 Good afternoon. I'm happy to be here. I'd like to thank Hans and Guelchan for the kind invitation again to this this lovely conference and in sight. And this year I'm going to talk about a topic I haven't spoken on in quite a while. This was Hans's idea and I think it was a good idea as we'll see. It's a timely topic. So my topic is the role of the corporation and limited liability in a private law or free society. I'm going to post these slides later on my website. They have links and background resources as you can see here. I have a long blog post where I link to a lot of the materials I'll discuss here. Let me start with an incident that's always struck me. Murray Rothbard recounts that he once asked Mises, Ludwig von Mises, if there was any definite criterion by which you could make a clear-cut judgment about whether a given country could be designated, you know, was it essentially socialist or not or whether it was really a spectrum or continuum issue. This was a time when there was a lot of mixed economies in the world and full-throated socialism. So he was wondering if there was any way to just make a judgment. This country is socialist or not. So Rothbard said he was pleasantly surprised when Mises promptly replied, yes, a stock market. Mises went on, a stock market is crucial to the existence of capitalism and private property, for it means that there's a functioning market in the exchange of private titles and to the means of production. There could be no genuine private ownership of capital without a stock market and there could be no true socialism if such a market is allowed to exist. Now why did I start with this? Notice he said stock market. What is stock? Stock means private ownership shares in what's called a joint stock company, typically a corporation. When we think of the New York Stock Exchange or the NASDAQ, we're talking about people trading ownership shares primarily in corporations, although there are some types of exceptions, some types of limited partnerships. Primarily we're talking corporations and as we all know, and I don't need to belabor, corporations are extremely prevalent in everyday life. We all run into them, some of its own corporations, some of its work for corporations, we deal with corporations, we travel here on the services of corporations. So this is a very prevalent aspect of modern life, modern Western capitalist life. It is only one of several types of business arrangements. Others would include partnerships, trusts, sole proprietorships. The PFS is modeled after a private monarchy, which is another type of organization. Basically these are modes of cooperation in society. There's an economic theory of the firm which explains why business arrangements emerge, not necessarily the form, but why people cooperate in these arrangements, why we're not all just sole individuals outsourcing to each other. There's some theory about the lower limit of the firm and the upper limit of the firm. Like Ronald Coase has discussed, the role of employment in firms in overcoming transaction costs is why people come together and they have long-term arrangements in the shape of a firm, such as a corporation. Murray Rothbard and others have written on possible upper limits to the firm, such as the calculation problem of socialism itself. The larger a firm gets, the harder it becomes for it to have genuine free market transfer prices for internal units and it becomes less and less efficient in addition to other problems, such as bureaucracy, bloat, nepotism, etc. Firms obviously emerge for a reason and the corporate form has come to dominate the type of firm that we have on the market today. I want to back up because the partnership is one of the earliest forms and traditionally did not need the government to establish, just people became partners. They pooled their resources, they became owners of this partnership according to how much they contributed and originally in the original form of partnership, all the partners were considered to be all equally and fully liable for all the debts of the partnership. That's called joint and several liability in the common law. The reason is because of the origins of the partnership in Medieval Italy, when most partnerships were family-based and there was a lot of intermingling of private and public, the business funds and the private funds and there's this matter of family honor. If someone has owed money, then every partner of that partnership is considered to be liable to pay off the full debt even if the other partners are unable to. That's where the idea emerged from, traditionally. There's another type of partnership that's emerged. It's called limited partnership. In a limited partnership, not every partner is completely liable for the debts of the partnership. Only the general partners are and there only needs to be at least one general partner. Limited partners can lose their investment if the partnership goes bankrupt, but only the general partners on the hook for all the debts if the partnership is unable to pay it off. By the way, in a strange twist, which I'll become more clear later, corporation can be the general partner of the partnership. The only guy that's fully liable for a limited partnership is a corporation which is not a human being. This is the background here. What is a corporation? A corporation, the word corporation from Latin means a body. A corporation is a legal entity which is considered to have legal personality. It's established by in today's society registering with your local state. They have a procedure where it's of near formality but you register and then the state grants you corporate status which is we call entity status or legal personality. This corporation is considered to be a separate legal person under the eyes of the law. It's characterized, I don't want to get too much into boring law, but basically the corporation is characterized by an article of incorporation or what some people call a charter, which is a document that the incorporators or the founders established that determines the rights and duties of the owners, what the corporation's purpose is, et cetera. It's owned under law by shareholders and I have owned in quotes here and I'll explain that later why this is a little bit of a misleading legal designation by the state. The