Corporation

From Free Talk Live

Complaints about corporations are common, especially from "the left." Ralph Nader, in particular, railed extensively against corporations during his 2004 U.S. Presidential campaign. It is usually rare to hear anyone, other than libertarians, suggest getting rid of corporations altogether.

What is a corporation?

The word "corporation" literally means a body of individuals joining together to accomplish a common goal. The first corporations were called joint-stock companies and were devised in order to spread risk to multiple investors so that the risk born by the individual investor would be minimized. The classic example is shipowners' insurance. A loss of a ship could be economically catastrophic to a single shipowner; however, if the loss is born equally by many shipowners due to a prior agreement, then it becomes much less significant to the individual shipowner.

Today the concept of a legal corporation generally includes limited liability; however, this was not always the case. The United States, for example, refused to grant limited liability to corporations until the period following the Civil War, having previous suffered much abuse under British corporations enjoying that particular advantage. Thus, it should be understood that when libertarians talk about "abolishing" corporations, they do not mean abolishing the bodies themselves, but rather the special legal status that they enjoy.

Arguments for eliminating corporations

Consider first that corporations are creations of the State, government created fictional "persons." (This interpretation was made by the Supreme Court based on the 14th Amendment.) This alone should be enough to incline libertarians against corporations, at least on a theoretical level.

Corporations provide "limited liability." Liability is the civil equivalent of "guilt" in the world of criminal law. Few people would support such a concept as "limited guilt," except criminals wishing to do things that would render them guilty. So why is there a mechanism that allows people to do things that would otherwise render them legally liable?

In our system, the concept of corporations allows, for example, three people to get together and do things that would be illegal if they tried to do them in their individual capacities. And when they get busted, they each point their finger blaming not each other, but the fictional corporation, in essence saying, "we didn't do it, the corporation did!"

Libertarians believe in individual responsibility. The legal mechanism of corporations is designed to remove individual responsibility. It lets people do things and then deny responsibility. But you can't put a corporation in jail. You can sue a corporation, but even then the actual real persons who committed the offense giving rise to the suit can put the corporation's money into an account the corporation can't reach, or even dissolve the corporation.

Each state in the Union, and possibly every country in the world, has a law on its books that allows corporations to be created and to be recognized by their respective legal systems. All it would take is to repeal those laws and there would be no more such thing.

Why arguments in support of corporations fail

Supporters of corporations rely on a few, worn arguments that are easily dismissed:

Supporters claim that corporations have been a powerful mechanism for allowing risk-taking within markets. As an example, they may claim that multiple shareholders allowed risky ventures such as transatlantic voyages during the Age of Discovery. But this argument ignores the fact that any type of risk allocation among the parties who are actually causing the risk can be implemented by an appropriate, volutary contract between private parties. This argument that pro-corporatists make does not explain why limited liability is necessary to distribute risk. The essential attribute of a corporation is not that it allows allocation of risk, but rather that it allows elimination of risk by all individuals.

Another attempt to justify corporations is the example given of investors in the stock market. An investor today may buy stock in a company, expecting a positive return, but risking a negative return or even complete loss in bankruptcy. However, the bankruptcy claimants are not able to reach through the stock into the investor's other assets. Pro-corporatists claim that if corporations were completely eliminated, investors would risk their own wealth every time they tried a new venture, and that investment capital would dry up and economic growth would slow considerably. This argument fails for the same weaknesses as the first, namely (1) an appropriate contract for the sale of equity could protect the investor from liability, and (2) the argument does not address the problem that while relieving the investor of liability, the corporation also relieves all other individuals of liability.

Within a free society, it is very likely that something like the limited liability and spread risk of corporations (without the legal fiction of corporate "persons" that assume the liability that real persons avoid) would develop by contract, to allow capital for risky ventures. An example would be some sort of investor's insurance that could be purchased to cover unplanned liabilities.

Corporations, as legal entities, are a bad thing because they represent government-granted permission to act irresponsibly. They should not be recognized by our legal system.