Limited Liability and Libertarianism: A Thought Experiement

What follows will be a thought experiment on whether limited liability can be principally incorporated into libertarian theory or if it is antagonistic to the libertarian notions of restitution. I have read nothing regarding this matter—or at least nothing I can remember—and this is purely my own extrapolation from my understanding of libertarian theory and, therefore, may be rife with errors already addressed in libertarian literature regarding limited liability. Regardless, whether what follows is wrong, unoriginal, or unimportant, these are my own views ignorant of, and unreconciled with, contemporary libertarian theory regarding limited liability. I also have a limited understanding of the legal principles surrounding limited liability and corporations as it currently exists, but hopefully that shouldn’t hamper my foregoing analysis. Some of the terms in the post might be used inconsistently or incorrectly, but hopefully I have avoided most of these kinds of errors.

NOTE: Following the posting of this analysis, I plan to respond to my own analysis in an edit of this post after having read some conceptions of the compatibility of the limited liability principle (or any responses this post might garner). I think this is a useful exercise to test one’s freestanding knowledge of libertarian theory and the ability to extrapolate it to complex topics. If there are responses, some useful responses would be directing me to sources regarding the topic or commenting with your own freestanding thoughts of libertarian theory as applied to limited liability; I think it has the potential for a good discussion.

First, let’s begin with the basics. A group of individuals come together and agree to pool their assets together to create a corporate body, stipulating among themselves the assets they agreed to pool constitute the boundaries of their required obligation to the corporate body. Should one of the members of the body cause demonstrable harm through its business dealings to an outside individual, they further agree that this individual should not be liable for damages, resulting from lawsuit, greater than the share of assets they contributed to the corporate body. These owners may end up losing all the assets they contributed to the arrangement, but have agreed this is the extent of their liability. So far, so good; a voluntary arrangement has been formed among capable parties causing no physical invasions of another’s person or property.

But, how can this principle be applied to individuals outside of the arrangement? Indeed prima facie if someone outside this agreement is harmed by one of these individuals, the demands of restitution would suggest they are entitled to full restitution and are not bound by the limits imposed by the agreement that had formed the corporate body and established the limited liability regarding the stakeholders.

In practice, there are multiple ways in which a consumer coming into contact with the corporation might assume the obligation to honor the principle of limited liability should they ever be harmed by any of the parties to the corporate body. First, visiting a physical location owned by the corporate body might entail agreeing to be allowed to sue the corporation only to the extent of the pooled assets of the stakeholders as condition of admittance to the property. Thus, consumers would be bound to respect this agreement in any lawsuit they bring up against the corporate body given that they voluntarily assented to the limited liability. Similarly, customers of online establishments may be enticed to digitally sign an agreement stipulating limited liability of the corporate body should any of its products, the website, or its agents cause harm to the consumer in the course of its relations; access to the website would be limited to those who agree to this limited liability stipulation. Thirdly, if a corporate body delegates agents (employees) to carry out its functions—whether in a physical location owned by the corporation or owned by the consumer, i.e. traveling salesmen—it may require the signing of the arrangement detailing limited liability in order to continue doing business with its agents. Thus, the consumer dealing with agents of the corporate body would only be capable of suing for restitution to this limited extent, given the voluntary assent of the consumer to accept this principle in order to continue relations with the agent.

Now, what about cases in which no explicit or tacit agreement has been reached regarding limited liability? For the sake of example, we can use fracking to illustrate how it might work. Let’s say the agents of Frack Corp. engage in some fracking, causing the death of Farmer Joe’s cattle when they eat radioactive grass that had been contaminated by the runoff of the fracturing process. Farmer Joe has never visited the property of Frack Corp., never visited their website, and never done business with any of its agents; hence, he has never agreed to abide by the limited liability charter created by the stakeholders of Frack Corp. In this case, the requirements of restitution entail Farmer Joe can sue both the corporate body as well as the agents that engaged in the behavior causing harm to farmer Joe. Depending on the exact situation, the owners may be responsible for restitution from their own assets depending on their complicity in the harmful behavior. This would put agents in a precarious position if their employment duties could entail a significant risk of being subject to lawsuit for property violations. However, the agent could negotiate a contract with their employer requiring the owner to be responsible for restitution of the agent if they sued by a third party in the carrying out of the agent’s duties as prescribed by the corporate body—the principal. Regardless, in cases such as this, where a third party outside of the agreement is harmed by actions undertaken by the corporate body, liability greater than the value of the corporation’s assets could be spilled over to agents and or principals responsible for physical harms caused by their actions, just as in cases involving non-corporate actors who have not come to any kind of agreement.

