Corporations

[Skooma Reborn]

This was a topic I originally made from my older account, but I want to reintroduce the subject again since there are a lot of new people since then and I like getting peoples opinions on this subject...........

I think since most people here dislike corporations, it would be good to defend them. Even though todays corporations do receive privileged benefits from the State, the corporation as an entity does not except to a relatively small extent. People that think the corporation is given special privileges need to show two things. First, that it is corporations and only corporations who receive the relevant "privilege." Second, that these features cannot be acquired by a contractual agreement.

1. First is what the critics call entity status. Corporations are given an unfair advantage in that they can sue and be sued as a unit. It can also hold a legal title to property despite changes in the ranks of its shareholders.

However, this argument fails since entity status is an optional feature to all unincorporated businesses, including partnerships, limited partnerships, and trusts. Being a legal entity is not a feature unique to corporations. Also, entity status for corporations is used for convenience. They can use courts without writing the name of every shareholder into their papers. Even if this were considered a privilege, it is neutralized by the fact that being sued under a single name is not advantageous to the corporation. Rather, it is a measure of fairness to their opponents.

2. Second is the complaint of perpetual duration. This is pretty self explanatory.

This argument does not work since all that perpetual duration means is that the articles of incorporation don't need to be renewed. This however certainly doesn't mean the corporation will continue in business forever.

Also, this is not an advantage for corporations since partners can make their enterprise immortal by adopting a continuity agreement specifying that the firm won't be liquidated when one of the partners dies or withdraws.

3. Finally, we come to the most controversial issue. Limited liability. Again, everyone already knows the argument so there is no point in reiterating.

Limited liability is actually an implied contract between corporate owners and their creditors. To quote Berle: "A clause could be put in every contract by which the apposite party (creditor) limited his right of recovery to the common fund: the incorporation act may fairly be construed as legislating into all corporate contracts an implied cause and effect."

Also, limited liability does not necessarily discriminate against creditors to the benefit of shareholders. Creditors cannot be compelled to accept a limited liability arrangement. In fact, they often insist that one or more shareholders become personal sureties for the debt. But most importantly comes limited liability in respect to torts. It seems to many that limited liability for torts is a government privilege which shields shareholders from liability. While a semi-legitimate argument against corporations, it isn't as strong as people claim. It certainly does not prove that such a privilege is what allows corporations to exist.

The fact is that the rules of tort liability originated centuries ago when English courts established the respondeat superior. Let the master be answerable for the acts of his servant. This principle is based on the premise that the servant commits the tort while engaged in some activity on behalf of his master, and that servant is personally hired, instructed, and supervised by the master. This meant the courts gave the victim someone solvent to sue for damages.

Liability should only apply to those shareholders who play an active role in managing an enterprise or in selecting and supervising its employees. The liability for inactive shareholders should be the same as that of limited partners. That is, limited to the amount invested. The law should be that whoever controls the business, regardless of its legal form, should be personally liable. So in partnerships, liability falls on the general partners. In corporations, it falls on the officers (owner-investors or hired managers). This would lead to more careful supervision of personnel.

But anyways, partnerships can limit liability by forming a close corporation. They can then discard nearly every other corporate feature. So again, this is not a feature unique to large corporations.

The most reasonable belief is that corporations will merely change their form with the adaptation of a free market. They will not disappear.

For more info, see In Defense of the Corporation By Robert Hessen, and The Modern Corporation and Private Property by Adolf Berle. If I were not lazy, I would have cited some of my paragraphs as they are very similar to the ones in those two books I cited. However, I am lazy. Finally, I am not familiar with any recent changes in corporate law. So it is possible that one of my points could be "obsolete." But I am pretty sure that is not the case. I could be wrong though. I have not even mentioned the economic advantages for a corporation. Maybe that discussion will come later.

[RGacky3]

Don't Ban him .... common, let me deal with this.


However, this argument fails since entity status is an optional feature to all unincorporated businesses, including partnerships, limited partnerships, and trusts. Being a legal entity is not a feature unique to corporations. Also, entity status for corporations is used for convenience. They can use courts without writing the name of every shareholder into their papers. Even if this were considered a privilege, it is neutralized by the fact that being sued under a single name is not advantageous to the corporation. Rather, it is a measure of fairness to their opponents.


Entity status is not the worst part, its personhood status, with full personhood rights.


This argument does not work since all that perpetual duration means is that the articles of incorporation don't need to be renewed. This however certainly doesn't mean the corporation will continue in business forever.

Also, this is not an advantage for corporations since partners can make their enterprise immortal by adopting a continuity agreement specifying that the firm won't be liquidated when one of the partners dies or withdraws.


