Long Live the Limited Liability Corporation
What does it mean when angry mobs take to the streets not to protest against the specific corporations and politicians that teamed up to loot the federal Treasury, but to challenge the very purpose and existence of corporations? Is it nihilism or ignorance that makes these people want to extinguish the organizations that provide the food that they eat, the clothes that they wear, the homes where they live, and the jobs they claim to want?
On the chance that it might be ignorance, let’s take a look at what a limited liability corporation is and does. Perhaps this might penetrate the fog often spread around this misunderstood topic.
First, limited liability does not mean no liability. Executives and employees convicted of crimes can still be sent to jail, and often are. What it does mean is that the third party providers of capital that enable a business to grow stand to lose only the amount of money they invested in the business, and no more. That is why if you buy stock in a company that later goes bust, the bankruptcy judge cannot go after your paycheck to satisfy the company’s creditors. Imagine managing your IRA if, as part owner, you were fully liable for any debts incurred by each company you invested in.
In addition to making debtor’s prison obsolete, the legal concept of limited liability has liberated more people from premature death, disease, and poverty than any other economic innovation since the end of feudalism.
Prior to the invention of corporate structures that allow companies to operate behind legal firewalls protecting third party investors, it was difficult to achieve scale in any business that required large amounts of capital. This may not be an issue for subsistence farmers, independent craftsmen, sole proprietors, closely held partnerships, family dynasties, landed nobility, or the King. But without modern corporate forms that concentrate capital from disparate shareholders, the industrial revolution could not have occurred. And without the industrial revolution most of humanity would still be bound to the land – rising with the sun, going to bed when it sets, and laboring like mules in between.
Utopians may idealize our agrarian roots, but there are good reasons such yearnings are confined to utopians.
First, our ancestors did not flock from the farms to the factories because farm life was so peachy. Voting with one’s feet to escape the drudgery of living off the land is a process that continues in developing countries to this day. Progress is all about substituting machines for backbreaking labor. Ban the limited liability corporation and you reverse that process.
Second, a pre-industrial, corporation-free economy cannot support the billions of humans that currently live on planet Earth. Just who would you kill off in order to return to our noble agrarian past? I know an Al Gore-inspired environmental activist who openly wishes a flu pandemic will decimate the human race. Such intellectual consistency in a hardcore progressive is as rare as it is horrifying.
State ownership of the means of production has been tried as an alternative method of industrial capitalization. The misery that ensued makes the death toll from flu pandemics look mild.
The judgment of history is in. Never before have so many owed so much to such a misunderstood form of economic organization. And never before has such a beneficial innovation been subject to such constant criticism. Most people take the modern cornucopia of goods and services produced by corporations for granted. But if you were to go 48 hours without them you would look, smell, and feel like the people camping out for days in Zuccotti Park.
If you want the perfect example of the positive impact of the corporation, turn your eyes from Wall Street and take a look at Wal-Mart. When you consider the outcomes, there is no denying that Wal-Mart has done more for the poor than Mother Theresa. After all, Mother Theresa only salved the wounds of a comparative few, most of whom continued to live at a level of abject poverty unknown in developed countries. Wal-Mart provides a steady paycheck to 2 million people, many uneducated and unskilled yet organized into an effective workforce that delivers tremendous value to hundreds of millions of cost-conscious consumers. These consumers include the working poor themselves, whose dollars otherwise would buy a lot less. Everyone who shops at Wal-Mart is better off than the slum dwellers of Calcutta.
In addition, Wal-Mart’s global supply chain employs tens of millions of people around the world, freed from the land as they climb that first rung up the economic ladder. And that ladder was built with capital that came from millions of investors thousands of miles away. They felt comfortable investing their savings because they didn’t have to risk more than the price of their shares.
So the next time someone around you mouths off about corporate greed, ask them to be more specific. If they are ranting against bailout recipients and the politicians that keep shoveling our tax money into their maws, you may want to join them. But if they’re ranting against the corporation itself, you may want to speak up in defense – for the decline of the limited liability corporation will mark the decline of civilization as we know it. If that happens and you don’t want to starve, you’d better make sure you are handy with a manure spreader.