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A book review and thoughts on bankruptcy

I do not intend to buy the book, but Sean Gabb’s review of Kevin Carson’s recent work is well worth reading. Carson is a sort of radical anarchist-libertarian who has interesting things to say. He is worth paying attention to; and Sean gives what looks like a very fair appraisal. And reading Sean’s review got me thinking about one supposedly arcane issue: bankruptcy law.

I thought about this because Mr Gabb, whom I would consider to be a libertarian in the Rothbardian tradition – with a Burkean twist – and Mr Carson are opponents of limited liability laws. I am not so opposed, but I can certainly concede the force of the point, and I think a similar point applies to the bankruptcy codes of some western countries. I have come across several instances recently of the “pre-pack”, in which a business goes into liquidation, the firm’s assets are sold off to supposedly the highest bidder, and the firm is re-started, Phoenix-like, under the same management, often in exactly the same business and line of work. I know of at least one business rival of my firm who has done just that and has, as a result, been more or less given, for free, hundreds of thousands of pounds in credit, while his creditors get the shaft. In a pure free market order, a rather more drastic outcome might be felt by this debtor, not least, the blackening of his or her business reputation. Indeed, if I recall from history, debtors used to go to jail.

Now, there may be good reasons for bankruptcy protection laws: they ensure that the chances of creditors getting their money back are enhanced by continuing a business as a “going concern”. But a balance needs to be struck, since if the law is too lax, it surely means that many borrowers get away scot-free with heavy debts and as a result, the average cost of credit goes up for the rest of us, good and bad risks alike. The law of unintended consequences strikes again.

Anyway, I am sure Carson’s book, which covers a wide field, will get plenty of attention.

38 comments to A book review and thoughts on bankruptcy

  • Without getting into the technicalities, I see no particular justification for current incorporation practice and in particular the base concept that a company has, or should have, its own distinct legal personality. All trading is performed by actual people; all companies are owned by actual people. I am director of (and perversely an employer of also) my (very) limited company. I can see no rational reason for the company having a separate hypothetical existence.

    If I incur debt, it is me doing it, not “the company”. If I prosper, it is me doing it, not “the company”. Non-incoporated citizens who make foolish financial decisions- or make wise ones with bad unforeseen consequences- remain liable for their debts. There is no reason that there should be any difference if they happen to be “in business” rather than “in employment”. Indeed, I have argued that we need to entirely abolish such distinctions and the state should recognise (such little as it needs to) nothing but individuals trading, whether they sell their labour to another person in “business” or they sell tomatoes on a market stall or sell coals to Newcastle. These distinctions are arbitrary, imaginary and basically an historical artifact- employer and employee replaced lord and serf, and before that master and slave. Currently the state offers different packages of favours, taxation and harm to these various arbitrary classes and this makes no sense.

    People should be responsible for their debts. That is the end of the matter. Offloading them to imaginary persons who are able to vanish due to a legal fiction is not rational and not, I believe, a natural function of free individuals and free markets.

  • Robert Speirs

    The “corporate fiction” gimmick encourages entrepreneurs to take undue risk in the knowledge they can fob off the losses on their creditors without endangering their private fortunes. It is yet another manifestation of the government conferring benefits on a favored few (politically connected, no doubt) and then, when things go wrong, blaming the disaster on “unfettered private enterprise” and asking for more power to control the rogue capitalists.

  • Mary Contrary

    and as a result, the average cost of credit goes up for the rest of us, good and bad risks alike

    I don’t precisely wish to disagree with the above, but instead to say that that statement could be read broadly or narrowly, and the narrow reading is insufficient.

    The narrow reading is that easy bankcruptcy simply forces a small raise in the price of credit across the board: essentially, a few basis points are added to interest rates. Or, if bankcruptcy is too easy, many many basis points.

    I think the problem is worse than that. Access to credit is hard enough for small businesses. The value to the bank of the income the loan generates very often doesn’t justify a detailed consideration of the individual business plan, so even good risks find it hard to get credit in the commercial market.

    Not for nothing is it a cliche that small business start-ups are funded by Friends, Fools and Families. And for those lucky small businesses that do obtain bank credit, the so-called “unfair protection of limited liability” is a sick joke: their proprietor-managers invariably have to guarantee their businesses’ bank loans as a condition of access to credit. This is not a common requirement on FTSE CEOs!

    That’s not a market failure exactly, it’s just a description that there’s a limit to the point at which it’s economic to calculate the true value of the business and risk of the loan on an individual basis. Everyone else gets valued based on the (discounted) net book value of pledged assets – because that’s cheap to do and more certain.

    Bad debts from easy bankcruptcy don’t just make banks more expensive, they also make them more conservative. That’s a rational response: a few points on interest rates won’t make up for a rising failure rate; the bank needs to avoid loss of the principle.

    Easy bankcruptcy therefore exacerbates the problem, by raising the size of loan at which it is economic to consider intelligently the prospective debtor’s credit-worthiness on an individual basis.

    That means the response from banks to bad debts is not just to raise their prices, but to raise the threshold at which a business loan is granted on the basis of a business value as a going concern instead of just discounted net book value of pledged fixed assets (mainly, the proprietor’s family home).

    Lax bankcruptcy laws therefore don’t just penalise the rest of us who are good credit risks generally, they differentially penalise those who are good credit risks for relatively low value loans.

  • Maz

    Ian B, Robert – I’m not sure I agree with you. Why should there be any real difference between dealing with a legal personality (a company) and a real personality? A real person, just like a company, has a measurable credit-worthiness and ascertainable, limited assets available to meet debts. In each case the prospective creditor has to weigh the credit-worthiness of the prospective debtor, including its/his/her ability to repay the debt. This will involve a consideration of the entity’s assets, forthcoming business prospects, and the creditor’s ability to get its money back on failure, which includes an assessment of the bankruptcy law framework. If a creditor deals with an individual, then getting its money back on failure will depend (in part) on the personal bankruptcy rules, rather than the corporate rules.

    As such if the concept of corporate personality is leading to problems of recoverability for creditors, this is due more to the nature of the bankruptcy regime for companies rather than the fact of corporate personality itself. Many bankruptcy regimes allow for some “piercing the corporate veil” on bankruptcy in certain circumstances, eg fraud by the directors. So if there’s a problem, isn’t the answer to tweak the insolvency regime?

