 Now, a lot of us have a kind of ambivalent attitude toward big business, right, as economists, as people who know economics, people who are sympathetic to the market and to capitalism. We kind of have an, most of us have an instinctive admiration for large successful companies, just as we admire successful athletes and entertainers or, you know, big scientists who discover, you know, add to our knowledge and so forth. We might think, well, big businesses, large businesses, are just the most successful, the most accomplished participants in the business world, and we should like them as well, right? But we also recognize that in all countries in the world today, we're not operating in a purely market setting, right? We have big government in pretty much every part of the world, certainly in the United States. We have a very large activist interventionist state, which is involved not only with foreign policy and so forth, but, of course, regulation and other aspects of domestic policy as well. And we know that some large companies, right, are the beneficiaries of government intervention. We, while we praise capitalism, we equally condemn crony capitalism, right? So how do we make sense of the different effects of government policy and government intervention on things like corporations, large companies, big manufacturers, et cetera? How do we make sense of that? So that's what I kind of want to walk through a little bit today. Now, you know, it's worth just sort of reminding ourselves of some basic framing issues, right? If you take an economics course or probably a history course at a typical U.S. college or university, you learn something like what you might call the public interest approach to government intervention in the marketplace and the public interest approach to regulation more particularly, right? This says that, well, the reason we have government in society is because, first of all, the government has to enforce rights, has to define and protect people's rights to life, liberty, and property, so especially in this context, in a regulation context, they would say, well, we need the government to enforce people's property rights. And then more importantly, we need the government to correct certain problems that arise in the market, so-called market failures like externalities and public goods and monopoly and so forth. Now, in my one o'clock lecture today, I'll be talking about arguments for externalities, talking about externalities and public goods and the role of government more specifically. But the idea that you get in economics and history and social studies courses is that, well, the market works okay, but it has certain problems and you need the government to step in and fix these problems. You know, I sometimes call this the high school civics class version of government when they take kids on a field trip to the state capital and, you know, you get the little tour of the capital building and they tell you all the wonderful things that government does to fix all these problems in the economy. Well, look, it doesn't take more than a few moments reflection. It doesn't take a very deep analysis to realize, okay, this is a seriously incomplete at best and downright false view of what government does in the economy, right? Most economists, if you really press them, will acknowledge the importance of private interests in the mixed economy, right? So a private interest approach to regulation recognizes that regulations often benefit particular groups at the expense of other groups. For example, you know, I mean, tariffs, quotas, subsidies, I mean, it's obvious here that if the United States imposes a tariff on, you know, on imports of textiles from Asia or Latin America or the Middle East, right? I mean, this obviously benefits domestic textile manufacturers. It raises the prices of textiles in the U.S. It guarantees or it shifts demand towards domestic manufacturers. It comes at the expense of foreign manufacturers and domestic consumers who pay higher prices than they otherwise would. So it's pretty obvious in the case of a tariff that this is not something that, you know, has the purpose of increasing the national welfare, improving national well-being. It's really just taking money out of certain people's pockets and putting that money into other people's pockets and creating some inefficiency and distortion along the way, right? So it's even worse than just a pure transfer. It's not quite as obvious, but fairly straightforward to show that a lot of safety regulations, health and safety environmental rules, often favor large companies at the expense of smaller companies, right? So something like the Americans with Disabilities Act that was designed, that mandates that companies offer, businesses offer various accommodations for people with, for disabilities. What we found when this legislation was debated in the United States in the 1990s is that lobby groups, interest groups that represented large manufacturers almost universally supported these laws. And you might think, why would companies lobby in favor of laws that add to their costs, that require them to install new equipment and to reconfigure their buildings and to provide additional services? Isn't that just cutting down on their profits? But of course, large manufacturers realized that it was much easier for them to meet these requirements than it was for small companies, for mom and pops, for new firms, startup companies and so forth. It's a sort of beggar thy neighbor policy or what economists call a move to raise rivals' costs. So lobby groups for small firms typically opposed these kinds of rules, whereas lobby groups for larger firms generally supported them. We find the same thing with health policy. We find the same thing with environmental rules. Large firms love environmental restrictions in general because they impose disproportionate costs on their smaller rivals. In general, we recognize that politically connected firms can use the regulatory system