Corporations: Incentive to Harm

September 19th, 2013   Submitted by Sima Qian

CorpAs left-anarchists are often quick to point out, corporations have a bloody history. During the colonial era corporate structures were some of the most effective tools of conquest, and today that legacy lives on with “security” firms like G4s, or weapons manufacturers like Lockheed Martin, Northrop Grumman or BAE Systems. On the other hand, “corporation” can also refer to your corner bakery, a small manufacturer, or farm. Most businesses these days have some form of limited liability, and corporate “personhood.”

These two different expressions of what a corporation “is” (an arm of the state, or a firm engaged in voluntary exchange) often make it difficult for right-anarchists and left-anarchists to discuss corporate structures with each other. The left often assumes that “corporation” refers to massive systems of power that dumb-down and spy on the masses, while distracting people to keep them in line. The right often assumes that “corporation” refers to a group of people doing their best to provide their customers with the goods and services that people most intensely want.

Both these stories are true.

Corporations as arms of the state:

The first corporations were created as extensions of monarchical power. These corporations (like The Company of Merchant Adventurers, which has the greatest name ever) were often created in order to establish trade routes with foreign governments. It was required at the time that they have some “official” backing by their native government. These corporations were essentially outgrowths of feudal power, to the extent that it may be more clear to think of these legal fictions, the corporate bodies, as Noblemen. The corporate person was a vassal of the monarch (and eventually of the republic), except the power was vested in a group of “adventurers” rather than in a single person. Many of these companies held their own armies, most notably the East India Company and the Dutch East India Company. The East India Company was an extension of the British state to the point that it was eventually officially subsumed back into its folds.

Early corporations literally conquered new lands in the name of their respective states, and were essential in colonization. However, they not only served as tools for invasion, but also served for the “public good,” as the state calls anything that it would like to grant as a monopoly privilege to the well-connected. Recourse to a corporate form of governance (and the related limited liability) was not only allowed to trading firms, but also allowed by states for certain capital-intensive projects, like railways and banking. The theory was that these functions were so important to the general good that it would be acceptable for normal rules concerning liability to be waived (obviously, as long as the corporation followed the rules and guidelines, created with the most honorable of intentions, set down by the state.)

Early corporate structures were “obviously” arms of the state. This continues today with banks reporting to the government about money flows, telecommunications companies reporting to the government about phone calls and texts, ISPs and Email providers reporting to the government about web activity, the multitude of companies related to the wars, etc. etc. The left is clearly correct about corporations being arms of the state.

Corporation as firms in the market:

By the mid-1800’s the small amount of liberty that had been wrested from the state (I say “small” because there was still slavery, and women weren’t “persons,” but the property of their husbands) had lead to an explosion of wealth. Shares in the most liquid partnerships were traded almost daily and there were partnerships comprised of hundreds of “partners.” Partners could, and did, write almost whatever they liked in their contracts, and one of the clauses written in some partnership agreements was limited liability for one or more of the partners. This made a lot of sense in many cases.

Suppose Bob wants to sell molasses, so he talks to his buddy Bill. Now, Bill understands the molasses business and knows Bob is an experienced molasses salesman. Bill expects them to make a large return on his investment. But Bill’s already busy managing his widget factory, and he knows that the molasses making business can be risky. What if there’s a problem, and the molasses floods the town? Bill doesn’t want to be liable for that. So, Bill agrees to be a partner, and puts up money for the business on the stipulation that he’s not expected to do any work for the company, and assumes no liability for the company’s debts. They sign a contract and everyone’s happy.

Unless something went wrong.

If people were damaged by the operations of the molasses business they would have had a hell of a time suing. For one thing, except in extreme circumstances, a suit had to be brought against each partner individually. When there were hundreds of partners, and who was a partner was changing every day, this was almost impossible. And then there was a question of contract law. On one hand, under common law, people could generally make whatever contracts they’d like, but on the other, there were damages. If Paul was harmed by Bob’s company, clearly he should receive restitution, but if Bob didn’t have enough money, should Bill, who only became a partner on the stipulation that he wouldn’t be liable, have to pay?

