Corporate Statism

For many years now I have been examining the logic of the corporation. My conclusion is that it is not just evil by nature, but ultimately guarantees disaster for us all.

Please see my blog at http://philosborn.joeuser.com/articlecomments.asp?AID=8010&s=1
for more details. Or, google on "Gangs of America" for a detailed legal history of the corporation, albeit written by a liberal.

In brief, the corporation is NOT a market entity, it is an artificial creation of the state, often referred to as a "child of the state." The reason that the corporate form has come to dominate business is of course the limited liability, granted by state fiat via the creation of a ficticious person, the corporate entity. Except in special circumstances, the liability of a corporation is limited to the assets of such, meaning that when disaster strikes, the actual humans who decided what the corporation would do are able to pass those costs on to the rest of us, which is theft, BTW.

Naturally, most corporate managers want their company to succeed and make lots of money. This is fine. Most corporations are started by and run by people who are every bit as honest and productive as any other business person. They are virtually forced into using the corporate model because of the risks of devastating lawsuits and punitive judgments.

The unfortunate fact, however, is that risk does not go away by virtue of state fiat. Risk is real, just as real as a table or an oil spill. By isolating the consequences of actions to a ficticious entity which is nevertheless entirely controlled by real humans, the real humans make economic decisions and calculations based on the fact that risks are capped, while profits are not.

Thus, risks that are very unlikely but are much greater than the total assets of the corporation should they come to pass, are systematically ignored. The consequence is a time bomb.

Note that I am NOT against business, big or little. There are other share-based business forms, such as the "Massachussetts Trust," which would be quite able to replace the corporation if it were not for the legal liabilities, which are a flaw in our court systems.

(Edited by Phil Osborn on 1/18, 8:34pm)

Post 1

Friday, January 19, 2007 - 5:11am

I wrote a review of a book that examines asset protection using trusts, corporations, etc. at

http://rebirthofreason.com/Spirit/Books/163.shtml

I agree with Phil about the need for tort reform. I disagree with his argument that corporations are intrinsically evil.

The compartmentalizing of a body of productive assets into a corporation or other artificial entity makes ownership, control and transfer of that block of assets far easier than direct ownership by natural persons.

If I understand Phil correctly, he objects to such artificial entities based on their limited liability, not based on their abstract and immortal nature. Am I correct?

Post 2

Friday, January 19, 2007 - 7:59am

One of the more immoral concepts of corporations is that of limited liability. If there is a problem, you can just dissolve the corporation and be done with it. Nobody effectively takes responsibility.

Corporations would be more responsible if the owners (stock holders) had more say in their governance. Boards need to be accountable to them.

Post 3

Friday, January 19, 2007 - 8:18am

This is an interesting topic. Have you read In Defense of the Corporation by Robert Hessen? I read it long ago, but have, of course, forgotten most of it. It argues that corporations are not merely creatures of the state, but can be the result of privately-made contracts. The state recognizes them, but doesn't create them. An overview of Hessen's argument is here:
http://www.econlib.org/library/Enc/Corporations.html
An article in the Journal of Libertarian Studies is critical of Hessen's view. It has two parts with Hessen's view addressed mostly in the second part.
http://www.mises.org/journals/jls/19_3/19_3_3.pdf
http://www.mises.org/journals/jls/19_4/19_4_3.pdf
There is some discussion of the first part here:
http://blog.mises.org/archives/004269.asp
Regarding limited liability, wouldn't it be immoral to seek retribution against an investor (for more than the value of his/her stock) in a corporation whose only action was to buy some of its stock and had no part in the act for which retribution is sought? If not, what's to bar seeking retribution against a creditor of the corporation as well?

(Edited by Merlin Jetton on 1/19, 11:27am)

Post 4

Friday, January 19, 2007 - 9:23am

The limited liability is crucial in order to allow business to take risks and this leads to innovation and growth. With the costs of of lawsuits spinning out of control on top of it, eliminating the corporation would be a short trip to an economic disaster.

Post 5

Friday, January 19, 2007 - 9:28am

One of the most popular criticisms of the corporation nowadays is that of executive compensation � and that extends to criticism of capitalism in general.

