Neither A Soul To Damn, Nor A Body To Kick

Today I’m having a look at an issue you might not generally associate with Libertarianism, but whose existence directly impacts on the liberty of us all, thousands of times every day: the company. Specifically, the limited-liability, joint stockholder corporation.

Most of you will regard the corporate entity as a core plank of free-market capitalism; in fact, it is so ingrained into the notion of the capitalist society that it rarely bears any scrutiny. To question it at all is an open invitation to be branded an anti-capitalist, or even a Marxist. Yet, to my non-economist view, the rights and privileges today accorded a joint-stockholder company far outstrip its responsibilities, which are in any case imputed to no one individual: in other words, a textbook case of moral hazard. This is what has happened when the corporation went beyond its original purpose—the pooling of capital in a co-operative enterprise beyond the means of any one investor—to become a collectivist activity whose purpose was the maximization of profit while palming off the investor’s rightful risk onto others further down the food chain. I was reminded of this fact by James’ recent blog article on General Motors, which prompted me to say something about it today.

A little history first. Prior to the Industrial Revolution, companies in the United Kingdom were comparatively rare beasts, generally created only for very large-scale enterprises. They could only be formed (incorporated) either by direct Royal Charter (as, for example, in the case the East India Company, granted a Royal Warrant by Elizabeth I in 1599), or by a Private Member’s Bill in parliament (such as Lloyd’s of London). Of course, most commercial enterprises at the time were small farms, guild-regulated trades, retailers or service providers, all of which were owned and operated by a single person, who by law was directly and personally responsible for all the actions of his business, including those of his employees, as well as all debts incurred, without limit. Common law recognized the magnitude of responsibility this represented, and balanced it by giving the business owner far greater freedom of action than he enjoys today.

As the Industrial Revolution progressed, however, smaller workshops gradually coalesced into larger and larger mechanized factories, which often faced a stark economic choice: either hand over control to an individual (generally of the aristocracy) capable of raising the capital to build or purchase the infrastructure required, and maintain an ever-expanding workforce, or find some way of “collectively” pooling resources that did not require the patronage of an MP to pass a bill in the House. The result in 1844 was the Joint Stock Companies Act. Prior to it, the large, unwieldy, ad hoc enterprises (known legally as unincorporated associations) generally used for this purpose were almost impossible to sue, as writs against every single investor (possibly hundreds) had to be filed. The 1844 Act provided for the creation of a single corporate identity, regarded for most purposes at law as a legal person. Rather than requiring a separate bill in parliament, a group of investors could incorporate upon payment of a modest administrative fee. The Act, however, did hold investors fully responsible for the actions of the company, and all debts incurred; this despite criticisms that unlimited liability dissuaded many from investing in enterprises other than those with which they were intimately familiar and professionally knowledgeable, and thus retarded economic growth generally.

All that changed in 1853 with the outbreak of the Crimean War, generally regarded as the first “technologized” war of the industrial age, with combatants employing both railways for the mass movement of troops, and the electric telegraph for the transmission of orders. Desperate to free up nascent British industry to produce the requisite matériel for the war’s prosecution, Parliament relented and in 1855 passed the Limited Liability Act, and in 1862 the Companies Act, which had the effect of transferring responsibility from investors to company directors. Crucially though, complete liability could not be transferred to directors who, while bound by fiduciary duty, not only were not required to personally possess the means to cover all liabilities the company may incur, but in any case were careful to take steps to place their personal wealth beyond the reach of creditors (for example, by transferring title into their wives’ or childrens’ names). Directors could go to jail for breach of trust, but that didn’t mean the company’s creditors would ever be paid. This article’s title, an epithet against corporations, is generally attributed either to U.S. President Andrew Jackson or, a half-century earlier in England, the first Baron Thurlow, Lord Chancellor from 1778 to 1792.

Dark satanic mills: Widnes, England, circa 1880. Monster profits for a few, squalour and misery for the rest. This is what happens when capital is simultaneously collectivized and invested with irresponsible rights

This dissolution of individual responsibility also had profound repercussions for the employer-employee relationship, particularly those employees who were either unskilled or whose skills had limited transferability. In the case of trades, for example, a master craftsman historically took on apprentices by means of an indenture (a common law contract signed on the apprentice’s behalf by his parents) which bound master and apprentice together by mutual obligation; the apprentice bound in servitude and obedience, the master required to teach the apprentice his craft and provide board and lodging (typically becoming part of the master’s own household) by way of recompense. But from the mid-nineteenth century, an employee found himself suddenly without the protection which his master’s obligation had hitherto provided. Industrial historian L.T.C. Rolt (the subject of an upcoming LibertyGibbert article), in his 1947 magnum opus High Horse Riderless, put it memorably:

It has also been observed that the pursuit of power by the acquisition of wealth, which was the practical manifestation of the materialist doctrine, was accompanied by a dissolution of that responsibility which the possession of power should involve. In the first phase of the Industrial Revolution the manufacturer had no course but to accept full moral and financial responsibility for his actions in the conduct of his business, and no matter how strained by abuse it might be, the link of mutual dependency between employer and employed could not be severed. As the revolution progressed, however, the same change was effected in industry as had already been accomplished in government, responsibility being transferred from the individual to the group. In the interests of security, the factory system tended to imitate the great primary monopoly of banking and credit which had been the diabolic deus ex machinâ of the New World, by coalescing into larger and larger units. The doctrine of individualism, in fact, produced the opposite. As a result of this process the individual was relieved of moral responsibility and the tie between master and man was broken. Financial responsibility alone remained until the Company Act made possible the limited liability company. This represents no less than a ficticious and inhuman entity for whose policy no single individual can be held responsible, but which enjoys all the rights of individual freedom and is now mis-called “private enterprise”. By becoming a shareholder in such an undertaking, or in other words by lending his money and deriving an income from the interest on that loan, the individual was not merely free from any responsibility for the policy of the undertaking, but was also relieved to a great extent from liability for the debts incurred in the pursuance of that policy. Irresponsible power in the shape of functionless property thus became a practical reality.