Eventually governments attempted to solve the problem by allowing a much broader application of corporate forms. Corporate personhood allowed for one “person” to be sued when a corporation caused damages, while a wider application of limited liability, granted by the state, settled many questions that otherwise might have been negotiated through private contract.

After these reforms, corporations (the business of which used to be almost exclusively managed through partnerships) were “obviously” just trying to sell goods and services to willing customers. This continues today with all the particular businesses that you interact with, many of which you’re probably not even aware of, and that will be different for every person, because markets are incredibly diverse.

Analysis of the Modern Corporation:

Just as the state likes to divide people over race, gender, religion and other ways, it also divides people over definitions. Corporations provide people with goods and services that are useful and in demand. Corporations are also arms of the state. To the extent that a corporation serves some government(s) (regulations, taxes, reporting to the state etc.) it will be more an arm of the state. To the extent that a corporation serves various people, it will be a business providing useful goods and services. These two things are not mutually exclusive.

Corporations are often required to have certain hierarchical structures by law. We see historically this has been based on feudal military chains of command. Many positions in these structures have “objectives” that incentivize the people filling the positions to go after a single goal without groking the fullness of their actions. This, combined with the limited liability granted by the state, in many cases creates perverse incentives for corporations and people working for corporations. Along with certain tax codes that encourage “bigness” in order to be able to discount expenses and receive certain tax credits, these things mean that there is an incentive for corporations to become authoritarian and bureaucratic in structure and form generally.

The existence of these bureaucratic structures are then used for Statist ends, giving a hand-out to favored groups (almost all labor laws fall under this category), checking the power of certain unfavored groups (child labor laws, licensing requirements) and doing work that directly benefits the state (spying on the populous, keeping people distracted etc). These things are done through regulations and subsidies, and are the bulk of what historically the libertarian right has argued against in reference to the state and corporations. Clearly, yes, there would be more prosperity and freedom without these regulations, but the left is correct that the very structures underlying corporate forms, as they exist today, tend to create bureaucratization and authoritarianism. Unfortunately, these structures of power have been identified with the “free market” even though under a truly free market there would be no limited liability and organizations could be organized in whatever way the people in the organization thought best. This causes confusion that results in disagreement where there should be agreement.

When it comes to corporations, I think anarchists on the right and left agree about more than we disagree about. Corporations, today, are used by the state and this should stop.

Would corporations exist in a stateless society? I suspect something like them would exist, but it would perhaps allow people to choose their own “boss” instead of a strictly hierarchical, almost feudal set up. Instead of having strictly limited liability for shareholders, there might be tranches for shares, where different tranches had different liabilities and paid different dividends. Also, regulation would be done by the market through customers buying the best goods at the lowest prices and by The Sword of Damocles of potential lawsuits hanging over tranche owners’ heads.

If you’re ever in an argument with someone on the left and their argument is assuming you support corporate power as an arm of the state, point out that this is not the case, find common ground, and gripe about the state together.

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35 Responses to “Corporations: Incentive to Harm”

  1. There is a similarity between corporations and street gangs such as the Mafia, both exploit and many times murder outsiders. Downsizing corporations and street gangs is certain to create a better environment.

    • Sima QianNo Gravatar says:

      Yeah, I hadn’t thought of that. And there’s probably an argument to be made that street gangs exist because of certain policies of the state, making them even more like modern corporations. Good point!

  2. EthanNo Gravatar says:

    Writes article about corporations.
    Ignores the difference between corporations and companies.

    “Would corporations exist in a stateless society?”
    Literally impossible, the dictionary would have helped with this one. Too many anarchists are totally ignorant of basic economic systems and this surely isn’t helping.