In summary, it seems that the way corporations operate in a libertarian society would be fundamentally the same as they operate in the current system, save that corporations would likely be more explicit with consumers that doing business with them entails to agreeing to limited liability should they be harmed by the corporate body or its agents. Where it would deviate the most is that in harms caused to third parties not privy to any agreement with the corporate body regarding limited liability, corporations and the parties responsible for demonstrable harms, potentially including the owners, would be responsible for full restitution of the injured party, which would not be limited by the extent of the pooled assets of the stakeholders of the corporation.

Walter Block on Slavery: Another View

Many moons ago now, Walter Block was summarily condemned by the president of the university he teaches for — Loyola University New Orleans, a Jesuit university — named Rev. Kevin Wm. Wildes. In his criticism of Dr. Block, he mentions Walter Block’s purported criticism of slavery as “not so bad— you pick cotton and sing songs,” which was quoted in a New York Times article about Rand Paul. He claims that this is tantamount to “hinting to endorse slavery enforced against someone’s free will,” which would then “contradict [Dr. Block’s] basic libertarian principles.”

Many libertarians rightly noted that this quote was taken out of context in the original NYT article, that likely Rev. Wildes never read the source of the quote himself to ascertain any context, and that the quote was not an endorsement of, nor did it “hint” at, endorsement of slavery. In the original piece, Dr. Block was writing in hyperbole in order to draw attention to what was wrong with slavery; namely, it was a forced association between individuals. In the original piece he talked about slavery noting various innocuous features of slavery, which include picking cotton, singing songs, and eating gruel. These are not why slavery is wrong. It is not wrong because of what minimal benefits slaves receive, i.e. food, shelter, or singing while they work; it is wrong because a slave does not get to choose his or her employer or the nature of his or her work. They are bought and sold without the consent of the individual slave. This is a fundamental denial of a slave’s freedom of association.

To put it another way, let’s assume a relationship in which a slave gets better working conditions. They have a beneficent master who is kind to his slaves, feeds the slaves the same food he eats, dresses the slaves in nice clothing, etc. Do we not still condemn this relationship just as much as the one where a slave is fed gruel, beaten, and barely dressed? Of course. In fact, the hypothetical I just presented is the same kind of argument some Southern slave-owners were making leading up to the Civil War; that most slaves were treated kindly and liked their masters. Yet, historians understand that regardless of the truth of this argument of “beneficence”, the institution of slavery is still inherently wrong.

And this brings me to the neglected point in the discussion. Dr. Block’s line of thinking, that most people can recognize slavery is wrong because of its denial of the principle of freedom of association, is not quite true, particularly of his detractors. What do I mean, exactly? Most of his criticizers tend to be of the liberal, socialist, communist, or other leftist ideologies. Hence, it is probably true for them that slaves being fed gruel or forced to live in poor housing is just as wrong as the forced nature of the slave relationship. These individuals are of the idea that every individual is entitled to a minimum wage, adequate housing, food, and so on. This is why things like sweat shops are looked at as inherently “evil”, exploitative, and are akin to slave labor. They subscribe to the idea that if an individual has no other options than to take a job in a sweat shop they are being exploited; whether they chose this or not is of little consequence to them.

In this light, it is easy to see how even if Dr. Block’s detractors understood his argument on slavery, they would likely still disagree with him.