I'm by no means an expert in this matter but it seems to me that the flaw with the laws with respect to corporations lies in the requirement that the boards of directors determine executive compensation, rather than the shareholders. The members of the boards are generally composed of executives of other corporations and thus comprise an "old boys" network. Thus they have a vested interest in large executive compensations in general.

If executive compensation were determined by the shareholders I think this would be a vast improvement. (or have I missed something?)

Sam

(Edited by Sam Erica on 1/19, 10:37am)

(Edited by Sam Erica on 1/19, 10:39am)

Post 6

Friday, January 19, 2007 - 10:32am

The best measure of the "size" of executive compensation, I should think, is shareholder return: how much have stockholders gained under this CEO or executive team in proportion to what they're paying the people at the top? Though I don't have details, the claim is that, by this standard, executive pay is not so high these days. Welch at GE was a classic case in point; shareholders earned thousands of times what they paid him.

Another point is that, circa 1990, state and federal laws making takeovers more difficult were politically popular, and a lot of them passed. Those who opposed these measures, including Dan Quayle and the WSJ, said that the real effect would be to protect managers from market scrutiny and market discipline (since they'd have less to fear if they didn't do a good job), thereby allowing them to enrich themselves at stockholder expense. If pay really is higher these days by the standard above, this would be one place to look for an explanation.

Post 7

Friday, January 19, 2007 - 11:52am

I hope anyone who opposes limited liability does so consistently and fairly. The book I mentioned in Post 1 of this thread describes ways in which ordinary individuals can shield themselves from liability. Many of these laws vary from state to state.

For instance, the Florida homestead laws prevent any forced sale of a person's principal residence for any lawsuit outside of mortgage foreclosures or tax liens. Litigants can place a judgment against the property but may not collect on it until the voluntary sale of the home. However, the IRS treats the judgment as if the plaintiffs had already collected it and taxes them accordingly.

Florida also protects wages deposited into accounts uncontaminated with any other funds such as interest, etc.

Public policy at all levels of government generally protect retirement accounts from lawsuit seizure.

Read that book to get the whole story. Anyone who opposes these measures will have many years of legal precedence to fight. I should also mention that anyone can form a corporation, so in that sense, the playing field is level.

The bottom line: The average person who educates himself on these laws can largely shield himself from collections in a lawsuit. Notice that he can still be sued and have judgments on his credit record, but he can so arrange his affairs as to make much of his net worth uncollectible.

Persons who want to attack these laws will have to reconcile their attacks with the ethic of self-interest.

(Edited by Luke Setzer on 1/19, 12:45pm)

Post 8

Sunday, January 21, 2007 - 4:38pm

With very limited time today, I suggest that readers look at my referenced blog on the subject. For those who are too lazy - TOO BAD!

Oh heck, might as well see if I can restate the basic arguments in five minutes...

Before that, however, let me point out to whomever objected that we need to encourage people to take more risks by artificially lowering the bar that this argument could essentially be used to justify ANY and ALL government interference in the economy. I trust the individual businessmen and investors any day over government bureaurats. The objection I mention implies that somehow people in general are unable to rationally assess risks, but that the STATE has some kind of divine wisdom.

As I mentioned (and see the blog for more details) risk is a fact. Risk is real. Interfering with the rational assessment of risk is RISKY behavior. If risk assessments overall are corrupted to the down side, then people will behave more destructively in general. If to the up side, then people will tend to be overly cautious.

Risk assessment is a prominent factor in virtually any activity, personal or market transaction. Thus, the issue is hardly trivial. Unfortunately, although most objectivists will doubtless have some idea of how manipulating the money supply to cause artificial booms and busts is an ongoing disaster, I have see nothing at all regarding this equivalently important subject.

As I also indicated, the real problem is the courts. I strongly suspect that the corruption of the courts during the 19th century which paved the way for the takeover of the corporation as THE business model was not accidental, but rather part of the proto-progressive conspiracy, which has been thoroughly documented regarding the state educational system.

For more info on that subject, I suggest checking out John Gatto's site for his monumental book http://www.johntaylorgatto.com/underground/adcomments.htm, and the history of the actual conspiracy from Joel Spring http://highered.mcgraw-hill.com/sites/0072558849/student_view0/joel_spring_live.html (sorry, couldn't locate his main site in the short time left.)

