Topic: Economics
Markets & Incorporation A commentary on the relationship between corporations and the free market.by Gavin Kitchens
(libertarian)
Tuesday, October 6, 2009
There is a concept I've been trying to get my arms around for some time. What escapes me is why others don't seem to acknowledge or articulate it. It makes me think I am missing some fundamental element. Tonight I saw one of the very few credible politicians, Ron Paul, on Jon Stewart's Daily Show. Jon Stewart asked Dr. Paul, if a [limited] government is required for the common defense, then isn't a government required to protect people from corporations. I have otherwise heard people conclude that in a capitalist or laissez faire economy, corporations would have too much power and would trample individual or collective rights.
Incorporation is not a product of the market, but was rather established by statute. Granted this happened very long ago. Dr. Paul acknowledged in the appearance that corporate favoritism in government dates back a long way - at least to the early railroad industry. There seems to be a consistent and fundamental flaw in mainstream thought about free markets. Corporations are essentially a subsidy by which government grants business owners a limitation of liability in business. Owners who incorporate their business are basically liable only to the extent of their personal investment in the corporation. While there are exceptions where corporate officials may be held liable for their conduct, they are generally protected from the corporations debts and liabilities. A free market society does not put obstacles in the way of business, nor does it subsidize business. In such a society, all businesses must operate as partnerships or sole proprietorships. Those who engage in business in a free market are personally liable for their conduct in business - be it financial, criminal, ethical, or otherwise.
Perhaps I am missing something here, but I don't think so. In a true free market economy - a libertarian ideal - there are no corporations. I once heard Michael Badnarik briefly explain this, but someone should educate the population more fully about the limited compatibility of markets and corporations. We will never find solutions to society's ills until free market ideals are realized. Free market ideals will never be realized until corporate protections are rolled back. Politicians depend on their ability to manipulate society through corporate favoritism. Until people stop demonizing the free market in order to expand the size and scope of government, the benefits of the market will continue to slip away.
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As Walt would say, "corporations are a creature of the State".
They are also an insult to contract law. By their "contract" with the State to limit their liability, they use the force of the State to coerce third parties to agree and honor the terms of a contract they never consented to.
In a true free market, a group could organize anyway they wanted to, but would need the consent of others to accept a limit on their liability. And I would bet that would have a cost.
By state sanctioning "limited liability", we not only transfer that cost but subsidize the sanctioning itself. and, bailouts are an added insult, as they are nothing but the taxpayer fullfilling the "forgiven" liability of corporations to each other.
Thanks for this article. I am glad to see both Dr. Paul and you pointing out that economic freedom has been in trouble in the U.S. for a long time.
My research into a minor historical figure led me into an investigation of the Knoxville Railroad Convention of 1836. This convention was held to promote a projected railroad promoted by a coroporation and originally funded by the State of South Carolina to be called the Cincinnati, Knoxville and Charlestong Railroad. The funding was provided by the South Caroina legislature to the Corporation with the provision that each state through which the railroad passed would also provide a subsidy to the corporation. The plan eventually failed because most of the states involved promised the subsidy on the condition that the federal government distribute the money raised by the notoriously protective tariff of 1828, passed to benefit the manufacturers of New England. When the federal government decided to hold onto the money to fight its imperialist wars against the Indians and against Mexico in the west the project was abandoned.
So the idea of government subidy of corporations, and even revenue sharing grants from the federal government has been around since the time of de Tocville's visit to America
Posted By: Steven A. Rosile
Date: 2009-10-08 00:20:46
Corporations originally were created individually by an act of a legislature that, among other things, granted limited liability which protected the owners/stockholders and, at least in theory, continuous existence beyond the life of a sole proprietor or the lives of the several partners in a partnership.
Some of the original corporations set up by charter of legislative bodies have names that should be familiar to us such as Hudson Bay Company and East India Company. These early corporations, like modern ones, allowed for formation of the large amounts of capital necessary to conduct business on the scale contemplated by the entrepreneurs that envisioned them. The limited liability granted by their Charters Of Incorporation were necessary to protect the owners/stockholders from being bankrupted by calamities such as shipwreck, piracy, war and natural disaster as well as poor management or criminal activity on the part of the managers.
These early corporations benefited from these privileges and could not have come into existence without them. That these corporations with their privileges often abused natural persons is unquestioned despite the fact that a doctrine of English Common Law stated that no corporation shall cause damage or harm to any natural person.
