Dear Franklin,
I don't know if you've read Murray Rothbard's defense of Contractual
Limited Liability or not. But it disputes your argument that it's the
state that grants the limited liability. It also disputes that limited
liability is a bad thing. I would hardly call Gary North or Murray
Rothbard corporatists.
Best regards,
Michael Denny
Rothbard's Defense of Contractual Limited Liability
by Gary North
One of the advantages of reading either Mises or Rothbard is that each
man presents his case for liberty axiomatically. Each begins with a few
premises and thereby develops an entire system of social thought from
these premises.
Mises begins with the axiom of action: men choose. Rothbard begins with
self-ownership. We read in For a New Liberty:
The libertarian creed can now be summed up as (1) the absolute right
of every man to the ownership of his own body; (2) the equally absolute
right to own and therefore to control the material resources he has
found and transformed; and (3) therefore, the absolute right to exchange
or give away the ownership to such titles to whoever is willing to
exchange or receive them. As we have seen, each of these steps involves
property rights, but even if we call step (1) "personal" rights, we
shall see that problems about "personal liberty" inextricably involve
the rights of material property or free exchange. Or, briefly, the
rights of personal liberty and "freedom of enterprise" almost invariably
intertwine and cannot really be separated.
Much as I appreciate Mises, I believe that Rothbard begins where all
economic reasoning should begin: the question of ownership. I agree with
Tom Bethell's observation in his book, The Noblest Triumph: Adam Smith
made a strategic intellectual error when he began with the division of
labor rather than the central issue of private property. This error set
back the intellectual case for free markets by almost two centuries.
I began my 1987 book, Inherit the Earth, with a chapter on ownership. My
debate with Rothbard begins here. I see God as the original owner, with
property being delegated to man (chapter 2).
We both agree that ownership is the central issue. So, when I come to a
debate over this or that policy issue regarding economics, I always
begin here: "Who is the owner?" Similarly, when I come to a judicial
issue involving conflict, I ask: "Who is the victim?" The underlying
principle of biblical justice is this: victim's rights. I wrote a book
with this title.
THE RIGHT OF CONTRACT
As we have seen, Rothbard affirmed "the absolute right to exchange or
give away the ownership to such titles to whoever is willing to exchange
or receive them." This is the foundation of the right of contract in his
system.
He placed no limits on these rights, just so long as the exchange does
not involve aggression against anyone else. He then makes this
observation:
While opposing any and all private or group aggression against the
rights of person and property, the libertarian sees that throughout
history and into the present day, there has been one central, dominant,
and overriding aggressor upon all of these rights: the State.
He saw nothing good coming out of the State. I mean nothing. If any
policy or practice had its origin in the State, Rothbard opposed it,
both axiomatically and operationally. This is what is unique about his
social and ethical thought. For him, this is an axiom: State = bad, both
morally and operationally.
For Rothbard, the right of contract means immunity from the State. It
also means immunity from violent action by others. If two people decide
to make an exchange in terms of a set of non-violent principles, no
third party has the authority to interfere. The terms of exchange are
established by the contracting parties, not by a third party. This is
fundamental in Rothbard's defense of contract. In The Ethics of Liberty,
he writes:
In contemplating the law of a free society, therefore, the
libertarian must look at people as acting within a general framework of
absolute property rights and of the conditions of the world around them
at any given time. In any exchange, any contract, that they make, they
believe that they will be better off from making the exchange. Hence all
of these contracts are "productive" in making them, at least
prospectively, better off. And, of course, all of these voluntary
contracts are legitimate and licit in the free society.
There is no legal appeal beyond these contracting parties. What the
doctrine of the divine right of kings attributed uniquely to kings, and
what the divine right of the British Parliament in 1688-89 substituted
for the divine right of kings, Rothbard assigns to the non-coercive
individual, and by implication, to voluntary contracts made by
autonomous individuals.
LIMITED LIABILITY
In Rothbard's system, individuals possess the legal privilege of
specifying their mutual obligations. There is no higher appeal beyond
them. His discussion of limited-liability laws rests on this moral and
judicial foundation.
