 In a world of Democrats there will be time for them to make profits now is not that time and Republicans have abandoned free market principles to save the free market system. You need a voice of Liberty Look no further. You found it. Tom Woods Beware citizen you are now departing from the world of allowable opinion the Tom Woods show Welcome to the Tom Woods show episode 325 What should libertarians think about the corporation is the corporation a creature of the state or Are the various corporate features? Features that would have evolved anyway on the free market spontaneously without any state involvement Well joining us today to help sort this out is Stefan Kinsella Stefan is founder and executive editor of Libertarian papers and he's founder and director of the Center for the Study of Innovative Freedom You may know him for his book against intellectual property and over on the show notes page Tom Woods comm slash 325 I'm linking to a whole bunch of things Stefan is involved in and of course to his website Stefan Kinsella Com before we get to my conversation with Stefan. Let me remind you guys. I have a new book out Real descent a libertarian sets fire to the index card of allowable opinion if you enjoy this show You will enjoy that book I think you can check it out at real descent dot com and I actually Narrate the audiobook and you can get a free copy of that audiobook via audible through the offer at Tom Woods audio dot com All right, let's turn now to Stefan Kinsella and my conversation with him about corporations and Libertarians Let's talk about the corporation today This is one of the topics as I look over the 320 something that I've done so far that I haven't hit on yet But that I've been meaning to hit on because it is a subject of it's a bone of contention among libertarians And in particular I want to I want to focus on some of your own work on this subject And as I was framing this episode before you came on I was explaining to people what the controversy is and the controversy is that You have the corporate form and you have some libertarians even who say that the that Corporations are getting a state benefit By virtue of being incorporated and that this that state incorporation is a state benefit So libertarians can't support it. What's interesting about that by the way Is that a book that you and I both like very much by Robert Hesson called in defense of the corporation? Was actually written as a response to Ralph Nader who was making exactly the arguments that left libertarians are making now That doesn't make them wrong Ralph Nader is not always wrong But this was thought of from the start this kind of modern defense of the corporation as a response to people like Ralph Nader right what exactly is the Corporate form first of all, that's the cause of all this controversy. Yeah, so let's talk about that Um, and I think Hesson's work is the kind of seminal work on this on this issue Although to be to be honest for libertarians probably there's about three pages of that book Which address the really only issue we ought to have the rest of its address to concerns that non libertarians Really have these kind of utilitarian arguments, etc. But um, you know, of course, you know The word corp corporation means body like the word corpse or corp in Latin or core Um, and it's a legal form. That's fairly recent in its modern form in in in the in the modern western Society It's a it's a way of organizing a firm or a business enterprise Traditionally in the past You have individuals which are persons which we now call natural persons in the law to distinguish them from Legal persons or civil persons, which are these artificial entities that have legal personality The United States government is a form of corporation in a sense all states or corporations because they have a legal personality They are said to exist on that plane as an acting entity In private relationships, you know individuals would have a business or they'd be employed or Have a shop and they're just an individual if you own the shop you called yourself a sole proprietor if you Partnered up with someone because you needed more than one person Unless they were employees or family members You might have a someone else who contributes capital and you all work together and that's called a partnership So you just partner together, but that's really nothing more than a private contractual arrangement Under those types of legal arrangements in the past Each partner would contribute a certain amount of capital or have a certain share of ownership of this Corporate of this partnership, which was not a legal entity. It was just the way that these people arranged their affairs But if there was a debt owed by the partnership like for a loan or even for some kind of tort Traditionally, all the partners were held to be liable for the entire amount There are many reasons for that one of which was they wanted to hold themselves out that way so that they could Have a good reputation and also a lot of times these were like family type businesses where there was honor involved and all this But sometimes they needed capital from someone who didn't really want to be too involved in the business They just wanted to contribute some capital and have an ownership stake in it But they didn't want to be liable for possible debts of the partnership And so the the practice of limited liability partnerships arose Okay, a limited liability partnership is one where there are two different types of partners One they're they're general partners Which are the traditional type of partners who are each personally liable for all the debts of the entire partnership And then they're limited liability partners who are only liable up to the amount Of money that they invested in the partnership So that was sort of the emerging model in early industrialism and capitalism um, and then the state stepped in and Came up with something similar to that which they called the corporation So the corporation is similar in many ways to the limited liability partnership the state allows you to register a charter with the state and call it a corporation and The shareholders to people that invest capital are not liable For the general liability of