    Also from a free-market perspective, the answer to the problem is one of risk and pricing. If I, as a creditor, think that the risk of dealing with a corporation is greater than dealing with an individual, I will adjust my business model accordingly and charge more risk premium to the corporations. If the bankruptcy regime changes this balance, then the market should reflect this through revised pricing.

    From that perspective the real problem as I see it is predictability. Markets need to know that when the bankruptcy regime says X will happen, X does actually happen. Even if X means high risk, markets can price that in. What happened in the credit crunch with (for example Chrysler) is that some western governments started changing the rules on an ad hoc basis. Markets hate that because there is no certainty. On big corporate deals, how are you going to price that uncertainty, when your legal opinion says “on insolvency, we can’t predict what will happen because the government might change the rules based on political expediency”.

    Incidentally, variations in world-wide insolvency rules are, in my view, another great example of why the move to cartels (whether tax or law) are a bad idea. Jurisdictions like the Cayman Islands attract and generate masses of capital markets business in part by having simple, creditor-friendly bankruptcy rules. No administration or Chapter 11 – straight liquidation. You can’t tell me that a blue-chip bank will want to run a capital markets transaction through an individual rather than an offshore holding company?

  • Laird

    This has all the earmarks of a lengthy thread. I just hope we can keep LVT out of it.

    First of all, let me disagree (again!) with Ian B.* Limited liability for a business entity has very little to do with shielding it from its contractual debts; its primary purpose is to shield it from tort claims. For most small businesses (such as mine), any debt, even if secured (such as with a mortgage on real estate) must still be personally guaranteed by the owner. Having “Inc.” or “LLC” in your name doesn’t do anything to diminish that risk. But the “LLC” designation does protect my home and other assets if someone slips in my office and a runaway jury gives him an outsized damages award. We can have (and indeed have had) a discussion about whether that’s proper, but that’s an entirely separate issue unrelated to the insulation of a business from its contractual debts.

    Large, widely-held corporate entities with thousands of shareholders typically have non-recourse debt (i.e., the creditor’s ability to recover is limited to the actual collateral posted, if any), so there again in that respect the bankruptcy laws aren’t terribly important to such entities. However, there is still the risk of tort liability, which could fall on the shareholders (who aren’t even active in the business) in the event a “mass tort” (class actions such as asbestosis, silicosis, tobacco claims, etc.) drives the company insolvent. Large entites, with immense capital requirements, would be impossible without the corporate form.

    None of this is to defend the current US bankruptcy laws (which are the only ones I know much about), especially now that The One has his clutches in them. Bankruptcy itself is an ancient principle in Anglo-Saxon jurisprudence, and is very useful and justifiable. At its heart it provides an orderly means of liquidating a business’ assets and prioritizing and paying off the creditors to the extent possible. It also serves a valid purpose when a firm finds itself in a temporary liquidity squeeze, and provides a means to hold off the creditors while the business is reorganized and people can be eventually paid off. The problems began when the law was changed to permit claims to be reduced or “crammed down” even for an operating company where the owners remained such, or for an individual who isn’t simply liquidating everything (a Chapter 13 wage-earner plan).

    US bankruptcy law has lost its focus on equity (bankruptcy was originally an equitable proceedure), forgotten that its primary purpose was for the benefit of creditors, and metamorphasized (“metastasized”?) into a forum for protecting debtors. The most egregious example is the recent Chrysler pre-packaged bankruptcy, which was perverted for political purposes by the President of the United States. That was a travesty. So I won’t defend what bankruptcy has become. But neither will I criticize its historical roots or the validity and utility of the fundamental concept.

    * In the first post out of the box Ian changed the subject from bankruptcy laws to limited-liability laws!

  • Paul Marks

    I wrote a lot on Kevin Carson (on the Libertarian Alliance website) after being provoked by being given a work of his in a pack for a Libertarian Alliance conference.

    I am not going to get involved in another long drawn out argument again – but Mr Carson is NOT just opposed to limited liability (whether in the form of the various 19th century statutes or all the other forms that have existed over thousands of years). Mr Carson is on the other side in a lot else as well. If a private individual (not a corporation) owned an estate or a factory (or any large scale productive activity) Mr Carson would not be on the side of protecting their property rights – on the contrary he would be an enemy of these rights.

    So it is NOT “Carson hates corporations” – it is a lot more than that.

    To be blunt – I would rather have Gordon Brown (as much as I despise Mr Brown’s opinions) in a position of power than Kevin Carson.

    “Another example of Paul Marks intolerance” – yes I am intolerant (and bad tempered and……). But I am right on this one.

  • Paul Marks

    On U.S. bankruptcy laws:

    They are a dead letter.

    Under bankruptcy laws the secured creditors (the bond holders) get paid first (if there are any assets to pay them with).

    However, when the Indiana teachers and policemen pension fund went to court in the Chrysler case to get their money – the lower courts refused to deal with the substance of the case and kicked the case upstairs to the Supreme Court. And the Supreme Court refused to hear the case at all.

    So this is worse than the 1930′s “yes I know your private contract says you are to be paid in gold – but we say you are going to be paid in paper Dollars”. Now it is “your private contract is worthless”.

    Therefore further talk of the “rule of law” in the context of the United States is absurd (by the way there are many other examples of violations of the basic laws by the current regime – and no chance whatever that the courts will act against the regime on these matters).

    On the concept of limited liability (in a nation that had the rule of law – not the United States that no longer does).

    If people choose to trade with a limited liability enity (whether it is a church, a guild, a company, a friendly society, a cooperative, or whatever) that is up to them – it is a free libertarian choice (and anyone who wishes to bad this choice is not a libertarian in this respect).

    However, people must know what they are dealing with IN ADVANCE (no changing the rules after the fact) – that is why the old practice of limited liability enterprises having to call themselves “Ltd” (in Britain) and “Inc” (in the United States) is a good one.

    And, almost needless to say, there should be subsdies (no slush fund from the Federal Reserve – and these subsidies are NOT recent, preferential treatment goes back a long way) and there should be no bailouts and no debt backing.

    I despise organizations like General Electric as much as Kevin Carson does. But so would Trotsky – agreement on some matters does not make people allies.

  • Paul Marks

    On banking:

    Banking is (or should be) money lending.

    The money (the REAL SAVINGS) must never be less than the loans the bank gives out.