shareholders who are the quote owners or the stockholders, sometimes called, they have the power to elect the initial and subsequent boards of directors. So these are the people that kind of govern the overall mission of the company. These board of directors is usually compensated, they meet quarterly or something like that and they appoint the officers, the president, the treasurer. These guys then go hire other managers and other employees and that's how the company is run. The company is literally run by the officers and the managers and to some extent the board of directors. Other rights of shareholders would include the right to receive dividends if the corporation pays them, it doesn't have to pay them, it can just retain all the profits it makes. And if the corporation ever winds up, that means being dissolved, then any assets left over get distributed to the shareholders at the end. So that's basically what shareholder status means. The right to vote for board of directors, the right to get dividends if any, and then the right to receive assets upon dissolution. If you're a Google shareholder you don't have the right to use the corporate jet. If you're a FedEx shareholder you don't have the right to go jump in the FedEx truck down the street and drive it around. So it's not that type of ownership. So there are three features that critics of the corporation focus on. They call these privileges. Privileges granted by the state. Entity status, which I've mentioned, potentially perpetual duration. The corporation doesn't have to ever cease functioning after 50 years or something like that. It could potentially live forever. And finally, limited liability for shareholders, which as we'll see is really the key topic under dispute. Now, despite the prevalence of corporations in capitalism, it has come under assault, heavy assault. Primarily or initially by the left. Critics like Ralph Nader in the US are well known. He has books in 1973 and 1976 mounting large scale attacks on the corporation. The basic argument is that, look, corporations are artificial creatures of the state and they have many state privileges like limited liability. And so the government should heavily regulate them and you can force them to give back and be socially responsible, right? If the state's giving you life, the state can condition that grant of life on whatever it wants and it should regulate it heavily. These sentiments are echoed in the law and standard treatments like law professor Robert Dahl, who has argued that corporations have to be socially responsible because they exist primarily to benefit society. A quote from this professor. Today, it's absurd to regard the corporation as simply an enterprise established for the purpose, sole purpose of allowing profit making. We, the citizens, give them special rights, powers and privileges, protection and benefits on the understanding that their activities will fulfill our purposes. So it's like these corporations, we allow them to exist only if they give us something back. So they have to give back. And the state echoes this theory. In the U.S. Chief Justice John Marshall of the U.S. Supreme Court in 1819 said in a famous phrase, a corporation is an artificial being, invisible, intangible and existing only in contemplation of law. The conservatives are also very critical of the corporation. This is Irving Crystal, the author of Neo-Conservatism. I may have the date wrong here. This may be an updated version because he's talking about 1978. He was, I'm not going to read this whole quote here, but he basically is saying it would have been a mystery to the founding fathers and to even Adam Smith this weird thing called the corporation. He concludes, the founders would have said, what we've been asking for a century now, who owns this Leviathan, who governs it, by what right, according to what principles. No other institution in human 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 has remained controversial to this day. So the left hates corporations. The state has a love-hate relationship with corporations. And conservatives have mixed feelings about it. Even some libertarians are skeptical and critical of the corporation, including some of my friends here tonight, or today. There is an article in the JLS, Journal of Libertarian Studies, a few years ago criticizing corporations because the right to free incorporation conflicts with the individualism inherent in classical liberalism, because private ownership rights are given to impersonal entities. So he's criticizing the entity theory. And second, free incorporation, free private incorporation contravenes the very basic liberal and common law principles of personal responsibility. Okay. Now one of the key libertarian criticisms centers on the privilege, they call it, of limited liability. Now first of all I'm going to explain what it is, but let me just say, well let me tell you what it is. Limited liability means the shareholder of a corporation, like the limited partner of a limited partnership, has no personal liability if the corporation has debts. That means that the person to whom the corporation owes money, if the corporation doesn't have the resources to satisfy that debt, cannot pursue the shareholders and go after their assets. Now he might lose the value of his shares because the corporation might be driven to bankruptcy and be worth nothing after satisfying the debts. So he can lose the value of his investment, but that's all. Okay. So it's like, now so but a lot of people confuse what limited liability is. They think that it shields corporate officers or the board members from liability, which is just not true. It only says that shareholders are not liable. Corporate officers and the employee who performs an action like a tort that hurts someone, they're liable under the law. The directors are potentially as well, which is why there's a very widespread practice called D&O or Directors and Officers Insurance. No one would take a job, no reputable person would take a job with a with a corporation serving on the board of directors or as president unless they can make sure the corporation has taken out a good D&O policy to protect them in case of liability. Okay. So let's go back to these three alleged privileges that the corporation enjoys and see if they are