the corporation only the corporation and its assets are and as part of that process The corporation was deemed to have what's called entity status. It has our legal personality. So it is a legal person So that's how the corporation arose and the criticism by the libertarians is that they believe that When the state did this it granted A privilege to the shareholders it granted them immunity from general liability for debts of the corporation That they otherwise would have had in a free market and therefore it's a privilege and ought to be abolished All right, let's yeah, let's pick that up from there because I have to admit that years ago I fell into that error too that I believed that that Incorporation was a state privilege and it was mainly because I hadn't looked into it all that Deeply and it was frankly an easy way for me to seem like I had some common ground with the left Hey, I'm against corporations too And I'm kind of embarrassed as I look back on it and frankly it was you really more than anybody else who jolted me out of that Because when we see that government involved in something we're inclined to think that the government is granting something But it could simply be codifying a relationship that could emerge Inoffensively from a libertarian standpoint. That's what I want to look at now I want to look at the three areas that hesson identifies and that you're talking about here as as really constituting the You know the major corporate features so entity status as you just mentioned or so-called corporate personhood I think that's that that's one of the key ones then perpetual life I think it's not as big a deal and then limited liability I want to get to to all these but when we say entity status, this is the same thing as Corporate personhood is it not yes Okay, so this is this is a topic that that comes up quite a bit on the left too Because you see people chanting Corporations aren't people and I think they think they're making some kind of profound point here But I think everybody knows that a corporation is not actually a human being And it seems to me that the entity status is a fairly benign Uh feature of corporations What is it? What is the purpose of entity status? What does it do? Okay, so so yeah, so let's um That's the right place to hit it and I agree with you We should be suspicious of anything the state does but we should also be suspicious of its claims, right? I mean, you know, we're used to the the state providing education and roads They take credit for these things they co-op them, right? Um, so it could be something like that's going on here So we have to be careful not to just assume This and if you want to find common ground with the left and we can get to this later I would agree. We should abolish state incorporation Um statutes and grants, but I don't think it would lead to what the left libertarians think it would Um, so so the entity status. Yeah, so you mentioned the three features that Hessens sort of zeroed in on There's uh limited liability there is Perpetual duration and there is the entity status Then you say what's the purpose of entity status? um I think there's two answers to that the free market or the practical answer is it's just for administrative convenience It's actually for the benefit of Of uh people that the company might owe money to they can just sue a creditor could just sue, you know Chevron corporation in the courts instead of having to sue 10 000 shareholders Or some nebulous group of managers. It's actually an administrative convenience And there's no reason why contractually or practically a court system Couldn't allow something like that But the state's reason for entity status is to pretend like they're granting some special privilege So, you know since the state and the left and the left libertarians all agree on this thing that the state is granting a privilege To the corporation or to the members of the corporation So the state grants them entity status. Why so they can say it's a privilege so that they can say well We're get we don't have to give you this privilege so we can condition it or we can ask for something in return For example corporate taxation, right double taxation or corporate regulations I mean you hear this kind of rhetoric all the time. Hey, we're giving you a privilege of entity status and limited liability So you can't complain if we Have corporate taxation or capital gains taxation or regulations on what you do So our bains-octly regulations all these kinds of things So basically it's an excuse for the state to regulate companies so If we remove if if we were able to see that you could achieve something like a corporation without the The state's assistance just by pure private contract and and private law Then the state would have no excuse to tax the corporation So I think it would be a good thing if we removed entity status But I don't think it would result in unlimited liability for shareholders And by the way the perpetual duration thing I think is easy to dispose of as Hessin does you could easily arrange for some kind of arranged group of Some kind of contractual network to live Indefinitely because the members can be switched in and out just like a neighborhood association Or a restrictive covenant or a trust There's just no reason you couldn't just have private arrangements to make some some some so-called business firm last Potentially forever or beyond the lifetime of its original Founders so to my mind the only sticking point for libertarians is limited liability And for that we have to look at two types of of limited liability That is two types of debts that the shareholders are protected from and one would be contractual Liability like a debt to a creditor someone who loans money to the firm or someone to whom the firm owes money like a vendor And the other would be someone who doesn't have a contractual relationship with the firm But who is injured by some kind of negligent act by the firm. So for example A little old lady who is run over by a FedEx truck. Okay, that's a tort committed by the driver of the truck So then the question is Who is she entitled to sue? Okay, so this is where we get into this question of limited liability Right now with limited liability