Faced with the evaporation of employer protection in an increasingly corporatized, technologized and inhuman society, the emergence of trade unions and the rise of socialism in the late 19th century became inevitable. Put another way, faced with the collectivization of capital—which the limited liability company represented—labour merely responded by following suit.

The arts community of the day saw what the business community could not - or would not

In fact, what limited liability really represents is a state sanction, albeit with caveats, granted to entrepreneurs and investors. I won’t pretend this isn’t a contentious subject among Libertarians; you can get an idea of the range of discussion on this issue than occurs on Libertarian fora here, here and here. Critics of Libertarianism have pointed out (with considerable justification, I might add) the inconsistency of many Libertarians on the subject, and failing to grasp the difference between a limitation of liability freely agreed to under an individual contract, and a state fiat that to many represents no less than a “get-out-of-jail-free card”.

Incidentally, up to this point I have been implicitly referring, primarily to two separate types of liability as interchangeable, which they aren’t. First, there is liability to creditors. This one is certainly important, and is covered by limited liability law in most western countries. As a bit of Libertarian theory, it’s pretty straightforward: liability to creditors should not be a part of the limited liability state sanction, but rather should be written into individual private contracts, to cover the inability of one party to live up to the terms of the contract. It is then up to contracting parties to judge freely for themselves whether the entity with which they are doing business is capable of discharging their responsibilities under it, and the rôle of the state is eliminated entirely.

The second, and far thornier issue, is that of tort liability: injuries wrought by a corporation upon third parties. When BP or Exxon spills oil into the sea, either through accident, negligence or some combination of the two, polluting hundreds of miles of coastland; when a medical implant fails through a design flaw, injuring or killing thousands, or when tens of thousands die through asbestosis or mesothelioma, due to exposure to asbestos decades earlier, before its dangers were known, who is responsible? Not what company, what individual? If the answer is no-one, then clearly responsibility has evaporated.

Critics of Libertarianism observe that, having being gifted the immunity of state sanction, corporations, particularly larger ones, have actually come to resemble the governments that enable them. If Libertarians are so hyper-critical of the monopoly power of the state, they ask, why not also of the corporations, that differ from the state in little beyond the label? After all, the moral position of a manager in much of the private sector is not so far different from that of the bureaucrat: he has a vested interest in displaying short-term gains, and expanding his own remit; his duty to his ultimate employers (shareholders and taxpayers respectively) is several times removed and, being of no immediate moment, largely ignored. This recent open letter, written by a departing Goldman Sachs employee and published in the New York Times, illustrates perfectly, not only the disconnect between the corporate manager and the client he is supposed to serve, but the indistinguishability between the moral vacuum of his position and that of the state bureaucrat. Is this not precisely what Libertarianism is supposed to damn? Libertarianism’s critics are, on this issue, actually hoisting us on our own petard—and they are right to do so.

Built by one man

When engineer William Boeing in 1910 purchased a disused Seattle boatyard and, with his business partner, built his first aircraft (pictured above), a sea-going biplane with wings fashioned from wood, wire and linen, he could scarcely have imagined that, a century hence, the company which still bears his name could produce a machine capable of transporting hundreds of passengers across the Atlantic Ocean in the space of an afternoon. The science and engineering, however, that went into the building of such an object, is the culmination of tens of thousands of man-years of education, experimentation and experience. There is literally no-one on earth, and there never will be, who knows how to build a Boeing 787 Dreamliner. Yet they get built, and they work.

Built by thousands

And not just Boeing: Ford, GM, Exxon, Microsoft, Apple and Google are all multi-billion-dollar corporations that began life as one- or two-man operations, but now create products which require the input of hundreds, if not thousands, of highly-trained specialists in a wide diversity of fields. Does this mean, then, that modern industry can only proceed along the lines of a vast corporation, whose owners (shareholders) are safely removed from all responsibility or liability beyond their investment’s face value? I’ll get to this in a moment. But it’s important to remember here that historically, the corporate structure was introduced as a response to the needs of the Industrial Revolution; that is, manufacturing, mining and other heavily-capitalized industries beyond the means of most single investors. Very soon after its inception, however, the potential for huge, risk-free profits was apprehended by the banking and financial world, and the unintended consequences of the 1855 Act in Britain, and its counterparts elsewhere in the West, are visible all around us today.

For example, recently I watched a documentary on ABC-TV’s Four Corners program dealing with the current debt crisis in Ireland, specifically the scandal surrounding Anglo-Irish Bank (full show and transcript at the link). In a nutshell, Anglo-Irish practised flagrantly reckless lending policies during the credit boom of the 2000s. When the boom eventually went the way of every other boom, Anglo-Irish collapsed, along with many other banks, and the Irish economy as a whole. But the European Central Bank required, as a condition of a Euro-bailout, that Anglo-Irish’s unsecured bondholders—the very people who bankrolled the whole financial profligacy in the first place, who had made out like bandits in the good times, and who should have been left to their just deserts in the bad—be paid out, in full, by the Irish government (read taxpayer). A government of just four million people, on the hook for €30 billion. Rights without responsibilities, writ large. The burden instead, demanded the ECB, is to be shifted onto the Irish taxpayer—the poor Brian and Mary on the street (many of whom are now literally on the street, having lost their homes)—for at least the next seventeen years. The imposition is doubly infuriating for Irish taxpayers, as a mere few weeks earlier, the same ECB negotiated a structured write-down of Greek government debt. One rule for Miklos, another for Mick.