    Whether the savings come from the owner or owners of the bank or from depositors is a side issue – as long as the savings totally cover the loans (i.e. their is no credit bubble – no “credit expansion to meet the needs of the economy”).

    If 100 Dollars is lent out than someone (or some people) must have saved (really saved) 100 Dollars – a cent less is wrong.

    However, if fractional reserve credit expansion games are played – then the bank involved (and, sadly, all who depend upon it) should be allowed to go bankrupt when these games end in a bust.

    There must be no bailouts (and no “deposit insurance” – business risk of this sort can not be “insured”) and no “too big to fail” doctrine. However, legally people should be given advance warning of the end of government “deposit insurance” so that they are not caught by surprise (changing the rules after the fact – i.e. dishonouring such “insurance” only after a bankuptcy, is wrong).

    Of course this means that people will have to accept much lower returns on their money (if they wish to have a good chance of keeping it). Bernie Maddoff style “good returns and no risk” does not exist in the real world.

    Almost needless to say – limited liability (i.e. Bank of …..) verus “Mr Jones the money lender” is a side issue here.

    What matters is that their is no Bank of England (or Federal Reserve) backing “Bank of ……” or “Mr Jones the money lender” and that the money being lent out really exists (i.e. is someone’s real savings – whether these be the real savings of Mr Jones or of a large number of people).

    By the way – two parties can not have the same money at the same time. If money is “lent out” it can not be “on deposit” AT THE SAME TIME.

    If someone agrees to have their savings lent out (rather than sitting in a safe deposit box or whatever) then they do not have those savings anymore till when and IF they are paid back.

  • Laird-

    Why should there be any real difference between dealing with a legal personality (a company) and a real personality?

    Well, because one of them actually exists and the other one doesn’t. The difference between things which exist and things which do not exist is quite profound.

    Why do we not furnish each and every person in the nation with an imaginary friend who can incur debt, go bankrupt, be held reponsible for tort, etc, on their behalf? Why does a man selling machine tools get an imaginary friend, but not a man selling his labour?

    There are only two options here- either the existence of legal personalities is a benefit to businesses, or it isn’t. If it isn’t, there is no point to it and it should be abolished. If it is a benefit, then it is a distortion of the free market, and should be abolished. Libertarian free marketeers are against state distortions of markets. Why not in this case?

    You used the example of it offering some protection in matters of tort. Then the problem lies with tort, and that must be addressed. Introducing another “counterbalance” distortion in the marketplace is the progressive strategy, and we all know what is wrong with that. It doesn’t negate the first distortion, it just means you have two distortions instead of one.

    Has the phenomenon of runaway tort been encouraged by the presence of giant corporations benefitting from legal personality? Does legal personality encourage irresponsiblility by those corporations, since it is not the people to blame, but their imaginary friend? If absence of legal personality would lead to a differently shaped marketplace, isn’t that the actual free market we should be seeking? Has the use of courts for legal game playing by corporate (business, pressure groups, etc) personalities led to the current state of tort, with precedents set at the higher level by those so wealthy as to not care adversely filtering down to the lower level of less wealthy litigants?

  • Maz

    Ian B, I think you are discrediting Laird with my question. I’m not sure why the real vs. unreal distinction in business is relevant. Money is a human invention and is (to the same extent) unreal but I don’t imagine you would suggest we should be bartering goods instead?

    I think that one problem with trying to reduce business back to the personal level is that, assuming you allow freedom of contract which I guess you endorse, people will always be free to reach contractual arrangements which reflect limited liability. Hence if (say) Laird and I pool some parts of our property, and say to potential creditors “here, do business with us on the contractual basis that you agree to limit your recourse to this pool of property”, then Laird and I have limited our liability to that pool of resources much as if we had simply capitalised a limited liability company and traded through it. Allowing for limited liability corporations by law simply provides an easier way to reach that contractual solution. And it’s clear to everyone. No-one dealing with a company is under any illusions that its liability is not limited. People are free to contract, or not contract, with that company.

    And I’m not sure that contracting solely with real people solves your problem, because it ultimately depends on the personal bankruptcy law. If that law allows the bankrupt to discharge his debts and have a new start without having to repay them in full, how is that any better than limited liability of a company?

    As I said earlier, I think the real danger in all of this is having bankruptcy / liability rules that are perceived as arbitrary and unpredictable, because then no-one knows where they stand. The most important thing for markets is consistency. Real distortion occurs when the rules can be and are changed without due notice.

  • Sorry Maz, wrong attribution indeed!

    Hence if (say) Laird and I pool some parts of our property, and say to potential creditors “here, do business with us on the contractual basis that you agree to limit your recourse to this pool of property”, then Laird and I have limited our liability to that pool of resources much as if we had simply capitalised a limited liability company and traded through it.

    Of course you would be free to do that. But what fool would do business with you? You are saying, “We want to borrow some money off you, but we want you to pretend that the person reponsible for the debt is our imaginary friend Harvey, so if we can’t pay it back, it’s his problem not ours”. Who would lend money to such a pair of rogues?

  • Thanks, Jonathan. If you want to read the book without shelling out the money for a hard copy, an ebook version is linked from the sidebar of my blog (it’s an earlier, slightly longer version before I pruned the ms to BookSurge’s length specs).

    Re Mr. Marks’ comments, I take a position something like that of J.K. Ingalls and Benjamin Tucker on land (occupancy-based tenure)–although I recognize some practical difficulties in it and see it as differing only in degree, in concrete terms, from Rothbard’s refusal to enforce absentee rights to vacant and unimproved land. I have repeatedly stated that this occupancy-and-use regime applies only to land, and not to capital. I would strongly advise reading my original Contract Feudalism paper for the LA and my rejoinder to Mr. Marks, along with Mr. Marks’ reply, before accepting his characterization of my position on ANYTHING at face value.

  • Laird

    Ian, if Maz and I were to set up a company, a bank could lend to it on a non-recourse basis, and sometimes that does happen. In that case it isn’t “Harvey” who is responsible for payment, it’s the corporate entity (the legal borrower), but the creditor’s right to collect in the event of default is contractually limited to the specific collateral. Of course, the norm is that we’d have to personally guarantee the debt, in which case the fact that our company has an “Inc.” or an “LLC” in its name is irrelevant; we’re both 100% on the hook. It’s all a matter of negotiation (relative bargaining power, of which we would probably have precious little). In a non-recourse situation the bank would have to be satisfied that the overall financial strength of the company, and the value of any collateral, justifies the incremental risk. That’s simply a business decision.