    • Seth KingNo Gravatar says:

      Are you claiming that the author is ignorant of basic economics? That’s a pretty gauche statement.

      http://www.thefreedictionary.com/corporation

      cor·po·ra·tion (kôrp-rshn)
      n.
      1. A body that is granted a charter recognizing it as a separate legal entity having its own rights, privileges, and liabilities distinct from those of its members.
      2. Such a body created for purposes of government. Also called body corporate.
      3. A group of people combined into or acting as one body.

      Modern corporations, 1, as they exist today surely wouldn’t exist in a stateless society. However, corporations, 3, would almost assuredly exist.

      • ShawnNo Gravatar says:

        It appears a dictionary did help, indeed. 😀

      • EthanNo Gravatar says:

        “corporations, 3, would almost assuredly exist”

        LMAO, where does this stuff come from!? Your own definition that you posted (from a shaky source I might add) proves you wrong.

        Companies”can not act as a separate legal entity. Buildings and imaginary ideas do not hold legal responsibility, nor should they. You should understand the dangers of this.

        • Seth KingNo Gravatar says:

          I’m not sure how you turn “A group of people combined into or acting as one body” into them “act[ing] as a separate legal entity.”

          The third definition doesn’t even mention the law.

        • ShawnNo Gravatar says:

          Ethan, I, like Seth, am not really following you. If I got together with 9 of my friends to create some organization to fulfil some singular purpose, be it to sell some line of products, raise money for the poor, or promote awareness of voluntaryism, it would not be a “corporation”? I’m not being purposely obtuse, I’m really trying to understand your POV. Whenever I would find myself in discussions with others about corporations and anarchy, I would always says “corporations as WE KNOW THEM NOW would not exist in a stateless society,” meaning, groups of people acting together for a singular purpose always will, they just won’t have the backing of a violent and coercive entity forcing their will on others.

          • ShawnNo Gravatar says:

            Say, not says…wish I could edit in this comment section…

          • EthanNo Gravatar says:

            That would be a company not a corporation which can ONLY exist with governments and the laws that follow it. A corporation is a TYPE of company defined by government law and special privelages.

            • ShawnNo Gravatar says:

              By the third definition given in Seth’s post, that is not the case. (If you understand how dictionaries work, enumerated definitions are those separate and distinct from one another; that is, one does not depend on the other for its meaning). Hence, a corporation does not require the existence of a state to exist. Going with my earlier example, the 10 people mentioned form Anarchy, Incorporated, an organization dedicated to raising awareness of anarchy and voluntaryism. To that end, it hosts a website; sponsors live musical performances; disseminates pamphlets and other materials; sells clothing, knick-knacks and literature that promote its mission, etc, etc. As an ENTITY, it contracts business with others to accomplish all of the above … that is, a musical group may not believe that any single partner in Anarchy, Inc can pay them timely for their services, but knowing that Anarchy, Inc not only has the backing of 10 members, but also brings in money from selling clothing and other articles, they are willing to contract with the ENTITY, Anarchy, Inc, and establish contractual obligations with that ENTITY. This may, in actuality, bind myself and my 9 friends to some contractual obligation, but that fact is, it was a single entity that entered into the contract, and hence, a group has been combined into or is acting as one body…hence, incorporated.

              If that doesn’t explain the point, I don’t know what will.

              • Seth KingNo Gravatar says:

                The problem is that in modern vernacular the act of incorporating implies incorporating with The State. But we anarchists know better… well, some of us. 😉

                • Sima QianNo Gravatar says:

                  Which is the difficulty of discussing this topic that I was trying to talk about in this article. Sweet! xD

                  But consider people doing stuff. They cause some damage. Who pays? Right now the state says, “The theoretical body that they created but only if the state allowed it to ‘exist’ and they followed all the rules laid down by the state.” which gives the state a lot of power.

