Stephan Kinsella has an interesting blog post quoting a short debate between him and Thomas Knapp.
I think Kinsella makes the incisive point that the whole limited liability discussion boils down to a theory of responsibility and thus causation. I can see both sides: a minor shareholder has minor control, if any, over the workings of the firm and so should not be liable if a driver mows down a few people but he is still technically employing the management, in his ownership capacity, and is so liable.
I think the way to resolve this problem is create a sphere sovereignty style (this is orignally a theological concept created by Dooyeweerd) concept of liability. Essentially every role in a company has a certain remit of authority and if exercised correctly then you could not be held liable for tortious actions because of a subordinates failure. So supposing the van driver mows down a few people whilst working if his manager has done that which he ought to within his role then he could not be held liable. If on the other hand complaints had been ignored and other less serious incidents have occured and not been dealt with then he could.
The obvious problem with this is deciding on to what extent each sphere should be described. Clearly a fully a priori account would be impossible but I think it could serve as tool for the judiciary and serve the creation of common law.
I was very much pro free market solution for liability, and still am so, but I think that Kinsella’s argument (among others) avoids the point, as follows.
Privilege by definition is a limitation of liability. Sure, we can agree to limit liability in the market, but we cannot create blanket liability limitation, and without that the corporate model is of very limited utility.
I’d love to have a conversation with Kinsella about this one day.
To build on this, I think a business’s owner(s) would be different from the shareholders in a free-market society. Shares are issued by businesses in order to raise financial capital. When a share is initially purchased, the shareholder now owns the shares while the owner(s) now own(s) the money that the shareholder used to purchase the shares. The expectation of the shareholder is that, in the future, he’ll be able to sell the share for at least as much as he bought it for. “Fringe benefits” like voting rights are added to shares to make them more attractive to potential investors.
Responsibility for the actions of the business ultimately rests with the owner(s) of the business. Given the above, note that these are necessarily separate from the shareholders, despite any voting rights or other forms of control granted to the latter by the former.
To answer the OP directly, I wonder whether a theory of implied insurance or implied suretyship might arise. By that, I mean an employee would be held directly liable for any harm he commits in the course of his job, but his employer would be liable for whatever liability costs the employee cannot cover himself. Of course, that leaves open the possibility of the employer being allowed to (try to) recover those costs from the (former) employee.
Brainpolice which spelled it out clearly for me- “it occured to me that limited liability suffers from some of the exact same problems that social contract theory does. In particular, the concept of the social contract is problematic because it implies that the terms of a contract can be enforced onto 3rd parties of people who never explicitly agreed to it. Corporate limited liability as a state legal construct functions in the exact same way as this, as the limited liability is uniformly applied to everyone within the society rather than being restricted to those who explicitly agreed to the contract.”
I agree with Kinsella and those that say it all boils down to responsibility for torts. I think ‘Limited liability’ as a body of state law is bad for the reason that it presupposes that in its absence, (in its repeal say..) suddenly minority shareholders would have ‘unlimited liability’ for the torts committed by individuals somehow related to the company regardless of the shareholders responsibility for the tort (or more precisely there being a flat assumption that holding a share guarantees that one is responsible for crimes committed by other human beings, whether they ‘act independantly’ or otherwise, by virtue of their being an ‘associate’ with the organisation in which you are a stakeholder.)
If you need an analogy to help, imagine there being a body of positive law passed in which was titled ‘limited liability of the family union’ under which family members are granted limited liability for the acts of their relatives. There is a big problem with this. The problem is that in the absence of such a law, if your brother commits a crime, pay up. your in the family.
One’s ‘liability’ should be limited by ones involvement…ones degree of responsibility for the tort having occurred. indeed one struggles to find a better word for it and ends up having to say that ones ‘liability’ should be limited to ones liability…:-p ya know what I mean…
This is the sticky bit though. Whether I am a minority shareholder or a majority shareholder, I am a shareholder and have a voice in the management of the firm. If that management guides the firm to create injury, loss or damage, I put them in position and gave them the means to do so.