    But in either case it’s a matter of contract law. Limited liability entities serve to protect the owners in the case of non-contractual claims, which are inherently unknowable. That’s a societal policy decision, which I support. Obviously, we disagree on that. So be it.

    “As I said earlier, I think the real danger in all of this is having bankruptcy / liability rules that are perceived as arbitrary and unpredictable, because then no-one knows where they stand. The most important thing for markets is consistency. Real distortion occurs when the rules can be and are changed without due notice.” – Maz

    Bingo!

  • Alisa

    Laird:

    Limited liability entities serve to protect the owners in the case of non-contractual claims, which are inherently unknowable. That’s a societal policy decision, which I support.

    I understand that you have good reason to support it as things are now – per your example above with someone slipping in your office etc. But would there still be a need for this in a sane tort reality?

  • Laird, I am left wondering this-

    If the state did not define and recognise “companies”, if there were no registration of “companies”, then how in private contract- which would have to be made between individuals- would you define the liabilities- and indeed finances- of your company?

    It could not have its own bank account, because it would be unable to present itself independently to a bank, for instance. You could say, “I want the account in the name of Widgets Manufacturing Co” but the account would be with you, not with your company.

    So how ciould you limit its interaction with others, when it would not in any meaningful sense exist? Isn’t it the case that companies only have a life of their own because the State grants them one? “Setting up a company” is an interaction with the State. Take that away, all that’s left is you and Maz.

  • Midwesterner

    My last business was set up in the form of John Doe, DBA* John Doe Widgets Manufacturing. *DBA means ‘Does Business As‘. Practically speaking for banking and insurance purposes, the business name and my name were considered synonymous only I signed documents with my own name.

    Some friends of mine set up a business 50/50 and for them the bank and insurance companies just wanted official statements of who had power to do what in the name of both of them. I warned them to require two signatures on all payments but they didn’t. They aren’t friends anymore.

    All limited liability does is transfer the cost of high liability insurance premiums for reckless or irresponsible business owners onto the general public. If limited liability is eliminated, the net growth of wealth in the economy would increase, not decrease because instead of the shop owners, the breakers in those broken windows cases would be held to pay and would be highly incentivized to break less windows.

    For very large stockholder owned businesses, the stock holders would purchase stockholder liability insurance. The premium would counter the dividend and Union Carbide style stockholders couldn’t gamble lives in Bhopal against limited liability in order to secure high dividends. Their stockholder insurance premiums would have reflected their extreme recklessness and the incentive to gamble the company would not be there. The limited liability bankruptcy (for tort) is simply an asymmetrical risk/reward structure. Many non-consenters on the risk side, limited liability owners on the reward side.

  • Maz

    Ian B – you could set up all these limited recourse arrangements contractually and without a company, but it would require a complex web of contracts with all your suppliers, creditors, debtors etc which would be cumbersome. I agree that it would be difficult and some businesses would not want to deal with you on that basis.

    But the fiction of the limited liability company allows you to achieve that concept of limited liability at a stroke. I wholly agree that this requires some interaction with the state, but only to the extent that the state must furnish a companies law. My view is that having this fiction is a benefit to business. This may be a “distortion” of reality, but then so is the concept of money.

    As to your “imaginary friend Harvey” analogy, that is not what I mean. Let’s say the business Laird and I wanted to enter into was property finance, and we jointly owned a piece of land with a building on it. We could structure a finance deal whereby the financier agreed to limit its recourse to the land, building and rents from it, and priced the deal accordingly. Alternatively we could just put the land and building into a company and have the financier contract with the company and no personal guarantee from us. It all boils down to what assets the creditors have available to them on bankruptcy.

  • Laird

    Maz answered Ian’s question for me.

    As to Midwesterner’s comment, it is a fair point that limited liability sets up “an asymetrical risk/reward structure”. But it isn’t to protect against recklessness or irresponsiblity. Incorporation is no shield against egregious conduct; that’s why the courts reserve the right to “pierce the corporate veil” and reach the assets of the owner in appropriate cases. Rather, LL exists to protect owners from unexpected and uninsurable claims. All insurance policies have limits, and runaway juries routinely award damage awards far in excess of any reasonable amount of insurance.

    My company is adequately capitalized for its business needs, and we carry liability insurance in a reasonable amount. But if someone were to injure himself in the lobby and receive a multimillion dollar damage award, I’d be wiped out and the insurance wouldn’t cover it. If the injury were due to my recklessness (such as if I put a gun on a tripwire aimed at the door), it is possible the claimant could reach my personal assets, but otherwise I’d be protected and my loss limited to the assets of the company. I know that we disagree on this (we’ve had this discussion before), but I think that is a reasonable societal decision.

    By the way, Bhopal is an excellent illustration of my point. That was not, as you state, “extreme recklessness” on Union Carbide’s part. Indian law required that there be a significant component of local ownership (I don’t remember the percentage, but UC couldn’t own 100% of the company) and the law also required local management. The accident was the result of an Indian employee, reporting to Indian management, running a hose into the wrong tank contrary to corporate procedures. 100% of the fault was local, but because the accident was so horrific they had to find a foreign devil to blame. UC was destroyed, and its shareholders lost everything, even though the corporation did nothing wrong. It was a gross miscarriage of justice, but at least (thanks to limited liability) the shareholders’ personal assets were not at risk. To me, that’s a good thing.

    I’ve said my piece, so unless someone gets my dander up I think I’ll bow out of this discussion now. (As I said, we’ve had it before and I’m not particularly interested in rehashing it further.)

  • Paul Marks

    Having said I will not engage in a long debate on Kevin Carson I will not let Mr Carson’s own comment go by.

    Is “occupancy based” ownership (“tenure” can mean all sorts of things),including the right to sell? Putting the name of Mr Tucker just moves the issue (to “what was Mr Tucker’s position”) rather than telling me anything about what your position might be (or whether or not it is anything to do with Mr Tucker’s postion).

    For example, should the late Mr Wicksteed have been allowed to turn some land near me into a pleasure park (which he did) when there were other people who wanted farm the land?

