Leftists and other "progressives" have long been suspicious of, if not downright hostile to, corporations. For many left-wingers of the Ralph Nader variety, corporations (especially multinational ones) are the ultimate embodiment of capitalist greed and exploitation.

Surprisingly, though, given their commitment to the free market, some libertarians have taken up corporation bashing. And they’re not just opposed to corporations in cahoots with the State, but the very idea of corporations. In a recent article for The Voluntaryist, Jim Russell writes, "corporations are pure-bred progeny of Leviathan." Likewise, Wally Conger, in discussing a possible strategic alliance with the Left claims, "radical libertarians consider corporations creatures of the State and would abolish them to free the market." The upshot is that if Russell and Conger are right, and corporations are the State’s offspring, then maybe libertarians and market anarchists have more in common with certain parts of the Left than they thought.

But what exactly do these critics mean when they say that the State creates corporations and they would, therefore, not exist in an anarchist society? Here I want to focus on what I take to be Jim Russell’s argument against the corporation as an institution and why libertarians should oppose their existence. He writes

One absolutely inescapable prerequisite of a libertarian society is people who are willing to accept responsibility for themselves and their actions. The fundamental raison d’etre of incorporation is to avoid responsibility. A corporation shields its owners (stockholders) from responsibility (vis., liability) for the corporation’s actions by means of a legal fiction imposed and enforced by Leviathan. It is so contrary to libertarian purpose and principles as to assure that no libertarian society can emerge from a corporate culture.

There seem to be two parts to this argument. First, it is claimed that the State creates a legal fiction – the corporation – that acts as a shield behind which cowardly shareholders hide in order to avoid responsibility. Limited liability here refers to the fact that if you invest, say, $100 in a corporation and it runs up massive debt, the creditors can’t come banging on your door to demand you fork over your car, house, etc. to help pay off the corporation’s debt. You lose your original $100, but are not liable for any debt beyond that. Similarly, shareholders are not liable for damages incurred by third parties as a result of accident or negligence. The injured party can sue the corporation, but not individual shareholders.

The second part of Russell’s argument seems to be that this shirking of responsibility will lead to the debasement of people’s character and undermine the libertarian virtues of self-reliance and individual responsibility. The special status of corporations is just one more case where the State shields people from the consequences of their own actions, resulting in a populace that is more and more dependent on special favors from Big Brother. A free society, by contrast, requires people who are willing to take risks and put their lives, fortunes and sacred honors on the line. On the face of it, then, Russell seems to have made a strong libertarian case against the corporation. Why should libertarians support an economic arrangement that depends on special favors from the State for its very existence, and absolves its shareholders from responsibility to boot? If he’s right, corporations are not consistent with a free market and, by extension, a free society.

Before we all quit our jobs and start a co-op (not that there’s anything wrong with that), I think we should re-examine some fundamental principles and consider the possibility that we’ve been led astray. The basic axiom of libertarian ethics, I take it, is that any action that does not involve aggression against the person or property of another is morally permissible (in the sense that no one may be compelled to refrain from that action). It follows from this that adults can enter into agreements to exchange their justly acquired property so long as it is voluntary on all sides. So, if corporations, by their very nature, are incompatible with this ethic, then somewhere in the formation of a corporation, someone’s rights have been violated.

The most plausible candidate for victim here seems to be the firm’s creditors. Because of limited liability, they can only recover their money from the assets of the corporation itself, not from any of the individual shareholders. If the firm doesn’t have enough in its assets to pay off its creditors, they’re out of luck. So, it seems that the shareholders have been enabled, courtesy of Leviathan, to stiff their creditors. Surely this is an egregious violation of the libertarian code!