to their advantage. We can go further and try to identify specific cases, specific industries, specific contexts where we would expect this private interest to be more successful in lobbying for their own benefit at the expense of their rivals. So for example, in cases where the benefits of a particular government intervention are concentrated among a small number of persons and whereas the costs are spread out over a larger group of people, those rules are fairly easy to get in place and to sustain, like agricultural policy, for example. So there's massive subsidies in the U.S. towards domestic sugar cane and sugar beet production. The U.S. is very inefficient at producing sugar relative to countries like Brazil. If we had complete free trade and a complete free market in agriculture, there would almost certainly be no sugar produced in the United States at all. We would import all our sugar from Brazil and other countries in Latin America. But there's a small group of sugar cane growers in places like Louisiana who are very politically powerful and they lobby to get restrictions on sugar imports. Let's say there's just a dozen or so of these large sugar cane manufacturers. This restriction on imports of sugar provides a lot of benefit to them. You know, it doubles or triples their income. Their whole livelihoods depend on keeping out foreign sugar. What about you and me? Well, the result of the U.S. sugar policy is that we pay a few pennies more for a pound of sugar than we otherwise would. It's really not that big of a deal for us. It's not something that you and I probably, it's not something we're even aware of. We don't pay attention to it. I would never take, you know, a week out of my life to go to Washington and lobby and protest and demonstrate to get the price of sugar that I pay at the grocery store down by a penny or two. It's not worth my time, right? But a sugar, domestic sugar manufacturer will devote, you know, most of his or her energy to keeping that protection in place because their livelihoods depend on it, right? That's why we see what on the surface might appear odd. Lots of government interventions that seem to benefit only a few people. But that's precisely the point. You can spread the pain over a lot of people who don't care and won't do anything about it. If you concentrate the benefits, the beneficiaries will do a lot to keep those benefits. They're also what the economist Bruce Yandel has described as bootleggers and Baptist coalitions, right? Bootleggers and Baptist being a metaphor for two different types of groups that support particular rules, right? This is the Baptist and bootlegger version of the story, right? He originally, he used this example to illustrate prohibition, alcohol prohibition in the U.S., right? So you had two groups during the prohibition era who were strongly in favor of banning alcohol production and consumption, right? You had one group that opposed alcohol for moral reasons, what he calls Baptist quote unquote. People said alcohol is harmful, it's breaking up families, it's causing health, a lot of health problems, ruining our communities. We need to ban alcohol because alcohol is evil and harmful. But you had another group of Americans also in favor of prohibition, namely bootleggers, right? Those who make money selling illegal alcohol at high prices, right? The mafia Al Capone, of course, became the most powerful mafia figure in the United States from his control of the moonshine business. So the point is, the sort of Baptist group is out in front of the cameras, arguing publicly in favor of some restriction or regulation. But behind the scenes, you have domestic manufacturers and others who get an economic benefit from the rule staying in place. And they are quietly working behind the scenes also to make sure that those restrictions remain where they are. So the claim is not that these two groups explicitly work together, but that they're sort of operating as a tacit coalition. So in the case of environmental rules, right? You know, domestic large factories that benefit from strict environmental rules because these rules impose disproportionate cost on newer entrants into the market. They can't go before Congress, they can't go on TV and say, hey, we need pollution restrictions, we need a carbon tax, we need green energy because it will put more money in our pocket. But they don't have to do that because Greenpeace and the Sierra Club and other sort of Baptist-type groups are out there saying, we need to do something about climate change, we need to protect, we need clean air and clean water for the good of humanity, right? So where you have multiple groups pushing for the same kinds of rules, but from different perspectives, you're more likely to see those rules stay in place even if they, on the whole, are doing that harm to the economy. Now among free market economists and libertarian scholars, economists, historians and so forth, there are a variety of perspectives on how to put all this together and make us think about big business. You know, Ein Rand famously took the view that big business was America's persecuted minority. So Rand took a very favorable view of large American companies while they're producing all this value, but they're constantly under attack in the media and from the government and so forth. But there's views among libertarian scholars have been a little bit more nuanced than that, right? So Murray Rothbard in the 1960s and 70s and some of his colleagues were very much influenced by some historical literature coming out of the so-called New Left, the New Left revisionist historians, who developed a theory of what they called corporate liberalism. And I mean people like William Appleman Williams, James Weinstein, Gabriel Colco, many others. Again, mostly writing from a kind of left-wing perspective who argued that in the United States, most of the important regulations passed in the late 19th and early 20th centuries, the Pure Food and Drug Act restrictions