    And should the land have been allowed to be left to a chariable trust (a limited liability enterprise) on his death – or should this have have prevented?

    If I recall from our L.A. debate your normal tactic is to quote snobbish comments by 19th century rich people about 19th century poor people. Assuming those quotes were in context you proved that some rich people were snobs – and proved nothing else.

    Ian B.

    If I say to you “I have a venture, but I am not willing to bet my clothing or home on it – I will put in 100 Pounds into the venture but if losses are greater than that (because, for example, the ship goes down) I am not willing to pay any losses above that amount”.

    How is the above unlibertarian – you can choose to say “I will not sell the enterprise supplies then”.

    Or you can say “O.K. I will sell the enterprise supplies in the hopes the trading venture comes off – but if it fails (because the ship goes down or whatever) I will only come after the money you have put down on the table – I will not come after anything else.

    The “money down on the table” is the stake (the share) that I and others are prepared to lose.

    Of course some people are prepared to put everything on the table (like Lloyds “names”), but it is a matter of CHOICE whether one only does business with such people.

    As long as it is all known in advance.

    However, (of course) the richest man in Britain in the 18th century was the Marquiss of Rockingham – a man whose income (both from farming estates and mining and industry) was not limited liability.

    So it is possible to be operate on a very big scale without engaging in limited liability – and without being distant or absentee (Wentworth Woodhouse being in the heart of the Rockingham part of South Yorkshire).

    So, like Edmund Burke, Kevin Carson would have been a firm supporter of the private property rights of the Marquess of Rockingham (or Charles Watson-Wentworth if people dislike titles).

    Unless, of course, Kevin Carson is what I think he is.

    “But Charles W.W. was born rich”.

    If this nonreply is given it would not apply to Charles Wicksteed (or to many others).

    But we will not get a clear reply about Wicksteed either – even though I can hear the train in the park from where I sit at home.

    I know that because I have asked the question before – and just got a lot of evasion.

    And that was before I went to work at the park – in case anyone brings that up.

  • Paul Marks

    “Occupacy and USE” – so a person can not own land he does not live on?

    And a person does not own a wood – unless he chops down (“uses” the trees)?

    “Only the land not the capital”.

    So a person owns the factory – just not the land it is bulit on?

    Accept that you really do not believe in a privately owned factories either, do you Mr Carson?

    It would be easy to prove me wrong.

    Just say that you would have supported (not financially – morally) the Abraham Darbys at Coalbrookdale, or Wedgewood at Etruria, or Arkwright and the his textile factory in 1771 – or any of the others.

    But, in honesty, you can not do that. Because you do not support private factory owners anymore than you support the owners of landed estates.

    And it is nothing to do whether they were born rich or poor, whether they got a government subsidy or not, or even whether they ever made a snobbish comment about poor people.

    I understood you for what you are within seconds of first opening the paper and seeing what you had written.

    It still astonishes me that some people can not see you for what you are.

  • Midwesterner

    You seem to have joined the chorus that “juries are bad, we need to offset that with this other fix”.

    Awards should accurately reflect the governing laws for the damage done. If there are legitimate harms that exceed the company’s or its insurance companys’ ability to pay, then they should not engage in that activity. You reinforce the ‘fixing a different problem’ interpretation of your belief with your choice of examples; the injury in your lobby. Furthermore, I think you and I both agree that you should be able to declare and post your lobby to be a restricted liability area, ie ‘at your own risk’ or ‘medical expenses only’, ‘ -x- $ maximum coverage’.

    Limited liability is a patch on the system to offset several usurpations of your rights as a business owner for example the right to declare limits on liability for people voluntarily on your property (or using your products), the right to not be held on ‘deep pockets’ claims, the right to have damage awards accurately reflect the actual damage, etc.

    Obviously these other problems would need to be corrected before limited liability could be ended but we need to stop declaring LL to be a good in and of itself. It is not. It is a patch on a system thoroughly infested with corporatists, rent seekers and players of lawsuit lottery.

    As for Union Carbide, wow. Count me uninformed. I had no idea that the owners of Union Carbide set up shop in India for philanthropic reasons. Silly me thinking it was for the ‘friendly regulatory environment’ and low overhead. I thought they found themselves a friendly corporatist business environment were they could hire cheap workers, run a lax plant, have a better profit margin than they could where public safety were strictly monitored and enforced rather than giving the host government a cut of political and economic spoils. While, of course, still being free to point the finger at the host government and say ‘they made us’ when things go all to hell. And then have that host government insert itself into the settlement process, usurp the cases of the killed and injured, tell those victims what they were going to ask and settle for and then ‘supervise’ the settlement payments on their behalf.

    Silly me, I never new it was actually philanthropy driving Union Carbide, I thought they just hopped into the back seat with a friendly government to fog up the windows.

    Seriously, a lot of people who lived nearby were killed outright, maimed or died horrible deaths. If Union Carbide was so short of expertise that they didn’t know the risk because permanent on site staff didn’t tell them about it and headquarters staff never checked, then Union Carbide should never have been in that business. Passing the blame down the chain of command is always a sign of a seriously f’ed company.

  • Maz

    Midwesterner – it seems to me that a big problem with the removal of limited liability in the way I understand you to suggest it is that it would likely result in a massive reduction of economic activity. People would be far less inclined to speculate with their capital if they were exposed to full potential liability for (say) a Union Carbide disaster. I have a portfolio of shares spread across in excess of 20 companies including many that carry out potentially risky activities in the oi industry etc. I rely on the directors of those companies to run them properly but there would be no way I’d invest like this if I could be exposed to such liabilities.

    Your analysis suggests that limited liability gives an incentive to companies to engage in risky activities knowing that they will get away with any tort losses that result, but I don’t agree. If one of my investments fails because of a big tort award, and I lose all my capital, the directors and employees have also lost their jobs and the whole enterprise has failed. There is a powerful market incentive for companies to avoid negligent accidents and resultant tort claims, which results in companies putting in place stringent safety measures and sophisticated insurance arrangements.

    You say that “If there are legitimate harms that exceed the company’s or its insurance companys’ ability to pay, then they should not engage in that activity.” Again, I’m not sure I agree. Take a nuclear power company. The obvious worst case scenario risk of running such a company is a nuclear disaster, the costs of which would almost certainly exceed any company and insurance coverage. Even unlimited liability would not help unless the ownership was sufficiently massive. But I would not suggest that there should be no nuclear power for this reason. I’m sure there are similar, smaller scale examples and I certainly don’t want to turn this into a debate about the nationalisation of the nuclear power industry!