                  The whole tranche thing is trying to suggest that HOW the people doing stuff should pay for the damages should be worked out between them, but THAT they are still obliged to pay the damages is the same as if they had been, “The organization for kicking people in the shins and stealing stuff” or if they had kicked people in the shins and stolen stuff independent of being part of any organization. Damages are damages and should be paid to the extent that people are able. The state distorts this through the creation of the legal fiction of “corporations.”

                • SinNo Gravatar says:

                  “The problem is that in modern vernacular the act of incorporating implies incorporating with The State. ”

                  I think that’s all that needs to be said. Seems simple enough.

              • EthanNo Gravatar says:

                If you knew how sources works, you’d know the citation is bull.
                If you knew how English works you’d know what “incorporate” means.
                If you knew how anarchism works you’d know what you’re currently talking about.
                If yu knew how liberty works you’d know the dangers of even suggesting such titles.
                To hell with back to basics, back to grade school! This stuff isn’t even worth refuting. I’ve told you the truth, and you dismiss it in willful ignorance just so you can act like you’re “right”. No more attention for you, you’re a damned waste.

    • Sima QianNo Gravatar says:

      /Ignores the difference between corporations and companies… Too many anarchists are totally ignorant of basic economic systems and this surely isn’t helping.

      My undergrad was actually in Econ, though we tended to talk about “Firms” rather than any distinction between “Corporations” and “Companies.” I’m not sure what distinction you’re trying to make, nor how it relates to the article, which is about corporate forms, the state, and how right-anarchists and left-anarchists think about that relationship differently.

      Certainly some companies (like the mentioned Company of Merchant Adventurers:
      https://en.wikipedia.org/wiki/Company_of_Merchant_Adventurers_to_ New_Lands ) were distinct entities from the “Adventurers.” I suspect the distinction you’re trying to make, if it is valid, is from definitions imposed on previously existing words and concepts. But perhaps if I understood what you were saying I might see what you do.

    • SimonJesterNo Gravatar says:

      You’re saying in a stateless society, if I needed to raise capital to expand my business, I couldn’t issue stock and sell ownership shares to investors? Or that I couldn’t contract with them that their purchase did not indicate assumption of liability for my actions as head of the company? Who, exactly, would stop me?

      • Sima QianNo Gravatar says:

        /You’re saying in a stateless society, if I needed to raise capital to expand my business, I couldn’t issue stock and sell ownership shares to investors?

        You still could, but I don’t think they could have (completely) limited liability without some grant of limited liability by the state, which is essentially an extension of sovereign immunity.

        / Or that I couldn’t contract with them that their purchase did not indicate assumption of liability for my actions as head of the company?

        Possibly. That might be an agreement you have with the company as well.

        I was more considering the owners of a firm. Consider a partnership. Within a partnership, each partner is liable in the case of damages to the extent of their total personal assets. If something bad happens, the partners can be completely wiped out. In the mid 1800’s partnerships often adopted limited liability clauses for one or more of the partners. This made a LOT of sense, helped raise capital and increased the liquidity of the shares. However, it could be abused, and if the actions of the partners caused harm to a third party, that third party would only be able to collect damages up to the value of the assets of the partners without limited liability. Limited liability gets rid of some of the disincentive to avoid harming third parties.

        If there were the right to free contract, partners could still specify who would pay for the debts of the partnership, but I do not think they should be allowed to grant themselves complete limited liability any more than an individual can say unilaterally declare, “If I hurt someone, I will only ever have to pay $10,000 to them.” If a person could do that they would have an incentive to cause $100,000 worth of damage to someone else if it would lead to an $20,000 profit for them. But if the partners have to pay full damages, they have a HUGE incentive to avoid losses. In 2008 a ton of corporate banks lost a LOT of money. Brown Brothers Harriman and Co. was unscathed.