I would up until I read your stuff. I was more or less able to handle Half the issue. I could I could handle half it. I could handle the the part that says that With the deals with debts and say that and you know, there's no reason that again contractually Creditors couldn't just say we understand that in lending you this money We will not be able to go into the college funds of every shareholder to get it if you guys don't pay We're you know, we're we're limited to the assets of the corporation or whatever Like they would understand that and that and there would be a premium in the interest rate here reflecting the fact that they know That this is a limitation on how much they can grab in a case of default. So everybody could Establish that purely voluntarily. Yes, and I think the other the other way around to tom if you want to Loan money to a corporation and you insist that the That the some of the shareholders or some of the managers or some of the major shareholders You insist that they personally guarantee it, which is done sometimes in very small corporations. Okay, then those Those borrowers the corporate borrowers they're taking on more risk and they may insist on You know better terms for themselves because of that. So it's a two-way street there Ah, okay. I hadn't actually thought of it that way. So for example, if you wanted to loan money to exxon Right, um, you know, you know, you don't really need the ceo to be personally guaranteed alone Because they have plenty of assets, but if you insist on that they will just they'll turn you away and go to the next lender So you would actually lose business. So it's a two-way street Now what about the case the classic case of the delivery driver? You know, who's he's an employee of the corporation. He's driving around and he strikes somebody and right and harms them That that's the that's the issue that we need to tackle. Yes. No, so here's the fundamental issue I think for libertarians on this corporation issue and in a way, it's like the ip issue It's one of the issues where there's a lot of things taken for granted or a lot of assumptions And you just have to step back and think What is everyone assuming here and let's think more clearly about this to get to the heart of the issue And then it starts becoming clear and I was like you on this I was confused on this privilege issue. You know, you don't want to be in favor of the state granting privileges but We're in favor of capitalism and there's got to be something wrong with With with what the leftists are proposing And I discovered that basically this has been already addressed by at least three libertarians that I found hesson and also roger pylon And rothbard specifically and I'd never noticed it when I read him the first time because I wasn't Thinking about, you know corporate limited liability But going back and researching this issue all three have basically the same point And it really comes down to a question of causation and responsibility The idea the idea is that what should Individuals be responsible for in life or what makes you responsible to someone else for a negligent act or for a tort And the general answer is that if you commit it, right? So the delivery truck driver At first glance is the person who committed the tort so If you what the people who want to abolish limited liability want to see happen is they want the shareholders of the corporation To be also liable now in the law. That's called vicarious Or secondary responsibility. That is there's a doctrine saying that A is responsible directly for his actions like the truck driver and b is also responsible For some reason Now there's several exceptions or cases in the law for which b should be responsible for a's actions. So if b Uh coerced a into doing it, right like a hitman like a mafia boss Ordering a hitman or coercing someone to to do something Or if if b was somehow in cahoots with the driver, you know, there's different exceptions like that But in general you you can't just pick a random b out of the crowd and say well b should be responsible for a's for a's liabilities So what the left and the libertarians who are on the opposite side of the opposite side of this issue say is well be The shareholders or owners of the corporation and therefore they should be responsible. So now to me. This is the crucial issue That's the mistake they make There's there's two mistakes in that formulation One mistake is that they're assuming that ownership implies responsibility But that is actually not what ownership is ownership is the legal right to control It's not the right to be it's not the obligation to be responsible for It's the right to control And a clear example of that would be if you own a knife And someone steals your knife and they stab someone with it You know, we would say you still own the knife because the thief doesn't gain title to the knife and your knife is used to kill someone But you're not responsible for that because you didn't perform it. So ownership By itself does not confer responsibility It has to be action that causes responsibility So then the question is what action did the shareholder perform that caused the harm to the victim of the negligence of the truck driver Okay, so that's the real question and the second mistake they make is they rely upon state classifications like when they say Ownership they say well the shareholders own the corporation Well, that's kind of a legal classification that the state uses To call these guys owners But we need to look as libertarians and as austrians at the reality of the situation If you remember on ownership is the legal right to control a scarce resource Possession is the factual ability to control a resource. That's what human action is Now as a matter of fact, if you're a shareholder in google You're not entitled to go have your child's birthday party in their conference room You're not entitled to take the corporate jet and go fly with it So you don't have actual day-to-day control of that asset like an owner in the simple sense would So just because the state labels someone an owner doesn't mean they're an owner in the actual libertarian Legal sense So if you get rid of these assumptions, which are kind of statist