 The Corporation by Iran Brooke. The Corporation. Corporations are under attack, under attack in America. It seems almost as if there's a cycle with these things. Every 20 years or so, there is a renewed energy behind going after business in America, particularly big business. And the fact is that in America, big business is structured as in a corporate form. And we'll see that the actual fact that big business is structured as a corporate form, the actual nature of a corporation is much of what brings about this attack. If you read the headlines these days, CO pay is obviously a big one these days. COs attack constantly for how much money they make. And what is the story about CO pay? The story is that COs somehow control these companies. They dominate their boards. The boards are just unthinking, second-handed followers. And that everything that the CO wants, he gets. And therefore he negotiates the contract from a position of strength. The board just succumbs to whatever the CO wants. And then 10 years later, maybe there's a shareholder up for, the board wakes up, or what have we done? We've given hundreds of millions of dollars to the CEO and they have to fire him. And that's the story. And it's not challenged. I mean, one of the things we'll talk about is the fact that these issues are almost never challenged. You know, I've been on CNBC a lot over the last year and it's almost always on, one of the issues that I'm a regular on is CO pay. Why? Because if there's a CO pay issue and somebody needs to defend COs, there is nobody. There just isn't anybody they call me. It's not like I'm, you know, at the forefront of this. It's just that the Inrin Institute are the only people putting out material about this. So, and there's an issue then, and in academic literature, if you look at the academic literature, looking at CO pay, there's a lot of back and forth. This isn't, we'll get into this in more detail. There's a lot of back and forth on is this an issue? Why is this an issue? How did this issue come about if it is an issue? And we'll see, we'll talk about some of that evolution. There's a big push right now, big push for what's called corporate democracy, corporate democracy. Because we have these tyrants at the head of the corporations, right? We have what many have called, including many people who claim to be defenders of capitalism, have called the Imperial CEO, that's a term that has come about over the last 10 years or so, because we have an Imperial CEO. These CEOs are obviously running their companies to their own benefit, enriching themselves at the expense of shareholders. What we need is more shareholder activism. And in general, there's this general discomfort about we've got all these millions of shareholders. They have no real control over this guy running the company. There's a real problem here. And how do we get the shareholders to have a say in running the company? And of course, the model they're using is a political model. Well, if all these shareholders, stakeholders, all these participants want to have a say, we should give them a say. We should give them a vote. And there's a real push. And you can see this in the last annual meetings at Walmart and at Exxon and at hundreds of corporations, a real push by some investors to start letting shareholders vote on lots of things. And the ultimate, as we'll see, is to have shareholders basically manage the company. And we'll see where the logic of that goes. And we see that shrug, don't we, where the logic of that goes, when you have the employees voting on every decision. It's not going to be that much different if you have shareholders voting in every decision. So you've got a big push on corporate democracy, but what's interesting about this push is it's made in the name of property rights. It's made in the name of shareholder interest. Obviously, these managers aren't maximizing shareholder wealth enough. What we need is to get the shareholders whose wealth they're supposed to be maximizing more involved in the process so that we discipline managers to maximize their shoulders. But what's interesting is the same people advocating for corporate democracy. So supposedly the advocates for wealth maximizing behavior on the part of the managers are exactly the same people who are pushing managers to be stakeholder friendly and to enhance their social responsibility. Exactly the same people. And we'll see who these people are and what part of what they're both, the ideological and the political agendas are. So they've got this conflict going on. On the one hand, they claim to be shareholder advocates. On the other hand, they're claiming shareholders should be only one group among many stakeholders who could be stakeholders. You could have employees. You could have suppliers. You could have the community, whatever that is. You could have spotted owls. I mean, all of those are potentially stakeholders in a sense that they are impacted by decisions made by the CEO. So there's this interesting conflict that these so-called shareholder activists have on the one hand going for wealth, on the other hand going for its destruction almost explicitly. So on the one hand standing up for shareholders, on the other hand saying, well, shareholders aren't that important. And again, nobody calls them on this. Nobody actually makes a big issue of it. And of course, over all this, we've got an environment, a regulatory environment that is probably the most brutal regulatory environment that American big business, particularly big business, small business as well. But big business in particular, probably the worst regulatory environment big business has ever faced in the United States in terms of their internal functioning. We've got a lot of activities that have been allowed to be deregulated, you know, things, you know, the airline industry was deregulated. The trucking industry that deregulated to some extent banks have been deregulated or at least we regulated. The rules have been changed. But in terms of how the corporation functions internally, there's never been more regulations on American business as they are today. Saabin's Oxley, which by one estimate that I saw is going to cost the US economy north of $1.5 trillion, that's with a T, is the latest of these regulations, but this is a trend from the 1930s on. And a lot of it not only has to do with the regulations in place, but a lot of the regulatory environment, the burden placed on businessmen, has not only to do with the rules, but how they're enforced. There are periods in which the enforcement is lax in which when interpreting certain rules, the interpretation tends to be more liberal, more open, letting businesses do more. And then the periods where the interpretations tend to be more stringent, more constrained. And we definitely have been over the last five, six, seven years in a very tight regulatory environment. And then at Saabin's Oxley onto that, and you've got enormous burdens on American business. So that's kind of the world we face. And what's interesting is that the attack on business at almost every level comes from every quarter. I mean, there are no defenders, there are no significant defenders of business out there, and particularly when you talk about corporations, and we'll talk about why this animosity, in particular to the corporate form. But liberals obviously attack corporations, and we'll talk quite a bit about liberals and their attack because I think they're the most consistent about their attack and consistent about how they do it. In looking at this, the attacks on corporations obviously go back well into the 19th century. But in, I'd say, modern times, the most significant event, on the most significant advocate for attacking big business and corporations has been Ralph Nader. And I've been shocked in doing my research how influential Ralph Nader has been. The attacks that I see today in the newspapers, for example, the issue of corporate democracy. The issue of corporate democracy was introduced by Ralph Nader in 1973. And in a book in 1970, he did two books, 173 and 176. It was actually discussed in Congress. He wanted national chartering. He wanted a forced corporate democracy down the corporate throat, if you will, all the way back in the 70s, and it's resurrected itself right now. And when you hear, when I hear a lot of these commentators talking on TV and talking about these issues and the shareholders' activists, it's as if they've just read Ralph Nader's book. And it just shows how ideas, even bad ideas, or maybe primarily these days, bad ideas, just spread and have an impact on the culture in ways that you can't even imagine. And people don't even know the root of their ideas. I'm on a talk show, regular talk, regular guest on this talk show by Tom Hartman. Tom Hartman is a fire-breathing leftist, anti-business, and all his arguments, I've learned during this research, are all straight out of Ralph Nader's book. So the liberals hate business. They hate businessmen, and they hate the corporate foreman. We'll get into their arguments in detail. But what I find intriguing is that to a large extent, this is shared by conservatives and libertarians. I'll give you an example of a quote from Irving Crystal, a leading conservative thinker, well-published, very influential among the neo-conservatives, really the godfather of neo-conservatism. And this is about corporations, about large corporations in America. Quote, but one must also concede that both the founding fathers and Adam Smith would have been perplexed by the kind of capitalism we have in 1978. They could not have interpreted the domination of economic activity by large corporate bureaucracies as representing, in any sense, the working of a system of natural liberty, system of natural liberty, in quote taken from Adam Smith. The large