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Home | Blog | The Over-reliance on State Classifications: "Employee" and "Shareholder"

The Over-reliance on State Classifications: "Employee" and "Shareholder"

November 20, 2008

The state takes over and corrupts many institutions and aspects of life--roads, communications, law and justice, healthcare, money, defense, police, finance and banking, and education (see, e.g., Hoppe's Banking, Nation States and International Politics: A Sociological Reconstruction of the Present Economic Order. In so doing they gradually infiltrate language and even our concepts with official state classifications.

Employee

An example of this is the idea of "employer" and "employee". In a free-market economy people are market actors and interact with each other, in a division of labor. Firms arise, in part to overcome transaction costs, though there is an upper limit to their size (see Klein's Economic Calculation and the Limits of Organization). But just as a firm may outsource some functions to other companies, it may purchase the services of individuals in a variety of arrangements. Some are called "employees" if they work repeatedly and extensively for the firm; though there can be part-time employees, and full-time employees who moonlight. Others are called contractors or consultants, even if they have only the employer as their client.

In a free market the labels employed would be relatively unimportant. In fact these are really just examples of a contractual relationship where the firm has agreed to pay a fee to the employee or contractor in exchange for performing specified services. There is no sharp distinction between them. But as the phenomenon of "employment" has become prevalent, it presented itself as a juicy target for state regulation, e.g. minimum wage, fair labor standards (overtime pay, maximum hour, etc.) legislation and the like. What this means is that if a firm has an "employee" as defined by the state, then certain legal rules apply to the "employer." Naturally a firm might want to just re-classify its "employees" as "independent contractors," but the state will not permit this, since it defines reality.

Not only that, but the state defines the employee's actual position and job title, in determining whether the worker is "exempt" or not from certain FLSA requirements. Companies might try to give a mid-level employee a "manager" title to classify him as "exempt" and evade overtime requirements, for example, but the Department of Labor won't permit this--it defines reality.

Besides being an unfortunately effective tool that the state uses to control market actors, another problem with this state of affairs is that the's state's own (artificial, arbitrary, decreed) classifications become accepted unquestioningly and used in normative and even economic reasoning. For example, libertarians tend to take for granted the idea that "employers" are "responsible for" the torts of their "employees"--the doctrine of "respondeat superior." They take for granted the legitimacy of the doctrine of respondeat superior in part because it has become ingrained in our legal system (which the state has monopolized), but note that in any event, this doctrine requires one to be able to objectively identify that someone "is" or "is not" an "employee" or "employer." If the state does not decree what this means, then the question would arise, should a company be responsible for the torts of other individuals it profitably interacts with? What about torts committed by its contractors and consultants? What about torts committed by the employees of a company it uses for outsourcing? Why does it make sense that I would be personally liable if my "employee" harms someone while delivering a package for me, but not if a FedEx truck driver does it when delivering my package? And so on.

(I discuss some of the problems with respondeat superior and shareholder liability for the torts committed by employees of companies they own shares in, in my comment to Long on the Corporation; In Defense of the Corporation; Sean Gabb's Thoughts on Limited Liability; and Legitimizing the Corporation.)

Similarly, some libertarians rely on the classification "employee" when discussing issues like conspiracy or joint liability for a crime (see my Causation and Aggression for elaboration). According to some, if A "merely incites" B to perform a crime, A is not liable; but if A is B's "employer," this changes matters. And so on. In other words, the libertarian determination of A's responsibiltiy turns on the state's own arbitrary, non-objective classification--a classification which is selected solely for purposes of allowing the state to control market actors for labor regulation purposes, etc.--that is, a classification that is not significant, rational, or objective for purposes of normative reasoning.

(We might add here a similar observation: some would argue that if a woman merely persuades her lover to murder her husband, she is not responsible; but if she "agrees to pay" him money, she is--note that the latter case rests on the state's own definition of "contract", and is unscientific because while the state might only define contracts for money or monetarilly valuable objects or services as "counting" for this purpose, the Austrian knows that value is subjective and motivates all actions--the lover who kills his girlfriend's husband to obtain her love or sexual favors is engaging in human action just as a hired hitman is; just because the law focuses on monetary transactions (mostly so that it can tax them) is really irrelevant to the proper classifications and distinctions that the ethicist should employ and draw.)

Shareholder

Another category--related to respondeat superior and "corporations" (see links above)--is shareholder. Even though "corporations" could exist on the free market with no state privilege or backing, the state has monopolized this too, and sharply defines who a "shareholder" is. Libertarians, who of course believe in private property and ownership, accept this category as some holy writ. They do this implicitly when they oppose the idea of corporate limited liability--whereby owners of shares in a corporation are not personally liable for contractual debts of the corporation, nor for damages caused tortiously by the corporation's employees. Now the contractual debt part is easy to dispose with; Hessen has done so. What about torts committed by the corporation's employees, that damage third parties? Why shouldn't the corporation be liable? Why should't its shareholders be liable?

In criticizing this form of limited liability, critics make several ungrounded assumptions: (1) the validity of respondeat superior (so that the corporation is responsible for the employee's actions in the first place); (2) the objectivity and relevance of the "employee" classification; and (3) that shareholders are causally and legally responsible for damage the company is (indirectly) liable for (which itself requires an assumption that the classification "shareholder" is objective and relevant).

I've already pointed out some flaws with (1) and (2), but what about (3)? Austro-libertarians realize that ownership is simply the legal right to control. Shareholders have a legal right to receive a pro-rata share of assets upon winding up; and the right to elect directors, who appoint officers, who hire managers, who direct employees, who carry out daily tasks. They don't have the right to, say, enter the headquarters and use a conference room. Their rights are distributed, conditional, and limited. They basically have some rights to receive money, and some tenuous rights of influence over the company. But there are any number of market actors who have such influence, or even more--employees, vendors, customers, lenders, and so on. (And don't even get me started on the artificial concept "stakeholder" also pushed by the state.)

The point is: why is the shareholder just assumed to be "the" "owner" of the company, for purposes of responsibility for actions caused by its "employees"? Because the state classifies it this way? A sound theory of libertarian causation and responsibility would look at the underlying reality, not the state's labels and arbitrary classifications.

Corporation

This one, too, is abused--mainly today by "vandarchists"--see my links above.

More needs to be done on all this--we libertarians have to be wary of the state's takeover of our conceptual way of understanding the world.

Update:

Of course, many other examples can be found: "education" (the state doesn't count practical things like working on a farm); "citizen"; "adult" (18 years old, or maybe 21, so sayeth the state); "marriage" (the whole gay marriage debate would be moot if the state didn't define marriage and classify people as "married" or not..

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