Hypothetical

[The Terrible Sweal]

A publicly traded 'corporation' such as Inco or Microsoft is essentially a social construct for managing a pool of proto-capital, capital, and potential capital invested in particular ways.

Though corporations are often criticized as either rapacious or bureacratic, the success of the corporate form of organization is clear from its persistence and frequency, and arguable on the basis of wealth creation.

Now my question is this ... what if we someday attain 'enough' wealth and further creation of it is superfluous?

[Hugo]

Very interesting subject, Sweal.

Though corporations are often criticized as either rapacious or bureacratic, the success of the corporate form of organization is clear from its persistence and frequency, and arguable on the basis of wealth creation.

It has been successful, however, consider too that legislation and regulation favour the stock corporation as a business mode. The biggest benefit is limited liability, which other organizations (such as, say, workers collectives) do not get. This phenomenon relies upon a state grant of legal personhood to an abstract. Another example is lobbying, when corporations can use money to try and attain a goal politically rather than economically, and the existence of lobbying makes bigger (richer) mean better due to political rather than economic reasons.

Now my question is this ... what if we someday attain 'enough' wealth and further creation of it is superfluous?

Economics is the science of studying the optimal allocation of scarce resources. If resources cease to become scarce (I believe that's what you are theorising) then economics will have become defunct.

Think Star Trek. Nobody works for pay and materialism is not an issue because they have replicators, items of technological magic that can duplicate or create things from nothing (gel packs or whatever geek-speak they use, but essentially, something from nothing). Therefore, in the Star Trek universe, material things no longer have value. How could gold be valuable when anybody could go to his replicator and say, "Computer: ten gold ingots" and have them instantly appear?

[August1991]

Now my question is this ... what if we someday attain 'enough' wealth and further creation of it is superfluous?

I'll be frivilous and say that would happen when people live forever. We face a fundamental constraint of time. IOW, we will never be wealthy enough.

This phenomenon relies upon a state grant of legal personhood to an abstract.

That is irrelevant.

The biggest benefit is limited liability, which other organizations (such as, say, workers collectives) do not get.

They could if they wanted to. Limited liability is a wonderful invention that makes it possible to divide risk. It is the distinction between a put and a call option. Such ways to define risk (and property, for that matter) will become more extensive in the future so taht they can be traded.

A publicly traded 'corporation' such as Inco or Microsoft is essentially a social construct for managing a pool of proto-capital, capital, and potential capital invested in particular ways.

Like all firms, a publicly traded corporation is a way to organize a whole series of contracts between individuals that, given current technology, would be too costly to organize through markets.

You put emphasis on one aspect - lending and borrowing claims on (real) resources (buying and selling shares and bonds). This can be done through an organized market (public trading) or in an informal market (privately held corporation).

The State creates a bias not through limited liability but through corporate taxes. Since shareholders are taxed on dividends paid from earnings after corporate taxes are paid, there is double taxation. As a result, corporations have an incentive to retain earnings rather than pay dividends. This means corporations are constantly searching for new ways to grow (and use their retained earnings). Shareholders realize their benefit through a capital gain - which is also taxed differently from income tax.

Viewed from the perspective of your post, corporate taxes mean it is cheaper to raise funds internally rather than start up a new firm with new shareholders.

Firms are larger than they would otherwise be and there is a misallocation of resources.

----

Incidentally, if you use the word "capital", ensure that is clear whether you mean physical/human capital (real resources) or claims (financial paper) on that capital (real resources).

[Hugo]

That is irrelevant.

Prove it. My contention is that only universal law backed by monopoly on violence can create something so ridiculous as a fictitious "legal person" who does not actually exist.

Limited liability is a wonderful invention that makes it possible to divide risk.

Oh, you can divide risk, and you can transfer risk, but limited liability is a way to destroy risk, to abrogate it, and ethically, that is impossible.

What limited liability does is to make it possible for the corporation to be held liable rather than any individual in it. However, as an abstract and as an entity that does not exist, the corporation cannot possibly be an acting agent and so cannot be liable for anything.