publicly owned corporation of today which strives for immortality, corporations have, they can last forever, they don't have a sunset, which is committed to no line of business but rather seeks the best return on investment, which is governed by an anonymous oligarchy would have troubled and puzzled them just as it troubles and puzzles us. And they would have asked themselves the same question we have been asking ourselves for almost a century now. Who owns this Levantian? Who governs it? And by what right? And according to what principle? He goes on, no other institution in American history, not even slavery, has ever been so consistently unpopular as has the large corporation with the American public. It was controversial from the outset and it remains controversial to this day. This is from a leading conservative thinker. Take Libertarians. The Libertarian party's platform to quote, it also proposes to quote, abolish the limited liability shield laws, limited liability shield laws to make corporate offices and stockholders fully responsible for the corporation's actions. And then, you know, in an article in the Journal of Libertarian Studies, quote, first the private right to freeing corporation conflicts with individual conflicts with individualism inherent in liberalism. He means liberalism in the classical liberalism sense. Second, free private incorporation contravenes the basic liberal and common law principle of personal responsibility. So not only are they, you know, as usual attacks and big business, they, you know, I'm sure you've heard objectivists talk about the attacks and big business. They've attacked the selfishness of the profit motive and so on. Here the attacks of the corporate form itself. There's something wrong inherently that's telling us with corporations. They're not responsible. There's some kind of Levantian that the American people hate and yet and the funny fathers would despise. Anna Smith, indeed, as quoted, was not a big fan of corporations. So he wrote negatively about the corporate form. But then again, Anna Smith wrote in 1776 when the corporation was a completely different entity than the corporation is today. Again, we'll see some of that history. So, you know, the question that we're going to try to answer in this class is why all these attacks, what is the nature, what is the more fundamental nature of these attacks and is there anything to it? Is there something wrong with the corporate form? And we're going to go over kind of all their arguments and discuss them and see and deal with each one of them. And some of these arguments, just to give you kind of an overview, as I said, they question the very legitimacy of the corporate form. Many, particularly on the libertarian side and certainly the liberals and the conservatives agree with this, claim that the corporation is the creation of the state. It's an arm of government that, and that's the libertarian attack on the corporation. It's an arm of government. It's a creation of the state. It couldn't come about in a true free market and therefore it's a bad thing. The liberals say it's a creation of the state absolutely and therefore, what would the liberals say if it's a creation of state therefore, the state should regulate it, should control it, should dictate its actions. And the conservatives agree basic with the liberals, just they want to control it less. But they don't question, there's very little questioning in the literature about the fact that the corporation is a creation of the state. And we'll talk about where that comes from and why. The whole issue of social responsibility against comes from the same place. So if it's a creation of the state, then it has supposedly obligations. So for example, what the state gives the corporation is its unique form and in exchange, the corporation is supposed to function in a socially responsible way. It's supposed to give back to the state something. Okay, so there's this, and that's really where the whole idea of stakeholder corporate social responsibility comes from. And then as we talked, there's this issue of separation of ownership and control, which is I believe probably the most sophisticated argument and the one that has the most plausibility here at all. We'll talk in great depth about that. And of course, the whole idea of corporations not being democratic enough. Now, let me state out right up front that I think there are real issues. There are real issues, not with the more fundamental questions that are being asked here, because I think those are bogus, but certainly there are some issues about corporate governance and about what's going on in corporate America. There certainly have been some big time crises, right? I mean, we've got Enron and WorldCom and a lot of real corrupt stuff has been going on. Bad stuff has happened. And I think we need to ask ourselves why. Now, I'll have a different answer than what they have, but I think there is a legitimate question being asked in America today. Unfortunately, there are very few legitimate answers being given. What happened? What happened seven years ago when so many corporations did so many dumb, really, really stupid things? How could that happen? How could CEOs get away with that? How do board of directors get away with it? How did the market not catch it? How did boards of directors not catch it? How did shareholders not catch it? What happened? There is a breakdown. And once in a while, you hear about even in this issue of COPA, you hear about a situation with COPA where you go, you know, that doesn't really make sense. What's going on? Well, what's happening here? So I do think there are some issues that we're going to have to resolve and deal with. I'm going to place the blame, as I said, in a different place than where other people have. And I also, I think it's important to note right off the bat, that as a background to all of this, the background to all the accusations and all the problems and all the attempts to delegitimize the corporation, you know, these shareholder meetings that are getting rowdier and rowdier. Again, if you've seen video of the Exxon annual meeting and the Walmart annual meeting, I mean, they're getting more and more aggressive. And a lot of the bad stuff is getting passed. That is, a lot of the bad stuff are a majority of shareholders and are voting for in many businesses. In the background of all this, it's crucial to note just how well American corporations have done, just how productive they've been, how phenomenally well the stockholders, these shareholder activists, have done. If you invested a recipe in the Dow Jones industrial, in 1982, anybody want to guess what multiple of your money you would have today in spite of the big collapse in 2000? Anybody know what the Dow Jones industrial bought them in 1982? What it bought them at? What's that? 879. 879. I think it was something close to that. In the 800s. What's it at today? 13,500. 13,500. So the Dow Jones industrial is 30 of the largest corporations in America. You know, that basket of 30 corporations has gone up in excess of 15 times. So $1,000, and I'm excluding dividends here, $1,000 invested back then would be $15,000 today. And if you go back to stock market performance in the Great Depression, or go back stock market performance even from the 50s or 60s, stock market, i.e., return to shareholders who are invested in what are called public corporations, has been phenomenal. Why? Why has it been phenomenal? Because these corporations have been incredibly productive. They've been incredibly profitable. They've made money, and all these shareholders scrambling these days and making a ruckus have made a fortune. Have made a fortune. Now the pension plans, the insurance companies, the mutual funds, the people who invest in mutual funds have all done well. All done well. And there's no question, in my mind at least, that the success of the American economy over the last 150 years is to a large extent. Brought about by the efficient effect of functioning of corporate America and the brilliance of the CEOs that have run those companies. So all these attacks are not... Yes, we had a crisis in 2000. Yes, 30-some-odd companies went bankrupt. You know, I don't know how many CEOs committed fraud, back-dating options, stuff that shouldn't have happened. But put that in the context of the achievement of corporate America over the last 100, 150 years, even of the last five years, even of the last 25 years, 15 years, I mean, slice it anywhere you want. The achievements are... I mean, you could slice it in a way that was negative. But, you know, almost every slice you take, the achievements are phenomenal. Yeah. Welcome to the Total Wireless Store, where total confidence awaits. I need a smartphone with an awesome camera. Got anything to fit a new dad's budget? Don't worry. You got this with Total Wireless. And now you can get $50 off on select phones $99 and up. My relatives won't miss a thing. Now you can focus on the important stuff, like diaper duty. Discover the Total Wireless Stores and get Total Confidence, the latest phones, the best network, all at great prices. Now open in LA. Limited time offer in 6.30, 18th. Available while supplies last. Portion required for a non-track phone grant. Offer only available at Total Wireless Stores. Visit store for details. Why does that compare in a worldwide context to how Europe and Japan are done? That's a good question. How does it compare to other countries, how Europe and Japan have done? Because one of the things I find is that a lot of these critics say, yeah, but in Japan, they do it this way. And in the 1980s, particularly in the late 1980s, there was a big push to the Kewatsu, which is the Japanese form of corporation. That's the solution. That's the way we need to go, because Japan is so much better than