Then there is the issue of the speed with which shares in limited-liability companies may be bought and sold. On the face of it, in a free market this should actually be a good thing, allowing economic agents to make decisions within a time frame of their own choosing. In theory, at least. What happens in practice is that the buying and selling of shares (and options, debentures, bonds, derivatives and other instruments) is driven, not by a company’s fundamentals, but by arbitrage; with moment-to-moment, or even nanosecond-to-nanosecond fluctuations in price, the difference between success and failure of Wall Street investment houses often boils down to who has the better supercomputer. There is simply no way that anyone who invests their money in a company in this manner can possibly have any notion of the business practices and liabilities they are (or should be) taking on, further separating investor and enterprise. And while Libertarian economists will defend instruments such as credit default swaps as being compatible with the operation of a free market, the multiplying of such layers between investor and enterprise has the practical effect of dispersing, and ultimately eliminating, responsibility. And that, to my mind, is profoundly illiberal.

Add in the corporate shenanigans of mergers and acquisitions, takeovers and tender offers and the like, and the moral hazard to those with inside information is multiplied a thousandfold. And none of this can be credibly claimed to going any way towards increasing the production of useful goods and services—particularly when the businesses in question are themselves merely bankers or financiers, several times removed from the actual engines of production. I can highly recommend James B. Stewart’s 1991 best-seller Den of Thieves, which traces the criminal activities of four New York businessmen—Michael Milken (the junk-bond king of the 1980s), arbitrageur Ivan Boesky (who originated the quip “greed is good”), Martin Seigel (takeover guru who invented the “golden parachute” and the “pac-man defence”) and Dennis Levine, an inside information go-between.  Liquidity is invariably offered as the rationale for the law allowing situations to develop involving the quite monstrous conflicts of interest described in Stewart’s book. If that really is American capitalism (and I don’t believe it is), then call me an Austrian.

Greed may very well be good. But fraud is bad.

To some extent, the limited-liability, joint stockholder corporation will always be with us. It has served a useful function in enabling the industrialization of the West. But what I see coming in the post-industrial age, with employees being increasingly highly educated, with portable skills, autonomy and individual bargaining power, is a devolution of the corporate monolith to the smaller and smaller units of the past. It’s happening already, in the form of outsourcing. Increasingly, for example, large companies are reducing their IT departments to a shell, and contracting out to service providers to provide most of the hands-on grunt work. These, in turn, employ or subcontract individual technicians on a job-by-job basis. At each stage, contracts set out duties and remuneration, and with proper project planning and risk management strategies employed, the possibility of damage to third parties is minimized. Within that framework, and with all due diligence performed, insurance for public liability is the solution for protection against accidental damage to third parties.

I actually disagree on this point with Libertarians like Stephan Kinsella, who would impute liability wholly to corporate officers—those with hands-on control of a business—rather than investors, whose involvement he (IMHO) mischaracterizes as “vicarious liability”. There are two issues here; first, as I argued above, under most Western company law there is no requirement for corporate officers to possess personal wealth against the possibility of tortious damage (to do so would limit the hiring of senior management to the exceedingly wealthy), meaning he seemingly accepts the evaporation of responsibility; and secondly, the investor reaps the rewards of an investment, one would imagine that by natural justice he should also accept the risk of his capital, while in his service, causing injury to others. A contentious viewpoint, I accept. For an opposite opinion, here is an excellent article from the von Mises Institute.

The ideal situation for the application of limited liability to creditors is best summed up in Chapter 3 of Murray N. Rothbard’s Power and Market; according to him, any limitation of liability should be private and contractual, not an immunity grant of the state:

Finally, the question may be raised: Are corporations themselves mere grants of monopoly privilege? Some advocates of the free market were persuaded to accept this view by Walter Lippmann’s The Good Society. It should be clear from previous discussion, however, that corporations are not at all monopolistic privileges; they are free associations of individuals pooling their capital. On the purely free market, such men would simply announce to their creditors that their liability is limited to the capital specifically invested in the corporation, and that beyond this their personal funds are not liable for debts, as they would be under a partnership arrangement. It then rests with the sellers and lenders to this corporation to decide whether or not they will transact business with it. If they do, then they proceed at their own risk. Thus, the government does not grant corporations a privilege of limited liability; anything announced and freely contracted for in advance is a right of a free individual, not a special privilege. It is not necessary that governments grant charters to corporations.

It may be dismissed as idealism, but I believe a move away from the state sanction of limited liability, and towards the resumption of investors’ responsibility for actions taken by a company, while leading undoubtedly to a loss of liquidity in the market, would make investment a more concrete, less abstract activity, and with the fortunes of investors at stake, the actions of corporate officers directly answerable to them would in all likelihood avert the kinds of economic crisis we have witnessed over the last thirty years, fuelled as they were by the recklessness that is the inevitable consequence of the imbalance of power and responsibility.

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19 Responses to Neither A Soul To Damn, Nor A Body To Kick

  1. izen says:

    I will have to have a holiday siesta and digest all that…

    I do not think it is possible for modern banking/financial systems to operate on the principle put forward by Rothbard – “such men would simply announce to their creditors that their liability is limited to the capital specifically invested in the corporation, and that beyond this their personal funds are not liable for debts, as they would be under a partnership arrangement. ”

    It is the ability of banks to lend FAR more than they have invested that provides the liquidity in the system. In global trade there inevitably emerge the need for global standards of liability. A bank which required each trade to encompass a private agreement on liability could not be part of the modern global trading network. Agreed standards generates regulation, policing and enforcement. There are innumerable international banking feds, assocs, bodies and orgs that debate the minutiae of this endlessly. When large, supra-personal organisation emerge which solve a past problem they often create new problems of their own. But you cannot remove those new problems by disassembling the new system. That would just re-instate the old problem and add the problem that there was now no way to carry out the improved functions that the past solution (like limited liability regulation in banking) had enabled.