Natural persons were and are still being harmed by corporations (as well as other natural persons and governments) but corporations, with ability to amass large amounts of capital and undertake large-scale enterprises such as world-wide trading operations, steamship and railroad manufactures and services, even colonization in the Americas and elsewhere, undoubtedly have benefited natural persons as well.
In the early 19th century American states such as New York and Delaware pioneered general incorporation statutes that allowed for corporations to be formed independently of a unique act of the legislature and so the number of corporations began to increase. Some of the benefits to the public of this increase in the number of corporations are increased production and variety of goods, lower prices and widespread availability of these goods (and services), and companies (corporations) that can and do last beyond several human lifetimes to provide continuous production of popular goods and also warranties, parts and service for those goods..
The negatives of this state of affairs, however, are numerous and include price fixing, fraud, and unfair advantage when dealing with individuals both out of and in legal or courtroom settings. Probably the most damaging advantage corporations have against mere individuals are their ability to influence government via lobbyists and manipulate the media via ownership of large numbers of newspapers, radio and television stations, magazines and motion picture studios.
However, corporations are legal fictions, creations of government, and subject to regulation to whatever degree government chooses. Unlike natural persons, who possess unalienable rights (theoretically at least) and who created government to protect these rights, the corporation's very existence depends on government.
This means that government can, if it only will, protect natural persons from the predations of corporations. This can be in the form of antitrust laws, antimonopoly laws, selective tax laws (such as the income tax which was proposed in Congress as a private law, i.e., one allowing for the taxing of corporate profits (income) without regard to apportionment among the states based on population, and laws that restrict the percentage of ownership of media in a given market.
In particular, independent, local ownership and control of newspapers and broadcast media is so important that no corporation should be allowed to own or control more than a very few, nationwide. The modern media conglomerates are little more than propaganda machines for their owners and this, in my opinion, is one of the greatest threats to freedom in our times.
Corporations are but a tool, and any tool can be used for good or evil. While I certainly agree that many ills are the result of corporate activity, many benefits we enjoy today would be altogether non-existent or greatly reduced without corporations. If not for the advantages and protections of corporate structure there would be no large scale manufacturing, service, communication or even merchandising companies.
Please consider these things before you begin to advocate abolishing all corporations.
Thank you for the comment, Steven. While I did not indicate that corporations should be abolished (I did indicate support for rolling back corporate protections), I do not think that would be a negative outcome in the long term. I think it is incorrect to presume that without corporations, the benefits and progress you indicate would be non-existent. We have not had the benefit of an open market in which to test that presumption. Man has an amazing capacity to produce without the interference of government. Giving the government the power to grant such subsidies effectively guarantees corruption. The question is not whether corporations are used for good or evil. Those are objective terms. The question is can they be used without restricting liberty and violating individual rights. The answer seems to be no.
The question is not whether corporations should be encouraged or banned, the question is whether government should force the corporate function and privilege on the market.
And the answer is no.
Corporations can form by consent and choice if they wish, but the government should stay out of it. and corporate action can never bind a non consenting third party to their contracts [ie. limited liability].
This is the only way we can have a "free market". You cannot have a free market with State sanctioned incorporation.
This "incorporation" itself is also subsidized by the taxpayer. Corporate law is a very large part of our legal system and it shouldn't exist. Everything that we pay for in our judicial system that involves corporate law could be covered under contract law and harm and injury laws if corporations weren't state sanctioned.
State sanctioning of corporations is simply socialism. when limited liability is surpassed [ie, every bailout in our financial history], someone or some group [taxpayers] pays what the defunct corporation owes.
Thanks for the article. It is encouraging to come across someone who doesn't either worship, or despise corporations, but recognizes the threat they pose to our constitutional republic.
I have come to the conclusion that the solution is to deny direct access between corporations and politicians. It seems that you and the folks commenting, recognize that corporations are statutory entities, and as such, have whatever rights, we the people, grant them in law. There is a public perception that corporations have freedom of speech, and that notion will have to be overcome.
It may also be helpful to point out that the cozy relationship between politicians and corporations is not "free market capitalism" as Rush and Sean seem to believe. Do we all agree that the proper term is "corporatism?" Corporatism seems to be such an innocuous term that I use the term, "fascism," instead just to make sure people are awake.