But wait a minute. Upon reflection, doesn’t it seem obvious that the creditors knew ahead of time that this was the case? After all, that’s the whole point of putting ‘Inc.’ or ‘Corp.’ after the name of your firm: to let people know that you are accepting liability only up to the amount of the corporation’s assets. If creditors find such an arrangement unacceptable, they are free to refrain from dealing with any company that claims limited liability for itself. In an article for the Library of Economics and Liberty’s encyclopedia of economics, Robert Hessen points out that

limited liability actually involves an implied contract between shareholders and outside creditors. By incorporating…shareholders are warning potential creditors that they do not accept unlimited personal liability, that creditors must look only to the corporation’s assets (if any) for satisfaction of their claims. This process…is an alternative to negotiating explicit limited liability contracts with each creditor.

Hessen claims that in recognizing a limited liability corporation, the State is serving a purely formal role, not granting some special privilege. By incorporating, a company is simply announcing its shareholders’ intentions not to accept personal liability for corporate debt. Potential creditors can take or leave this implied contract. Or, they can negotiate contracts where shareholders do accept some personal liability for the company’s debts (which does, in fact, happen). The reason that so many creditors do in fact make loans, etc. to limited liability corporations is that they expect to get their money back (with interest). Presumably they believe the financial prospects of the corporation to be sound enough to take the risk. They are hardly forced into doing so by the State. It’s hard to see whose rights are violated by this arrangement.

Ok, fine. But what about tort liability, that is, actions taken by a firm that (through negligence or accident) result in personal injury to a third party, or damage to their property? Parties injured by a firm’s negligent actions cannot plausibly be thought to have entered into a contract wherein they assumed certain risks (even implicitly). If your corporation pours toxic waste into my pond without my permission, my rights have been violated and someone has to be held responsible. Is this a case where shareholders are skirting responsibility? What about the corporate officers or employees? It’s someone’s fault, isn’t it?

Libertarians believe that individuals are responsible for their own actions. It hardly seems fair to hold shareholders responsible for actions taken without their knowledge that result in injury to third parties or damage to their property. Surely, in this case, the fault lies with the corporation’s management (or employee depending on who performed the action that led to the suit). They are the decision-makers, after all, and it seems a libertarian society would hold them responsible for their decisions.

But in this case, wouldn’t potential corporate managers be afraid to take these positions since they know they could be held personally liable for any torts committed on their watch? Who would be willing to make such a risky career move? After all, we’re talking about possible damages running into the millions. Well, luckily, people have found a way to minimize financial risk. It’s called insurance. Generally corporations carry liability insurance that pays out in case the corporation is found at fault in a tort suit. In a libertarian society, management would likely negotiate with shareholders (or their representatives) to pay for an insurance policy that would protect managers from personal liability in the course of carrying out their official duties. It seems to me that shareholders would be willing to pay this cost to get competent management at the helm of their company. So long as this is part of a voluntary contract, it’s hard to see who is evading responsibility for their actions. Victims of negligence or accident will be compensated for their losses and the shareholders are footing the bill (by paying for the insurance policy). Or, alternately, managers could accept lower salaries in exchange for being covered under liability insurance. To create incentives to carrying out business responsibly, managers’ salaries could be pegged to the insurance premiums the company has to pay. One way or another, it is the firm that absorbs these costs. Managers and shareholders have a strong incentive to come to some such agreement in order to do business. Again, it’s hard to see whose rights are being violated by these arrangements.

So, it seems that the essential features of corporations could emerge solely through contractual arrangements, without State intervention. In fact, this seems to be largely what happens. All the State does is give this form of economic cooperation its stamp of approval (to incorporate, all you need do in most states is fill out a few forms and pay a nominal fee). Corporations, with their separation between ownership and management, are simply one more instance of the division of labor and of specialization that thinkers like Mises and Rothbard have touted as the keys to an expanding and prosperous economy.

None of this is to say that corporations always, or usually, live by a libertarian code at present. Like so many other groups in society, many of them are all too ready to lobby the State for special favors. Tariffs, bailouts, guaranteed loans, and favorable regulation are only some of the more egregious examples. Libertarians, whether of the anarchist or minarchist variety, can certainly find common ground with the Left in opposing corporate welfare. However, if I’m right, corporations are a legitimate form of economic cooperation that could and likely would exist in a stateless or near-stateless society.

August 14, 2002