the United States. And these days, they're talking about corporate democracy. The shareholders do a lot more in London, in the British markets, have a vote on a lot more things than they do here. So the big example is, look, in Britain, they're way more advanced than we are. They're doing more of this. And the interesting fact is, by far the US market has beaten all these markets. Japan is a great example, because Japan peaked, the Nikkei average peaked at 45,000. For those of you who know where it is today, that'll be meaningful. In, I think it was 1991, the Nikkei is like S&P 500 in the US. The Nikkei today is, I haven't been following it, but I believe it's somewhere between 15,000 and 20,000. So that Japanese economy has basically been in a depression, certainly in a recession, for the last 16 years, with some blips up and blips down, but basically has gone no way. With a few exceptions of some phenomenal individual companies, corporate Japan has been a disaster. And indeed, the whole corporate governance structure of Japanese companies, which it shares, for example, with Korea, or very similar to Korea, has been shown to be very inefficient, very unproductive, and a complete disaster for the Japanese. So Japan has not done as well. And neither has Europe. Neither is Western Europe. Western Europe, I don't have the numbers, but Western Europe has done, the stock market returns for stockholders have been a lot weaker over most of the slices that you would take than the US. I wouldn't exchange my S&P 500 over this last 25 years with any other index. I mean, you might find some emerging market index. That's done very well. Thank you. Yeah. Let's also have another variable in the sense that in the American market, we have an individual shareholder that's a percentage of corporations radically different from what we have in South America, or Europe. Isn't that variable all that's played in there? Absolutely. The variable in what sense? Tell me in what sense. Another amount of the American public that invest in the stock market is far larger. A lot larger. Yeah. But they didn't have another kind of... Yes. And that's partially a characteristic of the fact that as regulated as we are, we're less regulated than they are in certain crucial aspects. But the funny thing is, we'll talk about this, that's partially a feature of some bad regulations we have in the United States, that regulations that restrict large stock ownership and diffuse ownership purposefully in the United States. So the regulatory scheme in the United States is set up so that lots of people own shares and not a few people own shares. It's actually preconditioned to that and I believe that that causes a lot of the problems we have is this idea that you can't have large owners like you do in other countries. We don't have the situation in the United States where the market will determine who owns what and how much of what. To a large extent, it's determined by regulation. But we'll talk about that. But yes, the fact that these stock markets haven't done as well in these other countries might have hurt individual investors less than if the ownership would have been dispersed. But I don't think the fact that ownership is dispersed is affected prices any differently because I think those markets are as efficient and sometimes as inefficient as the American market is. Okay? Yeah. So what do you think that's true when you say, is that fair to you or what are the intentions you would do with that? No, I don't think that's poor here. The one I have truly and is kind of the present value of the costs over the life. And I think that's conservative. And GDP is what? Love and joy. What's that? Love and joy. And truly, I don't think the GDP is too important. I'll look at it. Brian, do you know what the GDP is? 11 trillion. 11 trillion. You know what it says? 10 percent. Very good. Okay. So we have to remember the context of where we're heading in terms of how well the corporate form this form that is being attacked constantly how well it's done how well American business in this particular legal structure has done. And we'll talk about why that evolved. Okay. So let's talk about that. Let's talk about what corporations are what is unique about them what is it that people don't like why are they being attacked? So what are corporations? Well, the particular type of business organization, right? So the particular type of business organization organized to engage in productive activity for the purpose of making money and I'm differentiating here between you know I know they are non-profit corporations but I'm talking we're talking about you know corporations as business. Okay. What is it that makes corporations unique? Let's say in an obvious comparison would be partnerships or self proprietorship. So if you go back to American history in the 19th century many of the businesses that were started were self proprietorship and as they grew became partnerships many of the so-called robber barons of the 19th century ran partnerships at least for much of their career. So what is the difference? What is it that makes corporations different than partnerships? Real question. Liability. Okay. So one of the one of the one of the most distinctive characteristics is limited liability. What does that mean? It means that when you invest in a corporation you're placing the capital you're placing at risk the money you're placing at risk is that investment? If the company goes bankrupt i.e. why do companies go bankrupt? They go bankrupt because they can't well it's not really they can't make money that that's the cause but what actually causes them to go bankrupt when they can't when they can't pay their debts because they've got debts they can't pay them and that they're forced into bankruptcy as a consequence. So there's a gap between what the corporation has and the amount of debt, right? So let's say the corporation has assets worth 100 million but the debt is 200 million those debt holders if it was a partnership could sue the partners the actual individual partners who invested in the partnership could sue them for that different for that extra 100 million, right? So the individual partners in a partnership are liable for the debts that the partnership takes on. Now we'll see that that doesn't quite work in all partnerships that way but that's the essential simple partnership structure that's how it works all partners are liable for all the debts of the partnership in a corporation that's not true in a corporation if you're a stockholder the company goes bankrupt the value of stock goes theoretically to zero but the debt holders cannot come after the rest of your money okay they cannot go after that extra 100 million they can sell the assets of the company they can recoup the 100 that's in those assets the other 100 million is their loss they lost it yep Is it only debt liability or is it also like legal liability? We'll get to legal liability let me finish debt liability okay So seems like a problem because how do you how where does this limited liability supposedly come from? This is where we talk about state creation well it's by in a sense this is how government supposedly has defined corporations they have granted the corporation limited liability right so when you when you incorporate you get from the government somehow grants you this ability not to pay your debts if you go bankrupt that's how it's presented and it's a huge a lot of these quotes that we talked about about escaping your personal responsibility and not living up to your responsibility which the libertarians and even crystal talk about and nata talks about all the time all about this idea that the government has granted you this ability to invest in stock but not take on the full responsibility of that debt so so what you know could could you imagine a situation where this could come about without the government granting? Could we contractually create a situation where we had limited liability vis-a-vis our creditors? well sure it would be easy you would put it in every bond covenant right you would put in a saying saying and by the way when you give me the money as a loan you understand that you can only go after the assets of the corporation you can go after assets individuals and that would be contractual and then the creditor would have a choice what would be the choice either to loan you the money or not and you might even observe in the market different rates right you might observe that a partnership in a corporation with exactly the same risk the partnership might get a better rate why? because they can go after not just the assets of the partnership assuming the same size same number of corn of the assets and the same type of project the same risk you're assuming a lot of things right but you know the partnership they can go after the assets of the of the partners as well as the corporations so there's more assets in a sense to go after so you might even see a lower risk and therefore a lower rate for this and that but that the market would sort that out what's happening now what's what's happening with with corporations today well all we've done is we've made this an implicit contract that is when you lend money to a corporate entity and for example one of the things the law requires is that you state that your corporation in your name it has to be was it LTD or INC right and you have to say INC why so that the world knows your your creditors knows that you're a limited liability that when they lend you money this is what they should expect all the law is not is codified a contractual thing that could have come about without an indeed did and indeed does because even in even partnerships have limited liability anybody think of an example of partnership having a limited liability most law firms most law firms most investment