The proto-progressives, who were the philosophical children of the early utopian socialists, were out to accomplish several goals in line with their ideas of the late 19th century, that the individual was just a part of a larger organism, the state. "Successful" projects of theirs were (1) Trust Busting to force businesses into the corporate mold, so that the state could theoretically reguate them (in the public interest of course), (2) Prohibition, (Now the War on Drugs) to establish the precedent that the state had the inherent right to control your body in the most intimate sense, (3) Imperialism (as in the tragic case of the Philippines) to establish the right of the state to force itself upon peaceful peoples anywhere on the globe in pursuit of its goals, (4) universal compusory state education to teach people how to give up their individuality and be obedient to arbitrary authority, (5) the military draft, of course, (6) the income tax, and, I would add to the generally accepted list, (7) the corruption of the courts to serve social agendas instead of determining equity.*

#7 above was the pathway to #1. When the courts began allowing punitive damages, especially those far in excess of the actual damages, in order to "teach a lesson," that additional, possibly catastrophic cost had to be factored into business decisions. I.e., it artificially raised the risk level for doing business. To counter that, the corporation artificially lowered risks. The rational move would have been to reform the courts, taking them back to the pure Common Law mode of simply assessing who was at fault and how much it would take to put things back to right.

(In the '60's, in college, in my U.S. History class, required reading was "A History of American Reform," which documented, as best I recall, how the very industrialists who were being hit with Teddy's Trust Busting, were actually financing the "progressives." They WANTED the bureaucratic control of the corporation, knowing that it would shield them from liability at the same time as allowing their hand-picked bureaucrats to give them special rules and regulations which would ensure their dominance of their respective fields.)

*Suggestions as to additions to the list are solicited.

Oops - fifteen minutes instead of five... Out of time. Later.

Post 9

Sunday, January 21, 2007 - 8:36pm

What exact risks are you speaking of being artificially lost? I see none - essentially all the corporation does is allow me to risk my money in an enterprise - and I am risking my money - without fear that on top of what I risk, I also can be sued for my house and more because my business fails. Remember the only way a business can lose so much that it is worth less is because:

1) It gets punitive judgements against it, which as we know are all too artificially high in any case - in other words the "liability" lawsuits are out of control in the direction against the Corporation. So, the theory that they are too powerful somehow does not apply here.

2) Money is lent to the Corporation - and when this is done, there is no guarantee of success any more than there is of my funding the company, either - why would the lender to teh corporation - who can weigh the risk of bankruptcy, have some special advantage?

Do you want to bring back debtor's prison, too? And remember, none of the above gets someone out of deliberate fraud - you can go to jail for that.

I really think it is a gross misunderstanding of economics as well as this fantasy feeling that somehow some vast conspiracy is holding us all back: "Gee! If only there were no corporations, think of the paradise!" It is as crazy as the people who think corporations are evil because of their Communist ideas.

So, how does it interfere with "real risk" when the actual risk is known to everyone who invests or lends?

Post 10

Monday, January 22, 2007 - 8:23pm

Hey Phil,

Awhile back in this forum I questioned the corporate model on epistemic grounds. See http://rebirthofreason.com/Forum/ObjectivismQ&A/0070.shtml#0

Jordan

Post 11

Wednesday, January 24, 2007 - 8:41pm

<What exact risks are you speaking of being artificially lost? I see none - essentially all the corporation does is allow me to risk my money in an enterprise - and I am risking my money - without fear that on top of what I risk, I also can be sued for my house and more because my business fails.>

If you're calling the shots, you're responsible. No? If you can defend that position, I'd really like to see it.

You can be sued for anything at any time. Whether a court will hear the suit or throw it out or pander to politics and permit ridiculous punitive awards is another matter. If the courts are properly constituted and honest, then you should have no more to worry about than any other person. And we do have this thing called "insurance." Of course, when the courts are irrationally constituted with improper authority and political agendas, then the insurance rates can become prohibitive. So, as I already stated (please READ b4 responding), the starting point is in court reform.

