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STL #4: Libertarians and Corporations

My Thoughts On: November 29th, 2003

Libertarians, defenders of the free market, often have little to no problem with big companies, especially those labelled as "corporations". We recognize that most anti-corporate propaganda is simply Socialist rhetoric best saved for laughs at their expense. However, when Adam Smith has a problem, I have a problem. Inside today's See The Light post is an interesting, potentially controversial inquiry into the nature of the modern-day corporation, and a Libertarian view on why the modern "corporation" is another victim to the meddling of big government.

Corporations. I love them, you love them, we all love them, right? Assuming you're not a Socialist, Democrat, or Environmentalist, or an Eco-Democratic Socialist... big business, especially in it's largest manifestation of the corporation, is a good thing.

Despite it's criticisms, big business provides for the better part of culture that we never appreciate fully, and furnishes us with ability to make our lives better at what would otherwise be at a massive personal expense that, no doubt, we would not be able to negotiate without much hardship and loss. Productivity and prosperity are not negative aspects of culture, no matter how you paint it. And it's in my desire to learn more about these things that I began reading "The Wealth of Nations" by Adam Smith. I'm sure that as I continue to read it, this book will be referenced more and more here in my articles on the 'NAM, due to it's major importance as a doctrine of modern society. In the early goings of the book, Smith dedicates some time towards bashing the corporations, because of the way European laws were regarding them in his time. In a European corporation of his time, the corporation by-laws were perhaps as effective as actual legislation, and the corporations controlled the wage and labourers by putting strict restrictions on apprenticeships. He ultimately concludes that corporations are "unnecessary" charters of government. This left me very confused, since well, I hadn't looked into it much, and generally have a positive view of corporate business.

This left me to ask, are corporations that way today, and what are they exactly, anyways? How does a corporation differ from any other big company? And are these things consistent with Libertarianism, or are they a part of some other system?

My understanding of corporations was shallow, to say the least. I thought a corporation as any large company with traded it's stock on the public market. In all truth, that isn't even accurate. Corporations do such trading, as we'll discuss below, but that's not what they are by definition.

Modern U.S. Corporations are bodies charted by the states - occassionally by the federal government - to act as their own fictionalized legal entity. This grants the corporation body special rights, but likewise creates very special penalties. To help put some perspective on what this means, let's talk about how a corporation affects specific people, to get a perspective on how this special government charter is just another piece of meddling in the natural way of business.


Owners/Investors

Investors in a modern United States corporation gain special priveledges from the state. Normally, an investor in a publically traded company, being a partial owner, would be responsible for both the profit and the losses of the company he/she owns. If 10 owners were to incur $1,000 in overall losses, then each would have to pay $100 out of their own stock to sustain the business, or declare bankruptcy. If each owner only owned $50 dollars worth of stock in the business, then each would be liable for the remaining $50 like any other debt. This could be taken to court, or even made into a jailable offense. A business owner of this kind is not safe from his own losses.

In a corporation however, the special corporate body is it's own "person", and responsible for it's own liabilities. This fictional entity saves the real owners and operators of the business from the ultimate penalty of being in debt should the business collapse. Instead, they can only lose as much as they invest. If 100 stockholders in a corporation incurred a $10,000 of debt, each would, again, owe up to $100 in debt, not necessarily all the debt. If each of those stockholders only held $50 in stock, then they would only lose that $50, but they would not lose anything beyond that. The rest of the debt - in this case, $5,000, would be part of the corporation's overall liability, that only the corporation itself (the fictional legal entity) is responsible for it. Naturally, this acts as a safeguard to protect owners from loss.

Economists argue that this "limited liability" situation encourages investment. This is true. Capital is raised because investors in corporations know that they can't lose more than they invest. If they only invest $50, and the corporation has a major downfall, they don't incur any substantial part of that loss. That "risk-free" investment helps them endlessly. If they gain money on that investment, then that's theirs in the form of higher valued stock and dividend payments. If their corporation loses money with their investments, the more's the pity, at least there is no lawsuit to deal with. This "limited liability" situation is more like a "no liability" situation - while the investor can lose the stock they originally invested, they cannot gain any new debts because of the investment. Getting back to the point... what's wrong with this situation? Isn't this good?

