In Defense of the Corporation

Today, the government of the USA is in an accelerating transition. For the first 100 years (with a few exceptions) the government of the USA existed to set man free from men. The rights of the people were respected by the law and by the courts. And it is no coincidence that the USA grew from a small agrarian society in the 18th century to a wealthy superpower barely a century later.

But today, the government is taking control over every facet of the economy: sector by sector, law by law, regulation by regulation, court decision by court decision, czar by czar, presidential diktat by president diktat.

In this environment, formerly good and honorable words like “police officer”, “banker”, and “corporation” have taken on negative connotations as people become aware of the nature of our present system. The evil is not in the fact of being a police officer; it is in the nature of enforcement of bad laws (and neglect of enforcement of good laws). It is not in the nature of lending (i.e. exchanging wealth for income), but in helping the central bank create inflation (i.e. counterfeit credit). It is not in the nature of forming a large-scale enterprise, but in buying coercive powers and in forming an evil alliance with government.

By Corporation, I do not refer to the modern parasite that latches onto the government, seeking to coerce its customers, destroy its competitors, and feed at the public trough. Benito Mussolini coined the term for this system—fascism—though of course he did not regard it as the terminal stage of civilization. People today also call this “crony capitalism”, a term I don’t favor, as it is not any kind of capitalism at all, but the negation of capitalism.

Ayn Rand once noted that, “civilization is the process of setting man free from men.” When the government abandons its legitimate mission of protecting the individual rights of life, liberty, and property and instead institutionalizes their violation, then that society is reaching the end. What inevitably must follow next is the disintegration of the specialization of labor and then collapse of the civilization back into a dark age. Without the specialization of labor, each man must learn to produce—and physically labor to produce—everything he needs on his own, using only the resources of the patch of ground he happens to be on. This relegates him to the level of a beast, and under such conditions life is short and miserable.

It is in this light that I offer my two (gold!) cents about the nature of the corporation. Stripped of its pejorative connotations—and of the looting of the current system—what is a corporation? Earlier, I noted that a corporation is a large-scale enterprise.

Let’s begin there. I will first propose something that I think should not be controversial. The production of certain goods and services requires a large scale. There is no such thing as a local subsistence computer chip manufacturer. Intel does and must operate on a world-scale. Only at this scale is it possible to pay for the vast research and development necessary for a chip maker. Only at this scale can a factory produce such small and delicate things as computer chips.

The same thing applies to an airline, or even food production. We take for granted today that we can go to a supermarket and buy almost any fruit or vegetable at any time of year, any meat, or processed food. It will be safe, and it will be affordable to a wage earner. This was not true 100 years ago, and it is not true in many places in the world today.

What are the requirements of operating at large scale? One needs a large amount of capital (more than one man could provide), large numbers of employees, and large numbers of customers. Let’s look at these in order.

What are the requirements of raising a large amount of capital from strangers? First there must be a business plan that promises a good chance to pay the investor a good return on his investment. And there is something else. The investor understands that the money he invests is at risk. But beyond that, he will not willingly risk his life’s savings, house, and his family legacy. If investing an ounce of gold necessarily put the other 99 ounces he owned at risk, then no one would invest, period. The investor has a choice of how to pursue his goal of exchanging income for wealth. He can always fall back on hoarding during his working career and dishoarding in retirement. The entrepreneur, on the other hand, has no choice. If he cannot raise capital from investors, he cannot get into business (or expand his business beyond his workshop).

What about hiring a large number of employees? With each hire, the company incurs a risk of loss due to any number of factors including if the employee is injured, the employee causes an injury to someone else, the employee damages the company’s property or the property of a third party, etc.

The same issues apply to selling at world-scale, to numerous customers all over the world. If a customer is injured due to faulty product design or manufacturing, if customers change their taste and refuse to buy a product which has been manufactured in large quantities in anticipation of big sales numbers, a competitor sues for patent infringement, or any number of other things happen, the company incurs a risk of loss.

One of the requirements of operating at large scale appears to be in conflict with two other requirements. To raise money from investors, there must be a limitation of liability. To hire a large workforce and to sell in large volumes incur risk of loss that could exceed the company’s capital.

