Limited Liability and Corporations

Wednesday, February 4, 2009

I so happened to be reading through old posts on this blog that slipped under my radar when they were initially posted. I came across one by Brainpolice entitled "Limited Liability and the Social Contract." While I understand where Brainpolice is coming from in his approach, I disagree with the overall claim of his article.

Instead of focusing on the article itself, I'd rather elaborate on the reasons that I think notions such as limiting liability are not in conflict with market anarchist philosophy.

It is claimed that limiting liability via a contractual arrangement suffers from the same problem as the social contract. Intellectuals like Lysander Spooner long ago swept the idea of a social contract into the dustbin of history. Spooner and others posited, quite rightly, that no one can bind a man to a contract in which he is not a party. Brainpolice alleges that limiting liability in corporations does the exact same thing that causes the social contract to fail: it attempts to bind third parties.

I dispute this claim. I do not agree that limited liability and the social contract are similar concepts which suffer from the same flaw. To the contrary, limiting liability is a product of free association and alienability in the free market.

My claim is that individuals can contract individually or form an entity to transfer responsibility for their actions, even their crimes. I base this on the idea that one can delegate his rights to another, i.e. he can alienate his rights. That is, a person can contract or sell away his legal responsibility to another in the same way that one can transfer any other kind of legitimately owned property. For instance, John buys the legal responsibility of Sam, so that when Sam goes out and commits a crime, like theft, the victim's right to restitution would not be viable against Sam, since John owns the legal responsibility of Sam. The victim's right to restitution would be directed against John, the rightful owner of Sam's legal responsibility.

It may be objected that the victim clearly has a right to have his restitution come directly from Sam. But does said victim? No. Restitution from Sam is no different than restitution from John in and of itself. To elaborate, if Sam is truly the owner of his legal responsibility, he can contract (or sell or alienate) it away. To the extent that Sam cannot alienate his legal responsibility, it is to that same extent that he does not truly own his own legal responsibility in the first place. If one does not truly own his legal responsibility such that he cannot alienate it, how can it be seriously maintained that restitution should be rightly directed against him for any of his crimes in the first place?

It is on this basis that the contrast between the social contract and the limited liability of corporations becomes evident. The social contract, from the outset, does not contract legal responsibility away from those that fall under a particular government, for the vital ingredient of consent is lacking. On the other hand, limited liability is a concept in which those that agree to it fully consent at the outset. This agreement does not bind third parties like the social contract, since it merely transfers a commodity from one person to another; it no more binds third parties than the fact that Yamaha purchases the tires for its motorcycles from Dunlop. Yamaha, in this market exchange, hardly "binds" consumers of its products in any meaningful sense. The rights of third parties remain completely intact. With one, the social contract, it imposes without consent a certain type of legal order; with the other, limited liability, it simply transfers a commodity, with no impact on the rights of third parties.

It is another matter to consider whether such an arrangement in a free market is a smart or good idea. It is also another matter whether or not such an arrangement under a government is legitimate, since the state's law is not consented to, and it does, in fact, change the legal rights of those seeking redress against a corporation. My point is to claim that limited liability of persons under a business contract merely transfers owned commodities and that this is compatible with market anarchy.
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