Unfortunate Economics

In a recent article on The Bleeding Heart Libertarian, Jason Brennan talks about the problem behavioral economics poses to apriorism in Austrian economic theory. He says that Austrian economics, advanced by “hack” scholars such as Ludwig von Mises and Murray Rothbard, bases its theory on the idea that all individuals act rationally. By this, we can assume him to mean that every individual acts purposefully and always makes the best choice given competing ends. Defenders of this Austrian apriorism are, to Jason Brennan, extremely naïve to believe this since behavioral economics data sets empirically refute the Austrian conception of man and choice over and over. For him, anyone with half a brain can figure out that humans don’t make choices that make them the best off economically, viz. they do not make value-maximizing choices. Brennan’s doctrine and perspectives on Mises and Rothbard are extremely convoluted and let’s see why.

Acting rational (redundant), from an outsider’s or non-Austrian perspective, can be defined as choosing the appropriate means to reach a particular end. There are two ways in which we usually characterize human action as irrational. First we may say that the means to achieve an end is irrational; we believe that either better means could be used to reach an end or the means chosen are utterly incomprehensible to the ends chosen. In essence, by saying this we believe that the only way man can act rationally is by choosing the absolute best means suited to reaching a particular end; nothing short of this will do. Second, we may say that the ends trying to be obtained are irrational; we believe the ends an individual has chosen are detrimental to their own well-being and is a foolish pursuit. No doubt, Brennan is focusing on the former.

As Jeffrey Herbener stated in his own refutation of Brennan, “Knowledge about human action learned by experience is contingent on the person, place, time, and circumstances of the action.” The problem characteristic of Brennan’s approach is behavioral economics attempts to define the circumstances surrounding a decision, a monumental task in the first place. Again, how can one truly know all the relevant circumstances surrounding a decision that would enable us to make a truly rational decision? Further, behavioral economics is a foolish pursuit because of one simple fact: value is subjective. Making the attempt (or lack of attempt) to quantify the subjective values an individual (let alone a group of individuals) holds is futile. These are not cardinal values; there is no way to measure them. Hence behavioral economics is going to make questionable conclusions because you have to arbitrarily quantify subjective values to even begin to create the framework for deciding whether someone’s behavior actually maximized value or not.

Moving on, we have to realize what is meant by purposeful human action, or “value-maximizing” human action. Since values are subjective, what is a value-maximizing choice for one individual may be different for another. The choice to go to McDonald’s and eat a double cheeseburger may be value maximizing for one, while staying home and cooking their own cheeseburger on the grill may be value maximizing for another. The science of human action says a priori when a human being makes a choice, he is displaying his preferences, and this action necessarily is a value-maximizing choice.

So many intangible factors go into deciding preferences; just because, given the choice, someone chooses the $7 an hour burger flipping job over the $9 an hour one does not mean that they acted irrationally. The fact that they chose the $7 an hour one means that some other tangible or intangible factors went into their demonstrated preference of the lower paying burger flipping job. Maybe their conscience won’t let them take a $9 an hour job when they know their marginal productivity of labor is only $8. Or maybe they like the number 7. Or maybe they asked their wife what job to choose. Or maybe they wanted to stick it to Austrian economists and try to prove that humans do not act rationally so they deliberately chose the lower paying job. Or maybe they went eeny, meeny, miny, moe and picked the $7 an hour job.

How could we possibly quantify these subjective factors? We cannot. Thus, we must understand that human action is demonstrated preference; a priori, choosing one thing over another means one values the thing they chose over the thing they did not choose, regardless of what we think about the prudence of their decision-making or the way they go about valuing things. That is what is truly meant by acting rational and maximizing values. It is not choosing the thing which will bring someone the greatest $ value, the greatest long-run happiness, the least amount of harm, or any other criterion that a behavioral economist will try to present as “rational.”