on child labor and so forth, Ben Powell talked about these, really did not have the effect of stymying the growth of large business or restricting large companies which these authors thought should be restricted. But rather they argued that most of these regulations were actually worked to the benefit of large companies. They said that big business had used these kinds of regulations cynically to line their own pockets while cloaking, making it look as if these regulations were progressive and pro-social and harmful to big companies and so forth. And Gabriel Colco is probably the best known proponent of this view in his books, Railroads and Regulation and the Triumph of Conservatism. He argues that the so-called progressive era in the US was really the triumph of crony capitalism. And I think Rothbard was very much influenced by this view recognizing that in fact, if you look carefully at the history of regulation, you find that many regulations seem to benefit large firms or at least large firms disproportionately. One example that many people at our conference, including Tom Di Lorenzo have written about is the antitrust movement, right? So antitrust laws were heavily supported and lobbied for by large companies. I mean, it doesn't seem to make sense if you were taught in school that antitrust was designed to break up Standard Oil and US Steel and Carnegie and Rockefeller and the so-called robber barons were destroying America and antitrust legislation reigned them in. No, in fact, antitrust legislation again was designed to be used by large companies against some of their rivals and probably didn't have much effect on the competitiveness of the US economy. Rothbard has a couple of great essays on the progressive era echoing this point. And if you look at things like war, look at World Wars I and II or the Cold War, you look at the New Deal, right? Many of these pieces of legislation can really be interpreted as pro-business even though they've been described in the history books as sort of anti-business. So Rothbard tended to take the view that we should be very skeptical of claims that under the present set of institutional conditions, large companies are automatically virtuous and large because they did such a good job serving the consumer. They might be large because they took advantage of the regulatory system, okay? So let's try to work through this kind of point by point at a more systematic level. What are the effects of government intervention on the size of the firm, the shape of the firm, the operation of the firm, and so on? Well, one obvious effect of the mixed economy or the interventionist economy is that it changes the objectives of the firm or rather it changes the means by which firms achieve, try to achieve their general objective of increasing their profit, maximizing the return to shareholders, creating economic value, and so on. This funny quip by PJ O'Rourke, it may not be original to PJ, I'm not sure, but it's very insightful. But he says, when buying and selling are controlled by legislation, the first things to be bought and sold are legislators. In other words, if I'm in an industry, and this would apply to pretty much any industry in a modern economy, where my bottom line really depends on the attitudes of politicians and having politicians in my corner, well it would be foolish of me not to invest some money in getting those politicians on my side. A student was asking me just before the lecture started about the oral exam, and do we judges accept bribes? And I said, why don't you try and find out? Make me an offer, and we'll see. But if I forget, what's the first prize of the, if you win the oral exam? How much? 2,500 bucks. I mean, in principle, right, you should be willing to pay me up to 2,499. If I could guarantee that you would win. Yeah, exactly, if I could guarantee that you would win the first prize, that would be totally rational on your part. If we faculty were not the noble and virtuous individuals that we are, but we're in fact corrupt, it would be foolish of you not to invest some of your money, if not an outright bribe, at least buttering us up and laughing at David Gordon's jokes, even the ones that are not funny. I sometimes think about this in the context of campaign finance reform. This is a big issue in the US and other countries. Why is there so much money in politics, as it said? People say, well, the way to get money out of politics is to pass rules, right, so-called campaign finance reform, policies that make it illegal to give money to candidates. And I think, no, I mean, that's really addressing the problem from the wrong side. If you're concerned that business people and others are investing too much in lobbying, too much in rent-seeking activities and so forth, well, take away the rents, right? We want a system in which nobody would ever want to bribe a politician because politicians can't do anything for you, right? The reason that companies are willing to lobby and pay money and so forth is because they can get a big return on that. If we had a system in which politicians were nothing but figureheads or blabbermouths on TV, but were not in a position to affect your economic well-being, then you would have no incentive to try to influence them. That's really the root of the problem. But what I mean in this context is that any business in a country like the US and in particular businesses that are in highly regulated industries, financial services, insurance, healthcare and so forth, I mean, so much of their bottom line is influenced by regulation, by antitrust, by other government rules. They have no choice but to devote a lot of their energy to understanding the rules, right? Lobbying to try to change the rules, influencing particular politicians, filing lawsuits, defending themselves against lawsuits and so forth. So the reason all Fortune 500 companies have a huge legal staff and a large number of corporate relations experts and government relations experts is because you have