Rothbard denied that limited liability is a grant of privilege by the
State. He wrote the following in Power and Market (1970), which had
originally been in the original manuscript of Man, Economy, and 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.
The State possesses no original ownership in Rothbard's system. It does
not even possess delegated ownership.
Any argument that challenges the legal right of contract between
autonomous individuals must of necessity invoke a higher law than the
right of self-ownership and a higher court than the mutually contracting
parties. For Rothbard, there is no higher law or higher court.
If limited liability contracts are prohibited by law, then there is a
major limitation on the right of voluntary contract.
In 1970, R. J. Rushdoony published Politics of Guilt and Pity. The book
is generally as good as the title, and the title is terrific. In a
chapter titled "Limited Liability and Unlimited Money," he argued that
the nineteenth-century corporation was a creation of the State. He then
went on to argue that paper money is limited-liability money (p. 260).
It was a clever argument. It persuaded me for over a decade. But then I
recognized something that I had not seen before. The historical model
for the limited-liability corporation was the church. That forced me to
re-think his argument.
TO JOIN A CHURCH
Let us say that I want to join a church. As a future member of this
local church, I wish to avoid legal liability for anything the elders do
that might inflict damage on someone else in the name of the church. For
example, if they decide to excommunicate someone from membership, and
that person then sues the church in a civil court, I do not want to have
all of my assets at risk in that court. This is not a hypothetical
situation. Churches do get sued by excommunicants. This undermines the
authority of churches. The state's authorities are sometimes happy to do
this. It increases the power of the state.
The church can specify this arrangement in writing before anyone joins.
Members agree to this as a condition of joining. This contract - called
a church covenant - can also specify that the church's judicial
decisions not be matters of future lawsuits in a civil court.
What libertarian principle is violated here? What Christian principle is
violated here?
Over time, civil law in the West formally recognized the existence of an
implicit agreement with respect to the legal immunity of church members.
The state does not create this legal immunity. On the contrary, the
state has recognized a previously existing legal immunity. To argue that
the state should no longer recognize this immunity in the name of a
universal principle of full liability without any exceptions is to grant
enormous power to the state to undermine both custom and contract.
Today, investors in corporations are governed by commercial
limited-liability law. Critics of limited-liability law argue that this
is a grant of privilege by the state. But would they also argue that a
comparable grant of immunity from lawsuit for church members is a
state-granted privilege? The existence of such immunity long preceded
the modern nation-state. Conclusion: it is not a grant of privilege.
In the late nineteenth century, Anglo-American civil law began to
acknowledge a right of contract that had always governed churches. In
doing so, the state made possible the modern economy, which is marked,
above all, by increasing per capita investment.
It is not random that the most rapid period of economic growth in
mankind's history took place from about 1875 to 1914 - the era of the
modern limited-liability corporation. It took place because the state,
at long last, extended the same right of contract to businessmen that
churches had enjoyed from the beginning. Rothbard wrote in Man, Economy,
and State (1962), "The great advantage of the joint-stock company is
that it provides a more ready channel for new investments of saved
capital" (p. 369).
A GRANT OF PRIVILEGE?
The modern nation-state has asserted an original authority over the
granting of limited liability. We should not take this assertion
seriously. What the modern State does is to restrict by law the right of
contract. This means that a group of people, acting in the name of the
divine right of the State, assert the monopoly privilege of limited
liability. Then they sell the right of incorporation or grant it to
their favorites.
The Anglo-American nation-state ever since the days of the Tudor kings
has claimed the monopoly privilege to grant such a right of contract.
That is, it claims an original privilege, which it can then ladle out to
cronies and purchasers of privilege.
The king was said to be above the civil law. Only God is superior to the
king's authority, the people were told. This is the judicial meaning of
"the divine right of kings": no higher earthly court of appeal. The king
therefore claimed limited liability as a monopoly. That claim ended in
Anglo-American law no later than 1688: the Glorious Revolution.
Parliament wanted in on the deal. Parliament's claim ended in 1783 in
the North American colonies. Then Congress wanted in on the deal. Then
the U.S. Supreme Court. And so it goes. The state wants its divine
rights: complete limited liability except from God, who is thought to be
on an extended vacation.
