>Why should individuals not in general be liable for the choices they make?
To quote: "You're playing an excluded middle"
Investor invests in building. Lightning burns it down. Should that investor be legally liable for their entire worth, or just the value invested?
There is some medium ground between being liable without bound and not having any liability whatsoever. Limited Liability Corporations are just that - you can be held liable beyond the LLC if you do illegal things. But the limitation is to be liable for only the assets relevant to the business. This seems perfectly like a reasonable middle ground.
And it's listed often as one of the best inventions enabling a modern economy [2]."To the economist the
concept is essential, for without limited liability capital acquisition would be difficult indeed." [3] The historical evidence is that limited liability corporations enabled using excess capital far more efficiently than previously, which is why pretty much every country in the world has adopted it. It was clear early on that those countries not adopting it were falling behind economically.
>Even without limited liability, those with assets will assume risks if the potential returns are commensurate. Always have, always will.
Before limited liability, unlimited liability was the norm. If a merchant invested some of his profits in a ship, and the ship sank, then those with cargo on the ship could sue the merchant for all the merchant was worth, far surpassing the value the cargo was worth. This disincentivized merchants investing.
So yes, investors invest commensurate with the risk. If the risk goes up, they invest less. This was the norm. Excess capital was not being used for fear of losing not only that capital but all capital.
The Dutch invented limited liability in the 1600s in order to tap this unused capital. " The innovation in the case of the VOC was that the liability of not just the participanten but also of the bewindhebbers was limited to the paid-in capital (usually, bewindhebbers had unlimited liability). The VOC therefore was a limited liability company" [1]
This proved so successful economically that all neighboring nations adopted it soon thereafter, enabling a boom in shipping.
Now, back to mortgages, etc. Mortgages are lent by banks (more or less). Before limited liability, the bank was owned by one or more people, and they were liable for any business deals they got involved in that went wrong, and not just for the amount invested in the business, but for all their assets. If they lent a mortgage, and something was wrong, even by acts of God, then the bank and any shareholders could be sued for everything - their entire set of assets, their houses, and even their families houses.
If you don't see how this disincentivises investment or risk taking, then I don't know how else to explain it. I'm far more likely to invest $100 if I know I'll at most lost $100. If I'm possibly liable for $1,000,000, I'm not likely to ever invest that $100.
> Even without limited liability, those with assets will assume risks if the potential returns are commensurate. Always have, always will.
We agree on that. When the risks are tremendous, there will be less investment. And this is historical fact.
> Investor invests in building. Lightning burns it down.
False example. The owner of a warehouse (clearly what you mean even though you fail to specify) would in general not have been held liable for the value of others' goods that were lost. As no less than Rothbard pointed out, contracts alone could have excluded that liability, with no need for a corporate structure. Or the owner and/or investors could have purchased insurance, which also predates corporate structure by centuries. The introduction of a new legal entity, which has since been expanded to be equal (or superior to) natural persons under law, was unnecessary to secure the benefits of investment.
> Before limited liability, unlimited liability was the norm. If a merchant invested some of his profits in a ship, and the ship sank, then those with cargo on the ship could sue the merchant for all the merchant was worth, far surpassing the value the cargo was worth.
You just happened to pick an example that has been used to show why the corporate form was unnecessary.
"The corporate form emerged from economic arrangements that mirrored the concept of limited liability offered by modern corporations. One such arrangement was the commenda, a system developed in Eleventh Century Italy ... This arrangement allowed the passive partner to limit his or her liability of their investment"
Robert W. Hillman, Limited Liability in Historical Perspective
People were already investing, without corporations, in the eleventh century. As I said before, your claim was untrue.
> If I'm possibly liable for $1,000,000, I'm not likely to ever invest that $100.
That's why you would write a limitation into any contracts related to that investment, and/or buy insurance. Either could be overridden by acts of gross negligence (an illegal clause in a contract is void and insurance contracts have similar exceptions). If you're negligent or malicious, or authorize others to be negligent or malicious on your behalf, you damn well should be liable for a proportional share of damages which could exceed the value of investments. Hint: don't do things that harm other people and you'll have nothing to worry about. Did you look up "moral hazard" yet?