no choice but to defend yourself if you're in a kind of a statist economy. And again, remember in a corporation, managers have a fiduciary responsibility to their shareholders. It would actually be irrational of a, or it would be a violation of fiduciary responsibility for some Austrian libertarian CEO to say, I'm not gonna play that game. I'm gonna ignore the feds. I'm not gonna lobby. And then the company goes bankrupt because the government crushed it or the government supported some rival. I mean, you can interpret that as a violation of fiduciary responsibility on the part of the manager. You really have no choice but to sort of play that game if you are going to fulfill your duty to maximize the return on investment of your investors. Okay, now you might choose not to do that or it's certainly private companies and proprietorships and so forth. It's sort of great for moral reasons if they take a firm stand, but it's hard to justify corporate managers doing this. So there's a further effect of this or there are further effects on what we might call organizational structure or organizational design. And Mises has a great discussion of this in his book, Bureaucracy. And I mentioned this the other day where he distinguishes what he calls profit management from bureaucratic management. And by bureaucratic management, Mises refers to actions that are taken by managers in a particular institutional or regulatory context, one in which managers are not guided by profit and loss signals per se, but by some kind of distorted signals that come from government intervention or producing goods and services that are not sold on markets. So Mises points out that the reason that firms have all these lawyers and have all these lobbyists and have all these employees who are not actually producing stuff for the consumer is because of taxes and regulations that distort profit signals, laws that interfere with hiring and promotion, the threat of arbitrary antitrust or regulatory activity makes firms more sort of quote unquote bureaucratic than the otherwise would be. So Mises was writing this book at a time in which a lot of authors, people like James Burnham for example, were worried about kind of the managerial state, the managerial society, saying that we have large companies with all these layers of middle management, they're not producing stuff, they're kind of a drag on corporate resources and social resources, how do we get rid of these big bureaucratic organizations? And Mises said part of the reason for the existence of these large so-called bureaucratic organizations is because of government intervention. These are sort of defense mechanisms against various things that government does in the economy. And I might just add, if you're interested in this, you might look at a book, Mark Rose book, Strong Manager's Weak Owners, which makes the argument that some of the problems associated with corporate governance, so-called Burley and Means Problem or separation of ownership and control is really the artifact of laws that restrict institutional investors like banks. So in the United States, banks are more or less restricted from, commercial banks cannot own equities, commercial banks cannot be engaged directly in investment banking since the 1930s. And this means that in the US, large companies, banks have a very small role in corporate governance compared to countries like Germany or Japan where banks are the dominant blockholders of large companies. Roe actually thinks that would be a better system, but we don't have it in the US because of restrictions on banks. Now, so here's a sort of issue that is particularly important to many of us is what about firm size? We're talking about big business. Does, is the net effect of government intervention to make firms bigger and more powerful than they otherwise would be? Kind of the new left view and the view of many libertarian scholars, so-called left libertarian scholars like Roderick Long, Kevin Carson and so forth. So what they have pointed out is that many government policies actually do promote bigger firms, right? What one way to think about it is, if there's a fixed cost of interacting with the state, you gotta have a Washington DC office, you gotta have some lawyers, you gotta invest in studying the regulations, understanding the regulations, lobbying for the regulations and so forth, then you might as well do it on a large scale. There are economies of scale and scope in interacting with the state from lobbying and compliance and dealing with intellectual property. So this provides an incentive for firms to sort of conglomerate a lot of that activity within their boundaries. In other words, for firms to get larger. A little tiny mom and pop startup, a food truck down the street, cannot have IP lawyers on staff, cannot have lobbyists on staff, but Walmart has thousands of lawyers and lobbyists on staff. Of course, there are many cases where you get direct subsidies, right? So lots of people like Elon Musk. Elon Musk is a great innovator, great entrepreneur, but in many ways a crony capitalist, right? Tesla and the whole electric car industry and the green energy industry mainly exists on the basis of direct government subsidies and indirect subsidies too. I mean, how about Goldman Sachs? I mean, I sometimes think of Goldman Sachs as like an additional branch of the federal government, right, because it's so closely tied to the Treasury Department. I don't just mean that almost every Treasury Secretary is a former Goldman Sachs executive and vice versa. Ted Cruz's wife and so on. By the way, I thought it was great when Ted Cruz gave a speech last week and apparently people were booing and they said that his wife, who was in the audience, was kind of, people were booing her and harassing her, but if you read the crime print, they were shouting like, down with Goldman Sachs, down with Goldman Sachs. So I thought that was pretty funny. But to be serious, I mean, Goldman is one of the handful of big Wall