As Jeffrey Herbener said, “Whether a person chooses “rationally” in the neoclassical sense or “less than rationally” in the behavioral sense, in a human action the person chooses. Choice is a universal feature of human action. It is no mark against the Misesian conception of economic theory that it does not address the contingent features of human action. That’s the task of economic history.” Our opinion of what ends are appropriate or what means are appropriate to reach a particular end is subjective. To that extent, rationality, in the sense Jason Brennan means, is subjective. Just because the thief chooses to obtain an income by stealing rather than earning it doesn’t mean their decision is irrational; our opinion of rationality depends on our point of view. Similarly, just because the thief chose to steal the $100 cathode ray television rather than the $1000 3-D television does not mean their decision is irrational. Just as when we exchange one item for another it necessarily means that we value the item we receive greater than the item we give up in return, when we choose one course of action over another necessarily means that we believe our course of action is suited to the end we are aiming for. The end itself may not even be totally understood or acknowledged by the individual striving toward it, but it exists nonetheless.

If you want to continue defining rationality as your own subjective opinions on what is rational and what is not, go ahead; but don’t try to present it as scientific or empirical when you are doing nothing more that deifying your own values and doing not much more than palm-reading to try to quantify someone else’s subjective values. As we can see, rationality in the context of Austrian economics does not mean whether we think a means is conducive to a desired ends, or the layman’s definition of rationality. They are not the same thing and cannot be used interchangeably. Nor can value-maximizing be defined as “choosing the thing which will bring someone the greatest $ value, the greatest long-run happiness, the least amount of harm, or any other criterion that a behavioral economist will try to present as ‘rational,'” because that is not what value-maximizing means in the cintext of Austrian economics.

PS. After I wrote this, I found a more eloquent version of what I said on Mises.org by Michael Rozeff, so check that out too.

Non-Aggression Under Fire

A (somewhat) dated article I came upon at Libertarianism.org, by Matt Zwolinski, entitled “Six Reasons Libertarians Should reject the non-aggression principle,” gave a couple critiques which endeavored to show the problems inherent in the oft-praised libertarian non-aggression principle. I only wish to cover one of these points briefly because it paints a somewhat distorted picture of the non-aggression principle, and there are easy ways to rectify the non-aggression principle with his critiques. From the article:

No Prohibition of Fraud – Libertarians usually say that violence may legitimately be used to prevent either force or fraud. But according to NAP, the only legitimate use of force is to prevent or punish the initiatory use of physical violence by others. And fraud is not physical violence. If I tell you that the painting you want to buy is a genuine Renoir, and it’s not, I have not physically aggressed against you. But if you buy it, find out it’s a fake, and then send the police (or your protective agency) over to my house to get your money back, then you are aggressing against me. So not only does a prohibition on fraud not follow from the NAP, it is not even compatible with it, since the use of force to prohibit fraud itself constitutes the initiation of physical violence.

This post is superficially plausible, however it is unknowingly setting up a straw man with regard to the non-aggression principle. First, the author’s characterization of fraud as non-violent is actually untrue. Fraud can follow from the non-aggression principle. This is because fraud is a theft. It is theft because even though the individual handing over the money for the “Renoir” is doing so seemingly on his own volition, he is handing over more money than he otherwise would have had he known the painting was not a real Renoir. To get a sense of the theft, we must think about the transaction without any fraud. In the fraudulent transaction, A buys alleged Renoir from B for $3 million. If there had been no fraud, and A tried to get $3 million for his painting, the only way he could have got $3 million from B is by coercion. B may have only been willing to pay $100, or maybe he wouldn’t have even been willing to purchase it at all. The theft, then, is the discrepancy between the price he would have paid if he knew it wasn’t a Renoir versus the price he paid when he was defrauded.

Even though we may not see an act of physical force being used, rest assured there is a coercion occurring in the theft as surely as if the thief took the $3 million from his home in the middle of the night. A theft is necessarily an act of aggression because it is, as Murray Rothbard would characterize it, an “implicit theft.” The act of aggression is therefore not an explicit act of aggression but an implicit one.

With the same underlying principle in mind as the Renoir example, Rothbard states:

Fraudulent adulteration is equally implicit theft. If Smith pays $1000 and receives from Jones not a specified make of car but an older and poorer car, this too is implicit theft: once again, someone’s property has been appropriated in a contract, without the other person’s property being turned over to him as agreed.