banks and and and all venture capital firms so for example how does a venture capital firm work you have a general partnership and they have unlimited liability but then where do they raise their money from they raise their money from what are called limited partners and those limited partners have limited liability and indeed you have to register that with the state now why would you have to register the limited partnership with the state why do you have to register corporation with the state to let the world know that it's limited liability so there's no funny games there's no shenanigans everybody who does business with you knows that there is limited liability and indeed the limited partnership limited partnership form this market creation of limited liability goes back to the Renaissance you can find the Medici's and other bankers in the Renaissance creating limited liability and they didn't call it that and it wasn't quite the same legal structure but something similar to limited liability structures in order to create limited liability and why do we like limited liability what's good about it take risk yeah it reduces the risk of the funders which makes what available more capital you get more capital more people are willing to part with their money because the risk of loss is just the money they're parting with not their whole entire net worth so it makes available much larger pools of capital so limited liability is a market solution formulaized recognized identified by corporate law but not created by corporate law let me let me ask answer this other is this still about debtors oh yeah I'll have the same yeah um maybe and isn't it the case that even with LLCs and Inks a debt someone's loaning money can require owners to personally sign where they're not comfortable taking that risk absolutely you see that all the time it's small corporations you know one man corporations or a small business that incorporates I mean at the institute I know we're a corporation right non-for-profit corporation I have to with a with a credit card company I'm the signature that is my personal wealth is at stake you know signing because they they won't you're right they realize particularly for a non-for-profit that the assets are limited and they want somebody else to sign off on it so yes even there the credit is when they want to can circumvent the issue by by requiring somebody to guarantee you know to guarantee your debt so so yes the market again the market has solutions to these things the market has evolved in particular ways to solve these issues but you see I mean I'm not talking about quotes from libertarians from you know 100 years ago I'm talking about this is now writing about this and to them this is and we'll talk about a little bit why but this is this is still a somehow a state organization the corporation because it grants limited liability and they can't imagine this this market evolving so what was this what you're gonna I was gonna say so place of use of limited liability increases risk yes it's an it would be more I can just actually distribute the risk because now lenders are taking on a little more oh yeah it produces it reduces the risk to equity to the providers of capital on the equity side it actually increases the risk to providers of capital on the debt side so all limited liability does is redistribute risk I mean it doesn't make risk go away it just redistributes it but to the shareholders it reduces risk you know and that's why they will need to provide the capital and that's why we you have large businesses with millions of shareholders imagine if you didn't have limited liability I would have to be concerned about the wealth of every other shareholder who owned the same company as I did because if I learned turned out to be the richest shareholder they'd come after all my assets and indeed in a partnership this is why partnerships traditional partnerships are structured in a way as that you know the partners control the addition of a partner very closely they want to know who he is his character not just his character his net worth you know it's it's very you know when you form a partnership you want to be very clear on who who else is with you in that partnership okay and again partnerships have evolved to much more complex organizations than the the simplified you know partnership that kind of is imagined in corporate law but but in the simplified thing every every partner needs to every partner could sign a check every partner has a sponsor everybody every partner can make a decision for the partnership and every partner's assets are at risk and therefore the wealth of your other partners is important when you buy shares in the stock market you care how rich everybody else says no because they can't come after your personal assets so it's not relevant the wealth of the other participants so it reduces your personal risk as a shareholder but you're right it doesn't reduce risk quasi qua risk torts limited liability the next the next level in the limited liability argument is well you know if I slip and sue the company for whatever for all the damages because it was their banana or it was or you know these days it doesn't have to even be their banana they just have to be the deep pocket in a radius of 100 miles for me to sue them and and now let's say I sue them for more you know my the court decide that I deserve more than the entire assets of the corporation they can't go to the shareholders to get money to reimburse me so there's no they can't go after the shareholders themselves to pay me for the damages that I supposed to cause and you get this you know you don't get this obviously from still being a banana but you get this for example from asbestos litigation and I'm and let's put aside whether it's even legitimate and all of that here's the special situation thousands of people they want gazillions of dollars the courts awards them gazillions of dollars the companies go bankrupt because they can't pay it all they liquidate they pay it all but they still a whole lot of money that hasn't been paid what a lot of these critics would love us to do is to go after the shareholders now stop by any of the 133 Los Angeles area O'Reilly Auto Parts stores where you'll find everyday low prices on the parts you need to keep your vehicle at its best are guaranteed low prices ensure you're always getting our best deal in fact we'll match any auto parts stores price on any like item O'Reilly Auto Parts better parts better prices every day now I am no lawyer and I'm no specialist in corporate law so this is my best understanding of this issue there is an idea that goes back in common law to England that if a servant does something and causes damage to someone else the person who's servant he is is responsible for those losses that is he sent them on the errand and therefore you know he takes responsibility for the servant's actions while he's on duty and the idea here is therefore that in torch you can sue the person who sent him and therefore the idea is so the so the owner if you will of the business is a sponsor of the actions of his employees while their employees and so the idea here is the shareholders are the owners and therefore you should be able to pierce the corporate veil they call it and go after the owners but this is the difference the reason this came into to into common law in the first place is the idea that the owner controls the actions of his employees is literally in control of those actions and therefore is liable for those actions but shareholders are not in control of those actions shareholders in a diffused corporation are not and if you just went by by by the law they wouldn't have towards responsibility for the actions of an employee of the company now the board might and indeed boards of directors have large insurance policies to cover that the corporation is and the corporations have huge liability insurance policies to cover these things but the owner the shareholder is not in control now you could make an argument and I'm open to this argument and you know discuss this with some of the lawyers and the legal scholars in the room you could make the argument that if you had blockholders who had control over the actions of the corporation you know that controlled the board that controlled the selection of the CO that controlled the actions the major decisions of the corporation you could make an argument that their assets might be at risk in tort and I don't think that's a big deal because again that's what insurance is for that's what liability insurance would be for and they would just buy liability insurance so that I think though that is a is a very technical and the fact is that it's very rare than any kind of tort litigation is such that it would drive a company in the bankruptcy and let me put it this way I don't know if you know maybe I'm wrong but I can't think of a legitimate legitimate litigation that would ever run a major large corporate entity into bankruptcy so I don't think the issue comes up often and it's certainly in a diffused corporation I don't think it's a relevant issue okay because I don't think that that the rules actually apply yeah to do what you did and in the same way about providing capital to a business my argument is to take action whether or not the control is actually right there I'm still I'm still enabling them to do that well but it's not clear to me that if you and again I don't want to get into the legal technicality it's not things like here and I don't remember yeah but if if you sold me a gun and I came into crime I don't think you're responsible for my crime right now but if you send me if you tell me to go shoot somebody or if of your if I'm doing it as part of you tell me to go and get money from acts and I happen to use a gun and I'm on your