        Instead of a grant of (completely) limited liability granted by the state (which is essentially an extension of sovereign immunity), I suspect in a free society people would specify tranches of liability. Say, Shares of Tranch 1 (Which, when the company is founded, are all owned by Bob) are liable for 5 BTC for every 1 BTC that Tranche 2 shares (all owned by Bill) are liable for. So if there were 600 BTC of damages, Bob would be liable for 500 BTC (up to the point that he could pay) while Bill would be liable for 100 BTC (up to his ability to pay, or more if Bob was unable to pay the full 500 BTC due from him.) Presumably, tranches that take higher risk would also be paid out higher dividends in the case of profit. In this way, Bill has some limited liability, Bob can sell, his shares, if Frank is damaged by the business he can still get restitution, and there’s no need for an extension of sovereign immunity by the state. There are probably some holes in this, but it’s a rough sketch of something that I think might work. Of course, we would expect people to be able to buy and sell liability insurance as well.

        /Who, exactly, would stop me?

        Presumably the same security companies or insurance agencies (or something very similar) who would collect stolen property in cases of theft. Damages caused by the operations of a company (like pollution) are theoretically the same as damages caused by the actions of an individual (like kicking someone or theft).

        • RagnarNo Gravatar says:

          Seems unreasonable that someone who puts a small amount into a company, and has no management role, would potentially be liable to lose their house. I suspect there would be effectively no limited liability for the managers and directors responsible for the harm, but unlimited liability down to every nickel and dime investor seems a bit extreme. Most people in our current system don’t even KNOW what companies they’re invested in. They buy mutual funds, or are vested in pension plans, which own the actual stocks. If I work for a company that runs a pension plan for me, am I subject to unlimited liability for the actions of every company it invests in? Seems more reasonable that I would only be at risk to lose what I’ve invested, and the company’s directors lose their homes if the company causes more harm than it has the resources to make right.

          • Sima QianNo Gravatar says:

            /Seems unreasonable that someone who puts a small amount into a company, and has no management role, would potentially be liable to lose their house.
            Totally agreed. This is the reason people started putting limited liability clauses into partnership agreements. Partnerships suck.

            /unlimited liability down to every nickel and dime investor seems a bit extreme.
            Definitely. But either the liability is put somewhere or there’s unlimited liability to third parties who have absolutely nothing to do with the company. If someone’s going to lose their house because of the actions of people involved with some entity, it does seem reasonable to have it be someone related to the entity, rather than a person’s whose only relation to the entity was that it fucked them over. The harm, the liability exists, the question is who should be made whole, and who should pay for that.

            /If I work for a company that runs a pension plan for me, am I subject to unlimited liability for the actions of every company it invests in?
            And hey! Demand for well thought-out contracts. Sweet. It would make sense that it could be treated as a banking partnership, in which, when you deposit money (or any asset) into the bank, it is no longer your asset, but the bank’s the asset you have is now the liability that the bank has toward you. Therefore, if the bank fucks something up, you had nothing to do with it and are a creditor of the bank, and are therefore on equal footing (again, dependent on the structure of the debt) with the other creditors of the bank.

            / Seems more reasonable that I would only be at risk to lose what I’ve invested, and the company’s directors lose their homes if the company causes more harm than it has the resources to make right.

            Suppose there’s more damage than that (The managers/major owners) can pay for. Should someone who’s tangentially involved with the company be worse off or someone who, up until the company destroyed their crops/gave their son cancer/ etc, was not involved with the company at all? There are a couple different ways in which the liability for small owners could be paid for. One way would be just straight liability insurance. You pay some amount a year and you get some amount of coverage, the ratio of these two payments being defined by the supposed risk of the shares held. Another way would be the one suggested above, where they’re no longer your assets, but the banks. And another way might be a bit of a mix between the two, where your mutual fund, say, guarantees that you will face no liability, and then your liability is limited by the assets of not only the managers and major shareholders of the company that causes the harm, but also the assets of the company operating the mutual fund, and their managers’, major shareholders’, and small-time shareholders’ assets. You could still be theoretically liable, but it would take a major catastrophe, like the chemical castration used in pigs causing millions of men to be chemically castrated or something.

