in the creation of the liability, but in general corporations are more financially responsible than individuals are, more likely to be insured, etc. If not, there is a doctrine called “piercing the corporate veil” that holds the stockholders of inadequately financed and uninsured corporations personally liable.

Dr Kling, while your way of looking at things might have some intuitiveness to it, the law of the matter does end up being important.

You see, neither management nor shareholders are the corporation. The shareholders are the owners of the corporation, and management are employees of it. Management have natural rights as natural persons, the same as shareholders. Corporations are somewhat different as a thing in themselves. In current Constitutional case law they have rights as persons, but they are not natural rights because they are not natural persons. Instead, they have rights granted to them by courts at the courts’ prerogative.

When it comes to criminal proceedings, things are complicated by the de jure existence of the corporate person. You can’t very well arrest a corporation, because a corporation does not have wrists to bind nor a body to imprison. However, it then becomes possible to question whether corporations can commit crimes at all: Without a body, corporations can only act through agents. Those agents are liable for any criminal acts they engage in.

I think you need to pay more attention to the law of the situation because its INCREDIBLY important to understanding how corporations work in the modern economy. Without it you can only use second-best models, like your attempt to treat corporations as just another kind of partnership. They really aren’t.

I suggest, if you really want to make informed judgments about corporations, you research more into their nature at law.

Since a corporation is legal and distinct entity from myself, I shouldn’t be allowed to “incorporate” to skirt legal issues.
As it stands now, my contributions to political causes is limited due to government regulations(I believe there is a moral case against this but it exists in our current environment). I shouldn’t be able to incorporate to do something otherwise not legal. Creating a shell corporation called “Bosanquet LLC.” funded only by my own pocketbook, only “employing” myself and only existing to forward my personal political views by giving donations to friendly political parties, lobbying and encouraging political advertising toward my views is inappropriate if I am not allowed or have reached legal limits to do so myself.

I am not a legal scholar but as I see it, this issue has more to do with the restriction of individuals to allocate money and effort toward goals of their own choosing then what a corporation is allowed to do.

I am also under the same (possibly mistaken) belief as Lars P. that a corporation is somehow legally obligated to maximize profits. If this belief is true, this is also another major problem. This problem would resonate a strong legal argument against a corporation to behave in the least. If this were true, it would seem the best answer would be to remove this government restriction forcing maximization of capital.

To me, a corporation is collection of capital to make a product to sell at the market. I don’t think the current US law supports this view and that is more likely the source of conflict.

If a bank has some of its debts guaranteed by the government and its shareholders have limited liability, then the moral hazard problem is severe.

Arnold, I think that there is a problem with your reasoning here: what I think you are saying is that the government’s (implicit) guarantee of financial sector’s debt lead to higher leverage, which increased the probability of these companies going under. Right?

Well, no. Increased leverage leads to higher probability of bankruptcy ceteris paribus. If the government’s guarantee reduces the borrowing costs, and the companies become more leveraged as the result of lower borrowing costs, then the probability of bankruptcy does not necessarily increase. Companies adjust their leverage in response to movements in interest rates all the time, but these adjustments are not viewed as a factor that changes the likelihood of bankruptcy.

Arnold; Throughout your piece you are working under the incorrect assumption that is is possible for management to act on behalf of the wishes of their shareholders.

Disavow yourself of this notion and reassess. You ought to find that this changes the situation even under the naive Libertarian view that everything is always better when people can do what they want.

MikeDC has it exactly right.

Corporations have exactly the rights that the individuals who compose them have.

And those individuals have the right to write down on a piece of paper “My liability is limited to X” and show it to anyone they have voluntary associations with and expect that limited liability to be respected.

But those individuals’ liability is certainly not limited if they commit a crime or tort against an involuntary party. And neither is the corporation or any of its executives or employees who commit such acts.

My philosophy on corporations and limited liability is that it should not be but that the corporate tax is an insurance premium against corporate wrong doing and that the tax exceeds the harm by a wide margin. The corporate tax advantages partnerships over corporations but corporations still out compete partnerships, meaning the limited liability is worth more than the cost of the tax. Also before getting rid of limited liability it would be good if we instituted looser pays.

One of the reasons that I see the corporate tax with limited liability as second best is that all companies not matter how safe or dangerous pay the same corporate tax. Electronic Arts, Inc pays the same rate of tax as Massey Coal Co. and BP and highly leveraged Lehman Brothers. An insurance company would charge much lower premiums for Electronic Arts because there is very little liability to what they do compared to the others that I listed.

I think the most effective response to those who say “corporations should have no rights” is to inquire how they would respond if the government were to dictate the content of the New York Times and all other media, which are corporate businesses.

More broadly, modern corporations evolved from joint ventures that kings and queens and other states were forced to create to induce private parties to capitalize and operate risky projects the state deemed important, such as foreign exploration and infrastructure creation. However, corruption in the awarding of such privileges, when successful, triggered adverse public reaction which in turn led to liberalized access and eventual privatization of the privilege.

The main reason in today’s economy for most corporations is the absurd unpredicability of the tort system, which is like playing Russian Roulette. The other is that it creates an off-the-rack method for capital attraction that reduces transaction costs and further economic development.