employment then you are somewhat responsible for you are responsible for how I act under your employment okay but just providing capital is not directing the action of the servant or of the employee and that's that's a distinction that's made way back in common law and I think a legitimate distinction it's to what extent you control the action if you are completely separate from that action then how can you be held responsible for what happened and we'll end it at this because what's that if you knew absolutely if you knew if that's why I said if it was a block code it would be different because you can't make the claim that millions of shareholders know every action that's being taken by every employee of a corporation that would be ridiculous even with a block holder that would be a stretch unless it was some major event but you certainly can't tell so yes if you knew it would make a difference but I don't think you can make that claim with shareholders yeah yes I think that sounds so you're right that there is a difference another difference between self-proprietorship and a partnership and ultimately a corporation is in tax laws and indeed tax laws penalize corporations right and penalize associating with corporations right because you're taxed twice you're taxed once at the corporate level once in the shareholder level the dividend you know is taxed both as income to the company and then when you get it to the shareholder as a dividend right so so corporations have a huge advantage of tax in in in the context of tax though so any other questions about limited liability there are a lot of criminal liabilities it sounds like everything you said so far is chivalrous again I think the criminal liability would only apply for you so if you were somehow in control and you knew that yeah it would be criminal liability but if you if you don't know and you haven't put anything in place that would necessitate you know the the the way you could expect criminal behavior then following on that question isn't corporation considered its own entity so if there's a criminal act by the corporation is the corporation against charge not the officers yes and this is the second big difference between partnerships what between partnerships self proprietors ships in corporation corporations are considered legal entities but but if it's criminal you know you they're gonna go after the people you know they're gonna go after anybody in the certainly the the the board members and the and the and the managers there's no question so but but let's let's deal with this entity there's this notion of if it's a partnership when you're signing a document you're doing it in the name of the specific individuals who are partners Goldman Sachs let's say when it was a partner it had the names of the partners in its title right Goldman Sachs at all you know and the rest of them right so it was every time you signed a document you're supposed to be signing it in the name of every one of those partners Goldman Sachs partnership suppose he doesn't have a legal identity so the assets the Goldman Sachs owned were owned by the partners corporations as you know a it's interpreted at least corporations are their own legal entity indeed you can fight supreme court cases in which they're called a fictitious legal entity a fictitious person they give them corporations have supposedly personhood they have rights that are separate somehow from the rights of of the owners they are a completely separate legal entity supposedly from those from the individuals that actually invested and this is different so the assets for example that a corporation's owns are owned in the name of the corporation the corporation when sued is sued court corporation when you sue a partnership you are suing the partners you're suing every one of the partners again the critics say well you know again evidence of state creation of this is an entity of the state the state is granted this uh this ability to be a entity that doesn't exist in the marketplace how could you do that now of course this again is ridiculous to the extent that it is a legal entity it is a great convenience it's primarily a great convenience for people to sue you right as a corporation it's it's it's very convenient for the sewers because instead of suing five different partners or in the case of a corporation a million different shareholders you get to sue one entity with known assets it's much more convenient for them okay and it it's a it's a market solution to the fact that you have so many providers of capital it's efficiency it's more convenient it's just easier to deal with that's all it is and you can't create such things with trusts where you can create trusts that serve as that own assets in a sense in your name that are separate from you that act as legal entities corporations are not and you see this everywhere are not fictitious people so where do corporations get rights right property rights for example corporations own stuff where do they get property rights are there are there special property rights out there for corporations or or other types of rights that are corporation rights because corporations are now assumed to be this other entity and and indeed there is discussion in the law about the fact that this there are special rights for corporations and indeed lack of rights for corporations for example corporations do not have free speech right you can't advertise whatever you want there are kinds of restrictions and on commercial speech why because they're not they're not individuals constitution doesn't talk about corporations that's that's a different entity it's a different legal entity so not individuals doesn't fall under individual rights so where where legitimately would corporations get their rights from well from the owners corporations have the rights of the owners to extend the shareholders have rights the corporation has rights it's only an extension of the rights of the owners that give rights to the rights of a corporation and the same with other way around any right that the owner have the corporation has when you violate the right of a corporation whose rights are you violating the rights of the owners of the corporation i.e. the shareholders and the fact that they have limited liability are the fact that their ownership is a specific form. It's not the typical ownership of a physical asset. It's different. It's more of a contractual type. Ownership relationship doesn't make any difference. It's still true that they are the owners and that the rare rights flow through into the corporate entity. So the fact that they are their own legal entity is not an issue of state creation. And then the third one is partnerships end when a partner dies, when a partner leaves. Again, there are all kinds of ways around this. Goldman Sachs has existed for decades as a partnership. Counting firms existed for decades as a partnership. So lots of ways around this. But again, the traditional partnership ends when a partner goes bankrupt, when he dies, when he leaves. The partnership is those specific people identified as partners and when one of them is out, the whole thing falls apart. Corporations, on the other hand, have indefinite life. The state has granted them indefinite life. They can exist forever. Stop by any of the 133 Los Angeles area O'Reilly Auto Part stores, where you'll find everyday low prices on the parts you need to keep your vehicle at its best. Our guaranteed low prices ensure you're always getting our best deal. In fact, we'll match any auto parts store's price on any like item. O'Reilly Auto Parts, better parts, better prices, every day. Again, this is any relevant and bogus claim. You can create that in a market setting. Partnerships have. And it's irrelevant. What difference does it make? But these are kind of the kind of accusations that are made about it. And the last one is this issue of ownership and control. One of the things that make unique corporations is the idea that the owners, the dispersed shareholders, don't have direct control over the day-to-day actions that happen. Again, differentiate for partnership or self-proprietorship where the owners run the business. The owners are the CEOs, if you will. The owners are the actual managers. But here, we've separated the managers from the owners. The owners are dispersed. They have very little say. They have very little control. They appoint a board of directors to act in their behalf, who appoint a management team that supposedly does what they want. Now, we'll talk a lot about this issue of ownership control, and I'll leave that to tomorrow. But let me just note, again, that this is not unique to corporations. And this is truly a market, I believe, a market solution to a real problem. We'll get to that tomorrow. But partnerships have that all the time. They have managing partners, who have, again, the GPs and LPs and lots of other types of market solutions that have evolved in order to create a similar situation where ownership is separate from control. Why do you think that would be? Why would you want to separate ownership from control? What's the advantage, Amy? Some people have money to invest in, and not good managers. Yeah, some people have money to invest in, and not good managers. I mean, this is a wonderful evolution of division of labor. I mean, it's a great market innovation separation of ownership control. The idea is that there is such a thing as being a good manager. There is such a thing as a profession of management. And that doesn't always coincide with having the capital. And what the separation of ownership control is allowed to all of us is all of us can now be shareholders without having to be great managers. We can hire an expert. We can hire specialists, just like we hire specialists to take care of our health care and our