This state's perennial argument in favor of state sovereignty over the
right of contractual limitations of liability should not be taken at
face value. It is in fact a highly self-serving view of the power of the
state.
Henry VIII stole monastic property in order to enhance the revenue of
the state, but he and his successors were not so arrogant as to argue
that church members were legally liable for whatever church officers did
as representatives of the church. Even today, politicians will not touch
this third rail.
If civil courts can lawfully impose complete liability on investors in
corporations, then it in principle has the right to impose the same
liability on church members. To join a church is to open your wallet to
those who would take the church to court. If this principle were
enforced by the state, it would have the effect of forcing the church
underground.
If a law banning the right of contract regarding limited liability were
enforced by the state, it would have a similar effect on the capital
markets. Overnight, American capital would disappear. Call it "green
flight." There would be a collapse of the stock market dreamed of only
by the most wild-eyed newsletter publishers - my kind of guys.
Let me assure you, I could write a direct-mail ad piece that would make
me rich beyond the dreams of avarice if American politicians ever began
considering the adoption of a view of strict liability of contracts. I
would show subscribers where to invest their money off-shore after
selling their shares of American-based corporations. Any nation that
made it clear that limited contractual liability is available to all
comers would gain a windfall the likes of which CNBC commentators only
dream about.
This law would de-capitalize America overnight. Americans would be not
just become impoverished. The resulting contraction of the division of
labor would probably lead to starvation. There would be a run on the
banks that even Alan Greenspan, acting as the nation's equivalent of
Donna Reed in It's a Wonderful Life, could not overcome.
STRICT LIABILITY OUTSIDE OF CONTRACTS
In For a New Liberty, Rothbard has a section against the Friedmanites'
view of pollution. Friedman would allow companies to pollute property
not owned by them under a system of legal immunities granted by the
State. Rothbard regarded this as a violation of property rights.
The Friedmanites concede the existence of air pollution but propose
to meet it, not by a defense of property rights, but rather by a
supposedly utilitarian "cost-benefit" calculation by government, which
will then make and enforce a "social decision" on how much pollution to
allow. This decision would then be enforced either by licensing a given
amount of pollution (the granting of "pollution rights"), by a graded
scale of taxes against it, or by the taxpayers paying firms not to
pollute. Not only would these proposals grant an enormous amount of
bureaucratic power to government in the name of safeguarding the "free
market"; they would continue to override property rights in the name of
a collective decision enforced by the State. This is far from any
genuine "free market," and reveals that, as in many other economic
areas, it is impossible to really defend freedom and the free market
without insisting on defending the rights of private property.
Rothbard was not here discussing limited-liability corporations. He was
arguing that Friedman's view of the limited liability of some polluters
to pollute at some bureaucrat-established price is a denial of the right
of contract and its protection. This context has nothing to do with the
right of individuals - buyers and sellers - to work out mutually
beneficial arrangements on their own, without interference from the
state.
Rothbard was arguing against Milton Friedman and all those economists
who would allow pollution at some government- established price. He was
not speaking of mutually contracted arrangements but rather a form of
violence against third parties, whose property rights have been
violated. It was in this context - not in the context of the
limited-liability corporation - that he quoted Robert Poole:
"A libertarian society would be a full-liability society where
everyone is fully responsible for his actions and any harmful
consequences they might cause."
CONCLUSION
Rothard's doctrine of the right of individuals to make contracts that
limit their personal liability points to the legitimacy of the modern
corporation. Rothbard was clear: Any attempt to undermine this right is
an infringement on contract.
But, long before the limited-liability corporation, there was a
limited-liability church. I want to go to join a church without worrying
about what the U.S. Supreme Court determines regarding my liability as a
member. A 5 to 4 decision by this most monopolistic of all American
institutions does not in fact constitute the really supreme court.
September 28, 2005
Gary North [send him mail] is the author of Mises on Money. Visit
http://www.garynorth.com. He is also the author of a free 17-volume
series, An Economic Commentary on the Bible.
Copyright (c) 2005 LewRockwell.com