For one, because the market is saturated with those kind of scanty investors who are in it for quick gains without fear of potential losses, capital is not stable nor long-held. It will fluctuate, in booms and recessions, with investor confidence. This kind of fly-by-the-wire confidence wouldn't be required were it a true investment - as those investments which can incur losses are typically weighed with higher value and taken into greater consideration before being undertaken.

Secondly, this encourages the government to intervene. Not only with the trading of the stocks (we'll get into that later), but in the condition where a corporation goes bankrupt into massive debt. Upon bankruptcy, the government is the first thing people turn to for a solution and since it's owners aren't responsible (their stock depleted, they are no longer owners of this fictional corporate entity), the traders who dealt with the company must shoulder the overall loss. This is one of the primary reasons the government today doles out corporate handouts, to help burden the blow for the traders who ultimately are hurt (and sometimes also driven out of business) by the corporate owner's collective legal inability to take responsibility for their own debts. The practice of government bailing out corporations time and time again is common, and while vastly criticized, typically nothing is done about it. Since owners aren't responsible ultimately beyond their own stock for the condition of a corporation, if it were to totally collapse (as is what happens time and time again), they would not be at a greater loss. In some situations (Enron) this can even encourage fraud and manipulation of the market.

Finally, the last reason this "limited liability" environment negative to the market is because it drives away investors from private company trading and encourages them to support this system of big government-dominated corporate business, bloating anything with "Inc." after the title with investors who don't care to risk burdening real loss. This is negative towards the growth of new business and competition... it also empowers the government by giving the parts of industry it does have control over power over the total market.

Workers

From the viewpoint of the worker in the corporation, things also change a lot. To get a charter from the state (or federal government) to be incorporated, a corporation must often go through many loopholes. This offers up more rules and regulations for the corporation to abide by. Once many businesses are incorporated, their industries can be subject to licensing requirements. Their employees can suffer restrictions from moving from one incorporated trade to another (often reflected in the form of education requirements). This opens the way for licensing and regulation, as it did in Smith's time. From the way employees collect their wages, to what wages they can collect, to the manner they do business, to the amount of time and education is required to gain licensing in any skilled trade of the industry, to virtually every aspect of benefits of employment (pensions, health care, insurance)... once incorporated, many of these things become much controlled by the government itself.

Consumers/Taxpayers

Once a business becomes a part of a state-chartered government-controlled vessel called the corporation, it is prone to much more government interference. Products and innovations are required more special attention, prices go up as a result of a higher control of the supply (in the national corporate environment this would be to increase demand - thus drive up prices), and because most corporations have measures to prevent labour from being openly available to the market, and through incorporation protect those skilled labourers from their competition, consumers will find that more of this price will be in profit to the stockholders, and not the wages of the workers. The same corporations go back with their state-held ties, lobbying for favors of law that the incorporated status might give them, with their state officials to garner some additional sway. Consumers and Taxpayers should be the ones to notice the corruption of coporations moreso than any other group - and, likewise, they are the last to suffer for the failures of corporate institutions as government-bound institutions.


Now, we've talked a lot here about the corporation, while skipping over a few vital points. Do people have the right to form corporations? Yes they do. Any group of people can voluntarily, under a respectable, Libertarian system of property rights, declare amongst them an articifial person to represent them legally, so long as they understand the terms of that binding make them all liable. In fact, that is how government came to be. Government, in a way, can be considered the largest American corporation. It is a legal entity that is fictional, yet bound through the cooperation of the aggregate of all American citizens.

So yes, honest business corporation exists. But that checklist above of the effects of corporations to different classes of people sure doesn't seem very honest for investors, owners, workers, consumers, or taxpayers... what gives?

The premise behind corporations is the premise behind the rights of "natural" people. Each of us have our own rights to our life, liberty, and property (if you're Libertarian and reading this, you should know this by heart). People can volunteer to create a body representing them, of course, but if they expect it to be consistent with the principles of our "natural" rights, then they must give the artificial body "natural" rights and be responsible for them. Thus, they cannot give the artificial body any rights they themselves do not have, a basic Libertarian principle.