    I accept that because of limited liability, when the safety measures fail and the insurance is insufficient or doesn’t pay out, there may in some instances be a shortfall for those who have suffered loss. In my view this is a balance – does the amount of economic activity (and the undoubted benefits thereof) stimulated by having limited liability laws outweigh the risk of occasional negligence and imcompetence that leaves some people out of pocket. It’s hard on those who suffer, but I believe that the balance across society as a whole is right.

    Also, I’m not sure I entirely buy the idea of limited liability being designed to protect against tort claims. I haven’t done my homework so will go out on a limb, but I think that is getting things the wrong way round. From my hazy recollection, limited liability largely grew up before the days of big tort claims, as a convenient way for large numbers of investors to pool their resources for commercial gain under the management of a small group of directors. Big tort claims are a more recent arrival and whilst limited liability certainly serves to shield investors, I don’t think it would be correct to describe it as a patch for that problem.

  • Alisa

    Maz:

    Midwesterner – it seems to me that a big problem with the removal of limited liability in the way I understand you to suggest it is that it would likely result in a massive reduction of economic activity.

    It probably would, at the transitional stage. In any case, the mere volume of overall economic activity is a parameter better not used while debating regulatory business environment, because then someone could use it to support the runaway money-printing by the Fed of the kind we have seen over the past few decades: it generated lots of economic activity – must be good for business, right? And BTW, who is this person named ‘Business’ anyway?

    It’s hard on those who suffer, but I believe that the balance across society as a whole is right.

    Are you sure that you really want to go with this line of thinking? Look, I am not necessarily saying that LL is bad, and you are wrong (although my gut does say so – it’s just that I don’t have the time now to articulate what my gut says). But if you want to defend LL, it seems to me that it would be more fitting to try and do so from a moral rather than a utilitarian perspective. Again, I doubt this is possible, but maybe it’s just me.

  • Midwesterner

    Whoa, Maz!

    a big problem with the removal of limited liability [...] is that it would likely result in a massive reduction of economic activity.

    Two major problems with this. First, redistribution must never be justified on economic grounds. That way be dragons. That justification has given us ‘The Stimulus™’

    Secondly, you might want to revisit the ‘broken windows‘ parable. Just because the justly established (lawsuit lottery is a real problem I acknowledge) consequences no longer fall on the causer of those consequences does not mean that the consequences disappear from the economy. They most certainly do not. They are merely transferred from the the person(s) who profit from the risky activity onto those non-consenters who suffer the consequences of risk realized. If they have not contractually agreed to the risk, then in a society that respects life, liberty and property, they have not voluntarily assumed it.

    People would be far less inclined to speculate with their capital if they were exposed to full potential liability for (say) a Union Carbide disaster.

    People are exposed to the full risk of the Union Carbide activity. It should be those who stand to profit if it is successful, not non-consenting neighbors to the factory.

    . . . but there would be no way I’d invest like this if I could be exposed to such liabilities.

    And yet there are in fact people exposed to those liabilities. Just not the investors who hope to be enriched by them.

    There is a powerful market incentive for companies to avoid negligent accidents and resultant tort claims,

    Probably not in the case of highly leveraged companies with low assets. If the potential cash flow is very high and the net worth of the company is very low, there is a market incentive to engage in risky behavior. Failing and desperate companies are the biggest candidates for negligent accidents.

    Your raising the topic of nuclear power is interesting. No insurance company free from government compulsion/collusion would touch Chernobyl Power & Light, nor should they. On the other hand, well designed plants, even old ones from the seventies to say nothing of modern designs, have a very limited upper level for potential harm. They could and would easily be insured. Like almost all insurance, these stockholder insurances companies would also carry ‘reinsurance‘ for larger risks.

    But on the topic of nuclear power, do you truly believe it is so potentially dangerous that it cannot be insured? If that were truly the case, then I would oppose nuclear power. Barring an environment where tort is used as a de facto obstruction to nuclear power, if no company would insure it, that should tell us something. I personally believe that free market insurance companies would hire some experts to assist in actuarial analysis and be in a bidding war to insure it. Talk like yours will only scare people away nuclear power.

    It’s hard on those who suffer, but I believe that the balance across society as a whole is right.

    In that rationalization lies the root of the 20th century’s worst evils.

  • Paul Marks

    I am not sure what Union Carbide has got to do with any of this. But if Midwestern wishes to raise the matter……

    Union Carbide was not allowed to sell its products in India unless it opened a factory there – by the way the main products were fertilizers for India’s “green revolution” in farming (without which many millions of Indians would have starved).

    The plant was run by Indians – because of local government pressue.

    The land around the plant (owned by Union Carbide) was occupied by people who set up home there – the government refused to remove them. However, I would like to have a good hard look at how that land was bought – Tata got into big trouble in West Bengal this year when it turned out that the land it had got from the government was stolen (i.e. the Communist government of West Bengal had stolen the land). Protests led to Tata pulling out – but it did not get the money it has wasted on the car factory back (nor should it have done).

    There was a big accident at the plant and lots of people died. This accident in no way benefitted Union Carbide – indeed it undermined the company and led to it being taken over by Dow.

    What has any of this got to do with “limited liability”?

    Unless you are saying that someone with a pension (say a teacher in Wisconsin) should have had everything they had taken away from them (the house and so on) in order to pay out claims in India. Because the pension fund owned shares in Union Carbide.

    Of course if it had been an enterprise owned by one man that man might have been nasty (someone like me).

    “So you say to sell to people India I have to build a plant there – well **** you, no one tells me what to do”.

    Or

    “You can not tell me who is to run the pland (no doubt there your relatives) – I am not going build the place”.

    Or

    “You will not remove people who have invaded areas owned by my company and you will not let me remove them – I will close the plant then”.

    However, most businessmen (whether corporate or owner managers) tend to be pragmatists not nasty people (people like me). And it was a series of pragmatic judgements (judgements most owner managers would have made – not just corporations) that led to the Bhopal deaths.

  • Paul Marks

    Leaving aside Union Carbide and the consequences of pragmatic judgements (although my style of rigid and inflexible judgements also has its perils), I have just looked at the Sean Gabb review of Kevin Carson’s latest work.