really privileges or not because this is the criticism even by libertarians of the existence of corporations. Remember, they're the entity theory that it has separate legal personality, has perpetual duration and has limited liability and others have criticized corporations too for having separation of ownership and control, that is the shareholders don't really control what happens to their money and they somehow think that's objectionable. And unaccountable CEOs, you know, CEOs just doing what they want, getting paid, it's too high and they say the CEOs are getting too much money even for failing corporations and they're robbing the shareholders. So on one hand shareholders are to blame, on one hand they're victims. Okay. And the reason we're asking this question is the fundamental question is in the criticism of the corporation, especially by libertarians, is could the corporation exist in a free society, in a private law society, in a stateless society? Okay. That's the question, are these really privileges granted by the state or could a corporation emerge in a free society? So the fundamental question is, is it more like something like let's say roads. When we know roads we think of roads as government things because the government has co-opted that field. As Professor Hoppe points out in his Banking Nation States article, this is one of the state's tactics. The state comes in and co-ops and undermines and takes over different aspects of private life, law, money, banking, and roads, and defense, justice. And then you know people start thinking of that as an essentially state thing. Even marriage is regulated by the state. So you know everyone thinks now, except for some of us radical people, that law, justice, defense, money, banking, space exploration, marriage are all government created or heavily regulated things and they can't imagine how they would exist without the state. But we all know that without the state we would have law and justice, space exploration, and marriage, and things like this and roads. But by contrast, something like patent and copyright are clearly government-granted privileges which could not and would not exist without the state. They're purely creatures of legislation and they undermine and undercut and contradict private property rights. So the question is are corporations more like patent and copyright or are they more like roads and marriage? Okay, so I'm going to make sure I have enough time to get to the most important part here I do. So let's take entity theory first. Now this is one thing that almost everyone agrees on, that first of all the entity except for libertarians who are in favor of the corporation like me. So the state leftist conservatives or some conservatives and some libertarians agree on the fundamental notion that the corporation can only exist by creation of the state and is an artificial creation of the state. Now they disagree on what implications this has. The left, the left thinks that it should be heavily regulated and the state follows their advice. Conservatives agree that it should be regulated but just not quite as much. So you know there's always a little bit better than the left but not much. Okay, now the libertarians, so the conservatives, the left and the state are all wrong with two ways. They're wrong that the corporation can only be created as an entity and they're wrong that it should be regulated because of this. Now the liberal, some libertarians are critics are only half right or half wrong. They're wrong that it is an artificial creation of the state but they at least think that because it's an artificial creation of the state it should be abolished. So they would think of it more like patent and copyright like I do. Okay, now some of the left libertarians also have these wild theories that you know the existence of the corporation and the privileges granted by the state that allow it to exist has led to a more hierarchical world, right? More unfairness, more employment even which is a bad thing to left libertarians. Authoritarianism of the workplace and exploitation of workers by these corporations. So in their view if we could just get rid of corporations we would have you know this a more decentralized world with smaller firms and no big giant companies and maybe less or very little employment. Everyone be a self sufficient and make deals with everyone or something. Okay, so the entity theory is not a privilege it is actually a huge detriment to the company because number one it's used to justify regulations and also taxes. Corporations because they're considered entities and separate legal persons they have to pay income tax on their profits which results in a bizarre form of double taxation because the corporation that you own shares in is taxed and then when you receive dividends of the already taxed money you have to pay income tax on that and if you you know sell and buy and sell and trade shares and make a profit on the selling you have to pay a capital gains tax. So it's really not an advantage in that regard. It's really not a privilege because you could easily accomplish this without the state just by using a common name to file lawsuits and to let people sue you. It's actually a convenience for the benefit of people that you're harming or that you owe money to. It's easier for them to sue the corporation instead of a bunch of individual owners of this select group of capital that the corporation owns by virtue of the corporate charter. And as Robert Hessin writes the entity concept serves no valid purpose like the idea that corporations are creatures of the state. It is a vestige of a medieval mentality and should be discarded. Now perpetual duration is easy to discard with as well. Critics are just wrong that this is a privilege created by the state. You can easily create perpetual duration by means of clever or careful contract drafting just like restrictive covenants in neighborhoods for example you know homeowners agree to restrictions on the use of their houses and this can last forever and it doesn't matter who moves in and out because the agreement affects the property. So perpetual duration is not an issue either. To make sure I have time I'm going to dispense with these really quickly but look separation of ownership and control people have the right