So, when B pays $3 million for a Renoir and receive back a “Person A” painting instead, it is implicit theft, or appropriation of someone else’s property; there need not be explicit theft to constitute aggression.

Further, we may see the aggression to the extent that A’s possession of my $3 million dollars means that B is no longer able to use the $3 million to whatever purpose B may choose now that A has expropriated my property and is in possession of it. This clearly constitutes aggression as the $3 million is still rightfully B’s since A had to obtain it by fraud.

In this light, the non-aggression principle can still stand.

Bloomberg Columnists Claim Libertarians Are the New Communists

I can’t make this stuff up: A couple of ill-informed Bloomberg columnists published an article online that made the absurd claim that “Libertarians Are the New Communists.” How exactly did they manage to take libertarianism, the philosophy that asserts the non-aggression principle as its central tenet, and equate it with communism, the philosophy that denies individuals the right to property, from which all other rights come from? By not reading any actual libertarian literature, no doubt.

Anytime an article mentions Ted Cruz as a premier libertarian and mentions Koch, Ron Paul, Grover Norquist, and other highly public figures in similar veins, you can pretty much chalk the article up as being filled with nonsensical and imbecilic content. It is destined to be the same kind of fear-mongering that Chris Christie did that has no real criticism other than asserting that it’s dangerous, somehow. Nonetheless, I think it useful to point out a few things. The article asserts:

By radical libertarianism, we mean the ideology that holds that individual liberty trumps all other values…Radical libertarianism assumes that humans are wired only to be selfish, when in fact cooperation is the height of human evolution.

Well, right off the bat we can see the only thing the authors might have read that is at all libertarian is maybe the Ayn Rand novel, Atlas Shrugged. Even if they did manage to read it, it’s clear their reading comprehension skills are abominably lacking. One of the most basic libertarian assumptions regarding civilization is that self-interest is the driving force that ensures cooperation. As Adam Smith said almost 250 years ago, “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.” A libertarian recognizes that self-interest is the cornerstone of cooperation which, in turn, is the cornerstone of civilization. Any number of other libertarian thinkers would say the same thing, which the authors would know if they bothered to do any research. If they wanted to make the assertion that self-interest does not ensure cooperation, that would still be an argument doomed to fail, but at least it would be a legitimate attempt and not a straw man.

Next, the authors state “[Libertarianism] assumes that societies are efficient mechanisms requiring no rules or enforcers.” That’s funny, because for there to be society, it presumes the necessity of rules and enforcement. The authors make the mistake in assuming that less government or no government means no rules and no enforcement. On the contrary, libertarians advocate for less government because it eliminates the arbitrary laws and enforcement that consider non-violent actions to be punishable offences, which tend to cause a deterioration of civil society and peaceful cooperation. Likewise, they believe that government has a greater comparative advantage in denying rights to civilians than in protecting the rights of civilians, ie. in fostering chaos rather than in promoting order. (In societies with a government, rights may be more properly called privileges since the state tends to revoke these privileges whenever it drums up real or imagined crises that “require” such measures).

What libertarianism does argue is that societies are governed by certain rules and mechanisms that lead to more efficient outcomes than when a government intervenes and creates arbitrary mechanisms that distort the natural processes encouraging order.

“Communism failed because it kept citizens from taking responsibility for governing themselves…so does radical libertarianism.” Again, the authors make absurd generalizations that have no basis in the philosophy of libertarianism. If the authors believed that libertarianism was a philosophy based in individualism like they say, than they are essentially arguing that individualism involves not taking responsibility for self-government, a self-contradictory statement if there ever was one.

I guess libertarians should take it as a complement that so many individuals want to attack the philosophy, since it represents a threat to the status quo of the welfare-warfare state which so many individuals have an emotional and financial attachment to. But in all seriousness, the thought that individuals can write such thoughtless pieces and get published is beyond me.