This is'nt an argument against corporations its against corporations having personhood rights.


Limited liability is actually an implied contract between corporate owners and their creditors. To quote Berle: "A clause could be put in every contract by which the apposite party (creditor) limited his right of recovery to the common fund: the incorporation act may fairly be construed as legislating into all corporate contracts an implied cause and effect."


Its not an implied contract, its a legal contract in encorporation.


Also, limited liability does not necessarily discriminate against creditors to the benefit of shareholders. Creditors cannot be compelled to accept a limited liability arrangement. In fact, they often insist that one or more shareholders become personal sureties for the debt. But most importantly comes limited liability in respect to torts. It seems to many that limited liability for torts is a government privilege which shields shareholders from liability. While a semi-legitimate argument against corporations, it isn't as strong as people claim. It certainly does not prove that such a privilege is what allows corporations to exist.


Its more the ability the absolve the executives, because the executives get to act AS bosses without being owners.

it also means the OWNERS of the company have very very little stake in the company, and the bosses act in behalf of the people who have the smallest stake (just a very liquid stock).


But anyways, partnerships can limit liability by forming a close corporation. They can then discard nearly every other corporate feature. So again, this is not a feature unique to large corporations.


In which case the owners are the bosses.


The most reasonable belief is that corporations will merely change their form with the adaptation of a free market. They will not disappear.


Corporations are a STATE ENTITY, if you are a libertarian you should oppose them ideologically, if you care about economics you should oppose them for the internal contradictions they create.

Now let me propose what these problems really are.

1. Agency.
This is not a problem all the time, however it is when you get really really large, you essencially have many shareholders with little power, investing/speculating on a company, all the manegement is internal, i.e. its the CEO picking the board and the board electing the CEO with some rubber stamping from major shareholders and the rest.

This gives you all types of incentive problems, also keep in mind many people on the board are also on other boards, and may be executives in other companies, so their stake in the company is even smaller

One such problem is the propensity to extract wealth, and inflate short term profits in order to extract more wealth (to the detriment of the long term and the other stakeholders, like workers.) Also to take excessive risks, since you get the benefits but can externalize the downside

2. Liquidity of shareholders as opposed to other stakeholders.

Shareholders are extremely liquid, I own stocks and probably own them for a couple days at most, anyone can pick up a phone and sell them. So what I care about is capital gains, I want to sell higher than what I buy for. But bosses are legally required to act in the interests of the most liquid and most short term stakeholders, i.e. the shareholders, and no at all to less liquid and more interested stakeholders like workers and the community.

THen what you get is short term profits which lead to long term problems.

lAvn6omrb5g

A major socialist policy suggestion would be keep corporations, but if you want state sactioned privileges you now are accountable to the workers and the community.

3. Dispersion of risk

When you start a corporation you can disperse the risk by selling shares, which is fine, but it leads to all sorts of other problems, one being conflicts of interests, say workers have pensions with shares of the company, when it comes to picking a wage or layoffs they have conflicts of interest, normally they would'nt want to get a lower wage, but they also want a higher profit, there are tons of other things.

Like excessive risk taking considering most of the downside would be an externality, if you loose other people loose their shares, and you can put off the externality, if you win, Huge Bonus. I guess this goes with agency.

4. Personhood

This is mostly political, and you know the arguments.

[Skooma Reborn]

I appreciate the response RGacky. I have not yet come to a final conclusion concerning my opinion on corporations, which is why I like to discuss the issue. I will say however that just from my time at my universities business college, my opinion of them has gone down.


Entity status is not the worst part, its personhood status, with full personhood rights.

Fair enough. But some people point to entity status as an argument against corporations.


This is'nt an argument against corporations its against corporations having personhood rights.

So if there is going to be capitalism, would you not be against the existence of corporations provided they were not granted corporate person hood?


Its not an implied contract, its a legal contract in encorporation.

Well the point is limited liability is completely contractual. Just like someone can enter into a limited partnership.


Its more the ability the absolve the executives, because the executives get to act AS bosses without being owners.

it also means the OWNERS of the company have very very little stake in the company, and the bosses act in behalf of the people who have the smallest stake (just a very liquid stock).

His is a well known problem with corporations, but to me it is just a disadvantage. Partnerships, sole proprietorship's, and corporations all have their own advantages and disadvantages. To me this is just a disadvantage of the corporation, but it still seems necessary since otherwise I don't see how a corporation would function.


Corporations are a STATE ENTITY, if you are a libertarian you should oppose them ideologically, if you care about economics you should oppose them for the internal contradictions they create.