taxes and our legal issues. We now hire a specialist to run our company. And that's what they're complaining about. They're complaining about us hiring a specialist. That's what ownership, this issue of ownership control, boils down to. And yet that's what Crystal was saying. Who runs these things? By what right? Who gave them the authority? You know, this is a big deal. Now, we'll see that there are some legitimate issues that come out of the separation of ownership control. But we'll see that they're mostly created by regulations, not by any kind of market phenomena. Now, we talked a little bit about this, but why did all this evolve? Why do we have these corporations? Why is this form so prevalent, popular? Why are there so many corporations? Why are they the biggest companies in the world today? Corporate? Yeah, it's what we just talked about, the division of labor. It's just efficient. It's an increase in efficiency. Much more capital can be accumulated. Then we hire specialized managers to manage that capital. And that is a much more productive form to do business than any other possible form. Indeed, those large partnerships that the so-called Robert Barons started in the 19th century, almost all of them evolved into corporations as they grew. It was a much more efficient form of business. Particularly when the original entrepreneurs who were managers and owners wanted to retire or died, the solution to continuing to accumulate capital, to continue to grow and to begin specialized management was the corporate form. And why can we accumulate large amounts of money? Because limited liability. Because limited liability and separation of ownership control. So corporations are a market evolution. They are a solution to a problem. They're an increase in efficiency for the problem of big business, for the problem of large accumulations of capital. So we need to separate here between corporations and public corporations that actually issue shares out to public. Because I think all of them are going to be, I would say all of them are corporations. And most of them are public corporations. Almost all of them are public corporations. Now there's a trend, which we'll talk about, to change that. You read about it all the time, which is called private equity. We just a Blackstone group just bought Hilton hotels for gazillions of dollars just two days ago. So we're seeing a lot of these public corporations go private and kind of leave this area of large numbers of shareholders and so on and take on a slightly different form. There's still corporations, but now they're private corporations versus public corporations. But I still think that a majority, overwhelming majority of the top 100 are going to be public corporations. Maybe the entire top 100. I'd have to look into that. Yeah, I mean, even the largest of these private equity, the largest public private corporation is Koch Industries. And I don't think Koch Industries is certainly not one of the top 20 in size, maybe not one of the top 100. And that's the largest in the US. And then you've got Cargill. Cargill I think is number two in terms of the top private companies. Somebody was starting to say something. First corporation? Who is it? I don't think, no. Koch is my father. And this is not Coca-Cola. This is a different Coke. It was a K. What's that? KOC, that's right. They are the most private company in the United States. So in my view, corporations are an association of individuals. They are ultimately individuals coming together for the purpose of a business. And for the purpose of providing capital for business, this is not any different than a partnership. It's just legal form. It's slightly different. But in essence, in its essence, it is no different. It doesn't have any different in terms of the rights, rights coming from the individuals, emanating from the individuals, the fact that this is a collection of individuals with a common goal. There's no fundamental difference here. It's just one is a more efficient legal structure than the other. A market created legal structure than the other. Yeah? So then you would disagree with the limitations of research? Absolutely. I think corporations have free speech. The individuals within the corporations have free speech, i.e., the CEO has free speech, the marketing department has free speech, and the owners have free speech. There's actually no basis by which you could limit corporate advertising in a free market, in a truly free country. Is there a related question? Are the existing restrictions on commercial speech actually tied to the nature of corporations as entities or basically applied to even the commercial speech by, for example, large companies? I think they applied to partnerships as well. I'm certainly not an expert of free speech, but I would suggest that the corporate form had some role to play in the kind of decisions that were made about these issues. Again, the idea that the rights don't flow and the idea that this is somehow a separate entity, that owes the state something, that has some obligation towards the state. Yeah? Can you give me a great example of the regulation on these things, which is that money that's done in the Department of Justice? Amy wants to jump in. Yeah? There's this formal thing about necklaces where people were asking that necklaces was hiring or wrong kind of workers in both countries, maybe child labor, some attacks. They were actually publicized as a tax against necklaces. And then necklaces wasn't allowed to defend themselves using the same media outlets as the attacking world. Yeah. Yeah, so there were restrictions on, I mean, the obvious one that came to mind is cigarettes or alcohol, which you can't advertise, right? I mean, those are the most obvious, but they're more sophisticated ones where they can't actually defend themselves. And the standards by which they can defend themselves, the standard by which they can be smeared and defend themselves against smears are completely different than what they would be for individuals. Oh, it's tobacco industry, it's alcohol industry, but no, it's businesses. I mean, the form in which, take the drug industry, look at the kind of advertising the drug industry has to abide by. Is it because of their corporations or? It's because of their businesses. Businesses, because of their businesses. An individual proprietorship would be subject to the same rules, I think. I think that's true. But again, when they were initiated, I think it was margarita. It was an initiative in the middle of it. Political speech, it worked out. Yeah. So an attorney, both of them were involved, but you can't have the services of freedom. Yeah, it definitely applies to the partnership of proprietorship and so on. But I would suspect that the origins have a lot to do with the corporate form. And you could go back to that. Again, I'm not a legal scholar. I'm not suggesting any other questions. Yeah. When does the cooperation work for a major? OK, so we're just getting there. So, yeah. Question on bankruptcy. So you see a lot today that companies powerfully chapter 11 bankruptcy. And then bankruptcy car reduces to your dad's. And they're able to continue operating. Is that legitimate? Can you comment on bankruptcy and how that works? Yeah, I'll comment, but this is tentative because everybody thought about this. And again, the bankruptcy is not an expertise of this. So there is a situation in the United States today which is different than other countries. Other countries function differently. In the past, you went to bankruptcy. You filed for bankruptcy. You basically liquidated your assets. You paid off your debtors. And the corporation was dissolved and it was gone. Today, you have the ability to file chapter 11, which allows you to go under, in a sense, court supervision where you restructure. You pay off what you can and you restructure and you come out as a new corporate entity, new shareholders, and so on. And I'm torn about this in this sense. There's no question in my mind that you could recreate that in a market setting and the market would probably provide for the same thing. So for example, I could write into my debt covenants the same kind of deal. I could say, I'm making this up, but if I campaign my debts, you will give me a period of two years to restructure. And you would take over control of the company, which is basically what happens in chapter 11. The debt holders form a committee and they take over the company. And they run the company under court supervision. And they are the ones who restructure. I mean, indeed, what happens is when the company comes out at the other side, who owns the stock? The people who own the bonds, the creditors, previously, unless you're a bank and then you're not a lot of own stock and so with all the regulations. But put aside banks, if you've lent money to the company and they can't pay you back, in this reorganization you now get equity coming out. And I think you could see a market mechanism would do the same thing. And I think you would see it because I don't think it is efficient from a market perspective to just liquidate and go away. I think it's much more efficient to hand over control to the debt holders, let them get the most out of the company that they can and what would be the most out of the company in many cases would be to restructure it and continue operating as a new company. Now, whether chapter 11 as structured today is the right way to do it way above my pay. I have no idea. I just don't know. I suspect that it's got lots of bad stuff in it as well as good stuff. So I've seen some bad stuff happen under bankruptcy, chapter 11 supervision. But usually it's a law that was created by this culture. I wouldn't expect it to be anyway close to what the market would do in a truly free market. And I'm not sure you'd have