What’s missing in most political economic discussions I’ve seen is an understanding of the difference between a “free market” economy and corporate capitalism.
If I buy a car for $20,000 and my child kills someone while driving the car recklessly, my liability is not limited to the residual value of the car after the accident. My entire net worth is on the hook for restitution. Similarly, in a “free market” common law partnership, investors are fully liable for the acts of the enterprise. If the enterprise accumulates debt or creates externalities (damage to others or society at large) exceeding the enterprise’s liquidation value, each individual investor is personally liable in civil court for the full value of the debt and/or damage. This is as it should be.
Corporations differ from common law partnerships in that their investors have limited liability. This allows individuals to invest in a corporation and share privately in unlimited profits of the corporation, while avoiding all personal liability beyond what they paid for their initial stock purchase. Losses exceeding the corporation’s liquidation value must be absorbed by creditors or other injured (innocent) parties, often by the general public. Not even prior dividends can be “clawed back” to pay such debts. Shareholders can profit from decades of corporate fraud or abuse that damages other individuals or the general public, and no dividends they’ve received are available to compensate victims or creditors. Such accumulated dividends can far exceed the initial investment.
There is no basis for limited liability in the “free market” of common law. Limited liability is a privilege, an entitlement granted by the state to preferred individuals (shareholders) via the corporate charter. Thus, large shareholders and executives in limited liability corporations and companies (LLCs) are like medieval nobility — a privileged, entitled class. Furthermore, the grant of limited liability is a government “interference” in the “free market” that creates numerous “market distortions,” some of which are discussed below. Knowingly approving of this government interference empowering investors, while objecting to any sort of government action mitigating this advantage as “statist” is hypocritical to say the least.
Giving investors license to be negligent in the effects their investments have on others is an abomination. But the first order effect of limited liability (privatizing gain while socializing costs) pales in comparison to the higher order effects. Limited liability is the original sin that makes all the other abuses of corporatism possible. Nobody in their right mind would put their entire net worth at risk in a common law partnership without maintaining tight control of the partnership, to avoid unwittingly incurring excessive personal liabilities. Such tight control is impossible in enterprises the size of modern corporations. Therefore, huge concentrations of wealth and power are a second order effect, impossible without limited liability. At a third order, the concentration of power allows the BoD and CEO to deal unfairly with individuals, be they non-management employees, customers or the general public (through externalities such as pollution). Another third order effect is the obscene wealth gap between non-management workers and their CEOs and large shareholders. The ignorance of the small shareholder, fostered by the bait of limited liability profits, allows even them to be swindled by unscrupulous CEOs. Finally, there’s the fourth order corruption of the political system, made possible by the wealth gap.
The issue of limited liability and its effects is poorly understood and never discussed on either right or left. I recall Ralph Nader discussing corporate charters at one time, but even he did not zero in on this government-granted privilege. It is studiously ignored by all others in the political-economic elites. I suspect this is partly because the corporate elite don’t want it discussed, but most of them are also ignorant of this reality. One of the reasons I advocate an alliance between socialists, Greens and other left-libertarians on the one hand and Paulistas, right-libertarians, Contitutionists and traditional conservatives on the other is because I believe a deeper understanding of the foundations of corporatism will help both sides understand the system better and possibly come to a consensus on what needs to be done.
On a tactical level, we diverse dissidents have far more in common with each other than we do with corporate Republocrats. We are all anti-war, opposed to Empire, for greatly reduced military expenditures, against government bailouts and other subsidies of large corporations, suspicious of the Federal Reserve, suspicious of large corporations, for an end to the war on drugs, for the protection of our civil liberties, for freedom of movement, against torture and for electoral reform and ballot access. On a Federal level, many disagreements can be devolved to state and local control. We left-libertarians are against NCLB and other Federal interference in education, so why not push to abolish the Department of Education as advocated by right-libertarians? Health care and local infrastructure can also be left to the states. That’s how single payer came to Canada.
On a more strategic level, cooperation will encourage dialogue. More right-libertarians will become conscious that government predominantly concentrates and shifts wealth to a small group of elites through limited liability charters and other means. They will come to understand that limits on wealth generated through such privilege are legitimate. And who knows, perhaps we left-libertarians can be convinced that charter schools and even vouchers would not be so bad if corporations (including non-profits) can be restricted from participating.
Limited liability is the fly in the right-libertarian ointment. Right-libertarians can not consistently advocate for deregulation and no government interference in the “free market” without advocating for the abolition of limited liability and hence abolition of the modern corporation, which in the short run might be disastrous. They can not claim progressive taxes are unfair to or envious of high income, high wealth elites when most of that wealth results from grants of privilege by government. They can not argue that strong government limitations on executive pay are an unwise interference in the “free market,” or that CEOs “earn” their pay, as the CEOs could not extract such pay without the entitlement of limited liability and the power it gives them. They can not rail against “statism” or “collectivism” without railing against corporations, which are themselves “collectives.” It is irresponsible to allow government to create such institutions, then fail to regulate them.
On the other hand, “progressives” and Greens are often too quick to relinquish personal economic freedom. They need to listen to their right-libertarian brothers and sisters and see the distinction between small business and huge corporations, between high incomes that are earned through creativity and hard work and those that are extracted through the power of a bureaucracy. They need to understand that government regulations and social welfare programs are stopgap measures, necessary only so long as large concentrations of economic power are enabled by government.
Fortunately for those of us who want to rein in the power of our elites, right-libertarians, Paulistas, left-libertarians, Greens and anarcho-socialists all tend to be highly principled individuals, searching for a coherent, consistent ideology that can guide them and their candidates and help them avoid corrupting political pressures. I’m hopeful that increased dialogue among these groups can resolve at least a few of their differences and build a unified movement to challenge the power of the corporatists.