influenced Which libertarians just rely upon in their arguments, then you have to go back to a causal question And then the question becomes one of causation and responsibility And then we get to the nub of the issue and this would Rothbard and Hessin and Pallon point out What they point out is that traditionally in the law the reason that we assume That the sort of owners of a business are responsible for torts committed by the employees Is the is the doctrine of respondeat superior? Okay, which means the superior is responsible for the actions of his subordinate And this is sort of a relic of Like feudalistic times when you had like an apprentice or you had a master You had a small shop a blacksmith and his apprentice And or a small family type unit And basically you do have a closely controlled Setting where there's a manager who is really in charge of ordering the subordinates to do things And so the doctrine arose of respondeat superior that the master is responsible for the actions of his servants And that doctrine is reasonable enough, although i'm not quite sure you could justify even that under libertarian principles But let's assume that we we could take that for granted that If there's a master controlling the actions of a subordinate by by which i mean giving orders That we would say the master has some liability For what that servant does just as president truman had liability for the bombs dropped over Nagasaki and Hiroshima because he gave an order to someone right although that's a state setting But still you could say he's responsible. He's not off the hook just because someone else did it You could see relationships and hierarchical structures where Masters ought to be responsible for the actions of the servants that they direct So the question is what kind of theory of causation could you come up with that would show that shareholders or in that position Like the managers of the corporations are right and The the problem I have is that you can't because if you if you broaden the scope of Responsibility and causation so broadly That you say everyone who gives exxon 30 dollars for one share of stock is now on the hook for 50 billion dollars of liability for an oil spill Then the all that person did was give money to exxon And have the right to vote in elections for the board of directors who don't themselves even run the company They appoint managers who run the company Okay, I could see an argument that the managers are responsible for actions of their subordinates Maybe even an argument that the board of directors is responsible because they appoint the managers although that's weak But there is a potential for liability there and that's why there's such a thing as d and o directors and officers insurance This is what most corporations get so even though they are potentially liable They're not really personally liable because they're insured anyway So this whole issue that the left raises is just a non-issue Because even if you said shareholders should be responsible Then the corporations would just get shareholder liability insurance and it still would be a non-issue They would still go on as before. I don't know if they'd call themselves corporations But the point is if you were to expand the net of causality And say that just because someone has the right to vote for the board of directors in a corporation Which means the right to influence the outcome of an election then they're responsible Because remember every shareholder doesn't necessarily even They they haven't even given money to the corporation because you know, I can buy a share from for an existing shareholder You know, I can buy a share of exxon stock from joe blow and I give money to him I never gave a dime to exxon so i'm not contributing money to exxon. I only have the right to vote What if I never exercise the right to vote or what if I vote and the vote didn't matter or what if I vote for a different candidate who lost So these nuances are never going into primarily because most critics of the corporation I think don't understand how corporations actually work And in fact, I'll you hear all the time people say that Limited liability exempts from liability the managers and the employees of the corporation, which is completely false Limited liability only says the shareholders aren't liable But in my view and roger and pilon and hessons and ross broads view They wouldn't be liable anyway in a free market. So that law does nothing in fact I think it's pretty difficult to sue a manager personally for a tort of a Of a driver that he was responsible for supervising Although you could argue that he should be liable. So The state system actually Exempts from liability people who wouldn't have liability anyway And it doesn't provide a remedy Or a cause of action against people that arguably should be liable So the state theory is bad on the causation role in both directions Well, let's uh complicate things a bit with the case of a truck driver Who is reckless and a drunk and the manager knows he's reckless and a drunk but figures He's the cheapest guy to hire. Are you saying that there might be some Some world in which that manager would be liable Into some degree. Absolutely. I mean I think this is this is one of these armchair libertarian issues where the whole field has been so corrupted by state Interference that it's hard to see what really ought to develop over it with a nuanced kind of a private law customary court decision process over time But my feeling is that probably that manager would be liable although as I said he would probably have Be covered by a type of dno insurance Now that insurance would probably have exceptions for like a willful negligence or gross negligence So but you know if you make a mistake Then you're covered by the insurance anyway, but yeah, I I could see that I could see that there would be but this is all really Practically irrelevant because for any corporation that's responsible enough and has the resources to procure insurance for its managers and its officers and its board members It's going to have insurance for the corporation itself Which the victim can can can you know? So the victim is going to go after the assets of the corporation and then as a