  2. Ozboy says:

    Interesting comments on this from Paddytoplad over at the DT, which I’ll quote here:

    That speed reading course when I was Fifteen just came in handy.

    Got about 75% through and got most of the gist.

    One slight critique I would have is that limiting liability protects individuals from being caught by what I might call “food chain problems”

    If a trader such as myself has a customer who he has dealt with for many years who places a large order for goods. I would then purchase those goods from a third party to supply my customers needs. If my customer goes bust through , for example change in legislation or change of. Consumer appetite I could then be liable for a very large goods order for which I have no way to pay.

    I have acted in good faith and with my best endeavours and yet I am unable to fulfill the contract.

    At the moment the supplier could only attack my company for compensation however if you extended liability to me personally I could lose my house through no fault of my own.

    I have to deal with this problem every day as I run my family business. We are a limited company.
    Now my business has been running for over 100 years so my word is my bond but sometimes you make a judgement call which may go wrong . it would be harsh indeed to make they home I live in part of the bargain.

    On the other hand I hate Phoenix companies.
    my industry is full of them and they are a cynical manipulation of the system. There should be a three strikes your out rule where if you bankrupt companies 3 times in your life you are then banned from running another .

    And again later:

    I know your target is crony capitalism and it’s excesses where bosses can abuse with impunity but if you remove the idea of the limited company you greatly hinder the small businesses which are the engine rooms of our economy.

    To which I’d reply: I think that in such a circumstance you’d actually be better off; as it is, under state-mandated limited liability you are on the same footing as all the “Phoenix company” shonks; the law treats you no better than them. That’s why the law should butt out.

    Under a Libertarian scenario in which people could simply announce they would limit their liability, and write this into each and every contract, who would people want to do business with? Well, overwhelmingly, people like you Paddy, whose business has been around for a century and has earned a high reputation. You could demand, and receive, the limitation of liability which prospective clients would view in your case as an acceptable risk on their part. There’s no way they would grant the same to Phoenix the shonk. In short, you’d still enjoy limited liability, and you would be attracting an even higher share of the market, which in the absence of state privilege would value reputation more highly than it does today.

    Actually, now Paddy mentions Phoenix companies, it reminds me of an old Cockney bloke who lives down the road here. A bit of a rough diamond, he used to know Ronnie and Reggie Kray back in the 1960s in London, and has told me about how they used to set up what were known as “long firms”, which were sham companies designed to defraud suppliers. With digital tracking it’s a scam that can’t really work any more, but if the market only gave limited liability to businesses it trusted, they never would have gotten set up in the first place.

  3. Like Izen, I need to think about this. It’s not as money corrupts or anything?….Clink! Clink!….

  4. izen says:

    Thanks for the most thought provoking and interesting article I have read over the Easter break Ozboy.

    I always like the historical overview you give and the links and references are invariably interesting. I find myself agreeing with Tokyo Tom(?) at the mises thread about the damaging consequences of limited liability. The separation of responsibility from ownership and the way companies come to have asymmetric power compared with their consumers with governments over regulation so that they become rentier interests shaping state policy I find I largely agree with. The military-industrial complex being the obvious example.

    But I am not persuaded by his argument that limited Liability is an arbitrary fiat that would not exist with state judicial sanction. Neither am I persuaded that it can be duplicated with a case-by-case contract between market agents.
    Far more convincing is the analysis of prof Bainbridge(?) that starts with looking at what a limited company IS. What characteristics, components and processes define a Ltd company. A key feature is the separation of ownership (shareholder) and management. The management exercises an authority granted them by the shareholder which also absolves the shareholder from responsibility for any debts beyond their investment.
    At the same time the management are not held to be responsible individually for all debts, those are considered to be the responsibility of a new legal entity – the Ltd company.
    Prof Bainbridge argues for the reality of this entity, the Co Ltd, as the nexus of contracts and long term interactions between the various components of an private business. I think he makes a case for the inevitability of this company structure emerging as a most efficient way of developing trade and industry. In this view State legitimisation of the limited company model is a recognition of the inescapable.

    Perhaps I find this view of what a Ltd company is persuasive because it matches up with a subject with which I have being trying to get up to date. About a decade ago there was a lot of new work done in the field of group behavior and the emergence of complexity from simple interacting agents. The insight into ‘tit-for-tat’ as a stable, evolutionary successful strategy and the way quasi stable systems could form from the iterative interaction of many simple agents.

    Nowadays it seems to have become General systems theory, or the study of Complex adaptive systems. The limited company is a paradigm example of a complex adaptive system. From the interaction of the component agents with limited responsibilities emerges a complex, stable (!) structure that IS the contractual nexus of those involved. The various subunits (shareholder, managers, workers…) of the company can never assume the full responsibilities that the company may incur because the company has capabilities that transcend any individual. Complex adaptive systems that emerge from group dynamics have functional properties that are not inherent or predictable from the abilities (or rights and responsibilities!) of the agents involved.