If you have a car accident, many people might be held responsible - you, the person you hit, your mechanic, or a combination, or something else. But no sane person would hold your car responsible, or demand that your car pay damages or serve a prison sentence, and that is what limited liability laws do - force a non-acting agent to become liable.

Financially, limited liability means that the owners - stockholders - are responsible, because they bear the ultimate boon or burden of what the corporation "does". But ethically, nobody bears the burden. No stockholders of Enron went to jail, and the directors only did because they couldn't make the case for limited liability, i.e. they couldn't claim that the corporation cooked the books.

[August1991]

What limited liability does is to make it possible for the corporation to be held liable rather than any individual in it. However, as an abstract and as an entity that does not exist, the corporation cannot possibly be an acting agent and so cannot be liable for anything.

Not at all, Hugo.

If I lend you money to buy a car and you kill someone with the car, my liability is limited to the sum of money I lent you. IOW, that is the most I can lose. The family of the victim can't sue me for damages because I lent you the money.

In extremely simplified form, that's all that limited liability means.

[Hugo]

If I lend you money to buy a car and you kill someone with the car, my liability is limited to the sum of money I lent you. IOW, that is the most I can lose. The family of the victim can't sue me for damages because I lent you the money.

One would assume that you wouldn't be liable for my actions. Perhaps I would agree to be liable for your loss. However, somebody is liable. In your example, that somebody is implied to be me. But in limited liability corporations, nobody is held liable - not the stockholders, nor the directors, nor the employees. That is akin, as I stated, to holding the car responsible in your example.

If the corporation owes beyond its ability to pay and goes bankrupt, limited liability states that the losses of the shareholders must be limited to their shares, that they don't get their investment back, but neither do they pay any of the debt. Thus, nobody is actually responsible for the debt (assuming the corporation was in negative equity). How can this be? Somebody incurred it, somebody has to pay it. The corporation can't pay it because it doesn't exist, and if it does pay it, what that means is the stockholders are paying it.

You can transfer liability and assume it, but what you cannot do is to state "nobody is liable" or that an abstract concept, a non-acting agent, is liable. This cannot logically be true. In the case of the debtor corporation, somebody incurred the debt or caused it to be incurred. Limited liability destroys their responsibility for that and replaces it with nothing.

[Guest eureka]

Limited Liability is not an absolute limitation. It is possible to "pierce the corporate veil" in certain circumstances.

If, for example, a ciorporation hires someone to perform a service, knowing that the corporation does not have the funds to pay, then the guilty parties can be held pesonally responsible.

[August1991]

But in limited liability corporations, nobody is held liable - not the stockholders, nor the directors, nor the employees. That is akin, as I stated, to holding the car responsible in your example.

That's not true.

Limited Liability is not an absolute limitation. It is possible to "pierce the corporate veil" in certain circumstances.

You both make it seem as if a corporation is some kind of legal stealth creation. [The movie "The Corporation" was typical of the thinking.] The notion of a corporation as a "legal entity" like a person entirely misses the point.

Nor is a corporation an entity that faceless suits hide behind. I blame Hollywood for many of these silly stereotypes. [From The Matrix to Waterworld, corporations are always the bad guys.]

Corporate managers are still subject to criminal prosecution or civil suit for their actions. They are not exempt because they are acting in the name of a corporation. [Government employees get this kind of protection however.]

The liability exemption applies specifically to shareholders. Partners do not get such an exemption.

What does this mean practically? Creditors of a bankrupt corporation cannot sue shareholders to get their money back. IOW, a shareholder does not risk losing his house if corporate managers borrow from a bank.

Creditors of a bankrupt partnership can sue the partners. A partner does risk his house when he borrows money from a bank.

It would be impossible to have shareholders without limited liability. The riskiness of a share would change according to the solvency of various shareholders. With limited liability, some risk is transferred to creditors. Bank loans to corporations typically carry a higher interest rate to cover the additional risk.