Anyway, this is a subject that needs to be discussed much more.
The government doesn't force anyone into making corporations, there is sole proprietorship, and also, corporations like LLC's can be owned by a single person. In addition, tax structures for corporations are intended to eliminate double taxation for the owners and investors- this makes sense. Corporations were an essential body which fostered accelerated economic growth in America compared to other countries- who were in sum, much richer than America. But corporations protected investors and encouraged risk capital to form under structures that could have enough momentum to create and foster development on a huge scale. Something that sole proprietorships or family businesses could not do, and the only other entity which could engage in such large accumulations of structured capital would be the government- as in socialist and communist countries. We are only so lucky to have such flexible and creative business laws and structures as corporations, which in most of the world, are so complex and expensive, they are effective barriers for ordinary people to get invovled in higher levels of business formation. Most of the millions of ordinary corporations provide the majority of employment in America and protect investors in many ways which encourages even more new businesses being created. I think the comments above are surely reflective of a "handful" of monster corporations who have of course have undue influence with the government and/or are interwoven with government powers (such as the revolving door between government and large corporations), but these are abuses "despite" corporate laws and strucutre- not because of it.
regardless of the "effect" of corporations, good or bad, "incorporation" and all the myraid laws and regulations and cost to the taxpayer is direct intervention by the government into the economy. There is absolutely no getting around it.
It is also a "forcing" of the concept of limited liability onto the majority of citizens who are not protected by the corporate status and the concept is a subsidy to corporations for the exact reasons you mention, "protected investors and encourage risk capital".
the other end of this is "unprotected investors and discouraged risk capital".
this is all well and good from the corporate socialist perspective which is held in high regard by neo-conservatives and to a certain extent by neo-liberals but has no place in minds of Libertarians.
A free market can only be that, once violated, it is no longer free, no matter what the so called "fostered accelerated economic growth" that results. That is purely subjective and depends on correlary logic rather than causative logic anyway.
The government does not "force" anyone to incorporate but forces the concepts and contracted terms of incorporation on everyone. There is nothing wrong with consensual incorporation and contractual "limited liability" as long as no third party is included in the terms without their consent, there is everything wrong with our present system of coercive participation in a market that is dominated and directed by corporations and their regulations.
I would agree with you " IF " corporations were not generally obtainable by the ordinary American. But they are, those protections and privileges are available to most adults, it takes little time and a few hundred bucks to incorporate. The comments here are acting as if corporations are the exclusive domain of the rich and powerful, they are not. Corporations deliver stability which would otherwise not be present with only family businesses and sole proprietorships and partnerships- which usually end up in failure (I mean partnerships). So, corporations are open and accessible to all, and of course its a creation of the government, so are all of our business laws and regulations, etc. I think the envelope of definition in the above commentaries for laissez faire, liberatarian and "true" free market economy is being stretched way beyond the original intent of those ideas. We need a functioning economy, we need a stable economy, I can't see the net benefits of economic anarchy, and "true" market economies are fleeting- they inevitably trend somewhere- and that's where we need government- to balance those trends. No matter the theoretical basis of all these economic theories noted above, a dose of reality might help.
since "incorporation" is available to all americans, what is the consequences if we all incorporate? wouldn't that be the perfect socialist state? since everyone would have attained and forced "limited liability" on everyone else, we would have extinguished liability.
Someone must have told you we need a "functioning and stable" economy? is that what we have? functioning and stable as long as the taxpayers pony up a trillion to satisy the exceeded "limited liability" or AIG and the rest of their buddies? functioning as long as the fed feeds phony paper money to its pet giant corporate quasi banking firms?
no corporation spells economic anarchy? does that mean that the typical non incorporated actor who engages with another non incorporated actor is acting in a state of anarchy?
and who says we need government to "balance" our economic needs? government's role is to remove forceful or coercive action not to encourage it by privileging some with special classifications and disadvantaging others.
corporation is entirely possible in a true free market that doesn't subsidize and legally forcibly sanction "limited liability". groups could form and incorporate any way they plese as long as they enter into consensual contracts, instead of leveraging the force of law. the whole idea is that you are free to act as you wish with who you wish as long as nothing or no one is forced to act. corporation is possibly in a free market, a free market is not possible with coerced "limited liability".
the problem is and the reason for the collusive action of corporations and government is that "limited liability" would also have a cost in a free market, whether it be a hard cost or the loss of competiveness.