    The functional utility of a Ltd company, and the way in which it enables ownership to be distanced, often by many institutional layers, from management makes it an inevitable development I suspect. If any state sanction were prevented, the market convenience of a default assumption of Ltd Co status, and a subsequent need for standardisation and regulation would create a quasi-governance system even without any state involvement. I would suggest that this can be observed with some of the international business systems that have emerged spontaneously in the global internet market. The long firm may be dead, but the ‘short firm’ is still around as anyone using web auction site may have discovered. The way big players get the reputation for avoiding this, as with ebay, indicates that it is not the hundred year old family business with a record of integrity that automatically wins the prize, but the new private gatekeeper who choose who to validate. How much accesses or trust, will the consumer have if the product is not on google, ebay amazon or itunes!

    Not quite the same issue as Ltd liability I know…
    The success of the Ltd model in the financial markets makes it impossible to uninvent. The utility of a default assumption/status of Ltd would favour it over a contract by contract individual judgement. Whether such institutions require MORE regulation, or less, seems to be a matter of contention. It is certain that the financial industry facours reduced regulation as is evident from the myriad of hedge funds, investment trusts, pension managers and banks registered in the States that regulate least. Turks and Cacos? Luxemberg? Belize’? Bahamas….

    However i am not convinced that the ‘moral hazard’ of the distancing of ownership and responsibility that emerges from the supra-personal rights/responsibilities assumed by a Ltd company is the source or cause of the periodic crisis and crashes of the markets. Other stuff I’ve been reading casts doubt on that hypothesis. At the risk of the resident State Collectivist being the only poster to respond to this excellent essay from Ozboy I may add more later…..

  5. izen says:

    The way in which our financial systems are organised is of far more import, it has a greater effect on our daily lives than something like abortion that affects a small percentage of half the population, yet it has provoked very little response.
    It confirms my suspicion that we tend to care about issues that embody some emotional satisfaction when we adopt a viewpoint, but avoid much more substantive issues where no emotional, moral or political stance provides self-definition. For a number of reasons the basic structure of private enterprise is not considered to be a subject amenable to rational discussion or moral judgement.
    Except perhaps amongst the minority of anti-capitalists who do derive some sense of value from opposition to the mainstream system.

    There may be a justification in this in the view that the emergence of private enterprise in its present form is an inevitable, contingent result of economics. It is not open to choice, but is the forced outcome of trade.

    There is another element to this connected with the repeated cycles of quasi-periodic crisis and collapse of the financial system. I have been reading a number of economic analysis that try to attribute the economic problems to some aspect of the system. Arguments rage over excessive, or inadequate regulation. But the book I found most provocative, and least reassuring, on this subject was Mandelbrot’s ‘The misbehaviour of markets’. This identifies no cause or reason for the volatility of markets or their tendency to fail. But it does identify the TYPE of behaviour that market prices follow. It is chaotic and fractal. The primary charteristics of systems that transcend individual actions or choice and are the result of supra-personal complex adaptive systems thT emerge when many agents interact.

    That implies that no amount of regulation, or its abolition will have much significant effect on the stability of markets. The book shows in detail the present methods of calculating the risk, return and volatility of stocks, shares and market prices are incapable of giving accurate results. Because the variance in the pricing data are NOT normally distributed, they don’t follow a Gaussian distribution conventional mathematical techniques fail to describe or predict the range of values that can arise in market movements. This is the result of very complex non-linear interactions dominating the economic system. The consequence of this is that conventionL wisdom about what will influence the way things work is almost certainly wrong. The sort of pattern of data seen in economic figures are typical of systems that do NOT behave in predictable, consistent and obvious ways. This may be in large part because the data is the result of many agents, Ltd companies, interacting iteratively. Our intuitive knowledge of how individuals interact in large groups is not applicable to Ltd companies.

    So I strongly doubt that the moral hazard of the divorce of responsibility from rights, or ownership from management that is a key feature of Ltd companies is a significant component in the periodic market collapses. The pattern of data from markets indicates that they follow much more complex behaviour which we have no chance of predicting, or controlling by the conventional and present means of regulating markets. Neither are the market failures a result of mistakes or errors, they are almost certainly inherent ‘features’ of the ‘normal’ functioning of the very complex system.

    The structure, functions and behaviour of Ltd companies is undoubtedly a key component in the complexity of the market system. But I doubt the issue of constrained liability is central, or a way of controlling the negative and damaging aspects of economic recessions, crisis and collapse.

    Predicting chaotic, non-linear systems with a multiplicity of forcings, beyond the extreme short-term, is every bit as futile an exercise as you describe; those who claim to be able to do so are invariably debunked by real-world outcomes. Your point is particularly well made, and well taken – Oz

  6. farmerbraun says:

    I think it is informative to see how prudent banks approach the lending of money to corporates. I can only tell of my own experience.
    I operate three companies,; one owns land; one processes primary products; and the third is a holding company. All three have common shareholding, and all three have borrowed for different reasons at different times.
    In every case the bank has required not just cross-guarantees from all other companies, along with the normal security by way of debenture, but also personal guarantees from the directors , who are also the shareholders. I am sure that , were any of the directors/shareholders assets held in trust , then those trusts would also be required to stand guarantor.
    Clearly the risks are well understood by those who choose to have skin in the game by virtue of lending to corporates. Contrast that state of knowledge with that of the investor who hands over his money to buy shares, the value of which, and the return from which , are essentially in the lap of the Gods. Why would you do it , unless you love gambling?
    Is it not simpler to acknowledge that share markets are driven by greed and ignorance? They are an efficient way of ensuring that fools and their money are soon parted.
    And share values and dividends from corporates are just a way of ensuring that the inevitable happens sooner rather than later.

    Disclosure Statement: FB has never voluntarily owned shares in any entity over which he did not have absolute and final control as well as majority ownership.