A call option is an example of limited liability. If I make a deposit for a holiday, and then walk away from the deal because I decide not to make the trip, my loss is limited to my deposit. The travel agent cannot sue me for not buying the whole trip. Limited liability for shareholders has the same effect.

Limited liability might have consequences for inecntives.

My car example was a bit too simple so I'll change it a little. Let's say I own a car which I lend to you so that you can make deliveries. We agree that you will pay yourself a salary and any residuals will go to me as payment for the use of the car. (I'm a shareholder and you're a corporate manager.)

You have an accident and it is determined that the brakes were faulty. As owner of the vehicle, I am held liable. The victim sues me but can receive in damages at most the value of the car.

In this scenario, would the limited liability provision lead to incorrect incentives? That is, as a shareholder, would I be less inclined to maintain the brakes.

One solution would be to force me to buy insurance. This happens in some corporations. The creditors usually insist on this.

[Hugo]

The notion of a corporation as a "legal entity" like a person entirely misses the point.

The point is that granting an abstract concept, a metaphysical thing, a non-acting agent "legal personhood" is completely fallacious. A person has to be liable, and liability can be deferred. For example, the CEO of a corporation could agree to incur the liabilities of the shareholders (the owners) as part of his contract. Or the shareholders might agree to remain liable and release the CEO from liability. The market would decide.

Creditors of a bankrupt corporation cannot sue shareholders to get their money back.

But they have to be able to sue somebody. You cannot say that nobody was responsible for the debt, otherwise there would be no debt. Debts don't just magically appear overnight, somebody runs them up.

Looking at the example of the car, again, the owner represents the shareholders and the driver, the executives. If we assume that driver error caused the accident, the driver is liable. If poor maintenance of the car was the cause, the owner is responsible (but he could have transferred liability to his mechanic). But in no case is the car responsible, nor could damages be limited to the value of the car, and if damages exceeded the value of the car, the plaintiff would have to have somebody responsible that he could pursue for the balance.

Incentives are irrelevant. It's about logic and justice.

If I make a deposit for a holiday, and then walk away from the deal because I decide not to make the trip, my loss is limited to my deposit. The travel agent cannot sue me for not buying the whole trip.

Unless, of course, it was in your contract that you would buy the whole trip and, in the event of cancellation, would pay the entire value.

But that's just the thing: people should be able to draw up their contracts as they see fit. A contract can transfer liability but only to another party, not a non-acting agent.

[theloniusfleabag]

Dear Hugo,

I own an incorporated business, and have insurance. It is taxed separately, and is 'legally liable' separately from myself. I have been told that to further protect myself from liability, I should create another 'shell company', (Fleabag Holdings, for example) to 'own' the first company and further remove my personal assets from risk. In contracts with my customers, they are doing business with my company, and not with me personally. Liability is then limited to the insurance I pay for, and not my home or car. That is why there are clear liability issues between "proprietary", "limited", and "incorporated" businesses. It seems that you are arguing that all businesses should be governed by 'proprietary' rules.

Corporate entities, as much as you would like to think they are 'non-entities' are vital to business. If the consumer has a choice of where to purchase goods or services, they often go to 'brand name' companies. The corporate "Brand" is often as important as the product itself. It gives the consumer peace of mind knowing that they could sue, and have a reasonable expectation that they could recover their loss. The same could not be said for most proprietary businesses.

[Hugo]

You aren't talking about your ethical concerns, only your legal ones. The fact is that you cannot transfer liability to a non-acting agent, especially an abstract concept. You are not describing how your company is responsible for things, you are simply describing how you use political processes to shield yourself from the economic consequences of your actions.

In contracts with my customers, they are doing business with my company, and not with me personally.

They are doing business with you personally. An abstract non-acting agent cannot do anything, which includes doing business. In business transactions, a person is dealing with a person or the agent of a person, who is responsible or liable. Until we develop artificial intelligence, this is always going to be the case (and then we have a whole new debate about whether or not an AI is a person).

[August1991]

The fact is that you cannot transfer liability to a non-acting agent, especially an abstract concept.

