The trouble with limited liability... it isn't a 'free market' concept.

[RobinFinderson]

The invention of limited liability has definitely greased the wheels of economic development, and is a defining characteristic of corporations, but it isn't a 'free market' concept. In fact it is just the opposite. 'Limited liability' is just another way of saying 'limited accountibility,' and that means that people can take bigger risks with smaller consequences for failure. It significantly changes human behavior.

[Jacob]

The invention of limited liability has definitely greased the wheels of economic development, and is a defining characteristic of corporations, but it isn't a 'free market' concept. In fact it is just the opposite. 'Limited liability' is just another way of saying 'limited accountibility,' and that means that people can take bigger risks with smaller consequences for failure. It significantly changes human behavior.

I'm not sure. You may be mixing things up. Limited liability is a legal concept. I don't see how it dampens the "free market." Are torts a "free market concept?" Limited liability changes the rules of torts and contracts. But that doesn't mean folks are not still free to bargain as they please. When dealing with big sums of money, it is common to bypass the liability limitations of incorporation by offering a personal guarantee. Everybody is free to demand a personal guarantee and to refuse to deal with another if such person relies upon incorporation for personal liability limitations.

[Katy Lied]

The concept of liability was a much much bigger contribution to historic economic development than the concept of limited liability.

[RobinFinderson]

I'm not sure. You may be mixing things up. Limited liability is a legal concept. I don't see how it dampens the "free market." Are torts a "free market concept?" Limited liability changes the rules of torts and contracts. But that doesn't mean folks are not still free to bargain as they please. When dealing with big sums of money, it is common to bypass the liability limitations of incorporation by offering a personal guarantee. Everybody is free to demand a personal guarantee and to refuse to deal with another if such person relies upon incorporation for personal liability limitations.

I'm not sure what limited liability being a 'legal concept' has to to with your or my argument. What I'm saying is that if a person or institution's liability is limited to some payout smaller than the potential damage that could be caused by risks taken, then the defining role of risk and reward in a 'free market' system is unbalanced. People and institutions with limited liability can reap the benefits of placing bets that they will not be required to cover in whole.

[Indy Coug]

The free market doesn't set the price on liability. It's completely arbitrary and capricious.

[creekster]

I'm not sure what limited liability being a 'legal concept' has to to with your or my argument. What I'm saying is that if a person or institution's liability is limited to some payout smaller than the potential damage that could be caused by risks taken, then the defining role of risk and reward in a 'free market' system is unbalanced. People and institutions with limited liability can reap the benefits of placing bets that they will not be required to cover in whole.

What are you talking about? It is hard to address your position if you have failed to make it even moderately clear. For example, are you talking about LLCs or about shared liability and resources through the corporate form?

[Green Monstah]

What are you talking about? It is hard to address your position if you have failed to make it even moderately clear. For example, are you talking about LLCs or about shared liability and resources through the corporate form?

You know what limited liability means, right? It doesnt mean a specific cap is placed on liability.

It means a company's liabilities don't extend to the individual stakeholder's in such company, unless the company is a sham (e.g. Undercapitalized, used to perpetuate a fraud). It is, in a very real sense, the creation of an inanimate person. In that sense, then it broadens the market, but I'm not 100% sure i'm understanding your point.

[RobinFinderson]

What are you talking about? It is hard to address your position if you have failed to make it even moderately clear. For example, are you talking about LLCs or about shared liability and resources through the corporate form?

LLC's are one example where liability is limited. So is ownership of common stock. And limited liability also comes as a benefit of incorporation. I'm speaking very generally here. Limitations to liability are limitations to one's accountability. Speaking very generally, if a person can take risks where the potential damage exceeds his/her liability, s/he will be more inclined to take risks that would otherwise seem unreasonable. If two parties are competing in the same marketplace, and they don't share the same level of liability for similar risks, that is a market advantage that comes from lawmakers rather than from the market. If you are a real 'free market' kind of person, this should bother you, because it means that the people with access to the lawmakers will gain unfair market advantages that are unrelated to the nature of the sector in question.

I am often hearing our conservative members conflate corporatism, capitalism, and free markets, as if they were all part and parcel of the same thing. They aren't, and I'm hoping that we can start delineating the difference by teasing out an aspect of corporatism -- limited liability -- that messes with the balance of risk and reward on which capitalism and free markets depend in order to work.

[Green Monstah]

Hmmmm....

I think there are legal checks and balances that prevent people from pissing away stockholders' capital. First, the ability to piece the veil. Second, derivative suits. Boards, Partners and Officers owe fiduciary duties to the corporation, partnership, etc. and are subject to personal liability.

Maybe this demonstrates your point. In a free market, an actor would bear the full brunt, or reap the entire benefits of hus actions.

So, what's the take away?

[creekster]

You know what limited liability means, right? It doesnt mean a specific cap is placed on liability.

It means a company's liabilities don't extend to the individual stakeholder's in such company, unless the company is a sham (e.g. Undercapitalized, used to perpetuate a fraud). It is, in a very real sense, the creation of an inanimate person. In that sense, then it broadens the market, but I'm not 100% sure i'm understanding your point.

I had no idea what Robin was talking about. Was he railing against LLCs? OR some broader concept? I had no idea. He does offer some clarification above. SO if you care to, you can address that, I suppose.

btw, I think your definition is correct to a point, but certainly not complete. But that's OK, as I don't think the LLC definition was, as it turns out, the point of his thread.