The modern state of corporations in the United States do not create corporations with "natural" rights. They are purely artificial rights. In the natural system, the people who formed the corporation, would be legally responsible for it's liabilities. As we've discussed, that isn't the case here. And this is the basic foothold behind the chartering of corporations, that allows government that loophole to create more legislation.

Let's illustrate the difference between natural and artificial rights through an example. Let's say that me, you and some other guy form a business in the proper "natural" system. We decide for legal reasons to give up our business all our legal rights, "Us, Inc." we'll call it. "Us, Inc." makes widgets. Well, over the course of the company, our customers realize our widgets are made of rubber, and well, don't work as advertised. So, we get sued. Me you and that other guy wind up having to pay a huge liability, we probably face jail time, and well, we're ruined. But that's what we get for selling widgets made of rubber, intentionally trying to rip off our customers.

Now, let's do the scenario again, in the artificial system of modern corporations. We form "Us, Inc.", and we make our rubber widgets, and get sued. Now, I step out, give up the stock I had in the company and go - "No - Us, Inc. did it - not ME". You and that other guy do the same thing. We all say "Sue Us, Inc... not US!". The law respects it, the customers are ripped off, and well, justice is not served. Me you and that other guy, while we lost the stock we had in Us, Inc., are free of the additional damages we caused.

Let's take this concept of the artificial system one step further. Let's say Us, Inc. made energy drinks. And well, we made energy drinks laced carelessly with cyanide (oops). Several hundred people die from poisoning. Their families sue us... but under this same system, we aren't liable for the additional damages of Us, Inc.

Now, existing laws might make this a fraudulent act, and a few might even cause punishment in that kind of situation. But basically put - the artificial system allows for this, that's entirely because the artificial entity of the corporation is granted more legal rights than the natural individual (despite the artificial entity being nothing more than a group of natural individuals). Hence where the corporation turns from being a positive force of the market economy to a negative element of government control of that same market.

To acquire this benefit, businesses must go through a lot of payoffs, a lot of regulations, a lot of mandates, restrictions... and in the end, virtually every aspect of their business is controlled, in some way, by the government which entitles them the unique right of being an artificial (as opposed to "natural") entity.

Such government interferences include the tax liability of corporations. Since corporations are fictional legal people, they are liable for tax, just like any other person. Dividend checks that corporations pay to stockholders do not count as deductions on this taxable income that corporate legal entities must pay. So the income of the shareholders are taxed as their earnings, and the corporation itself after those taxed earnings are put out are taxed for it's collective earnings (even including those earnings that are already taxed). This double-taxation happens to all large level corporations, and just shows how far government penetrates into controlling the economy through the loophole of government-chartered corporations.

This big government interference in the market, as strong as it is in the taxation case, is even more evident in the stock market itself. In the stock market, every major trade (such as that made by the big corporations we know best today) is regulated by the Securities and Exchange Commission. This arm of the federal government is specially made to monitor and approve major trades between big chartered corporations, and has extended to pretty much all areas of the stock market exchange. By acquiring this ability, the government can now impede the flow of capital. This counterbalances any positive flow a corporation formation may have had from the so-called "limited" liability (or "no" liability, as I'd prefer to call it). In fact, the wary market attitude, and unreprehensibility, makes the market very unpredictable, and liable to day-trading as a public fad and a reduction of long-term market investments, as well as a general reduction of market awareness (less liability equals less reason to be concerned about where your investments are). This encourages our notorious corporate scandals to occur (Enron) and this becomes the environment which originates many of those annoying Socialist anti-corporate criticisms.

The ultimate retort to those criticisms being, of course, that these kinds of corporations - or that entire aspect of corporations today - is not really free-market, capitalist nor Libertarian in origin or design. Only the "natural" corporation is of a free market design, and well, there are no big "natural" corporations today. The artificial corporation must be, if not a system of the free market, an invention of those who wish to disrespect the private property rights of individuals by granting a majority special priveledges over the few. This attitude is consistent with what ideology, again?

... I'll leave my readers to think about that one, and I hope I've shed a little light for a few fellow Libertarians. And maybe, just maybe, we touched on a little something we like to call the "New American Myth", in the process.

- Good ol' PA

phoebus@PAOracle.com

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