backup They have the assets of the insurance company which would be the insurance company for the corporation as a whole And yes, I suppose they would have they could sue the manager directly and then go after his insurer But this is all just lanyab. This is extra security Let me ask you Let's go back for a minute to the the debts question. I want to ask you if this is a legitimate analogy in your mind suppose you have Some kind of grievance against a local church like you you're suing them for damages You're suing what what you're able to get from them would be drawn from the assets held by that church You would not be able to get into the pockets and the savings accounts of the parishioners of the congregation Is that a good analogy for what's going on with the corporation with limited liability? I think it's a very good analogy because as I was going to say and I I lost my train of thought If you extend this net of causation so broadly in the corporate context that you could sue the shareholders For such the for the minimal role they have in the actions Of the of the person who committed the tort. Okay Basically the law considers them passive and the law by the way makes exceptions for what they call Active there's another term. It's something like active shareholders. So if you're a passive shareholder You're just someone who owns stock in a company. All you do is Vote in the occasional election and receive your dividends You can receive the benefit of limited liability But if you actually interfere with the actions of the corporation or you're such a big shareholder that you start telling them what to do Then you start becoming Basically one of the management and then you could be liable So I think that's a perfectly reasonable exception But my point is if you hold a passive shareholder liable for the actions of the corporation Then you would also have to hold liable Every other employee of the corporation Every vendor of the corporation every customer of the corporation because every one of them benefits the corporation in some way You know, if I go to mcdonald's and I buy a 30 dollar meal for my family I'm giving them 30 dollars What's the difference if I buy a stock a share of stock in mcdonald's for 30 dollars? And I or if I if I buy if I buy food from them or if I supply food to them Or if I loan them money as a creditor and in fact a lot of lenders like bank bank lenders They request or they require official contractual input to board appointments And how the companies run believe me a lot of companies that have Large lenders they listen to what those lenders say those lenders are a lot more influential on the policies and the direction the corporation takes Than some little shareholder. So the point is if you have this kind of theory this broad theory of causation or responsibility You have one medium-sized corporation. You have 10 000 people that are all liable for its for its debts Not just the shareholders, but its customers its vendors every employee All the union workers all the janitors everyone And this is clearly absurd So right and by the same token I think that's why your analogy is apt the parishioners of a church are not really the owners of the assets I don't think in most cases Right, it's probably some kind of non-profit trust or something like that someone someone on the church Right Yeah, I would think so that's why I heard that analogy and I can't now Remember where but it seemed to make sense because I've never heard of anybody complaining That you can't get at the assets of a member of the congregation. I've never heard any complaint to that That way but it would seem that if you're making this complaint about corporations, you should make that The problem is if you if you bring this point up then the libertarian will say But the shareholders are owners. So then they will go back to the state classification system And they will they will rely upon the state's own classification system I mean, what if the state just used a different word? What if the state said here's a shareholder Who is a person that has the right to receive dividends That has the right to vote for board of director elections And that has the right to receive a pro-rata share of the assets of this entity upon a liquidation event That's what they are In other words, they didn't have to call them an owner because they're not really an owner of the assets They have certain contractually specified rights just as creditors do just as vendors do just as employees do just as suppliers do Just as you know Anyone that the corporation interacts with does Well, Stefan, I appreciate your time and really in in helping to clear this up An issue that as I say made me stumble early on as a libertarian and in the show notes page for this episode I'm going to make sure and link to Quite a number of your writings on this subject so people can get more information I'll link to the hesson book. It's probably out of print But I bet there are some used copies out there here and there the show notes page will be tom woods.com 325 and of course we will link to Stefanconcella.com will link to you on twitter people can hook up with you in all kinds of ways As a result of this episode. Thanks so much for your time. Thank you very much tom. All right, everybody That's the show for today. I am heading to the airport So that I can speak in houston tomorrow at the mesas circle event So this episode is going to be going up probably late tonight when i'm back at the hotel So you late night people you'll get to hear this episode first Make sure and subscribe to the show because we give you a dose of liberty education Monday through friday you can do that over at tom woods.com. Remember the show notes page tom woods.com 325 and remember finally libertyclassroom.com Get a discount over there using coupon code show in all caps We've already got 12 courses where you can learn the history and economics. They didn't teach you From faculty members you can trust including me by the way And many other fun features with more courses to come We'll have a link to that also on the show notes page tom woods.com slash 325 Or just libertyclassroom.com. See you next week everybody. Thanks for listening The tom woods show