    I did that because I know well that Mr Carson will not reply to any of the specific questions I asked – I know that because I have asked them all before (many times) and never got a straight answer to any of them.

    Well the review….

    Dr Gabb says that most prices charged by companies are not determined by supply and demand – they are “administered” prices instead.

    That is not true.

    Dr Gabb also says there is little competition between companies.

    That is not true either.

    I do not know whether Dr Gabb was making up these lies (for that is what they are) himself, or repeating the lies of Kevin Carson.

    And I am not going to find out – because I am about as liking to read this 600 page “most important libertarian book” as I am the about 600 page Cap and Trade Bill that passed the House of Representatives last night.

    This is not to say that corporations do not do bad things – for example both General Electic and Goldman S. backed the Cap and Trade Bill.

    The measure will, of course, NOT reduce C02 emissions – it will send some of what is left of American manufacturing to China and other places (where most of British manufacturing is going or has gone) and the goods will then be shipped back as imports.

    So there will still be the C02 emissions of producing the stuff – plus the C02 emissions of transporting it.

    In short American manufacturing industry (and much else) is being backstabbed for a measure that will actually increase C02 emissions.

  • Paul Marks

    By the way in pointing out who ran the plant at Bhopal I mean no disrespect for Indian engineers – many of whom are very good indeed.

    The whole thing would have as bad in reverse.

    Indian company (or single owner it people are opposed to limited liabilty) wants to sell stuff in the United States.

    “You have to build a plant here to sell here”.

    “We tell you who runs the plant”.

    “And if people come and invade areas near the plant there is nothing you can do about it”.

    A pragmatic “let us make a deal” type of businessman (Indian or American, corporate or single owner) would most likely have gone along with all that.

    BECAUSE IT IS NEVER PUT IN SUCH STARK LANGUAGE.

    It is like the 600 page (or whatever) Cap and Trade Bill – I am not going read it, but I bet it does not say “we are going to tax and regulate everything till we drive it off shore”.

    That will not be said anywhere – it will just be the effect.

  • Unless you are saying that someone with a pension (say a teacher in Wisconsin) should have had everything they had taken away from them (the house and so on) in order to pay out claims in India. Because the pension fund owned shares in Union Carbide.

    Woah, hold on thar a second Paul! Before we get out the weepy hankies for the poor little schoolmarm in Wisconsin, let’s look at what she’s actually up to.

    She is attempting to profit by owning (indirectly) a part of Union Carbide- that is she has voluntarily become part of a syndicate that owns part of Union Carbide. She hopes to prosper as a result, from being a part owner of Union Carbide. What natural right has she to be insulated from the consequences of the behaviour of this company of whom she is a part owner?

    A person buying a share of a company becomes one of that company’s owners. By what natural law are owners of things not responsible for those things? Do not property rights automatically confer responsibilities on owners?

  • Midwesterner

    Or put another way, Paul, if no insurance company will even touch Union Carbide stocks on account of their operation in Bhopal, and those Wisconsin schoolmarms decide to ignore the judgment of the insurance actuaries and buy the stock that is so dangerous it can’t be insured, then yes. They should pay their stock’s share of the damage even if they lose their houses. There must be a reason insurance companies won’t touch the stock. Otherwise the schoolmarms’ stock would be insured and they would have nothing to fear.

    And Paul, if I invite you into my house and tell you the condition of you being there is that you help me shoot randomly through the walls, and you accept those terms, are you accountable when you ‘accidentally’ kill somebody? Of course. You didn’t have to accept the terms I set for you to be in my house. Nobody forced UC to open the operation in India. They did it in order to sell more product. Choices and consequences.

    Choices have consequences. ‘The government made me do it’ wears about as well with me as ‘the devil made me do it’.

  • Paul Marks

    It would have made no difference whatever if Union Carbide had not been a limited liability concern.

    Say there had been a Mr Union Carbide (as there was a Mr Du Pont – who founded the Du Pont chemical company and whose family dominated it for about two hundred years).

    How would that have saved a single life in Bhopal?

    As for Union Carbide – it was basically bankrupted by court judgements and so on.

    Nor is it anything to do with “the devil made me do it”.

    Did the devil allow a lot of people to move onto land next to the plant?

    Or was the devil responsbile for any of the other specific government interventions I pointed out?

    Of course had their being an owner manager of Union Carbide and had he been a dogmatic son of a …….. (like me) he would have not done business in India (remember this India before liberlization). on the ground that “no one tells me what to do with my own property”.

    But most owner managers are not dogmatic sons of …….. – they are pragmatic “let us make a deal” types.

    So, I repeat, limited liability stuff is not relevant to this matter.

    Although, of course, if Union Carbide had been like a big Lloyds of London synidicate (with unlimited liability) it is unlikely that the court cases would have gone the way they did.

    In short the widows and so on in India would have got LESS money – as the case would have been tossed out of court.

    As it most likely would have been – if a lot of indivdual retired teachers and so on had been going to go bankrupt if the case went as it did.

    “Deep pockets” and “its only a corporation” (and the “legal fiction of he invitee”) would not have played well in court then.

  • Paul Marks

    For those who do not know the “legal fiction of the invitee”is the practice of modern American and British courts of pretending that one has “invited” tresspassers onto one’s land – so they can sue if they get hurt in some way.

    I repeat – most owner managers are much the same sort of people as most corporate managers.

    They tend to be “let us make a deal” types (that is what business people tend to be like).

    Rigid, dogmatic people (like me) might well not have built the plant – but such people are hardly likely to get into a position to make such choices in the first place.

    Regardless of whether it is a corporation or an unlimited libiability company.

    So making out that limited liabilty cost lives in Bhopal is wrong.

    And claiming that the locals would have got more money after the event if it had not been for limited liabilty is wrong as well.

    Indeed the case would have been faught tooth and nail (if there were thousands of indivudal shareholders going to be wiped out if it was lost) and the locals might well have ended up with no compensation at all.

  • Paul Marks

    I repeat that there is a big difference between losing the stake (the share) you have put up – and losing everything.

    For those who still do not understand this – I will try and explain yet again.

    Take the example of the teachers and policeman pension fund in Indiana.

