Why Corporations are Irresponsible

It seems quite simple, really, and it has nothing to do with capitalism and everything to do with bad lawmaking and government privilege.

The problem is limited liability.

Now, there is nothing wrong with bondholders having limited liability, and even some stockholders possessing the privilege. This is well within the natural right of contract law, assuming the owners have agreed to such an arrangement.

What is not within the right of contract law, however, is the ability of multiple individuals to get together and write a contract that absolves ALL parties from liability. Liability may be divided equally, among several parties, or placed on one individual, but it cannot be contracted away entirely, in the same way that I cannot write a contract for myself that absolves me of responsibility for a crime that I will commit. Individuals cannot form a ‘corporate entity’ and place liability solely on it. Unfortunately, this is how the law currently treats corporations.

The way I see it, it doesn’t matter how many people are liable, as long as someone is held liable. That person will then have the incentive to make sure his business operates morally and responsibly (both socially and financially). If he does not, he and his business will lose everything.

In such a case, contracts would be written so as to give those with greater liability (whether it be a sole proprietor or some form of partnership) greater ownership, as no one who is liable will want to forfeit his control (and his fate) to an individual who is not held liable.

Instead, the corporations of today are amorphous collectivist entities in which executives are able to gamble away shareholder money and still make off with millions of dollars, without anyone ever paying the price for it. Incentives are distorted even further by the notion of “too big to fail” and the assurance of government bailouts, which transfer the wealth of ordinary citizens to these failing giants through taxation and Federal Reserve-funded inflation. In a world without this type of limited liability, I wager we would have far more responsible corporate decision making, sounder management, and perhaps even a larger number of smaller, more specialized and efficient organizations.

In my view, this single lapse of government is one of the biggest flaws in today’s economic system, and is at the root of many injustices and instabilities in the market. It is not a flaw of free market capitalism, but of law. Natural moral law is the foundation of good economics, and when these laws are violated, we pay the price. You want a real regulatory overhaul? Eliminate limited liability, end the bubble-blowing Federal Reserve System, and free the market.