Several people have noted the similarities between our take on politics and libertarianism. And it’s true that the similarities are there. We believe in local political control based on voluntary group identification. We believe that the federal government should stay out of our lives as much as possible. 

 

And, like libertarians, we believe that corporations shouldn’t exist.

 

Wait, you might say, libertarians love corporations! They want as few limitations on corporations as possible! 

 

While it’s true that many people who profess to be libertarians are definitely pro-corporate, we take the position that a true libertarian would not support the corporate form at all. Why? Because the corporate form is a legal fiction created by the government that interferes with free markets. Expanding on that point, here are five reasons that libertarians should hate corporations:

 

  • Corporations are all ‘Winners’

    • Libertarians claim they want to stop the government from ‘picking winners and losers’. Corporations are government-created fictional entities that get special rights. In essence, the corporate form is the government ‘picking winners’ in that they’re picking every corporate entity to be a winner. Who are the losers in such a scheme? Non-corporate entities. AKA: People.
       

  • Risk Doesn’t Dissppear

    • One of the primary justifications for the state supporting the corporate form is that entrepreneurs will be more likely to take risks if their liability is limited. That’s what the corporate form does: if a corporation takes a risk and loses, and incurs a big liability or can’t pay its bills, it can go bankrupt, and the corporation’s creditors can only seek redress from the assets owned by the corporation, not the assets owned by the corporation’s owners. 

    • So, let’s say Mr. T is an entrepreneur with $10 million in capital assets, and starts a company producing widgets, capitalizing it with $1 million from his own stash. But things go badly for this little company. Mr. T takes out a big loan, and spends all of the corporation’s money producing a big batch of widgets. But, because he squeezed everything he could out of the production costs, his widgets end up being defective. Maybe they have sharp edges in unexpected places. Maybe they spontaneously explode on days with low humidity. The point is, people get hurt, and they sue. And then, of course, people stop buying my product, so  I can’t pay back my loan. Perhaps there are $2 million in suits brought against me by consumers, $1 million in outstanding bills to suppliers, and another $2 million in unpaid principal on my loan. Mr. T Inc. only has $1 million in capital, so, quite rationally, it declares bankruptcy. None of the consumers bringing suit, the suppliers seeking payment for their bills, or the bank that loaned money is going to get paid in full. And even though Mr. T has enough money in his personal bank accounts to make everyone whole, he doesn’t have to contribute another dime. (It’s true that, in certain extreme situations, he will. This is called ‘piercing the corporate veil’, and it’s not very common and generally feared by all capitalists.)

    • Here’s the thing: corporations limit the risk to the corporation’s owner, but that risk doesn’t disappear: instead, it’s transferred onto other parties: my bank and the customers, in this case. 

    • Essentially, the way that corporations interfere with risk allocation is an impediment to a ‘free’ market, not a boon to it.
       

  • Limiting Liability Drives up Prices for Everyone

    • The market isn’t dumb. It understands how the corporate form alters risk profiles, and that information is priced into transactions. Mr. E Inc. had to pay a higher cost take out it’s loan than it otherwise would have, because the bank understood that there was a higher risk it would lose its out on its investment because of Mr. E’s limited liability, so they spent more money investigating his company’s creditworthiness, and they charge him a higher interest rate than they otherwise would have. 

    • Mr. E Inc’s suppliers know that the risk for unpaid bills exists as well, and that cost gets built into the price that everyone (not just the defaulting customer, but all of their customers who don’t default) has to pay for their product. If the hardware store you shop at buys nuts and bolts from the same Nuts & Bolts Company that Mr. E Inc bought from and defaulted on, then you can make a real argument that the couple of cents more that you pay for your nuts and bolts is funding Mr. E Inc’s bankruptcy.
       

  • A Free-er Market for Risk Already Exists

    • If risk doesn’t go away, we might still want to enable entrepreneurs to take steps to mitigate their own risk. That’s fine, and in reality market for risk already exists: insurance.

    • Businesses already purchase insurance for all sorts of purposes. They buy liability insurance that protects them from suits from customers, property insurance that protects them from fires, business interruption insurance that protects them from acts of god, etcetera. So what would happen if we eliminated the ‘limited liability’ component of corporations? If they wanted the benefit of limited liability, they could still get it. They would just have to pay for it.
       

  • Corporations Concentrate Wealth, and therefore Corporations Concentrate Power

    • In effect, limiting liability allows the owners of corporations to internalize the entire upside of their investment while externalizing the downside. If Mr. E Inc. makes millions of dollars in its first year, Mr. E can pay himself a huge dividend out of those profits, removing that money from any potential future liability. If Mr. E Inc loses money the next year and goes belly up, as we’ve already seen, he doesn’t have to internalize those losses. 

    • This allows for capitalists who own the stock to continually increase their personal coffers, while distributing losses across the broader economy. And this increasing;y concentrated wealth also means increasingly concentrated power. And that’s what a true libertarian is wary of: concentrated power, be it in private hands or ‘public’ hands.

Five Reasons Libertarians Should Hate Corporations

by Douglas Payn

November 16, 2014

Everything you buy costs more so that capitalists like this guy (not actually this guy... it's just a stock photo) can walk away from his bankrupt companies. Fair or foul?

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