to do what they want with their money. If you want to let someone manage your money then the manager is good at managing but he doesn't have a lot of money to manage. You have money but you're not a good manager. There's nothing wrong with the division of labor that's all that happens. The free market people should be able to do what they want with their money. As for unaccountable CEOs you know you can't take pity on investors they have the right to invest in a company or not they can investigate it if they don't like what's going on they can sell their shares. There's always a threat of hostile takeovers if a company's poorly run they throw out the management so this is really a non problem especially for the libertarian. I've already gone through the origins of limited liability which is really the key issue that people object to. What happened was as I mentioned you had originally had general liability for partners or partnerships. As capitalism started developing say in the 1800s then partnerships started trying to draft in their agreements contractual limited liability say look I don't want to be liable for everything the partnership does and American judges kept rejecting this because that they were not they were they were still making the assumptions that was the case in medieval Italy. So finally the state legislatures bowed to pressure and past statutes allowing incorporation and limited liability and also limited partnerships which is a form of limited liability. So this is how it arose and this is why some people now think that this is a state privilege because the state had to step in and undercut the decisions of its own judges to allow people to do something contractually as they wanted. Now there's two parts to this the first part is fairly easy to dispatch the second is the real none of the issue. So there's two types of liability that the corporation can have and that the shareholder could potentially face if they don't have limited liability. That's contractual liability like a debt to a bank right or liability for a tort that is some harm done to a third to a third person. So the first one if you understand enough about contract law and property rights and have libertarian principles it's really hard to argue that the limited liability grant for contract contractual debt is a problem or it's a privilege because it could obviously easily be arranged in a free market without the state's help because if you announce to the world this is Pepsi, Inc. You're telling anyone who does deals with you a vendor, a customer, a lender, a creditor, a bank, a bond holder you're telling them if you have to sue us to recover money that we owe you by this contract then you can only pursue this defined set of assets but you can't sue these shareholders directly. They agree to that, that's fine. This is similar to what's known in the law as non-recourse mortgages which Doug French has written on his book Walk Away where you have a house and you take a loan out on it and the bank agrees to only pursue the value of the house so if the house gets under water you can just walk away and the bank can take the house and foreclose on it and they only get what the house is worth but they might not get the contract back but you're not even a breach of contract because the bank agreed to that. In fact in small companies quite often the creditor knows that they don't have a lot of assets so they'll either insist the bank has a large insurance provision or has a lot of assets or makes the founder guarantee the loan, makes him co-sign the loan. This is all honestly negotiations. Big boys take risks when they deal with people they know what they can pursue. Contractual limited liability is no problem in my view. So let's take the nub of the issue. This is really what is the main argument, the main objection to corporations at least by libertarians. So you have, let's take federal express, FedEx truck injures a person. The driver is negligent, harms someone. Okay now first of all people sometimes believe that limited liability means the driver is invulnerable for lawsuit, it's not true. Only shareholders are protected by this status. So the victim sues the corporation and the truck driver but if the corporation somehow has insufficient assets which is extremely unlikely because FedEx is a large corporation with insurance policies and lots of assets then he can't sue the shareholders. They're not personally liable under limited liability. Now why should this be the case? Now unlike the case of contractual debts we can't justify this situation by saying well there's a contract. The victim didn't agree to anything before getting hurt. He didn't know he's dealing with a corporation and agreed to take his risks. So you can't justify limited liability based upon the contract theory. I agree with that. Okay so this is the heart of the opposition that there shouldn't be limited liability for tort damages. Their argument is that limited liability short circuits the liability that shareholders would otherwise have and it would make shareholders less responsible for who they elect on the board of directors. I don't really care who I elect because I'm not liable unless the firm have lower costs and externalizes costs and makes them giant, gives rise to hierarchies and authoritarianism and horrors or capitalism. Okay now this argument if you think about it rests on an unstated assumption. The assumption is that shareholders in a free market would and should be liable for these types of situations without the state and therefore when the state grants them limited liability it's giving them a defense or privilege they wouldn't otherwise have. But to make that argument you have to come up with a reason why shareholders should be liable. Now what's their argument? Because in libertarianism what's our fundamental principle? People are responsible for their own torts. I'm not responsible for what you do because I didn't do it. Right? So the FedEx truck driver is we all agree liable. What about the corporation assets itself? Let's put that to the side but we can even agree that the corporation should be liable because it's hiring and directing his actions. Okay? But basically this is a case of what we call in the law secondary liability or vicarious liability or responsibility. It means I