Street investment banks that are so-called primary dealers, right? When Roger Garrison and other people this week have gone over the Austrian theory of the business cycle, they talk about this idea that when new money is created, it goes first into the hands of certain companies and individuals who benefit from having that additional spending power before prices have risen and then these kind of injection effects. Well, who is it who gets the new money first? Well, it's Goldman Sachs and a few other primary dealers. They're the ones who buy government securities when the Fed is doing its so-called open market operations. You and I cannot participate in open market operations. You cannot buy or sell government debt when new government debt is issued. It's only a handful of big investment banks like Goldman and a lot of their profit is dependent on that. Bowing, right? McDonald Douglas, Lockheed, all these defense contractors obviously would not be large and profitable were it not for the gigantic military apparatus and the mammoth military budget of the United States. So Kevin Carson and some of his colleagues claim that they're indirect subsidies to large companies. They mentioned in particular things like transportation. The Interstate Highway System allows for companies like Walmart to operate huge distribution centers to consolidate control over retail to maintain the large share of the retail market because they benefit from cheap subsidized transportation. The ability to have one giant factory where you make a bunch of stuff and then you ship it out or you can run big distribution center, you sort the stuff and you ship it out. These critics say, well, in a stateless society in a society in which the government did not subsidize transportation, it would be more profitable to have many small manufacturing sites in local communities. Local communities would make their own things and distribute their own things rather than have them made in large factories because it would be too costly to transfer the inputs back and forth. People would grow their own food or they would source their food locally rather than globally because the transportation costs would be too high if it were not for the state. So, I mean, all of these are perfectly, I mean, of course it's true that government intervention promotes larger firms through these mechanisms. However, it doesn't follow that the net effect of government intervention is to make firms larger than they would be on the free market. Why? Because this is only half the story, right? Yes, there are government policies that promote bigger firms, but there are also government policies that promote smaller firms. For example, antitrust. Mom and Pops are not the victims of antitrust suits filed by competitors or filed by the state. There's what Fred McChesney has called rent extraction in his very interesting book Money for Nothing. McChesney argues that the way government business relationships work in the United States is essentially there's a threat, an explicit or an implicit threat from the government, a government agency, government officials, regulatory group, two large companies. We will crush you. We will break you up through antitrust or some kind of competition policy. We will tax you out of existence. We will regulate you out of existence. We will impose great harm on you unless you give us something that we want. Campaign contributions, lobbying, bribery, whatever. So it's kind of an extortion game, right? So companies give money to politicians. They make these huge contributions to political campaigns and so forth as kind of protection, as insurance against these government officials later doing something harmful to them. I mean, one thing you find in the U.S. is that if you look at corporate contributions to political campaigns, they're typically about equally distributed among Democratic and Republican candidates. So it's like, Walmart gave this $20 million to Democratic candidates and $20 million to Republican candidates. I'm thinking, well, if these companies were sort of expressing an ideological preference for one set of policies over another, for one candidate or one group of candidates over another group, you'd expect them to direct their contributions towards specific candidates or sets of policies or whatever rather than giving equally to everybody. On the other hand, if the goal is to ensure yourself against future payback by whoever wins the election, you would want to give equally to both candidates. Okay? Why do large banks and other big companies want to pay Hillary Clinton $225,000 for a 20-minute speech that was Hillary's going rate after she was, when she was out of the State Department before she ran for office? Because of her compelling, moving personal story, her great speaking ability, because of the insight, she's giving talks to Fortune 500 companies. I don't think she knows a lot about running a Fortune 500 company. No, it's rent extraction, okay? It's an insurance payment. These companies say, okay, this could very likely be the next president of the United States. I want this person on my side. Oh, yes, I would be happy to hire you at a preposterous rate to speak at my company meeting. Of course, I would be delighted to give a contribution to the Clinton Foundation. Please, let me know how I can support your efforts. And then, of course, they'll do the same thing to the Republican candidate or whatever. Disclosure requirements. Some of you may have read about some effects of the Sarbanes-Oxley rules that required public companies, corporations, not only to disclose more information about their operations, but some of these rules hold corporate executives, the CEO, the CFO, personally liable for any misstatements on the accounting forms in the wake of Enron scandal. It was thought that public companies were cheating, they were covering things up, we need to make their disclosures more transparent. Well, one effect of that is that it has been a sharp decrease in the