Corporations Are A Product of Government

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Brian LaSorsa Posted: Thu, Jul 29 2010 7:38 PM

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Are corporations a product of the government? Would they exist without the government, and why / why not? I need help with this for a paper, but I figured it'd be a discussion too. Was there a Supreme Court case or legislation that started corporations?

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Lagrange multiplier replied on Thu, Jul 29 2010 7:46 PM

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The slogan that "corporations are creatures of the State" is one of the most pernicious, stupidly anti-business ideas adopted by libertarians.

Quoting Rothbard, [C]orporations are not at all monopolistic privileges; they are free associations of individuals pooling their capital. On the purely free market, such men would simply announce to their creditors that their liability is limited to the capital specifically invested in the corporation, and that beyond this their personal funds are not liable for debts, as they would be under a partnership arrangement. It then rests with the sellers and lenders to this corporation to decide whether or not they will transact business with it. If they do, then they proceed at their own risk. Thus, the government does not grant corporations a privilege of limited liability; anything announced and freely contracted for in advance is a right of a free individual, not a special privilege. It is not necessary that governments grant charters to corporations.

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Sieben replied on Thu, Jul 29 2010 7:52 PM

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Limited liabiltiy and special privileges are government granted. The pooling of resources in peaceful activities are free-market-y

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Lewis S. replied on Thu, Jul 29 2010 7:54 PM

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I'd have to go back and look this up, but I think some of the confusion on "corporations are creatures of the state" stems from state-chartered corporations of the nineteenth century.  If memory serves, companies had to receive charters from a state in order to be awarded government contracts to build bridges, roads, turnpikes, etc...Because of the subsidies being handed out, there was a mad rush to organize "corporations" and secure a charter from the state, causing many people today to think that the corporate form itself was a state creation.

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ViennaSausage replied on Thu, Jul 29 2010 7:55 PM

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In the technical sense of the word corporation, the corporation as we know it today is a product of the State.  Each corporation is granted charter by the State, and the benefits and drawbacks of that charter differ from state to state.  The Federal government further protects corporations, granting them the rights and privileges as a corporal "person".  (Perhaps that is where the term corporation comes from?)

However, the more general term "firm" which refers to a "corporation" in the non-state endowed sense, is not a product of the State.  Firms are a product of freely acting individuals, voluntarily partnering to form an entity in the attempts to make profit.  No special rights are granted by the state to the firm.  An the "rules" of a free market, i.e. voluntary exchange and contract, apply to firms and "equally" to individuals.

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nirgrahamUK replied on Thu, Jul 29 2010 7:56 PM

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I don't know if I imagined it but I thought the original corporations grew up in the merchant shipping industry...

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Lagrange multiplier replied on Thu, Jul 29 2010 8:12 PM

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What are the differences, then?

In essence, the main gripe--I believe--is that corporations have limited liability, sheltering owners from negative consequences (accidents, externalities, what-have-you).

This can, as Rothbard state, emerge freely. It's like saying "space exploration is a creature of the State" or something.

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nirgrahamUK replied on Thu, Jul 29 2010 8:17 PM

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>>This can, as Rothbard state, emerge freely. It's like saying "space exploration is a creature of the State" or something.

it can for corporate debts, but its certainly more controversial for things like torts

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Brian LaSorsa replied on Thu, Jul 29 2010 8:25 PM

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@ Vienna Sausage:

An the "rules" of a free market, i.e. voluntary exchange and contract, apply to firms and "equally" to individuals.

Do you know if there was a court ruling that determined corporation to have the same rights as people?

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Caley McKibbin replied on Thu, Jul 29 2010 8:26 PM

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A "corporation" in the real world is a product of legislative act.  Simple as.

http://www.e-laws.gov.on.ca/html/statutes/english/elaws_statutes_90c38_e.htm

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Brian LaSorsa replied on Thu, Jul 29 2010 8:30 PM

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http://www.e-laws.gov.on.ca/html/statutes/english/elaws_statutes_90c38_e.htm 

Do you have any court cases or legislation from the United States? Thanks for the link, but I have to keep it related to the United States for what I'm doing.

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Lagrange multiplier replied on Thu, Jul 29 2010 8:31 PM

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nirgrahamUK:

it can for corporate debts, but its certainly more controversial for things like torts

Sure, legislation favoring corporations, against what would have emerged in a free market, certainly exists. Obviously, limitations to tort liability is a hot issue now.

But, here's the thing: blacks are politically favored by legislation (e.g., affirmative action), that doesn't mean blacks qua blacks are bad!

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Lagrange multiplier replied on Thu, Jul 29 2010 9:28 PM

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yessir:

Seems to me it would not occur to the same degree (less corporations would have LL). What do you think?