> People were already investing, without corporations, in the eleventh century. As I said before, your claim was untrue.
Yes, they did. But investing is not a binary, all or none event. You continually fail to address that less risk means more investment. You fail to address the fact, as quoted above, “ To the economist the concept is essential, for without limited liability capital acquisition would be difficult indeed.”
For someone claiming I fail to see a middle ground, you’re doing it repeatedly.
History shows limited liability spurred economic growth, which is why it’s used in likely every of the 200 plus countries. It’s why economists often list it as one of the greatest economic inventions of all time.
As to contracts, a LLC is a contract. As to gross negligence, it violates protections of the LLC. The contracts you argue for are a LLC.
Do you claim investment would be at the same level without limited liability?
> History shows limited liability spurred economic growth
Not even all forms of limited liability are equal, let alone all forms of corporate structure of which limited liability is only a part. To argue that all of the extensions to corporate personhood over the last 200 years are justified because of economic growth over the same time is not only to conflate different things but to confuse correlation with causation. That's where this discussion started - not with limited liability alone, but with corporate personhood in general, so I guess we can add the fallacy of composition to your trifecta. I refuse to engage with more such sophistry.
That's a good idea, since your contract argument simply reinvented limited liability. Also your black and white thinking is off: for example, I never argued about "all extensions are justified by economic growth," nor have I continually reduced positions to binary when they're clearly not. I think you're arguing against what you want me to write instead of what I've actually written.
To quote: "You're playing an excluded middle"
Investor invests in building. Lightning burns it down. Should that investor be legally liable for their entire worth, or just the value invested?
There is some medium ground between being liable without bound and not having any liability whatsoever. Limited Liability Corporations are just that - you can be held liable beyond the LLC if you do illegal things. But the limitation is to be liable for only the assets relevant to the business. This seems perfectly like a reasonable middle ground.
And it's listed often as one of the best inventions enabling a modern economy [2]."To the economist the concept is essential, for without limited liability capital acquisition would be difficult indeed." [3] The historical evidence is that limited liability corporations enabled using excess capital far more efficiently than previously, which is why pretty much every country in the world has adopted it. It was clear early on that those countries not adopting it were falling behind economically.
>Even without limited liability, those with assets will assume risks if the potential returns are commensurate. Always have, always will.
Before limited liability, unlimited liability was the norm. If a merchant invested some of his profits in a ship, and the ship sank, then those with cargo on the ship could sue the merchant for all the merchant was worth, far surpassing the value the cargo was worth. This disincentivized merchants investing.
So yes, investors invest commensurate with the risk. If the risk goes up, they invest less. This was the norm. Excess capital was not being used for fear of losing not only that capital but all capital.
The Dutch invented limited liability in the 1600s in order to tap this unused capital. " The innovation in the case of the VOC was that the liability of not just the participanten but also of the bewindhebbers was limited to the paid-in capital (usually, bewindhebbers had unlimited liability). The VOC therefore was a limited liability company" [1]
This proved so successful economically that all neighboring nations adopted it soon thereafter, enabling a boom in shipping.
Now, back to mortgages, etc. Mortgages are lent by banks (more or less). Before limited liability, the bank was owned by one or more people, and they were liable for any business deals they got involved in that went wrong, and not just for the amount invested in the business, but for all their assets. If they lent a mortgage, and something was wrong, even by acts of God, then the bank and any shareholders could be sued for everything - their entire set of assets, their houses, and even their families houses.
If you don't see how this disincentivises investment or risk taking, then I don't know how else to explain it. I'm far more likely to invest $100 if I know I'll at most lost $100. If I'm possibly liable for $1,000,000, I'm not likely to ever invest that $100.
> Even without limited liability, those with assets will assume risks if the potential returns are commensurate. Always have, always will.
We agree on that. When the risks are tremendous, there will be less investment. And this is historical fact.
[1] https://en.wikipedia.org/wiki/Dutch_East_India_Company
[2] https://www.bbc.com/news/business-40674240
[3] https://www.bus.umich.edu/KresgeLibrary/resources/abla/abld_...
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