I propose for consideration by the reader a statement that I realize is controversial today. I propose that the only solution for the above three constrains is the limited liability corporation. Without the limitation of liability, it is not possible to operate a business at larger-scale than a family workshop. It would be possible to make shoes, barrels, swords, and all of the other goods of the Dark and Middle Ages. It would not be possible to reach the Industrial Revolution, much less to produce refrigerators, cars, computers, or the Internet.

In addition to the limitation of liability, there is another important attribute of the corporation. The corporation itself owns its capital such as money, land, buildings, tools, inventory, etc. And the corporation is the party of record in contracts such as with landlords, suppliers, customers, banks, etc.

This is the other controversial aspect of the corporation. For legal purposes, a corporate entity is a “person” with the rights of speech, liberty, contract, and property. As described above, it would not be possible to operate a business larger than a family workshop if each tool had to be owned by a person (a wage earner?), each contract had to be signed personally by a person (a manager?), and each debt incurred by an individual person (one of the investors?) It is the corporation as such which engages in production, owns its means of production, sells its output, contracts with other parties, etc. It is not merely a loose confederation of family workshops in a cottage industry, wherein each is an independent entity.

Thus we must conclude that our modern, industrial, information-age civilization with its advanced transportation, communication, health care, and other technologies literally owes its existence to the limited liability corporation that has the rights of personhood. Let us all work towards the day when the corporation returns to this definition and is no longer a large-scale parasite, seeking ill-gotten gains at the public trough.

Keith Weiner is the founder DiamondWare, a VoIP software company, and is a PhD student at Antal Fekete’s New Austrian School of Economics in Munich. He is now a trader and market analyst in precious metals and commodities. He is also president of the Gold Standard Institute USA.

© 2012 by Keith Weiner

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5 comments to In Defense of the Corporation

  • Jim

    A minor nit to pick, is this written by Jeff or Keith?

  • Olav

    How the heck can you be a PhD student at the “New Austrian School of Economics”? That’s like saying that you’re a pilot in training at Disney Land.

  • Frank

    “Limited liability” was (rightly) opposed by jurists when most of them were still schooled in the tradition of natural law (which is the root, both historical and logical, of whatever libertarianism there is in the modern world).

    “Limited Liability” has nothing to do with raising capital. The contract between a corporation and a would-be shareholder who is willing to risk the loss of his entire investment in return for a dividend and possibly a pro-rata share of the residual value does not constitute the essence of “limited liability”. In fact, the shareholders have “no liability” for the corporation’s contractual debts or the damages it has to pay to third parties: creditors/victims cannot make claims against shareholders for damages in excess of the corporation’s capital.

    Moreover, the managers are also bound to the corporation by contract. Their personal liability is usually limited to whatever is deemed outside the range of normal or common business practices. This is not the case when we are talking about the private owner of something: he is liable for what he (not that something) is worth.

    Such “corporate” arrangements make it impossible to answer the question, “Who owns the corporation?”, otherwise than with “The corporation owns itself.” It is liable to the full extent of its assets, but “it” is not an actual or real agent. Nevertheless, while definite persons are the initiators of a corporation’s actions, not one of them is liable for [the consequences of the] actions performed “under the corporate veil”. Moral hazard, anyone? Reap the profits, let the losses fall where they may?

    The root of the problem is the fiction that a corporation is a “person”, when it is obviously nothing but a means or tool which some real persons create and use for their personal ends. Normally, these persons would be fully liable for their tool and its uses. In fact, where corporations are concerned, they are not, because they can limit/eliminate their liability by transferring it to the tool itself.

    It may well be that “that our modern, industrial, information-age civilization with its advanced transportation, communication, health care, and other technologies literally owes its existence to the limited liability corporation that has the rights of personhood”, but why should that “civilization” with its crushing debt burdens be right? Because it exists?

    You are talking about a civilization that thrives on debt extended by limited liability corporations to other limited liability corporations, all of them managed by limited-liability managers on behalf of “no liability” shareholders and sanctioned by the State (the mother of all no-liabilty/limited-liability corporations).

    Would you extend the limited-liability privilege to corporations in the law-and-order (i.e. effective coercion) business? If yes, what is there to complain about? If no, where do you draw the line?

    • Keith Weiner

      Frank: I can’t really parse what you are attempting to say. You seem to be agreeing with me and then disagreeing, stating what I said and then mis-stating it, and objecting to it. And at the end, I think (it’s hard to parse) that you are switching the context.