to have laws. But again, maybe, again, you would have some standardized way of doing it. And that's what chapter 11 tries to do, to standardize the process of bankruptcy. Japan, for example, until very recently, didn't have that. And it was a disaster. It was very difficult for them. When a large corporation went bankrupt in Japan, they didn't know what to do because they had no formal process by which to deal with it. And it was very inefficient, very cumbersome. It slowed down the restructuring of the Japanese economy that it needed to go through over the last 20 years. Yeah. Your argument overall is usually, well, the stuff in the cinema is an option. There is an option in the full market system. Is it important to consider whether the structure in law takes away options, such as, well, now you can't enter an agreement with a corporation that wouldn't allow them to file chapter 11. So that takes away the option of learning in that way. It could be. I mean, again, I haven't thought enough about chapter 11. But yes, certain of these laws do restrict. Now, you could rewrite the law saying that the creditor could write something different into the chapter. And maybe you can today. Again, I'm not an expert on the law. Maybe you could say, if you go bankrupt, you have to liquid it. And I could imagine a bond covenant that said that. So I don't think I'm not sure that the law limits you today. But in a free market, it shouldn't limit you in terms of the options that you as a creditor would have. OK, let's do a little bit in terms of the history here of a corporation. And I'm not going to do a lot in terms of history. How are we doing on time? 20 minutes, thanks. But I think, again, the history is related to this notion of, is a corporation a state creation or is it a market creation? Because people use the history a lot to claim that it is a state creation. So let's look at some of this history quickly. Let me just read you this quote from Ralph Nader, because I think it captures this approach about state creation. Nader quote, a corporate charter is in effect an agreement whereby a government gives corporate entity the entity existence, and that entity in return agrees to serve the public interest. And this is where the whole idea of corporate social responsibility comes from. Now, where does this come from? Because this is not completely out of the blue, picked from out of nowhere. This has a historical precedent. When is the idea, the concept of corporation first used? Well, it's first used in the late Middle Ages. It's first used with the idea of incorporating cities, incorporating guilds, incorporating churches. And what did this incorporation mean? It meant that the king who owned everything, everything was owned by the king, granted you the right to use a particular property under a corporate name for an indefinite period of time. So the first corporations were grants by the king, and they weren't business corporations. Most of them had nothing to do with business. They were legal entities. They were created in order to do something, collect taxes was usually the case, right? And that's how they created these municipalities. The thing that unified a municipality is it had a one tax collection agency that then took a cut and passed the taxes onto the king. So that's kind of the original idea of the corporate entity. And it comes from this notion of the absoluteness of the king, the king owning everything. The king grants a concession. He grants you the right to do something with his property. And indeed, this theory of the evolution of the corporation is called the concession theory of the corporation. It's all about the state represented by the king in those days, granting you the concession to act in a particular way. The first business corporations were the same thing. The first business corporations engaged in trade. Between England and actually the first business corporation was called the Muscovy Corporation, and it was set up in the 16th century to facilitate trade between England and Russia. It didn't last very long, and they never made any money. Now, in what sense was the king involved? Well, if the Muscovy Company was doing trade with Russia, that was taking something away from the king. Remember, this is mercantile economics. This is not a win-win type situation. The king wanted something. For you to do this trade, he wanted something in return because you were doing something that is truly just you were using the king's property when you were trading. You were using the king's ships. Everything ultimately belongs to the king. So you were granted a concession to trade with Russia, and in exchange, you paid the king off, right? You bribed him. So there was this mutual. I give you the corporate charter, the ability to trade with Russia. The most famous of all these corporations was the West Indies Corporation, which at some point literally ruled India, became a quasi-government that actually ruled India, but it facilitated trade between England and India. And me, the king, I let you do that, right? Because you don't have rights. We don't have individual rights. I let you do that, and in exchange, you give me something, i.e., this public interest. You serve the public interest by giving the king something. And most of the large businesses, going back, were granted these concessions, and almost always these concessions were associated with monopoly power. That is, you got the right to trade with India, but you got the exclusive right to trade with India. You were the only British company allowed to trade with India. You were the only British company allowed to trade with Virginia. That was the Virginia Company, corporation, another corporation, I think that never made money. And then these people who got the concession from the king would then go out and raise capital from other people in England. They would create this corporation, and some of them were very successful and made money. Some of them didn't. This created all kinds of shenanigans in addition. You had bubbles. You had really bad business decisions. You had really bad regulations, really bad laws. All the laws in England, at least until the 19th century, really restricted your ability to create what we would call real corporations, free corporations. Everything had to be state-approved, state-charted. Even in the United States, it's really interesting, and I encourage you to take Eric Daniels' course on capitalism in America, in the history, because it's always fascinating to go back to the early part of the 19th century, look at kind of the economy and how it functioned and how uncapitalist it often was. We kind of idealized the 19th century, but there was a lot of bad stuff going on in the early 19th century. And indeed, the first corporate entities in the colonies and later in the states were based on the same principle. Corporations from the state's perspective were viewed as a means to do quasi-state things like build canals. You got to be a corporate entity and in exchange, you were given a monopoly and in exchange, you went out and did something that the government wanted you to do, build a canal. A lot of the infrastructure in those days were built by these corporate entities. And it was clearly, there was monopoly powers given to these businesses, you could not go and just incorporate a business and start a business and go thrive in the very early part of the 19th century. There was clearly this quid pro pro. Now, this all changed in 1836. Now, in 1836, the state of Connecticut passed a new incorporation law, which basically said, just let us know you've done it. And you could do pretty much whatever you wanted, there was no monopoly associated with it. And it's very similar to the state incorporation laws today. Today, they're a little freer than they were back then. There was a whole evolution from 1836 through the 19th century of the states loosening up their control over corporate entities and allowing them, allowing any kind of corporate entity to come about. And indeed, in the competition, if you will, between the states in creating the most efficient corporate legal system, laws of incorporation and then a legal system that protected those corporations. Delaware, the state of Delaware went out, and indeed, over 50% of all the S&P 500 companies today are incorporated in Delaware. And it's not just that they have these very, they're supposed to have these very loose laws, and it's not even the state incorporation law anymore. It's really the Delaware over the decades that's built up a legal system and legal precedent where, to some extent, in the 80s, they messed up quite a bit. But to a large extent, it's very predictable what the law is going to be because they have this very long tradition of corporate laws. So when you incorporate in Delaware, and you can run the business from anywhere, you can incorporate any state you want, if you incorporate in Delaware, you get a set of established corporate laws that is predictable or more predictable, put it that way, than any other state. So there was this competition on who could create that situation, which Delaware happened to win. Now, so it looks like the corporate entity indeed evolved out of state concession, out of a right granted. But indeed, it is the founding documents of this country that make that obviously ridiculous. Yes, the king violated individual rights for hundreds of years by forcing people to accept their view of corporate entities. And indeed, American states violated individual rights up until 1836 by granting monopolies and by forcing incorporation by their method. The 1836 law in Connecticut was the first to recognize what individual rights truly meant as applied to the corporate form and as applied to business. So the perversion is not the corporation today, it's not the existence