<Remember the only way a business can lose so much that it is worth less is because:

1) It gets punitive judgements against it, which as we know are all too artificially high in any case - in other words the "liability" lawsuits are out of control in the direction against the Corporation. So, the theory that they are too powerful somehow does not apply here.>

In fact, there are many cases of massive damage to large classes of people who are never compensated because the corporation dissolved. Read "Collapse" for a description of the mining tailings disasters in the Western states, such as Montana. In other cases, class action suits that should have been a slam dunk were dismissed because the court ruled that the issue was already covered by jurisdiction of some state or federal bureau, which proceeded to then assess some HUGE $50,000 fine for $50 MILLION of actual damages to real people.

In California, the corporation theoretically exists only for the public benefit. That's an essential part of corporate law. In fact, the Attorney General can investigate, prosecute and revoke the charter of any corporation which is found to be acting against public interest. Now, of course, neither of us likes that kind of legal language as objectivists, BUT, guess just how MANY times this has happened. Hint: It won't take more than one space to write the correct answer. I.e., the corporation is designed to protect crooks. Period. Forcing honest businessmen into the corporate mode via a shoddy legal system makes for nice cover for the major criminals who use corporate vehicle for multi-billion dollar rip-offs.

<Money is lent to the Corporation - and when this is done, there is no guarantee of success any more than there is of my funding the company, either - why would the lender to teh corporation - who can weigh the risk of bankruptcy, have some special advantage?>
Sorry, please explain the relevance of this question...

<Do you want to bring back debtor's prison, too? And remember, none of the above gets someone out of deliberate fraud - you can go to jail for that. >

I want to bring back the pure Common Law courts as a first step. Within the Common Law, there is plenty of room for customized law, such as embodied in the Uniform Commercial Code, to simplify and streamline resolution of conflicts. But you have to have a sound judicial basis, and Common Law is it. Pure equity. No social agendas. No punishments. No "hate crimes" or "enhanced sentences." Just justice.

<I really think it is a gross misunderstanding of economics as well as this fantasy feeling that somehow some vast conspiracy is holding us all back: "Gee! If only there were no corporations, think of the paradise!" It is as crazy as the people who think corporations are evil because of their Communist ideas.

So, how does it interfere with "real risk" when the actual risk is known to everyone who invests or lends?>

Later dude. Outa time.

Post 12

Wednesday, January 24, 2007 - 8:45pm

Thanks Jordan. Looks like a great thread. Back to you later...

Post 13

Thursday, January 25, 2007 - 11:45am

Phil,

I don't see the connection between 19th Century courts and the birth of the corporation. I was taught that the corporation was a child of the legislature, used for pragmatic purposes, and not in response to any court rulings. Also, I'm unclear of your view on court reform. Common Law was never just about equity. In fact there were two seperate systems of courts back in the day -- one dealing with questions of law, the other questions of equity. The law courts applied the common law. And why the beef against punitive damages? They serve as deterrents, discouraging large organizations from repeating tortious conduct that would otherwise prove economically efficient. Bad idea? Probably worth another thread.

Jordan

Post 14

Saturday, January 27, 2007 - 3:23pm

Jordan wrote:

<I don't see the connection between 19th Century courts and the birth of the corporation. I was taught that the corporation was a child of the legislature, used for pragmatic purposes, and not in response to any court rulings. Also, I'm unclear of your view on court reform. Common Law was never just about equity. In fact there were two seperate systems of courts back in the day -- one dealing with questions of law, the other questions of equity. The law courts applied the common law. And why the beef against punitive damages? They serve as deterrents, discouraging large organizations from repeating tortious conduct that would otherwise prove economically efficient. Bad idea? Probably worth another thread. >

Corporations have been around for many centuries. There was the Dutch East India Company, for example, and the British counterpart, which essentially took over India by force and ran it as a private fiefdom for a couple centuries. Corporations were created to serve as an investment vehicle and an arm - actually, a "child" - of the state, simultaneously.

As such, they are the essence of fascism, and it is no accident that the same "progressives" who pushed for the "Trust Busting" (the trust being the market alternative to the corporation) were also often ardent supporters of both Hitler and Mussolini. William Randolph Hearst, during the period when he was considered a leading light of "progressive" thought, ran regular paid columns in the Hearst papers of the 1930's by both Hitler and Mussolini. Hitler's was discontinued only when he demanded more money after he was elected Chancellor.