As it is, corporations have free liability protection, competitive advantage and it is all subsidized and payed for by the taxpayer, at great cost. what would be cost in a free market, becomes profit in our controlled corpacracy.
a free market is just that, it is very simple and it is not some wild eyed theoretical concept, it is simply humans in action without the use of force. it is fine to like corporations, neo cons love them, but state sanctioned incorporation just doesn't jive with a free market. they are inherently antagonistic. can't have it both ways.
I apologize for my use of “anarchy” in the vacuum that I did, it was just a part of my train of thought at the time of writing. I meant it [ anarchy ] in the context that I am not “sufficiently” satisfied by the Austrian's offerings for replacing the current Keynesian methodology and econometrics, and therefore, without a satisfactory model and structure to replace the current paradigm, consider it a “bit” of anarchy.
Also, although we are all emotionally attached to the Gold standard idea, even Greenspan, I think historical reference proves Gold not to live up to its glitter, as it did not prevent constant economic instability, countless depressions and does not give government sufficient monetary tools to react to factors external to economics- a natural disaster that damages your economy for example. During our time on the gold standard we suffered EIGHT “Depressions” and while on fiat currency for the past sixty years or so, we've suffered ZERO- 0 depressions. That is because with the Fed and Fiat currency, the government has adequate tools to quickly adjust the economy to prevent a recession, like the one we are in now, from turning into a depression.
I also don't believe there will or can be “perfect” competition, therefore, state regulated corporations exist in the paradigm of what is today reality- imperfect competition. Therefore, the Austrians will subject my business dealings to projected anarchy in the market place to suggest something- perfect competition, which is not possible- it leaves us with no viable alternative unless perfect competition is obtainable. Sure, there are “costs” with imperfect competition, but I think they are in total, less than the ADVANTAGES, so I support the model offering me more advantages.
I also don't believe “free wages” (anarchy) is beneficial in the long run to society, and we live in a society- not an isolated village of two persons, free wages, as we had in the past, were generally harmful to development and classes of society as a whole and prevents upward mobility.
I believe that unregulated- or private sector non-government created corporations would create many more monopolies than we have today, and I believe that a cursory look at US history, particularly 1870-1929 proves that to be true. Your view points out the negatives of corporations as they exist today, and you're certainly not wrong, but you fail to mention, as I did (fostered accelerated growth among many advantages) the positive factors of it. This is a typical analytical fault of the Austrians when they critique mainstream economics of America, pointing out imperfections without taking into account that their alternatives creates many more larger problems than the current system in place.
I certainly understand and take your points, about state regulated corporations, fiat currency, federal reserve, as ways to tax Americans and manipulate the economy for the benefit of the rich. I however, also think that government's role IS much greater than trying to create pure economic free markets, as our periods of free markets and laissez faire economics during the “guilded” gold standard age created larger problems than they hoped to solve. I think my thoughts are not theory but history.
we have to remember though, the difference between causative method and correllary. the creation of wealth that has occurred can not be declared to be the result of corporation.
wealth has been created by man working on the resource.
the creation of state franchised corporation has determined the \"direction\" of wealth. we cannot know how much wealth would or would not be created without state sanctioned corporations. we do know that a portion of the created wealth that the world has at present would not be here if we didn\'t \"owe\" so much that might be repaid in the future. debt, in other words.
it is important to differentiate between understanding historical context and believing the circumstances that are with us are the only option.
i would just add that the idea that somehow individuals are incapable of determining their own lives is simply the notion of the central planner and those who benefit most from this planning. our mega national corporations, an outgrowth of state sanctioned incorporation [although that is not the only reason they exist as they do] are simply another arm of central planning. the state allows them to decide for us in areas the state delegates to them.
the period you refer to, 1879 to 1929 was already very far along in the corporate state alliance as you probably know from the history of the railroads and resource extraction. corporations originated in the old world and the idea was basically the same, to carry out projects the ruling class was interested in. the tradeoff was also the same, the corp would agree to certain terms with the state and in exchange be allowed privileged profits.
you make some good points, but truth be told, there has never been truly free markets yet, it is hard to attain because of the power and reward that those who prevent it receive. i think we have a case of allowing the "ends to justify the means". once we enter that realm, there is really little real justification needed for the means. also, thanks for the explanation of chinese investment, it was very helpful.
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