 Good afternoon. I'm happy to be here. I'd like to thank Hans and Gwelchin for the condemnation 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 the timely topic So my topic is law the role of a 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 linked 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 is 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 into 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. Hey, what is stock stock means? Private ownership shares of 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 us work for corporations We deal with corporations. We traveled 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 proprietors ships 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 the 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 sold individuals outsourcing to each other There are 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 and 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 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. So firms obviously emerge for a reason and the corporation form the corporate form has come to dominate the type of firm that we have on the market today Okay, now 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 You know 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 so that's where the idea emerged from traditionally Now there's another type of partnership that's emerged It's called a 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 first 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 Okay, but by the way in a strange twist which I'll Become more clear later Corporation can be the general partner of a partnership So the only guy that's fully liable for a limited partnership is a corporation which is not a human being Okay, so this is the background here. So what is a corporation a corporation? Well, the word corporation from Latin means a body, right? So a corporation is it a legal entity which is considered to have legal personality. It's established by in today's society Registering with your local state. Okay, they have a procedure where you 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 So this corporation is considered to be a separate legal person under the eyes of a law Okay, it's characterized. I don't want to get it too much into boring law But basically the the corporation is characterized by an articles 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 Etc. It's owned on the 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 You just retain all the profits it makes And if the firm 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 You know if you're a Google shareholder, you don't have the right to use the corporate jet All right, 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 Propentially 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 that is really the key topic under dispute now this despite the prevalence of corporations in capitalism it has come under assault heavy assault primarily or initially about the left Critics like Ralph Nader in the US are well known. He has books in 1973 and 76 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's 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 They give us something back. Okay, so they have to give back And the state echoes this theory in the US Chief Justice John Marshall of the US 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 neoconservatism 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 about what right according to what principles? No other institution in human history in not even slavery has ever been so consistently unpopular That's has the large corporation with the American public It was controversial from the outset and it is remaining 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 was 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 pre-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 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 he's like Now so but 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 or 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 that 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 objection 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 their 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 or 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 and 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 maybe 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 or 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 So let's take entity theory first and now this is one thing that almost everyone agrees on that first of all the entity Except for 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, they're 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 in two 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 liberty some libertarians or critics are only half right have 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 allowed 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 Cities 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 buy and sell and trade shares and make a Profit on this the selling you have to pay 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 Hesson 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 cover Confidence in neighborhoods for example, you know home owners 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 the 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 saying 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 and you know 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 you know Pepsi ink 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 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 that 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 in book walk away Where you have a house and you take a loan out on it The bank agrees to only pursue the value of the house So if the house gets underwater 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 And 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 You know makes him co-signed alone So this is all arms-length negotiations big boys take risks when they deal with people. They know what they can pursue Contractual limited liability is no problem My view so let's take the the nub of the issue. This is really what? Is the is the main argument the main objection to corporations at least by Libertaries so you have let's take federal express FedEx FedEx truck injures a person The driver's negligent harms someone. Okay. Now first of all people sometimes believe that limited liability means the driver is is Is a Invulnerable to lawsuit. It's not true. Only shareholders are protected by this 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 he can't sue the shareholders. Okay, 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 this situation by saying well, there's a contract that the victim didn't agree to anything before getting hurt He didn't you know, no, he's dealing with a Corporation and agreed to take his 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. Okay, that there shouldn't be limited liability for tort damages Okay There are arguments 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, you know, I don't really care who I elect because I'm not liable That less the firm have lower costs and externalizes costs makes them giant gives rise to hierarchies and authoritarianism and horrors horror capitalism Okay, now this argument if you think about it rests on an unstated assumption the the assumption is that shareholders in a free market would and should be liable for the for these types of Situations without the state and therefore when the state grants them limited liability It's giving them a defense or a privilege. They wouldn't otherwise have But to make that argument you have to set 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 that 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 alone 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 hit man 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-co conspirators in a crime should all be liable for what each one does You know 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 what's the reason why the the employer in general is considered to be liable? Vicariously for the torts of its employees. It's based upon a theory called respondia superior That means it's it's a 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 etc now this actually has been Rejected by the leading libertarian scholars who who've looked into this issue Murray Rothbard himself Roger Pallon and Robert Hesson in his his classic book in defense of the corporation as Roger Pallon writes respondia superior the doctrine has always been easier To live with than to justify Okay, so even if we agree because this is not too controversial that like 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 know 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 Okay, 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 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 Smith and Wesson sells someone a gun and later it's used to commit murder Smith and Wesson should not be liable for what's done They didn't direct the guy to do that If Avis rents me a car and I have a wreck Avis 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 staff 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 Okay, some people analogize this to the aiding and abetting idea like if you if you 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 Okay, 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 All right, and you're not usually voting for someone who's running on a platform that they're going to call the BP oil spill right Or is it because I gave money to the corporation by buying shares Well, what does this mean if you if you if you buy a big mac from 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 wouldn't snare 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