As for the common law, the original English Common Law and its counterparts in Scandinavia and Ireland had no criminal component. All actions were torts, seeking damages for the purpose of restitution - i.e., restoring things as far as possible to the condition - for the plaintiff, anyway - they were before the alleged transgression took place. The Common Law was literally the law of the commons. That is to say, you could have all kinds of private contracts that specified how disputes were to be resolved. When those contracts themselves were violated, then it fell into the realm of the commons, the explicit and implicit rights, rules, prior standings and custom by which responsibility and accounting could be assessed.

Under the common law, the only purpose for a jail was to temporarily house someone who was a clear danger, until matters could be resolved. As I said, there were no "punishments." However, if you refused to abide by the decision of the Common Law court, and refused to take the normal appeal procedures, if such were available, then you would likely be declared an "outlaw." This simply meant that the court held you to be outside the law. It also meant that the court no longer offered you its services, including its sanction or protection of you and your property, meaning that anyone could kill you or sieze your property without fear of legal consequences.

The problem arose when the Normans invaded England. If the Common Law was to be respected, then the various people whose husbands had been killed or crops siezed or been raped, etc., could have filed damage suits against William and his soldiers. There was no easy way around this, short of trying to rule by simple brute force against an overtly hostile population - kind of like U.S. soldiers in Iraq. So, the Normans grudgingly continued the Common Law courts, but they appointed the judges, and they introduced criminal law to the system, as a way of creating an exemption from damages for their invasion, as well as a new way to control the population.

The justification for the criminal law component was that certain acts are not just against the actual victims, but also and primarily against the sovereign. Under the Common Law, a convicted murderer and his family would have to work for many years to pay damages to all the relatives and other claimants who suffered by the loss of the victim. Under criminal law, the murderer was considered an enemy of "society," and might be hung - or likely tortured and then hung, as depicted in Brave Heart. But agents of society or the "sovereign" were immune, regardless of the number of actual victims.

Under the Common Law there is no problem in starting a class-action suit against a large organization which might hope to get away, for example, with polluting a source of drinking water. Adding punitive damages is simply unjust. Justice is when we each have what we deserve. It should not be the business of the state - or any anarcho-capitalist replacement - to try to assess the character or motive of a defendant. The proper job of the court is to figure out what injustice has been created and then specify how to restore the situation to one of justice.

Post 15

Sunday, January 28, 2007 - 8:43pm

Hey Phil,

From what I've learned, the old time common law (pre 1066) was pretty arbitrary, practiced inconsistently from judge to judge, village to village. And when the answer to a problem was unclear, a trial by ordeal took place. Yikes! I thought the Norms just stabilized the common law. But enough digressing on the common law. Back to corporations.

I don't know much about corporations outside American history. I don't know if foreign corporations resembled today's US corporations, which I'm assuming is the target of your critique. Were foreign corporations organizations where managers ran the business for the sake of the owners, with limited liability, double taxation -- all enabled by government?

Adding punitive damages is simply unjust. Justice is when we each have what we deserve.

I'd say the tortfeasor's "victims" deserve the security of knowing the tortfeasor won't commit similar torts against them in the future. Similarly, perhaps the tortfeasor deserves to be "disincentivized" from committing those future torts. Such deserts justify punitive damages.

Jordan

(Edited by Jordan on 1/28, 8:45pm)

Post 16

Tuesday, January 30, 2007 - 4:59pm

But then you're no longer talking about justice, but power, control and vengence. A proper court decision should leave the victim rationally indifferent to whether the incident - whether accident or attack - had occurred or would recur. They shouldn't make a huge profit from being victimized, but neither should the victimizer be able to intimidate the victim via the net damage.

As a case in point, this past weekend, I had reserved a rental truck to move a bunch of stuff from one storage location to another. When I arrived to pick up my truck, it had not been returned by the previous leasor on Saturday, nor on Sunday. So, the truck rental agency offered me another truck some five-ten miles away with 20 free miles. On Sunday I took them up on it, getting desperate. Now there is an automatic penalty for a leasor who keeps a truck beyond the contracted time - some $70 per day. However, these people were clearly happy to pay the penalty for whatever reason. Maybe they planned it that way from the start. Maybe something came up.