Certainly there is a difference between accident and negligence, but that is not easy to prove.
But ultimately, we have to ask if it is so necessary to have large firms, that we must create some sort of moral hazard (the inevitable outcome) through limiting liability. A critique from leftists is that Austrians are pro-corporation, because Austrians tend to spend a lot of time lavishing praise on successful business people, and little time discussing the state forms and protections these people have adopted and utilized to get to the top. It’s a sin of omission not commission, but people with an axe to grind will use that point to drive a wedge.
It would be great for AE if someone broke down liability. This area looks (to me) to be neglected in Austrian analysis of the entrepreneur.
The issue of limited liability has more to do with responsibility for managerial acts than the actual shareholder’s responsibility. Supposing a perfectly individualistic judicial regime, then only individuals who act would be liable for their actions. So if for example a plant manager is found guilty of poisoning a river, he will be prosecuted for his act and not the company. However, this introduces moral hazard where the company can reward managers who violate laws where it is profitable for them to do so, and some managers will find the risk worthwhile since they do not have any assets to risk themselves anyway. This is why the corporation as a whole has to be made liable for damages. Beyond that, however, there is no reason to pursue shareholders any further. They are not in a position to decide anything as shareholders.
First off, not all shareholders are created equal. If by “shareholder” you mean “someone who owns one or more shares of a company”, then owning shares doesn’t prima facie entitle you to any voice in the management of the company.
Second, I think an analogous situation can be drawn with the following. Let’s say you let a friend borrow your truck so he can haul some things. However, what he wants to haul is the dead body of his former girlfriend. He had killed her in a jealous rage earlier and needed a way to dispose of her body. You don’t know anything about this. Now while it can be said that you technically enabled your friend to dispose of the body, did you do so knowingly? Hardly. So why should you bear any liability for your friend’s actions?
Other scenarios can be used, such as whether a gun manufacturer is liable for injuries or damages committed with a gun he manufactured. After all, by manufacturing the gun, he technically enabled those crimes to be later committed, didn’t he?
Bah. I read half of Kinsella’s blog post and got fed up of all the shoulds, woulds, coulds and oughts. Nobody can predict the market and nobody knows what people will want once they are faced with paying for it themselves.
Consumers will have to pay for the level of liability they want. They will pay that in insurance / security premiums. Security and insurance companies will decide whether meeting the demand of liability protection is worth their while.
I can feel/should/ought/could/believe/whatever that the butterfly flapping its wings on the other side of the planet is liable for my poor harvest that I predict will occur next year but the chances of me being able to pay to resolve that liability dispute in a truly free market are slim ---- however, I could, should, would or ought to pursue my esoteric claims if I had enough money, right??? Yes, this is sarcasm but I am serious in my analogy.
In a free market, the cost of proving “who knew/did what and when they knew/did that” will affect the propensity/incentives for tort and will be reflected in the cost of insurance against it.
But if your shares allow you to vote, then you do have a voice in the management of the company because you can elect directors who elect officers. It comes down to the operating agreement of any particular business. A fairly normal form is that the shareholders elect directors who elect officers. Shareholders can typically serve as directors and officers.
Non sequitur.
It would be helpful if people understood how corporations are formed, under what sort of structures etc.
Right, I understand all of that. My point was simply that owning shares does not necessarily lead to any other entitlements. This is true even if other entitlements are the norm.
Also, how much of the modern-day corporate form came about because corporations have historically enjoyed blanket liability limitations?
I’m sorry, but I’m at a loss to understand where the non-sequitur is in the above. My understanding is that the liability issue we’re dealing with in this thread concerns a person’s actions that involve another person’s property. Am I mistaken here?
You’re right, of course. But as I’ve asked you before, does that mean no one should ever engage in speculation on the differences between a completely free market and what we live under today?
For example, it seems clear that blanket limitations of liability would not exist in a completely free market. The question is: what are the implications of that? Why not pursue those implications?