number of private companies going public. A lot of companies would rather not be listed on the stock market and get the benefits of being able to accumulate large amounts of capital because they don't want to meet those disclosure requirements. So if you're small, you can stay under the radar screen, you're not subject to all of the restrictions that larger firms are subject to and that might be a reason to stay small. Let's talk about subsidies. So there are certainly direct subsidies that go to small companies. Local governments build science parks and technology parks to try to encourage small tech startups to locate in their community. So you provide free land, you provide free infrastructure, you may give cash, subsidies, incubators, government-sponsored incubators to help new companies. There are grants, SBIR awards, the government writes you a check to help you get your company started. But even more important might be indirect subsidies. So again, consider the argument that in a purely free market, we would not have large-scale production because if you had to pay the full cost of transporting the inputs to a central location and then transporting the outputs back to the consumer, it would be prohibitively costly. Well, now imagine a world in which the government does not also subsidize energy, telecom, other kinds of services, education, right? Would it really be profitable to have small-scale, household industry, local production if they had to provide their own power, with windmills or something, if there were no electric grid, right? If it were very costly to communicate with potential customers and potential suppliers because there's no government subsidized telecom system, right? Then I suspect if you took away all those subsidies, we might see even more consolidation rather than less. Okay, so lots of services that are subsidized or provided by the state benefit smaller firms at the expense of larger firms. We'd have to try to net all that out and it's not easy to do so. More generally, you might think that most of what government does, restricting trade, waging war, controlling education and so forth, all of the policies that most of us would argue make us poorer as a nation, right? As a society. Also have the effect of harming productivity, right? So these things retard or reduce the international division of labor, right? They lower stocks of human capital, they lower the marginal product of labor. Imagine what the marginal product of labor would be in different industries if we had a free market educational system instead of the one that we have in almost all countries. All these interventions that make us less productive as a society that we otherwise may be may actually be reducing the economies of scale and scope that favor large scale production. Maybe in a purely free market with a better educational system where entrepreneurs can really, entrepreneurship can flourish, where innovation can take off. We might have even more consolidation than we have now. We might have bigger firms rather than smaller firms. The point is we just don't know from a theoretical point of view what the net effect of government intervention is on firm size. Some policies make firms larger than they otherwise would be on average. Other policies make firms smaller than they otherwise would be on average. The net effect is not clear. This is something we would just have to look at and examine through case studies and so forth. Let me say just a moment or two about the legal form of organization because some people in our circles tend to get very passionate about this topic. What about corporations per se? Some libertarian legal scholars and other scholars claim that the very existence of the corporation is illegitimate in a free society because they argue that in corporation is a grant of the state and that the corporate form, the limited liability corporation is a kind of an artificial construct of state intervention and should be eliminated. So first, let me just point out that whether firms on a free market would be organized as corporations or rather as partnerships, limited liability companies, proprietorships and so forth. This is itself a very complicated question. All forms of organization, proprietorship, partnership, LLC, corporation, venture-funded startup, whatever, private equity firm, all forms of organization have costs and benefits. You have to tease those out carefully and apply them to particular cases. I had this sort of fun little mini debate with Roderick Long in 2008. You can find, his contributions were on Cato Unbound and my responses were on the Mises blog and he responded to me on Cato Unbound and so forth. If you just do a Google search for a phrase, something like this, you can find them. I had a page on my blog that provided all the links. Roderick was essentially arguing that the corporation is legitimate in the free market and he gave a number of reasons why large corporations suffer from inefficiency, separation of ownership and control. Corporations are owned by shareholders, large corporations have many shareholders, they're spread out all over the world, they're not in any position to exercise discipline on the corporate officials who actually run the firm even though they themselves are not the owners. Roderick said therefore the only reason that large corporations exist is because they get direct and indirect subsidies from the state. And I said, essentially, Roderick, look, I mean, yes, it's true that there are all kinds of principal agent problems and coordination problems and governance problems associated with large publicly traded corporations. But there is an equal or greater number of organization management and governance problems in cooperatives, in proprietorships, in partnerships. Most of these libertarian critics of the corporation think that what we would have in a purely free market is mostly cooperatives. But they never actually study cooperatives or look at any of the scientific literature on