So, I'm sure the fine print of my contract spelled out remedies, etc., such that it would never have gone to a common law court, anyway. But, I'm fairly convinced that the lady who handled the renting got a cut or something on the side to let these people have the truck for the whole weekend. In fact, my guess is that you're shooting craps, in general, when you make that kind of contract. People know the costs and penalties, which are covered by private law - the contract you and they signed, etc. I have no need to go out and beat them up, or throw them in prison, nor would it do anyone any good.

They made a rational decision, one hopes, and it cost me a little, altho actually things worked out better in some respects. A better written contract from my standpoint would have paid ME a bonus if the truck wasn't there on time, instead of the rental place and/or the employee who probably knew that the truck was gone for the weekend long before I showed up hat in hand.

I don't care if people violate contracts or tresspass on my property or otherwise transgress against my basic rights in general so long as they compensate me for the rationally assessed costs that they have caused. This is true whether they steal my car, beat me up, or whatever. I expect and applaud someone who rationally breaks into my storage unit after the BIG ONE hits, in search of food, etc., in order to survive. That's a true "lifeboat" situation of course, which falls outside the realm of normative ethics, but the principle is reasonably general. Taking the costs of paying full damages into account up front, I hope people act rationally in their own interests, not treating "property," for example, as something sacred. So long as I get back to where I was and don't rationally care whether the incident occurred or not, then justice has been served. If the perps profit by it after paying my damages, more power to them.

Where there are problems, of course, is with people stealing candy bars or other situations in which the recovery is highly uncertain, and each incident in itself is trivial, but altogether add up to disaster.

The current punitive criminal law theory is based on the idea that only a tiny percentage of crimes are solved, and any perp who is caught doing a minor crime has likely done 50 or 100 other crimes that weren't caught. So, you hit them with penalties for the 50 or 100, not the one, unless there is clear evidence that this was a first offense, etc. There is a certain logic to this. People going in realize the possible costs of getting caught that one time.

However, people are not dumb animals, and even dogs or cats realize that it's not their behavior that is being punished, but rather the fact that you caught them doing it. So, if you hope to control "criminals" behavior via punishment, think again. It doesn't work. All the evidence shows that it doesn't work. And, it shouldn't work. We want people to behave rationally, not like Skinnarian pigeons. In fact, it produces criminals. People who are treated like that tend to respond in kind. If it's ok to violate their rights - as a lesson to them or others - then they can come up with lots of reasons while they're bitterly wasting their lives in a cell as to why it's ok to violate mine and yours.

In the cases where a person steals a candy bar, or a slice of pizza, it doesn't do any good at all to incarcerate them - for life, as happened in one 3-Strikes case - but you could make a case that they should pay a penalty to cover all the processing and all the likely times they didn't get caught.

In some cases, it is rational for a court to determine that you should have done more to protect your property. If you leave money or other valuables out on the sidewalk without anyone watching them, then it's your fault when someone takes them, as you have essentially abandoned them.

Oops, out of time...

Post 17

Wednesday, January 31, 2007 - 6:28am

The biggest issue with the corporation that I see is the fact that anyone can use it to shield their assets from debts. Lets take Donald Trump for example. A couple times he's gone through bankruptcy to supposedly 'remove' certain people from his business [restructuring and what not], but why does it entail that one has to evade one's debts to do so? If I try to evade a debt, then my credit rating tanks, but if a corporation evades a debt, a corporation can [and often does] retain a credit rating of their pre-debt evading status. And that's a problem, because what that implies is that one, through artificial constructs of the law, has the right to evade the debt one accrues. Sometimes, bankruptcy may seem reasonable, but to make creditors eat every debt on the books is more of an economic drain than shielding any one individual's decision that made the debt that is unpayable in the first place. I'd rather have an even playing field of a natural market, where people do have to pay their debts and cover their butts, versus an artificial market, where the state covers certain people's butts from their own mistakes.

-- Bridget
(Edited by Bridget Armozel
on 1/31, 6:29am)

Post 18

Wednesday, January 31, 2007 - 8:50am

Phil, I don't share your cavalier attitude on property. How many swindlers out there cheat elderly people out of their life's savings, money they worked a long time to save, and you would just let these kind of scum just ride? Even "commend them for making a profit"? I don't think so.

Post 19

Wednesday, January 31, 2007 - 4:08pm