By creating a corporation, Thelonious didn't do that.

You are not describing how your company is responsible for things, you are simply describing how you use political processes to shield yourself from the economic consequences of your actions.

Political processes? By incorporating, Thelonious has passed the risk on to any creditors because they now risk losing any claim on assets in the event of a bankrupting judgment in a civil suit.

The creditors are perfectly aware of this situation. They probably charge a higher interest on any loans and may insist that Thelonious have liability insurance.

A good lawyer would probably advise him to do this anyway. While the chance of a liability suit is small, the consequences can be drastic.

[bTW, I don't know what business is in but I suspect incorporation may have been motivated for tax reasons. An entirely different subject.]

The liability issue rears its truly ugly head in the case of involuntary victims. This brings me back to the innocent passerby killed by the corporation's car with faulty brakes. Taking the corporation to court, the family of the victim is surprised to learn that the car's owner, while very wealthy, is not liable beyond the value of the car. The creditors who provided the bank loan to purchase the car get nothing - but they knew the situation when they loaned the money.

Now, is this situation any different from any impoverished driver who causes a tort?

There are two major issues here: what incentives are skewed by shareholders' limited liability and would the world be a poorer place if shareholders' limited liability didn't exist?

[theloniusfleabag]

Dear Hugo,

You are not describing how your company is responsible for things, you are simply describing how you use political processes to shield yourself from the economic consequences of your actions

Indeed. It is a small company, with only my wife and myself as the shareholders, and 1 employee (for now). I am reasonably confident that my actions will not be the cause of a lawsuit, but such cannot be said with the same confidence of any employees, with risk increasing in direct ratio to the # of employees. These employees act on behalf of a company during working hours, so it is only fair that the company carry insurance to protect the company from bankruptcy due to the possible negligent actions of an employee. It is also fair, I believe, that a person harmed by the actions of an employee should be able to sue the company that person represents for damages. This, of course, is a two way street. For example, if I go to McDonalds and get served a McChicken Sandwich with a big cyst on it (true story,glad it wasn't me), that makes me ill, whom do I sue? The server? The company? The cook? It has to be the company, for they bear ultimate responsibility for what I get served. They carry insurance, too, believe me. What happens after the fact, like quality control, screening employees (If the cook knew about the cyst and served it anyway, just for larfs)etc. are the internal affairs of the company.

The insurance issue is not much different from an individual to a corporation, theoretically. It is meant to cover risks. Auto insurance is the similar. Both the insurer and the insured agree on a fee that will guarantee that reasonable costs will be covered by the insurer should a mishap occur. It is like gambling. (Unlike operating without insurance, which is gambling for the stupid).

Shareholders demand insurance, as August1991 states, to protect their investments from the actions of a 'perhaps renegade' employee acting on behalf of the company, or from unforseen mishaps.

I would suspect, Hugo, that you would be against forcing drivers to carry insurance.

[Hugo]

You guys are talking about transferring liability, which is fine with me. Any person can voluntarily assume liability for another, and even charge a fee for it, like an insurance company. Other examples would be archaic Letters of Introduction, Anglo-Saxon borhs or even a reference for an employer and so forth, basically, a guarantee of a given person's character by a reputable authority of good standing.

Let's say you run a cable company. One of your technicians, while installing a cable, damages a house. The technician is responsible as he caused the damage. The company can either hang him out to dry and make him fully responsible or it can assume responsibility for the damage, in which case the technician's liability has been transferred to whoever would be liable - the supervisor, the directors, or if the company itself pays the damages from its funds, the shareholders.

As long as everybody involved knew what they were getting into, i.e. everything was voluntary, there's no problem. I think we're in agreement.

I would suspect, Hugo, that you would be against forcing drivers to carry insurance.

I'm against all force.

[The Terrible Sweal]

The point is that granting an abstract concept, a metaphysical thing, a non-acting agent "legal personhood" is completely fallacious.

Legal personhood is neither fallacious nor impossible, but it is merely an artifact, like 'liability' (and for that matter, property or any other right).