I'm not sure. There might even before more corporations, since I believe government intervention politically favors entrenched, well-connected businesses at the expense of entrepreneurial expansion. I don't know, a priori, if limited liability would be less common, just as common, or even more common in a fully liberalized marketplace.

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mwalsh replied on Thu, Jul 29 2010 10:08 PM

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I know this was asked for several posts ago, but the big SCOTUS case a little while ago (http://www.supremecourt.gov/opinions/09pdf/08-205.pdf) was dealing with campaining and corportations, and although it is 183 pages of lawyer speak, it supposedly gave at least some form of "real" person status to corportations.

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Conza88 replied on Thu, Jul 29 2010 10:31 PM

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"Limited liabiltiy... are government granted."

Nope.

LIMITED LIABILITY

In Rothbard's system, individuals possess the legal privilege of specifying their mutual obligations. There is no higher appeal beyond them. His discussion of limited-liability laws rests on this moral and judicial foundation.

Rothbard denied that limited liability is a grant of privilege by the State. He wrote the following in Power and Market (1970), which had originally been in the original manuscript of Man, Economy, and State.

Finally, the question may be raised: Are corporations themselves mere grants of monopoly privilege? Some advocates of the free market were persuaded to accept this view by Walter Lippmann's The Good Society. It should be clear from previous discussion, however, that corporations are not at all monopolistic privileges; they are free associations of individuals pooling their capital. On the purely free market, such men would simply announce to their creditors that their liability is limited to the capital specifically invested in the corporation, and that beyond this their personal funds are not liable for debts, as they would be under a partnership arrangement. It then rests with the sellers and lenders to this corporation to decide whether or not they will transact business with it. If they do, then they proceed at their own risk. Thus, the government does not grant corporations a privilege of limited liability; anything announced and freely contracted for in advance is a right of a free individual, not a special privilege. It is not necessary that governments grant charters to corporations.

"the pooling of resources in peaceful activities are free-market-y"

Yes.

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z1235 replied on Thu, Jul 29 2010 10:48 PM

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yessir:

Wouldn't it make sense that a push against LL would occur?

I'd do a $1mil contract with an LLC with $10mil capital vs. a (no-LL) company owned by a guy worth $10k any time. LLC or not, free agents will calculate their risks and act accordingly. A firm is free to establish itself as an LLC with $X capital but if no one wants to do business with it, then it may have to put up more capital in order to bring its liability limit above a threshold demanded by the market. If not, it would be a firm no more. The state has nothing to do with this.

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ViennaSausage replied on Fri, Jul 30 2010 12:02 AM

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Here is the landmark case and summary that gave corporations personhood:

http://en.m.wikipedia.org/wiki/Corporate_personhood?wasRedirected=true

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Merlin replied on Fri, Jul 30 2010 6:13 AM

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Doubteth ye not Rothbard...on this one at least. Limited liability with third parties is government-created, not with second parties.

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gocrew replied on Fri, Jul 30 2010 7:54 AM

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Doubteth ye not Rothbard...on this one at least. Limited liability with third parties is government-created, not with second parties.

Bingo!  And this was a point that Rothbard made in the same text that people are quoting.  There should not be limited liability for torts.  Of course, in a free world, stock holders could purchase limited liability insurance.

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scineram replied on Fri, Jul 30 2010 8:06 AM

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gocrew:

There should not be limited liability for torts.

Why? All this is is just assertion.

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z1235 replied on Fri, Jul 30 2010 8:23 AM

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Merlin:

Limited liability with third parties is government-created, not with second parties.

Limited liability of anyone(anything) vs anyone(anything) is the state of nature. There's no such thing as unlimited liability. As with most things involving more than one human, actual limits to liabilities are the result of prevalent subjective valuations and norms of the market agents. If you (with no assets but your own self) accidentally destroy my $500k Ferrari, can I assume no limits to your liability and legitimately enslave you for the rest of your life?

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bloomj31 replied on Fri, Jul 30 2010 8:35 AM

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I might be wrong but I think corporate personhood was an obiter dictum in Santa Clara County v Southern Pacific Railroad.

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Merlin replied on Fri, Jul 30 2010 11:29 AM

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Limited liability of anyone(anything) vs anyone(anything) is the state of nature. There's no such thing as unlimited liability. As with most things involving more than one human, actual limits to liabilities are the result of prevalent subjective valuations and norms of the market agents. If you (with no assets but your own self) accidentally destroy my $500k Ferrari, can I assume no limits to your liability and legitimately enslave you for the rest of your life?

OK, you’re right, there’s no such thing as ‘unlimited’ liability. But there’s a world of difference between knowing exactly how much t you could lose (value of your shares) and potentially loosing everything.

Now practically I’d say that if I get my 500k Ferrari out there without insurance I’m looking for trouble. I see liability insurance as a way of overcoming the problem of limited liability…to a large degree.  

