Re: ECON: Corporations

Tim Hruby (
Mon, 25 Jan 1999 18:55:13 -0500

On Fri, 22 Jan 1999 14:48:59 -0500, "Michael S. Lorrey" <> wrote:

> Tim Hruby wrote:
> > In particular, the benefits of stockholder limited liability and status as
> > a distinct legal entity are confered by government/legislative fiat --
> > there is no guarantee such benefits would exist/be protected in a
> > non-statist polycentric legal regime. This point is often overlooked in
> > people's analyses of how things would work in a PPL society.
> One of the reasons PPL society appeals to certain people is precisely for
> reason. Corporations would not be as able to externalize costs as much as
> do under the current regeime, which is why environmental, social, labor and
> civil rights externalizations which are commonplace today and require
>high cost
> tortious class actions to combat (which have a low average liklihood of being
> settled in a manner that adequately compensates for the victims of such
> externalizations, even when the actual victims are compensated) would not
>be as
> possible if investors were more leery of investing in corporations which had
> histories of acting in such ways. A PPL society forces corporations to be
> corporate citizens purely due to market pressure (the invisible hand again),
> which will not require governmental fiat or even a fraction of the current
> level of civil tort load as we see today. Corporations which are thus enticed
> by the capital markets to behave will need no protection from their
>victims by
> a monopoly jurisdiction like a government.
> While illegal acts by corporate officers, etc are sufficient to pierce the
> corporate veil, there are plenty of completely legal practices that
> costs in ways that are merely burdensome or mere regulatory violations
>which do
> not rise to the level of being useful for piercing the veil. Expanding
>the risk
> to shareholders will sufficiently transfer risk to the capital market to
>act as
> a deterrent against tortious behavior.

Since I share the libertarian/extropian/law-and-economics meme-set, I'm inclined to agree with this analysis, or at least wish it was true. However, to me, it is clearly an empirical question whether this actually is an accurate analysis.

The first thing that quite obviously sticks out to me is that the analysis assumes virtually non-existent transaction costs to information gathering and analysis. I have serious skepticism about ever acheiving this frictionless an economy in what I hope to be a extropian lifetime.

> > And, _off of the top of my head without deep analysis_, the coercive
> > imposition against all potential claimholders of limited liabilty
> > protection for stockholders does seem to be an actual market-enhancing
> > benefit provided by coercive governments.
> Market enhancing for who? It enhances the profit of the suppliers to the
> capital markets, but it costs the customers and employees of the corporations
> which borrow on the capital markets....its passing the buck downward.

I meant market-enhancing in reference to net externalities produced by statist coercion. I.e., that the beneficial externalities produced by encouraging large formations of limited-liability equity captial appear to outweigh the negative externalties imposed on society. "Market Enhancing," as an economic term, has nothing to do with transfer payments; it refers to correcting market failures that arise for various reasons.

(Just to forestall ideological objections -- I _do_ believe that government intervention in such market failures generally mucks things up more than it fixes them, due to human imperfection as well as rent-seeking behaviors, and therefore I'd prefer to live in a society where such intervention is kept to a minimum; however, I'm not ideologically blinded from the _possibility_ that such intervention might possibly be beneficial, and I'm trying to explore whether this might be such a case).

> > It is not at all clear to me
> > that a potential tort-victim (as opposed to a contract partner) would
> > voluntarily agree to limit his potential claim for injuries in such a
> > manner (perhaps he would from a Rawls-ian "original position," but that
> > line of argument is by no means universally accepted, and I won't go into
> > it here). Yet without such limits, capital-owners would be _far_ more
> > hesitant in making investments over which they have minimal management
> > control. (Would you invest in Microsoft if Netscape could come after your
> > entire personal net worth for Bill Gates' alleged tortious competition?
> > Replace with Bhopal if you don't think that business torts would be
> > protected under a PPL system) There appear to be market-enhancing
> > externalities that result from coercively facilitating the formation of the
> > aggregations of capital we call corporations. Of course, perhaps the
> > market would be more efficient if we had fewer of these organizations and
> > tort-victims had more opportunites to be fully compensated under an
> > unlimited liability regime?
> Exactly.

Exactly what?

As I say, it appears to me that it is an empirical question between the two possibilites. The complex impact of the various transaction inefficiencies makes me skeptical that I can resolve this question through pure deduction that starts from an economic theory about which I have have to remind myself to be skeptical of as well.

> > (Not that I am implying that I agree with the statement that corporations
> > petition for less government protection than individuals. I suspect that
> > they petition more than individuals, because corporations tend have larger
> > economic interests than individuals, and therefore tend to be in a better
> > position to afford the high costs of rent-seeking and to better profit from
> > the protection they recieve. Not to mention such distortions like the fact
> > that it is far easier for a corporation to sucessfully deduct the cost of
> > petitioning the government as a business expense than it is for an
> > individual.)
> True, but they do not merely petition for more protection from their own
> actions, they petition for special treatment and compensation, and it happens
> behind closed doors with the people who make the laws, while us merehums have
> to take it in the backsides first and contest it after the fact in the

I never implied otherwise. My understanding of history is that the political elites, whether individuals, families or corporate elites, have always behaved this way. Be thankful that nowadays the state provides you with a court to contest in.