Libertarian Defense of CorporationsSubmitted by NowOrNever on Fri, 02/08/2013 - 15:02
The thread "Why Were Corporations Illegal before 1819?" prompted me to create this thread. The discussion there has become hopelessly confused, in my opinion, so I would like to start over, by clearly presenting the libertarian case. Since people are using wildly different definitions of "corporation," I'm not going to even argue in favor of the "corporation." I'm just going to argue in favor of limited liability, which I believe is the crux of the matter.
1. The libertarian position is that limited liability for contractual obligations is perfectly legitimate, while limited liability for torts is illegitimate. This is because limited liability for contractual obligations is (by definition) a condition of a contract freely accepted by all parties concerned. Whereas, the victim of a tort did not enter into any prior contract with the tortfeasor, did not agree to limit the liability of the tortfeasor, and so the liability of the tortfeasor is not limited.
2. Everyone has the right to contract with others on the condition of limited liability: as everyone has the right to contract with others on any condition whatsoever.
3. When we say that a firm (e.g. a joint-stock company) "has" limited liability, all that we mean is that this firm always in fact contracts on the condition of limited liability; everyone who contracts with the firm does so knowingly on the condition of limited liability. Moreover, when we say a firm "has" limited liability, we usually mean that not only does the firm happen to always contract on the condition of limited liability, but that it is designed to do so: i.e. the management of the firm is not permitted by the internal rules of the firm to contract unless on the condition of limited liability. This is perfectly legitimate; the owners of the joint-stock company have every right to require that the management of the company contract only on the condition of limited liability.
CONCLUSION: there are, of course, many special privileges granted to modern corporations by the State, but limited liability for contractual obligations is not one of them. It is not a privilege at all, it is merely an expression of the right to freely contract, which we all possess. In a free society, firms having limited liability should not be prohibited.