I am not a libertarian and I don't care if they are a "State entity." I should not have posted this part since I initially made this post back in my libertarian days, but my beliefs have changed. I support corporations because they can contribute massively to an economy. The amount of funds they can raise in a very short time should not be overlooked. There are some projects that can only be completed by a government or a corporation.

1. Agency.

Yes I agree that this is a problem in the sense that it is a disadvantage.



2. Liquidity of shareholders as opposed to other stakeholders.

I agree that they are also not looking out for the community or the workers. I don't think that should be their concern anyways. Their impact on the community should be regulated by the government. But they are also not specifically looking at people who buy and sell shares on a daily bases when they make their decisions. Most of the time it is just about the bottom line.

3. Dispersion of risk

I don't see the problem with the worker example. If the workers are getting underpaid, they won't have to worry about demanding higher wages. If they are being paid the market rate or above, then demanding a higher wage could have some drawbacks.

As for taking a massive risk, as long as it does not involve harming the environment or the economy than I don't see the big deal. Also, after making enough bad decisions the Executives will lose their jobs. It does happen.

My concern with corporations is their ability to influence the government and how influential playing politics has become. That is where I think they can do the most damage.

[RGacky3]

So if there is going to be capitalism, would you not be against the existence of corporations provided they were not granted corporate person hood?


Its funny, Marx was actually FOR corporations, whereas Adams was not, Marx thought that encorporation would hasten the growth of capitalism and thus its collapse, Adams was more of a purist, Marx recognized the evolutionary nature of the economy.

So I don'nt know, thats a strange question. If your a socialist I don't think it should matter, your fighting against the whole system, if your a pure-capitalist you should be against it since its a government internvention.

I mean capitalism as is cannot function without corporations.


Well the point is limited liability is completely contractual. Just like someone can enter into a limited partnership.


Its a state entity though, its a contract between certain people and the state.


His is a well known problem with corporations, but to me it is just a disadvantage. Partnerships, sole proprietorship's, and corporations all have their own advantages and disadvantages. To me this is just a disadvantage of the corporation, but it still seems necessary since otherwise I don't see how a corporation would function.

Its not about advantage and disadvantage, its all about for whome, and for what purpose?

You can't really say advantage or disadvantage, because different people involved have different interests.

Its an internal contradiction. In otherwords it works in the sense that the share holders get a return, and the executives get a bonus, and large projects get done, but in all that you have external contradictions that cause major major externalities which end up causing crisis.


I support corporations because they can contribute massively to an economy. The amount of funds they can raise in a very short time should not be overlooked. There are some projects that can only be completed by a government or a corporation.


Absolutely, I mean if you get rif of the corporation now capitalism can't work, thats why your first question is a little bit strange, get rid of the corporation capitalism goes down with it, the non-corporate buisiness structure juts can't handle the extreme scope and need for growth of modern capitalism, you'd need to replace capitalism with socialism or something else.


I agree that they are also not looking out for the community or the workers. I don't think that should be their concern anyways. Their impact on the community should be regulated by the government. But they are also not specifically looking at people who buy and sell shares on a daily bases when they make their decisions. Most of the time it is just about the bottom line.

they kind of are, because if one quarter is bad, shares get sold and you have a spiral effect, so EACH quarter has to be better.

Also of coarse they "should'nt" look out for the community and workers, and "should" look out for the owners, I mean thats just arbitrary, you can say either way.

But the point is when you have that model it leads to all sorts of problems.

There is no reason why the responsibility should NOT be to the workers and community as opposed to the shareholder, again, its a state entity.


I don't see the problem with the worker example. If the workers are getting underpaid, they won't have to worry about demanding higher wages. If they are being paid the market rate or above, then demanding a higher wage could have some drawbacks.

There are major problems with that analysis, and labor economists have pointed it out all the time, basically the individual worker is always at a huge disadvantage when dealing with compensation with the owner, especially if its a huge corporation.

Also the idea of a market rate for wages is flawed, labor markets DO NOT function like capital markets or commodity (marxist sense of the word) markets, there are major differences, that is one HUGE flaw in neo-classical economics, they use the similar market models for labor as they do goods and services, its a huge mistake.


As for taking a massive risk, as long as it does not involve harming the environment or the economy than I don't see the big deal. Also, after making enough bad decisions the Executives will lose their jobs. It does happen.

Except it ALWAYS invovles harming the enviroment and the economy, especially the economy.

Sure executives lose their jobs in extreme cases, but most of the time its not a big deal, because they are on other boards and get a huge golden parachute.


My concern with corporations is their ability to influence the government and how influential playing politics has become. That is where I think they can do the most damage.

Thats inevitable in capitalism.