    This lost the money it put up in bonds (not shares in this case) in the Chrysler case – due to the government tearing up the laws of bankrupcty (corporate or non corporate) and the courts not being willing to act against the Obama regime on this matter.

    But say the Bond holders had been told the following…..

    “Not only are you using the stake you put up (so we can pay off our friends the United Auto Workers union) – we are taking your homes, and everything you have got, to give the U.A.W. and so on even more money”.

    I.E. – a sort of unlimited liability (of course bond holders are not share holders – but I am sure a modern court could be found that would not care about that).

    Well then there would finally be war (civil war).

    “I bet you welcome what happened in Honduras over the weekend”.

    Of course I do – I am not going to hide it.

    The Supreme Court of Honduras (unlike the Supreme Court of the United States) upheld the Constitution of the nation and ordered the removal of the violator – and the Congress (unlike the Congress of the United States) put country before party (for it is mostly made up of the Liberal party of Honduras – the party of the ex President) and approved the action.

    Of course not a shot was fired and not a hair on his head was harmed – but I can live with that. The words of the new President (formally the Liberal party Speaker of the House) were enough for me.

    “Neither Chevez or Obama is going to stop us”.

    Even if everything goes down to defeat and death it was still wonderful.

    The above clearly shows why I would be a useless businessman. Pragmatism is not a part of my character.

  • Midwesterner

    Paul, I have a very busy week and do not have time to walk you through this. I suggest you just read this(PDF). Start around page thirteen.

    Here are some excerpts that may be relevent. UCC is the parent company (US based). UCIL is the Indian subsidiary owned 51% by the American parent company.

    UCC vindicates that it was not responsible for the maintenance of the safety systems of the UCIL plant in Bhopal. But UCC was allowed majority ownership despite government limitations on foreign investment, because of the technological sophistication of its operations. UCC chose all production processes, supplied all plant designs and designated operational procedures. UCC also conducted safety audits.

    In the procedure for manufacturing the pesticides Sevin and Temik, methyl-isocyanate (MIC)
    was used as an intermediate. In the beginning, MIC was imported, but in 1979 UCIL built an MIC unit. The company was offered a site outside the town, but insisted on using the existing plant area, close to the railway station.

    After the leakage, UCC’s first line was that the equipment installed in Bhopal was made in
    USA to US specifications, with safety equipment and standards virtually identical in both Bhopal and Institute, Virginia. Later on, this first reaction proved to be a double-edged sword, as it implied that the killing at Bhopal could recur elsewhere.

    [. . .]

    The UCIL factory was running at a loss and it was decided that the factory should be closed
    down and sold. This was probably the reason why maintenance decreased. In November 1984, the most important safety systems were either closed down or not functioning.

    [. . .]

    It was UCC that chose the design. On the UCIL board, UCC was well-represented. Thus UCC can hardly avoid responsibility for the safety status of the plant.

  • The attack on limited liability corporations is a red herring. Without limited-liability laws, investees would contractually assume the risk transferred from the investors, and take out insurance to cover the risk. Investors’ liability would be limited to the amount specified in the contract (which may or may not be the same as the amount of the original investment).

    The absence of the ability to transfer risk like this would lead to absurd results; e.g., a lender who lends money to someone to buy a car could be held criminally liable if that car buyer uses the car to commit murder, robbery, etc.

    Of course, opponents of limited-liability laws never contemplate applying their standards to the little guy, just to those big evil corporations – the ones in which most little guys invest.

  • Paul Marks

    I repeat that ending limited liabilty would have saved no lives at Bhopal.

    And I repeat that ending limited liabilty would not have meant more compenstion at Bhopal.

    The quote you mentioned (on the equipment) covered none of the specific points I raised – not one of them.

    Remember I did not talk about the equipment at all – I talked about the following things:

    The building of the plant – it was demanded by the Indian government of that time (as a condition for allowing Union Carbide to sell its products).

    Who (the people – not the machines) who ran the plant – that subsid was 51% owned by Union Carbide but who did what was not under their control (think Chicago style political cronyism).

    And the invasion of land near the plant – by people who later died.

    Also, of course, the case would have been more strongly defended had thousands of American citizens had been under threat of losing everything (not just their stake in the company) so the widows (and so on) would likely have got less (if any) compensation than they did.

    Still back to Kevin Carson:

    Let us say, Midwesterner, that your dream of limited liability being banned (so no more churches, friendly societies, charities and so on – they all go, remember it is not for profit things that depend on limited liabilty) came to pass.

    Do you think that Kevin Carson would then be pro private industry?

    If you do you are mistaken.

    A Mr Union Carbide in a non limited liabilty enterprise would still be treated as a mortal enemy by Kevin Carson.

    I know this because I have asked (again and again and again) to support (morrally – not financially) various manufacturers who were NOT limited liability enterprieses.

    You would support them Midwestener – but he would NOT.

    I know that because Kevin Carson has dodged the issue (not once, but many times) and over years.

  • Paul Marks

    Midwesterner – please note the sarastic reply I got from Dr Gabb on the comment thread to his review (I predict this is the only sort of reply I am going to get from these people).

    Let us say that limited libility was banned tomorrow (either for all associations – or just for the for profit ones) and the patent and copyright laws were abolished (although actually that is a different issue).

    You might be happy – but Kevin Carson would not be. He would no more likely to come to the defence of unlimited liability factory owners than I am to grow wings and fly to Pluto.

    I know the Carson type – I have known them all my life.

    What is sad is that people like Dr Gabb have so changed.

    You see I remember a time when Sean Gabb was a foe of international Marxism and a supporter of Mrs Thatcher and Ronald Reagan – although he, quite rightly, always strongly (very strongly) opposed their errors and their moderation.

    In short I remember a time when he was a man to be respected. Someone who would have seen through a Kevin Carson type in seconds.

  • Paul Marks

    For the record I have no financial interest in Union Carbide or in Dow – just in case any one brings that up.

    Nor I am claiming that a company (limited or unlimited enterprise) is infalible – quite the contrary, I hold humans to be very fallible indeed.

  • Paul Marks

    On further thought (and further reading) I own Midwesterner an apology.

    Union Carbide was a much worse run company than I remembered.

    Although I still hold that this says nothing about limited liability as such.

    Just as if a minister of a Congregationialist Church (or secular society for that matter) is guilty of child abuse it does not mean that every member of the Church Congreation should be liable.

    Even if they elected the minister.