of the corporate entity today. The perversion is what's happened before. The perversion is the origins, the original creations of these corporations. Yeah. Is there something in at that time? I don't think so, I just... Generally, and again, Eric Daniels, we know a lot more about this than I do. Johnson, Andrew, who's the president? Jackson, there's a whole movement in the United States in the 1830s. Very pro-free markets, very anti-government regulation. It was associated with the second national bank, the renewed chart of the second national bank with Johnson was against. Now, again, even this movement is mixed, if you look at it, because they're against big business and they're for small business and stuff like that, but they're clearly against government intervention and the economy. So it's an ideological change. It wasn't a legal change, it was clearly an ideological change of a rise of a significant number of people influential people believed in free markets, in getting a separation between state and economics, and getting the state out of regulation. And it is a change. Pre-1836, in the first part of the 19th century, you see a lot of government interference in the economy, and that changes after 1836. That's the beginning of true free banking in the United States that goes on for, unfortunately, only about 30 years through the Civil War and then continues somewhat until the early part of the 20th century. But that period, right after 1836, was considered an economic revolution, if you will, where a lot of people inspired by Adam Smith and other economists come up and say, wait a minute, the state shouldn't be granting monopolies to both canals, we should let the market do this, and things like that. So the whole attribution of this through some kind of historical beginnings is ludicrous, and it rejects basically the whole basis on which this country was founded, which is the basis of individual rights. This is new, this is different, because for the first time in human history, a political system was established that recognizes the rights of individuals, that recognizes the fact that the state doesn't own everything and then grants you permission to use it. That individuals own everything and therefore can do whatever they want with what they own, other than violate other people's rights, right? So history shows, in my view, the opposite of what is suggested by Nader and others, and not only that, but even during the times where states really restricted the formation of corporations and they were limited and they had a, entrepreneurs were very creative and created entities that looked like corporations, legally looked like corporations, but once, weren't incorporated. So entrepreneurs were always looking, again, you could go all the way back to Renaissance Italy to find these kind of entities, but even in America and certainly in Britain, these entities were being created in spite of the law that we created through contract. And all the 1836 law really, and this is one of the other reasons why it was passed, all the 1836 law did was recognize a market reality that already existed and try to formalize it and standardize it to make it, again, more efficient and easier. Again, the whole purpose of corporate law is that, it's to protect rights, it's to protect property rights, and it's to make things simpler and easier by creating a standardized contract that then you can change, right? The corporate charter can have different amendments and different changes, but at least there's one standard that when you have ink afterwards, everybody knows that it represents something. And then of course, in the governor, into the covenants or into the corporate charter, you can make changes to that standardized contract, but there's a standardized contract that everybody knows that ink stands for. That's the beginning point. It's not the end point, it's the beginning point. Britain starts passing similar laws in the 1840s and really passes the corporation law. I think to a large extent still exists today in the 1860s, freeing up the creation of corporations, freeing up its own markets. I think, unfortunately, in Britain's case, it was probably a little too late for a variety of different reasons. And immediately after that, starting in 1836 and really getting ahead steam in the late 19th century, the corporate form really comes to dominate. So the corporate form comes to dominate through the late of the 19th century, early 20th century and of course today, as we said, dominates business across the United States and the world. In other countries in France, Germany, Japan, the corporate form has taken different forms because of the different sets of regulations, the restrict, the limited, but the basic underlying principles are the same. So you find corporations in all these countries, you find the largest business organizations in all these countries taking on the same form because it's efficiency, because it encourages and enhances productivity. So just to sum up, corporations are under attack and we'll keep seeing this. One of the most fundamental attacks that is launched against them by liberals, conservatives and libertarians is the idea that they are state creations and therefore all responsibility to the state in some form, this is complete nonsense. There's absolutely no basis for this. It is a denial of the existence of individual rights to claim that, of course that's never stopped liberals, conservatives or libertarians before. All the characteristics of a corporation that supposedly the state grants them in this creation are characteristics that could be created and actually were throughout history created in a free market, in a market form. These are all relationships that could be recreated contractually. There's nothing special in that sense with this corporate entity. And as we've seen, it is incredibly productive, it's been incredibly successful, it is a dominant form. So the question now remains is are there any issues? Is everything they say about corporate governance and co-pay, is it all nonsense? Is it all bogus, is it just to be dismissed? And we'll pick up on that kind of trend tomorrow and the day after. Now I'll just open it up for questions now, I think I have a question over here. I'm just gonna ask, should the foreign gas bills that the government gets out of the picture entirely doesn't need to be incorporated in this bar market? No, I don't see a reason for that because I do think the law has a role to play in creating certain standards. I think that if the government just went away, I don't think much would happen, I think it would be less efficient, I think again you could create these. But there is a certain value to having this body of law that's based on certain legal principles that says this is how we deal with issues that come up when you're a corporation. This is how we deal with issues when they come up when you're a partnership. Because you still need a legal system under capitalism, right? So you need, and I think that you need some laws to anchor this, you need to standardize, again these standardized contracts, these standardized understandings. And I think that there is definitely a value to incorporate. And remember when you incorporate today, I don't know how many of you have incorporated, I've recently gone through that. When you incorporate, all you do is you write up a bunch of, there's a legal thing that your accountant gives you, you sign a form, you send it into the government and they send you back a little diploma that you've incorporated. They don't question what you've written there. I mean it's not, they don't put any burden on you. So in terms of actual reality, the process of incorporation is just a process of registration. It's like registering a patent. And I think there's real value in registering the corporation. Because again, letting the world know. Tom Bowden gave a whole course where he talked a lot about value standards and abstracts back in 2000. Okay, so I was going to make a similar comment that when you're standardizing human relationships among individuals in the same amount of the fights like marriage and stuff like that. Yeah, there's a standard marriage contract. And the state doesn't create marriage because they have a standard marriage contract, right? It doesn't create a marriage. It's just created a standardization. And people can ignore it and have different contracts and they can live in a capitalist world. They can have three wives and four husbands and create some kind of legal entity. It's just not a marriage, but they can create some kind of legal relationship that binds those seven people together in some kind of other form. You know, good luck to them is my view, but the fact that you have, let me just let last point on this. The fact that you have a standardized contract does not eliminate the opportunities to have other kinds of contracts that the market dictate one way or the other. Yeah, last question, I think. I was just gonna ask, do companies in America ever have a right to form a different kind of business entity that isn't exactly what the government says that the corporation is? Yeah, I think that right. Well, they certainly can form partnership with self-proprietorship and you don't have to register a partnership. You can form a partnership and the government doesn't have to know. I mean, the tax, for tax reasons they do, but for non-tax reasons they don't have to know. So you can form other entities. Now, what kind of legal protections will you get? Again, you'd have to ask a lawyer, I'm not sure. I'm not sure, okay? Okay, thank you all, I'll see you tomorrow. This course continues with lecture two. News with lecture two. News with lecture two. News with lecture two. News with lecture two. 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