  7. Amanda says:

    FB: Your last sentence: Wow. I’m not that pristine, I’m afraid. DO run a cash economy, though : )

  8. izen says:

    “Predicting chaotic, non-linear systems with a multiplicity of forcings, beyond the extreme short-term, is every bit as futile an exercise as you describe; those who claim to be able to do so are invariably debunked by real-world outcomes. Your point is particularly well made, and well taken – Oz”

    Beyond Poincare, our modern understanding of fractal chaos comes from climate science. The Lorenz strange attractor and the ‘Butterfly Effect’ come from climate studies.

    This complexity may negate ‘standard’ mathematical prediction and causal attribution. But the patterns in the data can reveal causal links, just not the details of how they work. In economics the mantra is ‘Follow the money’. Historical data makes it clear that the money supply correlates with its value. Debasing the currency affects prices. In modern economies the government no longer dilutes the precious metal content of the coinage.

    Think of CO2 as quantitive easing!

    I know how to push your buttons almost as well as you know how to push mine – Oz 😆

  9. izen says:

    Just to make it explicit Ozboy,
    There is a non-trivial connection between the Ltd company and climate change.
    As your elegant historical precis indicated the Ltd co emerged from the industrial revolution. The need for large capital outlays on the new industrial technologies made possible by the new source of power, exceeding that of men and horses, from fossil fuels.

    Whether the origin of Ltd co is an arbitrary government fiat or the contingent emergence of a necessary system, it created a legal entity that could raise a debt beyond its responsibility to pay. That enabled the exploitation of the new resource of coal power, then the oil economy generating more resources. But with the side effect that it divided rights to resources and responsibility for paying for them from the individual. A company might create enormous wealth from manufacturing new products, but might also consume resources without any return when it fails with debts many multiples of its assets. Stockholders have rights to the former but no responsibility for the latter.

    The new industrial power source of coal and oil was enabled, or generated the Ltd company model of modern business. Which some identify as the catalyst for the instability of the markets, the moral hazard in the supra-individual contractual nexus grant legal status as an independent economic agent.
    The same technological and socio-economic advance also generated the CO2 that most informed sources agree is having, and will have, some destabilising effect on the climate.

    To stretch the metaphor far beyond its Young’s limit….
    The Ltd company has injected money/energy into the economic/climate systems in the form of debt/CO2. Complex chaotic systems respond in known ways to such changes. The attractor becomes larger and more volatile. Prices/temperatures will spread and rise!

    Well, as I said, the limited liability company enabled the industrialization on of the West; so if you’re pointing to companies as being responsible for increased greenhouse gas production, well, of course they were the vehicle. I don’t think they were the primary cause though; the desire of individuals for a better life for themselves and their families deserves that attribution. I don’t share your enthusiasm for the primacy of “self-organizing structures” as a pat explanation for human behaviour. That said, you can probably use such constructs as a descriptor, but only on a very large scale. It is to look at a forest without seeing any trees – Oz

  10. izen says:

    @- Ozboy
    “I don’t share your enthusiasm for the primacy of “self-organizing structures” as a pat explanation for human behaviour. That said, you can probably use such constructs as a descriptor, but only on a very large scale. It is to look at a forest without seeing any trees – Oz”

    I have no enthusiasm for complex adaptive systems being regarded as primary. In fact I ascribe to the principle that individuals are the primary, indeed the ONLY causal agency for human behaviour. This is based in the fact that only individuals have moral agency, or sentient intentionality.
    However I cannot see any strong rational argument for that principle, I hold it as a matter of ‘faith’ rather than as a validated fact.

    However your trees – forest comparison is revealing.
    A forest is ‘only’ a collection of individual trees, but forests have behaviours and capabilities that an individual tree does not. A forest defines its local ecology and often creates a local micro-climate. Only forests can have a forest fire with all the implications of fire resistant plants and tree spacing.
    There are qualitative as well as quantitative differences between a tree and a forest.

  11. farmerbraun says:

    This is marginally off topic. I posted a link to an article at The Slog at Thinkers International , and got an interesting response:
    Farmer Brown wrote:

    FB posted the original question : “So what now?” Here is what one person thinks
    is happening; anyone want to say he’s wrong?



    “I want to know what those allegedly in charge propose to do about the 93% of
    folks about to be wiped out…”

    Well FB, If a large % of the citizens are wiped out financially, and it does not
    really matter if it is only 30% or if it is 93%, there will be a break down of
    law and order. The US will not be far behind a EU economic collapse along with
    other countries. Do you think that a few hundred million Europeans or American
    citizens will be content to dine at soup kitchens? How do you think that the
    citizens will respond to tax payer funded lavish Las Vegas parties or CIA
    prostitute orgies in South America, while the citizens dine on stone soup
    flavored with old shoes?

    So how will those in charge respond? The first response is to “print” more money
    and then socialize the the debt. About 20% of the US citizens have already
    financially collapsed, given that that is about the real unemployment rate. Now
    if we socialize the debt then we can financially collapse most of the other
    citizens with inflation and massive debt that can never be repaid. Each US tax
    payer will incur about another $15,000 in debt just this year, that cannot be

    There will be lots of political distractions like discussions of “taxing the
    rich” at a minimum of 30%, giving the illusion that there is a solution, a 5
    billion increase in revenue against a 1.25 trillion dollar annual problem.

    So just quit spending right? Spending is now 50% greater than revenue. Massive
    unemployment will follow if the spending is brought in line with revenue,
    pushing unemployment rate to perhaps 50%.

    The elitists are aware that there is no solution acceptable to the citizens for
    the government instituted economic suicide. They will postpone the inevitable as
    long as possible, giving them time to prepare. Economic collapse = anarchy and
    it is no secret how governments respond to civil anarchy. The US seems to be
    preparing now for anarchy. Homeland security has purchased hundreds of millions
    of rounds of hollow point bullets, to be used domestically. Bullet proof check
    point stations are being purchased to control the flow of the populations, the
    UL 752 BR. And you probably heard already that the government is implementing a
    system to that will allow any mobile phone to be remotely disabled, necessary
    for the control of the citizen’s communication during the anarchy.

