"He's a snake in the grass, I tell ya guys; he may look dumb but that's just a disguise; he's a mastermind in the ways of espionage." Charlie Daniels, "Uneasy Rider" Immodest thoughts: To fix capitalism, we must get govt out of corporate risk-management (rent-selling) business and get shareholders to stop playing 'victim' & start paying attention to risks - TT's Lost in Tokyo

Immodest thoughts: To fix capitalism, we must get govt out of corporate risk-management (rent-selling) business and get shareholders to stop playing 'victim' & start paying attention to risks

I am prompted by recent events to follow up on thoughts I emailed to Sheldon Richman a few months back:

I feel strongly that If we want to fix the country (and if libertarians don't want to be dismissed as irrelevant/patsies for rent-seekers) we need to find ways to restore shareholder ownership of downside risk. This is the only way to back away from the destruction of communities and our natural and government commons by faceless elites through corporations - and the battle for control over Government micromanagement that so often is captured by corporations and serves as barriers to entry. 

Insurers would step in to help shareholders and act as a check on management.

The states that create corporations retain power under the 14th Amendment to discriminate in favor of local, unlimited liability forms of corporation or corporations in which shares are not fully-paid up. There is nothing like a substantial risk tail to focus shareholders on managing management.

Allow me to summarize thoughts that I have posted extensively elsewhere. The state has institutionalized moral hazard and exacerbated principal-agent problems via the grant of limited liability to corporate shareholders. This grant is at the core of why investors chose to us the corporate form (as opposed to traditional partnerships and older versions of corporations where shareholders retained substantial risk), and is something that cannot be obtained merely by voluntary transactions - as it involves future potential involuntary victims of acts by the new corporate legal entity (lenders and other parties can of course agree in advance to liability caps and recourse limits). 

This state intervention has set in motion and greatly fuelled the growth of government and battles with citizen groups over the wheel of government -- battles in which insider elites, generally acting through long-lived and deep pocketed corporations that are armed with greater knowledge and cloaked with anonymity, have the overwhelming advantage. I earlier summarized these dynamics here: The Cliff Notes version of my stilted enviro-fascist view of corporations and government

 

As I have noted elsewhere: I am NOT arguing FOR a general rule that shareholders SHOULD be liable for corporate torts. Rather, I：

(1) point out that limited liability itself has served to muddle the question of whom, exactly, should be responsible for the very real harms that corporatons frequently cause (if, as some argue, the corporations and their shareholders themselves are the "victims" of the troubles they create, then whom, exactly, are the perpetrators?),

(2) note that the limited-liability corporate form has enabled risk-generation and -shifting on a massive scale, with innocent third parties frequently being stuck holding the bag (not solely when liabilities exceed assets, but more generally since the cycle of escalating government interventions to rein in corporations perversely ends up raising barriers to entry and giving corporations regulatory “rights to pollute” that curtail liability even when sufficient assets are available),

(3) argue that libertarians should reconsider the grant of limited liability for torts (as opposed to limited liability as to those who contract with the corporation on a voluntary basis) not simply because it is clearly non-libertarian to begin with, but because it has had profoundly perverse consequences (consequences at a serious enough level that state-loving libertarians in effect concede simply by troubling themselves to argue against curtailing limited liability),

(4) note that the most efficiacious way to roll back the regulatory state lie in the direction of shifting ultimate responsibility for managing risks to enterprise owners (and ending the counter-productive regulatory risk-management experiment), and

(5) note that a curtailment of limited liability for torts could be hedged by shareholders via insurance, and could be achieved by state governments and the federal government offering more lenient regulation to busness enterprises that operate as partnerships, unlimited liability corporations, or in cases where shares are not fully paid up so that calls for signifcant additional capital could be made against shareholders if needed to pay claims.

All of this should be quite evident in the wake of the BP disaster in the Gulf of Mexico, as well as in the nuclear crony-capitalism behind the decision-making that has now come back to bite Japanese individuals and firms that use TEPCO power or which are downwind of their tsunami-damaged nuclear plants (though both of these cases are compounded by even deeper governmental interventions). It should also be evident in the many cases at home and abroad where corporations act to exploit (and pay royalties to governments on) mineral and energy resources that governments purport to "own", and where governments grant corporations "public utility" monopoly rights. 

Any suggestion that one must “provide a theory of liability that coherently distinguishes shareholders from any other patron of the company” BEFORE one can examine any justifications FOR the state grant of limited liability or the consequences of such intervention would be both sadly non-libertarian and dangerously blind and shallow.

Can I interest any other libertarians in pursuing this avenue of rolling back the state?

Published Thu, May 12 2011 4:57 AM by TokyoTom

Comments

# re: Immodest thoughts: To fix capitalism, we must get govt out of corporate risk-management (rent-selling) business and get shareholders to stop playing 'victim' & start paying attention to risks

Wednesday, May 11, 2011 11:55 PM by Friedrich Dominicus

Very well put. Yes moral hazard was institutional introduces by government. You can see it especially well in the area of nuclear power. But that's not all, there are "caps" on every liability  and after that?

# re: Immodest thoughts: To fix capitalism, we must get govt out of corporate risk-management (rent-selling) business and get shareholders to stop playing 'victim' & start paying attention to risks

Thursday, May 12, 2011 9:19 PM by TokyoTom

Friedrich, thanks for the comments.

Yes, I have a number of posts on the moral hazard problems created in the nuclear power sector - and also banking, oil and gas, etc.

# Who wants to trouble with "moral scrupulosity", when we can pretend that the state-created capitalism we're cheering on isn't profoundly corrupt?

Friday, June 03, 2011 1:21 PM by TT's Lost in Tokyo

I tried to leave a few thoughts with Jefrey Tucker in response to his June 2 post, Scrupulosity and the

# Scrupulosity IV: Corporations are the Health of the State (thanks to institutionalized moral hazard)

Sunday, June 05, 2011 10:32 PM by TT's Lost in Tokyo

I copy below some more of my dialogue with Stephan Kinsella and others, regarding on Jeffrey Tucker 's