From: pcollac@pyrnova.mis.pyramid.com (Paul Collacchi)
Newsgroups: sci.econ
Subject: Re: Corporations (was Re: Libertarians live in Virtual Reality)
Date: 20 Aug 92 20:51:16 GMT
Reply-To: pcollac@pyrnova.mis.pyramid.com (Paul Collacchi)
Distribution: usa
Organization: Pyramid Technologies, Mt. View, California.

In article <1992Aug19.230241.4339@panix.com>, jk@panix.com (Jim Kalb) writes:
|> pcollac@pyrnova.mis.pyramid.com (Paul Collacchi) writes:
|> 
|> > 
|> >Given the existence of partnerships, why the innovation?  Obviously to
|> >provide some form of (financial) protection beyond that afforded by
|> >partnerships.  Why? Protection from what?   Obviously the big
|> >consequences of big actions.  The corporate form  then allowed for
|> >"shielded bigness" which meant (potentially) big damage without
|> >(full)liability for the consequences. 
|> 
|> Not protection "from what", but protection for whom.  Limited liability
|> makes it safe for someone who won't know much about or have much control
|> over what goes on from day to day to invest in a business without having
|> to worry........

Exactly.  They're complementary.  My protecting you presupposes that
there is a real threat, otherwise why protect?

The original post dealt with government as a solution to abusive behavior
of 'corporations'. (Sloppy language, I admit, but bear with me. )  The
suggestions were that government regulation was or wasn't necessary or
effective, and could or couldn't be privatized effectly.  One writer
suggested that government intervention distorted the natural market
feedback loop that might already exist and which would eventually and
'naturally' correct bad business practices. (Not necessarily true, but
and not the point of this post.)

I added the point that to deal with the "problem", individual misbehavior,
at "that level", government or private watchdog, was fine, but consider
changing the feedback loops at a structural level so that the misdeeds
of individuals are (more) likely to haunt them directly.  For example, people
tend not to exit moving airplanes.  The feedback is pretty direct and
quite inhibitive.  The government doesn't have to create a huge 
bureacracy to prevent the negative effects of gravity.
Gravity is not my rule.  Its not "good" or "bad",it's simply what's so
and it causes us to modify our behaviour.  Even complete assholes don't
try to defraud gravity.

A consequence of incorporation was that it directed litigants to
go after the fictitious entity, the corporation, rather than persons 
who performed the alleged dirty deeds.  This is a deflection of direct
feedback.  I'm not evaluating its goodness, I'm just pointing out that
it's so.
 
Under unlimited liability, a certain segment of corporate participants, 
"owners" are more protected from the consequences of their actions, which
are to choose to give their money to (potentially) unscrupulous persons and
to not supervise same.  As you correctly point out, it encourages the 
participation of someone who "won't know much about or have much control
over what goes on..."  It doesn't support the mindful, engaged
participation of owners who might otherwise stand to lose their shirts. 
Losing your shirt, like gravity, wakes you up real quickly in my
opinion.  The game is to wake ourselves up, to act responsibly, not to give 
ourselves excuses for going to sleep.  Let the owners police their own
corporations.
 
|> >Secondly, damages are usually assessed against a corporation as an 
|> >entity, but not as a 'personal' claim against individual  persons 
|> >(owners, officers, directors, employees).
|> 
|> Claimants go for the deep pocket.  Suppose IBM were reestablished as a
|> general partnership of its equitable owners instead of a corporation. 
|> Claimants would have no greater claim against the employees of the
|> partnership than they do now against the employees of the corporation. 
|> So why would the change make them more likely to go against employees?
|> 
|

If there were no fictitious 'catch-all' entities, one would seek damages
from specific, personal entities.  Again, the effect -- direct feedback 
loops for the participants.  What you do comes back to you not the
corporation.

(I didn' mean to confuse by implying that partnerships are "good".
I simply meant to point out that corporations are a legal innovation which
adds feeback distortions beyond whatever is present in partnerships. It
may be necessary to rework partnerships as well.)

|> 
|> If nothing else changed in the legal system, there would be many fewer
|> large business enterprises, and those that did exist would be owned by a
|> few very large individual investors rather than by a large number of
|> shareholders.  Also, businesses would be much more highly leveraged than
|> they are today because of the difficulty of raising equity capital.
|>

Bigness would diminish, I agree, unless it was capable of sustaining its
level of risk, i.e. acting responsibly.  Maybe certain big things are just
too risky.  Maybe we ought to not undertake them.
 
|> Of course, if limited liability were abolished for corporations (and, I
|> suppose, for limited partnerships) I would expect there to be
|> compensating legal changes.  For example, tort liability rules would
|> likely be tightened up since people would no longer feel that it would
|> be big impersonal corporations that would pay the price for looser
|> rules.
|>
 
Exactly.  One of the things I stated in a much earlier post, was that
the huge, bizarre damage suits and awards are (somehow) related to the
legal structure of limited liability and incorporation. Its a two-way
street. People who enter into relationship with corporations are responsible
for having made that choice.  No-one forced it onto them.  I'm not
against corporations per se.  I simply pointed out that the rules are stacked
in such a way that people are held less accountable for their actions.
The legal contrivance, 'corporation'(and partnership apparently),*IS*
such a stacking of the rule system.  I somehow feel that big damage
suits are a systemic attempt to compensate for the stacking of the 
rules which would go away when the distortion was eliminated.
Maybe not.

Paul Collacchi
Newsgroups: sci.econ