    Ed in Houston

  12. Luton Ian says:


    “The art of practical politics consists of keeping the electorate in a constant state of alarm, and hence clamorous to be lead. this is achieved by an endless string of hob[bes]goblins, all of them imagined”

    H. L. Mencken

    add that to Robert Higgs’ work “Crisis and the leviathan” – note the original Hobbesian reference there!

    In the Misesian analysis of the business cycle, the damage is done during the boom, the bust is the healthy process where the mal investments encouraged by credit expansion are liquidated, and the market re-establishes itself, bringing production into line with consumer’s highest ranked wants, and within the means of currently available savings.

    The bust should therefore be allowed to do its work without interference, and as with busts prior to 1929, it will be over in 12 to 18 months.

    If, instead, you view the bust as an evil to be avoided, and keep pumping in monetary expansion (governments have all loved monetary inflation, since before the time of John Law and his Mississippi company, it allows them to tax invisibly), then you waste even more resources on mal investments, and the system becomes even more unstable.

    Taken to its end point, the public seize their money back by raising prices ahead of money printing and the hyper inflation of the “crack up boom” destroys the money.

    There is a possible third way.

    If a boom is seen as a crisis to be exploited, then the government can use its basic threat of a Hobbesian war of all upon all, to assume the role of absolute ruler.

    Hence, we are threatened with dire consequences unless certain actions are taken, and certain freedoms are relinquished.

    Disaster scenario first, then demands (it is for our own good) are offered as the preventative measures

    Naturally, these include measures to prolong the crisis indefinitely, measures like bailouts which prevent unsound investments from being liquidated, and factors reassigned to more urgent uses, we also have all of the minimum wage laws, laws preventing wage cuts, and notice periods and redundancy payments, which inhibit people from being reassigned.

    It also includes printing yet more money, to tax us again and for the politicians to spend.

    The Irish government has managed to get a tax on residential property

    – supposedly to help pay the national debt, which is due to a property price crash, and the new tax will be capitalized and its discounted future value subtracted from the sale price of property, thus lowering prices even further, and adding to the problem it is meant to help cure…

    I only realized another implication a few days ago

    By pushing through the right to tax homes, it has de facto, declared itself as the ultimate owner of the homes!


    All land down here is owned, either freehold or leasehold, through the Torrens title system (created in South Australia in 1858 and now used through much of the Commonwealth, and several U.S. states. Ultimate title is vested in the Crown, but your use of the land is then subject only to local planning laws. So we’ve always paid a land tax down here, it’s unremarkable. It shouldn’t be such a big deal in Ireland either, except for the fact that it was introduced at such an economically delicate time (and so propitious for the Irish government). The state sees no limit on its own prerogative to impinge on the liberty of the citizen – all in the public’s best interest, you understand – Oz 👿

  13. Luton Ian says:

    A short summary of my previous comment:

    fear the government and its “recovery policies” far, far more than the bust.

    If government were really here to help, why do they tax the most vulnerable in society with their inflation?

    Why do they offer disaster scenarios, the preventative measures for which are pure theft and seizure of powers?

    gangsters, the lot of them.

  14. farmerbraun says:

    The Inevitable Calm Descends like a Fog.

    The subprime cancer has returned.
    The struggle to revive the credit engines has drawn the weaker elements into the room. Banks wish to lend more. While few players qualify for loan approval and partnership grants, the banks themselves have never been more insolvent. Without the FASB accounting largesse and generosity, all large US banks would be declared insolvent and prepared for liquidation proceedings. The junk bond warning lights are flashing. The movement to even remain standing still has come with greater risk assumed and embraced.

    The anti-USDollar forces gather strength.
    The emerging nations had been making numerous significant bilateral agreements a month ago. The Iran oil deals had dictated some degree of innovation in payment systems in response. The sanctions forced their hands. Additional sanctions like usage of SWIFT bank systems as a weapon, threatening usage in Europe, resulted in a flash point. The BRICS nations, led by China, appear to be on the verge of launching a rival SWIFT bank procedure that might be critical in trade settlement. It is likely to be outside the US$ setting.

    Prepare for the possibly sudden cardiac arrest event to the Petro-Dollar.
    In April 2010, a major conference took place in Abu Dhabi among Arab royals. They arrived in unmarked jets, over 200 strong in number. They struck important accords, including the reliance upon Russia and China in the security role for the protectorate. In essence, the Saudis worked to replace the United States in the protection racket that has endured since the 1973 embargo, manifested in trade surplus recycling, even as the Germans worked to establish the Eastern Alliance. If a new SWIFT system comes, then the foundation will be set to walk away slowly from the Petro-Dollar. Few see the pieces coming together. The impact on the USEconomy would be something between a wrecking ball and catastrophic.

    China prepares to wrest control of the USDollar, for the stacks of reserves held outside the US boundaries.
    This is history in the making. If a Chinese USDollar is launched, and trades independently of the domestic USDollar, then it is Third World curtain time for the United States. The practical effect would be rampant price inflation from a devalued domestic Dollar. It would be rampant shortages, since the restated Dollar would not be a favored piece of paper, not with tremendous economic weakness, absent industry, insolvent banks, ruined states, bond fraud charges in every nook & cranny, war cost impact, and the big storm cloud of the runaway USGovt deficits which could tack on another $200 billion in March. The path is clear, which begins with over 50% in external held debt, then lost sovereignty, then foreign voices influencing key decisions, then wearing down the muscle mass of tools like the IMF and World Bank, and finally lost control of the global reserve currency. Never in history has a nation had control of its currency wrested by another nation. The reaction process by foreign entities to the USFed and USDept Treasury abuses to the USDollar in hyper monetary inflation have wrought vengeance at worst and survival tactics at best.