            One of the difficult things to deal with pre-hoc is that whatever system of liability is adopted, people have an incentive to structure their contracts and entities in such a way as to limit their own liability. But, because harm is (usually) a zero-sum game, limiting one person’s liability means potentially forcing someone else to pay for the damage. I thought it was a bit too tangential for this article, but I think the WORST thing is to put the damage onto third parties who had nothing to do with the company until it caused the harm, which would potentially be the case if there is any unlimited limited liability for people involved with the company.

            • Sima QianNo Gravatar says:

              So this means that it might be fine to have a contract with the entity saying that you won’t be liable for liabilities of the company brought about through the contractual obligations of the company (which is chill because limited liability for the company’s shareholders can be explicitly agreed to by persons working with the company), but an agreement with the company that you’re not liable for harm done to third parties by the company would not have any force because it’s better (in terms of incentives for the entity) for someone who had something to do with the entity, (almost) no matter how remotely, to be harmed rather than for harm done by the company to be unpaid for, which is to say, paid for by the people the company harmed.

          • sinNo Gravatar says:

            You can still have limited liability without the government putting it into law.

            You can have a hired CEO or other management personel like a board of directors agree in their contract that they assume liability from the share holders. This may constitute hire pay and bonuses but the concept is that without a government setting a one-size fits all method of limited liability prevents efficiency as new and more responsibile/effective methods of limiting investor liability can come about.

            Thinking limited liability stops with the start is like asking “who will build the roads”.

  3. Seth KingNo Gravatar says:

    Very nice article!

  4. SimonJesterNo Gravatar says:

    Nice article indeed. Always nice to encounter another Heinlein fan! One of the things I’m most curious about, in this vein, is the distinction between “non-profit” corporations and regular ones. The principle difference at the moment is with regard to “tax exempt” status, which would obviously be irrelevant in a stateless society, but I think there would still be a need for organized, structured, group efforts which were not profit-driven. Charities, Churches, Private foundations, etc., would still have a place, perhaps more so, in a stateless society. What are your thoughts on that?

    • ShawnNo Gravatar says:

      For profit…not for profit…semi for profit…who cares? If a group got together in North America to “save” the Bonobos in Africa, in a stateless society, who cares about their means, as long as they don’t involve force? Knowing most North Americans don’t give a rats ass about Bonobos in Africa, this group would probably need to resort to some colorful activities to meet their goals. They may throw out some “wild” events to raise money. They may pull on your heart strings to get there. If some of their members are full time and make a “profit” along the way, well, more power to them. The thing is: the state having their own rules and regulations as to what makes a “not-for-profit” organization entirely cripples the ability of well intentioned individuals in their goal to make their version of a “better human society.” How about we not focus on whether a person or group claims to be for profit, or not for profit, and put our resources where we think the value is?

      • RagnarNo Gravatar says:

        I get what you’re saying, my thinking was that the (self-named) distinction might still be useful. If I’m buying a product, that’s one thing, but if I’m making a charitable donation, I like to know some opportunist isn’t getting rich as a result. Just my preference.

    • Sima QianNo Gravatar says:

      /Charities, Churches, Private foundations, etc., would still have a place, perhaps more so, in a stateless society. What are your thoughts on that?

      I’m super into mutual aid societies like fr33 aid
      http://www.fr33aid.com/

  5. Black Flag®No Gravatar says:

    Corporations, as defined, are created by government edict for the specific purpose of deflecting the NEGATIVE consequences of a person(s) choices onto the innocent, while accumulating all of the POSITIVE consequences of their choices for themselves.

    This is the essence of “Limited Liability” – you get all the gains when you “win”, but deflect the failures when you “lose”.

    And since loss is a zero sum game, if the loss is not absorbed and suffered upon the responsible, it must be absorbed and suffered by the innocent.

    Hence, Corporations are fundamentally immoral.