[Jacob]

I'm not sure what limited liability being a 'legal concept' has to to with your or my argument. What I'm saying is that if a person or institution's liability is limited to some payout smaller than the potential damage that could be caused by risks taken, then the defining role of risk and reward in a 'free market' system is unbalanced. People and institutions with limited liability can reap the benefits of placing bets that they will not be required to cover in whole.

Other non free market concepts: bankruptcy, limited individual wealth, and scarce resources?

[Katy Lied]

Speaking very generally, if a person can take risks where the potential damage exceeds his/her liability, s/he will be more inclined to take risks that would otherwise seem unreasonable.

So if a plumber purchases $100 worth of stock in a company that is 10 years later assessed billions of dollars worth of environmental cleanup fees, that plumber should pay $1000 of the cleanup fee for his $100 in stock holdings? You make it seem as if corporations use limited liability to nefarious purpose, when all it does is lower the stakes for plumbers who want to participate in capital gains just like big money.

Moreover, a baby who inherits a few shares of stock from an uncle should have to pay thousands of dollars if the corporation loses an expensive lawsuit? Where is the baby going to get the money? You would make purchasing shares of stock contingent upon the financial condition of the owner of the stock, if liability flowed through stock ownership. This is also part of limited liability.

If two parties are competing in the same marketplace, and they don't share the same level of liability for similar risks, that is a market advantage that comes from lawmakers rather than from the market. If you are a real 'free market' kind of person, this should bother you, because it means that the people with access to the lawmakers will gain unfair market advantages that are unrelated to the nature of the sector in question.

Exactly! This is why neoclassical economists feel that the only role of government is to keep the market unfettered from regulation, and the barriers to entry low. The government should not go in and "save" huge companies in the interest of preserving jobs, neither should they go in an subsidize the solar industry because it is good for the world to have solar power.

[Moliere]

Robin takes a very narrow definition to "free market" but with that narrow definition I guess I could agree with his first point.....but it's a useless point.

The concept of limited liability does not limit the amount of liability, it simply pushes that liability to another entity. The damaged party will still get what ever is awarded to them, they'll just get it from the entity that has the liability.

Also, a lot of liabilities are not known at the time they are incurred. In fact, most environmental liabilities are discovered years or decades after they happen thanks to scientific advancements or tighter regulation. How in the world would anyone want to invest in a company given the risk that 20 years from now they could be on the hook for environmental contamination that occurred as the result of something that was common practice at the time it was incurred?

[RobinFinderson]

So if a plumber purchases $100 worth of stock in a company that is 10 years later assessed billions of dollars worth of environmental cleanup fees, that plumber should pay $1000 of the cleanup fee for his $100 in stock holdings? You make it seem as if corporations use limited liability to nefarious purpose, when all it does is lower the stakes for plumbers who want to participate in capital gains just like big money..

Yes, if a anyone were to purchase common stock, without limited liability, they could be on the hook for more than the value of their stock. This would radically change the way that people buy stock, and it would also radically change the way that corporations assess risk. I think that limited liability has created the possibility of corporations getting much much bigger than the natural limits of risk and reward would otherwise allow. But I'm on the side that believes that the value:rate-rate-of-consumption of the planet's resources is not serving the people of the world's best interests. We are burning through limited resources and we have very little to show for it. The efficiency of massive multinational corporations to convert limited resources into useless crap that is designed to become quickly obsolete (Vitamix blenders being a key exception) is, imo, partially the byproduct of limited liability.

And we needn't attribute 'nefarious purposes' to anyone's rationale. We can simply say that, as a law of business, people will take biggest risks that seem reasonable given the reward. Limited liability reduces risk without reducing real liability.

Moreover, a baby who inherits a few shares of stock from an uncle should have to pay thousands of dollars if the corporation loses an expensive lawsuit? Where is the baby going to get the money? You would make purchasing shares of stock contingent upon the financial condition of the owner of the stock, if liability flowed through stock ownership. This is also part of limited liability.

If we were to get rid of the concept of limited liability, we would also need to establish something more like a margin-call for any stock ownership, where one's shares were dynamically increased or reduced to reflect dividends (now paid in stock shares) and liabilities. If the stock had outstanding liability debt owed that could not be covered by the estate of the deceased, at that point I think the debt gets taken to the grave and split evenly among the remaining shareholders.

Exactly! This is why neoclassical economists feel that the only role of government is to keep the market unfettered from regulation, and the barriers to entry low. The government should not go in and "save" huge companies in the interest of preserving jobs, neither should they go in an subsidize the solar industry because it is good for the world to have solar power

Sure, I agree with all of this. I guess I'm somewhat of a neoclassical in my economic thinking, and that probably stems from my libertarian view of the world. However I think that the government could reasonably invest in some sectors with the purpose of strengthening national security and obtaining global economic advantages.

[Pelado]

The invention of limited liability has definitely greased the wheels of economic development, and is a defining characteristic of corporations, but it isn't a 'free market' concept. In fact it is just the opposite. 'Limited liability' is just another way of saying 'limited accountibility,' and that means that people can take bigger risks with smaller consequences for failure. It significantly changes human behavior.

I agree with the bolded part, but not the part underlined. You've already articulated why your original premise is wrong:

If two parties are competing in the same marketplace, and they don't share the same level of liability for similar risks, that is a market advantage that comes from lawmakers rather than from the market.

There is nothing preventing each of the parties from taking on a corporate form to limit their liabilities. The problems occur when government steps in and says Party A's debts are guaranteed and Party B's debts are not, or something similar. If both are afforded the same protections and incentives under the law, then there is no lawmaker-induced market advantage.