    Germany has made preparations to leave the Euro currency union.
    The more accurate statement should be that Germany is preparing to take the Euro ball out of the park, to improve it, to sign new free agency team members, and to leave the Southern European nations to fend for themselves in a sandlot. The Latin remnant will be essentially bagholders left with the gristle, fat, and toxic matter of the Euro currency itself. What they hold onto will be devalued in a fast moving storm. The risk to Germany will be the opposite. They must sign up enough new trade partners so that whatever new currency (Nordic Euro, New Marc, Euro Mark) is not a victim of its own success. A fast rising new currency would inflict damage on the German export trade. Numerous financial safety nets have been created and loaded, designed to aid large German banks. Some might fail.

    Spain is on the verge of rejecting the austerity measures and maybe the Euro currency.
    Refusal to swallow the poison pill might have some benefits, like not pulling the rug from under the economy in vast spending cuts. But the reality bites hard, as the Spanish Govt Bond yield will revisit its old high levels. Funding problems will become acute. Think NO WAY OUT. The 23% jobless rate in Spain is written like an unusual figure in the West, but it equals the United States. The US simply has better liars in the economic trenches and more thorough press control. The strain in Spain will likely rain chaos on the bond plains, sufficient to cause their leaders to show disdain for remaining within the strained Euro domain.

    The USFed and Euro Central Bank are guilty of $5 trillion in paper binges in the last several months alone.
    The US Federal Reserve and the European Central Banks are operating like desperate siamese twins in the frantic rescue attempt to prevent a Western banking system collapse. ECB head Draghi might have expressed reluctance to trade in bad PIGS debt paper, but he has been the champion in EUR 3.1 trillion in window activity over just the last six months. Notice nothing is fixed despite the massive effort that has been no more than glorified paper mache application. It is a futile battle akin to the task of Sisyphus, who was forced to push a stone uphill, but every time he rested, it rolled back down the hill. Since the central bank paper merchants can only apply paper bandages to the paper wounds, the rotten limbs and appendages cannot distinguish between the old rot and the new fester that begins immediately upon treatment. Nothing is fixed, no remedy in place, none even attempted, nor is recognition of the problem part of the debate.

    The US financial markets have become an abandoned playground left to the High Frequency Trading freaks and their cadre of corrupt video game ilk.
    Volume is way down on the NYSE. Fund outflows are magnificent for stocks, as the public aint so dumb after all. ETF-type congames are losing their appeal. As the LTRO effect wanes from central bank paper shell games played at windows, the financial markets are experiencing a vast low pressure zone. The windows will eventually all be shattered.

    The US housing market is permanently destroyed.
    The Jackass has played word games since 2007 calling for a two-year decline. But my call has been repeated every year. Let the forecast be made in more plain terms. The US housing market will never come back. Its decline will go hand in hand with the deterioration of the USEconomy and lead the nation on the path to a USGovt debt default, accompanied by over 25 individual State defaults (called another name in legal parlance). The foreclosure parade is unending. The delinquencies mount unabated. The decline in home prices puts new household ranks into negative equity territory, exactly as Greenspan warned a year ago. What irony that the chief architect also acted as the Cassandra in warning. The banks refuse to liquidate, since doing so would expose their insolvent ruin and inflict even more deadly downdrafts in home prices, as well as expose the vast corruption among bonds, from false property titles to duplicate title usage to outright bond counterfeit, even to raids by past presidents.

    The hidden factor in the systemic ruin was the China card played in the last decade.
    The decision to send US factories to Asia, starting in the 1980 decade with Intel to the PacRim, followed by a climax to China in the 2010 decade, will serve as the basis of a chapter in history that led to the US systemic ruin. The gold card was played within the Most Favored Nation status deal granted in 1999, since the Rubin team ran out of US gold, ran out of European gold, and needed fresh gold meat. The Chinese committed their gold hoard and promised to recycle trade surplus, just like the Saudis did with oil money. The Gold Carry Trade began but did not end with Fort Knox raids. The carry trade is the singlemost financial factor that pushed the nation to ruin. Nothing backs the USGovt debts, not with an empty Fort Knox, never to be audited, the home of nerve gas storage if truth be told. The deep storage gold on the USGovt balance sheets does not fool many people anymore, the subject of ridicule. The US is insolvent without collateral, facing a margin call, soon to lose control over its own currency. American life savings are at risk, while pensions have been gutted, but the sirens are silenced.”

    So let’s talk calmly about this 🙂

    Gosh. Got a link? Oz

  15. farmerbraun says:

    Click to access Golden-Eye-of-The-Hurricane.pdf

    The Slog is also providing coverage.

    Ta – Oz

  16. izen says:

    Perhaps one of the scare tactics used by political movements to motivate compliance from the general population is the cry of imminent financial meltdown.
    I struggle to find a convincing example of such an event, at least since the second world war and the hyper-inflation in 1930s Germany.
    More recent societal collapses have more to do with ethnic conflict and resource wars than economic/monetary misbehaviour.

  17. Luton Ian says:

    It is always over printing. there is no other cause (ok, maybe military conquest and the conqueror declaring the old fiat currency to be worthless).

    A few recent examples, Argentina 2000, Zimbabwe 2008 (you’ve seen the $100G zim note I scanned?), Serbia…

    argentina is set for another melt down soon, have you seen the row over the argie government’s theft of a Spanish company’s stake in an oil company?

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