cooperatives, which finds that cooperatives are grossly inefficient in many ways. Cooperatives suffer from all kinds of agency problems and coordination problems associated with the fact that ownership is tied to employment or patronage. To be a member of the co-op, you either have to work at the co-op if it's a worker-owned co-op, or you have to be a customer of the co-op or a supplier to the co-op. And that means that your ownership is tied to your sales or your provision of labor or your purchases. That makes for a lot of problems in making managerial decisions, right? You can't, it's harder to exit. You have a lot of heterogeneous interests. The co-ops owners are not just interested in maximizing profit, but also in getting higher wages for themselves or better prices for their products they sell, et cetera. This causes all kinds of managerial and organizational problems, which the left libertarian critics of the corporation never, never discuss. But what about the corporate form itself? I mean, there are tax advantages to incorporation, right? Corporate tax rates may be lower than personal income tax rates and other kinds of business tax rates. Of course, the US has the highest corporate tax rate in the developed world. I might just add as a footnote. But the main issue that you see in these discussions is so-called limited liability, right? So by incorporating, right, the owners are shielded from personal liability for things that face the corporation. So if the corporation goes bankrupt, the creditors can seize all of the assets of the corporation, but they cannot go after the personal assets of shareholders. They can't take the shareholders' house and car and so forth. They can only claim assets that are owned by the corporation itself. Likewise, if you incorporate, if one of your employees commits some kind of harm or crime, shareholders are not personally liable for torts that are committed by employees or by the corporation. And some libertarian critics have said, well, this is illegitimate. So we want to parse this carefully. Limited liability has at least two manifestations. There's limited liability for creditors, the first case that I mentioned, and limited liability for torts or crimes or harms, okay? So limited liability for creditors, that's easy to handle in a free market. You don't need any government intervention whatsoever because limited liability is just part of the contract between the firm and a lender or an investor, right? So in a purely free market, you could imagine there would be two kinds of corporate loans, right? If a company, a corporation company says, hey, would you please lend us some money? We'll pay it back with interest. The contract could specify either, the contract has to specify, well, what happens if the firm goes bankrupt? Can the lender get the personal assets of the owners or not? And that's something that the owners of the firm and these creditors could negotiate and probably you'd get a better interest rate, a higher interest rate under one contract than another, but the market can just sort of sort all this out. If creditors don't like limited liability, they're free not to invest in limited liability companies that can invest in unlimited liability companies that they'd probably get a lower interest return on that, okay? The more difficult issue is limited liability for torts, right? If a FedEx driver crashes into somebody, kills somebody in an automobile accident, should the shareholders of FedEx be criminally liable? Critics of the corporation say yes, limited liability gives corporations an artificial privilege by shielding the owners from criminal liability from what employees do. But it's not obvious why the shareholders should be legally liable for torts committed by employees or other people associated with the firm, right? The legal term for this, I can use Latin because the judge was teaching in this room this morning, is respondeat superior, right? So this is a question of when is an individual liable for something that a subordinate did on behalf of the employer, okay? It's nothing to do with corporations per se. If Pat Barnett says, hey, Peter, we're out of pizza for the pizza party tonight, will you run down to Papa John's and bring us back some pizzas? And I say, yeah. And I commit some harm to someone. I beat somebody up or run somebody over on my way to come back with the pizzas. Is that Pat Barnett's fault? I mean, courts, common law courts have said, well, I mean, it kind of depends on the circumstances. If Pat instructed you in a way that the only, such as the only way you could have complied with the instruction was to engage in highly reckless behavior where causing someone harm was extremely likely. In that case, Pat could potentially be liable for the harm that I committed. But if Pat just said, go get us some pizza and I on my own accord acted recklessly and harmfully, then Pat would not be liable. It doesn't have anything to do with limited liability as granted by corporate charters, right? It's just an issue of who's responsible for other people's actions. My point is, even in a purely stateless society, even in a purely free market, it is far from obvious that owners of companies should be held legally liable for torts committed by employees. And if they're not, then limited liability is not a state provided benefit that can be used to explain companies. Okay, so I'm already done over time. So to conclude, government does help big business, but it helps small business too. Government policy has lots of effects on firm size, organizations, strategy, performance. It's complicated. Corporations, of course, do benefit from the state, but corporations are harmed as well. And finally, limited liability is not obviously an artificial state privilege. So people should not get worked up about this. The bottom line to me is, if you asked a question, what would the firm look like on the purely free market? Theory cannot tell us. So why don't we give it a try and find out?