But of course, because I can’t pay, I would not (I believe) be reduced to a servile status. I’d just find it difficult to be accepted anywhere in the future, without proper insurance. 

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z1235 replied on Fri, Jul 30 2010 12:19 PM

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Merlin:

I see liability insurance as a way of overcoming the problem of limited liability…to a large degree.  

An LLC with $10mil capital and no insurance is indistinguishable from an unlimited liability firm with $0 assets (owned by a person with $0 to his name) and a $10mil liability insurance policy. Entities with enough capital (LLC or not) are practically self-insured. We already concluded that all liabilities are inherently limited, governments/states notwithstanding. 

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Merlin replied on Fri, Jul 30 2010 2:18 PM

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An LLC with $10mil capital and no insurance is indistinguishable from an unlimited liability firm with $0 assets (owned by a person with $0 to his name) and a $10mil liability insurance policy. Entities with enough capital (LLC or not) are practically self-insured. We already concluded that all liabilities are inherently limited, governments/states notwithstanding. 

I fully agree that there is no such thing as unlimited liability. But of course for the 90% of guys without 10 mil of capital, liability insurance is the only way to make sure that, say, 90 % of damages will be covered. 

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ViennaSausage replied on Fri, Jul 30 2010 3:13 PM

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From a property rights perspective, IMHO, there is a such thing as "limited liability", in the sense that there is a limit to what an individual can legally claim from another individual.  

“The theory of contract enforcement should have had nothing to do with “compensation”; its purpose should always be to enforce property rights, and to guard against implicit theft of breaking contracts which transfer titles to alienable property.” (Rothbard, M. The Ethics of Liberty, p.140)

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z1235 replied on Fri, Jul 30 2010 3:17 PM

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yessir:

The options are not LL and UNLIMITED liability.

I concede that the tort (third party) case may not be as clear cut as I previously thought. The question is whether a free market would allow the existence of firms that limit the liabilities of their owners only to the firm's capital + insurance or those liabilities would proportionally flow through to the owners themselves. To the extent that the firm is considered as a separate responsible entity (person) by the market, those liabilities would be allowed to remain contained to a firm level. If so, the market would be seen as a set of persons (humans and firms, alike) each carrying (or not) their own capital + insurance. 

I still have a feeling that this containment of liabilities (LL) to a firm level is more a result of the market (resulting in more entrepreneurship, more business, more transactions, more prosperity) rather than a governmental decree, hence I predict it would still be recognized as beneficial in a non-regulated market. If I'm right, markets that do recognize it would flourish better than the ones that don't, but that's just a guess. 

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Consultant replied on Sat, Jul 31 2010 6:46 AM

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LL for torts does indeed lead to more business, but not more prosperity. Sure you can build more polluting factories if not all pollution costs have to be paid to third parties - doesn't mean it increases overall welfare.

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Merlin replied on Sat, Jul 31 2010 6:50 AM

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Consultant:

LL for torts does indeed lead to more business, but not more prosperity. Sure you can build more polluting factories if not all pollution costs have to be paid to third parties - doesn't mean it increases overall welfare.

As long as it is fully voluntary, welfare does increase.

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Consultant replied on Sat, Jul 31 2010 7:28 AM

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Agreed, but than it's not a liability anymore anyway. Maybe we're discussing semantics. Corporations are a product of the state to the extent that people suffer from negative externalities and want to but can't claim damages due to LL laws.

I think it makes sense to stress this part of libertarian theory, especially to the leftist save-a-forest crowd.

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z1235 replied on Sat, Jul 31 2010 8:54 AM

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Consultant:

LL for torts does indeed lead to more business, but not more prosperity. Sure you can build more polluting factories if not all pollution costs have to be paid to third parties - doesn't mean it increases overall welfare.

More business = more voluntary exchanges => more prosperity. You are making a straw-man by conflating limited liability with non-existent liability. As I previously wrote, all liabilities are limited. They lay somewhere between non-existent ("My damages to you are not my business") and absolute ("Your firm caused $XXX Billion of damage to me and since you have no way of repaying me, you become my slave until you fully reimburse me."). Both extremes are detrimental to prosperity, and there is no objectively derivable (moral) spot in between. IMO, the "sweet spot" for liability limitation is (would be) determined by the subjective preferences and norms prevalent in the market. 

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Consultant replied on Sat, Jul 31 2010 10:31 AM

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Yes, and my point is that those subjective preferences don't find their way  in the gov't LL system.

Edit: Voluntary exchanges can have negative externalities, so only under a free market law system can you conclude more business == more prosperity. Now, obviously most businesses add to the welfare, but not every aspect of their operation does when they can't get the right price signals in a failing gov't LL system. E.g. an entrepreneur who has to sell his garbage to the maffia to dump in the ocean because his competitors are doing it too, etcetera.