am responsible for what you did. If I co-signed a loan for you I am secondarily liable for that contractual debt because I co-signed. Right? If I order you to go kill someone then you know you're a hitman, you're guilty under the criminal law and I think I should be too because I'm causally responsible for that. I'm ordering your actions. Right? Co-cospirators in a crime should all be liable for what each one does. You know the three guys rob a bank and one of them shoots a teller. The other guys are fully liable, jointly and separately liable for the debt. No problem with that under libertarianism. But you have to have a reason. You have to have a reason to attribute responsibility to someone. So what's the reason why the employer in general is considered to be liable vicariously for the torts of its employees? It's based upon a theory called respondeat superior. That means the master should be liable for the acts of his servants or slaves. So you can see this whole idea is rooted in the kind of ancient medieval feudalistic notion where you have masters and servants, et cetera. Now, this actually has been rejected by the leading libertarian scholars who've looked into this issue. Murray Rothbard himself, Roger Pallon, and Robert Hessen in his classic book, In Defense of the Corporation. As Roger Pallon writes, respondeat superior, the doctrine, has always been easier to live with than to justify. So even if we agree, because this is not too controversial, that the owner, the actual owner of a small company who hires someone and supervises him on a daily basis, even if we agree, well, you're closely connected enough with the actions of this employee. You told him to go deliver that package, or maybe you didn't have the trucks maintained so they're not safe, or maybe you didn't give the employee enough training. You're closely enough connected to the actions of that person where maybe it's fair to attribute to the owner, the guy who controls and supervises the employee, to attribute to him secondary liability, vicarious responsibility. Okay. Now, but the question is, as I mentioned earlier in the example about the shareholder of Google not being able to use her headquarters, or the FedEx shareholder not being able to drive a FedEx truck, the owners, quote owners of the corporation, aren't owners in the sense that someone is an owner of a car who can use their car as they wish. Shareholders are what we call passive. They have the roles that I mentioned earlier. They can vote for the directors, and they receive dividends and winding up. That's basically what they do. Some of them, when they buy shares, contribute money to the corporation. Okay. They don't all do this, which is another fact admitted by critics of the limited liability theory. So the reason I'm bringing this up is this is the facts or the features that critics of limited liability point to. They say that shareholders are owners, and therefore they should be responsible. Well, this is just false. Ownership doesn't imply responsibility. Ownership is the right to use something. It doesn't imply responsibility. Libertarians believe that we're responsible for our actions, not for ownership. And I'll just give a couple of examples. You know, if Smith & Wesson sells someone a gun and later is used to commit murder, Smith & Wesson should not be liable for what's done. They didn't direct the guy to do that. If A, this rents me a car and I have a wreck, A in my opinion should not be responsible just because I used their property. It was my action, not theirs. If someone steals my knife and they stab someone and kill them with it, I shouldn't be liable for murder. It was my knife that was used to kill the person, but it wasn't my action. I still own the knife. So it's this kind of bizarre, unjustified theory of strict liability which it just assumes that ownership of property gives you obligations. It doesn't. It gives you rights. It gives you the right to exclude others and the right to use a resource and that's it. Some people analogize this to the aiding and abetting idea. Like if you plan a bank robbery or you are sitting outside the bank in a getaway car waiting for the robbers to come outside, that you're held to be causally responsible and jointly liable with all the bank robbers because you were aiding and abetting. And I agree. That should be a crime. And you should be responsible. And the ideas that shareholders are these evil guys that are aiding and abetting some evil corporation by doing what? By electing board members on the board? Well, they don't all vote. And sometimes they vote for the guy that loses. And you're not usually voting for someone who's running on a platform that they're going to call the BP oil spill. Or is it because I gave money to the corporation by buying shares? Well, what does this mean? If you buy a big map for McDonald's, you're giving them money. You're a customer. Does that mean you're aiding and abetting any torts that McDonald's commits? And in fact, shareholders don't always give money to the corporation. If I buy shares from an existing shareholder, I'm just trading it with him. I never gave a dime to the company that I bought shares from. Okay, lots of actors that interact with a corporation aid and abetted, in a sense, vendors, people that give it supplies, every employee in the company, the unions, creditors and lenders, bondholders, and customers. If we're going to have a theory of causal responsibility and joint liability and vicarious liability that we have such a low threshold that we can say that just because you're a shareholder, a passive shareholder has no direct control over the actions of employees, then we would have a threshold so low that it would ensnare literally tens or hundreds of thousands or maybe millions of people that have any connection with the corporation. If shareholders are liable, customers are liable, vendors and suppliers are liable, creditors and lenders, banks and bondholders, all these people are potentially liable, which is, I think I don't have to argue that this is obviously absurd. So, in conclusion, I would say we do need to get the state out of the business of building roads, regulating marriage, chartering corporations, but I wouldn't expect roads, marriage or corporations to disappear in the free society. Thank you.