Corporations | Have Your Cake—and Let Someone Else Pay for It

(Original publication date:  April 2007 (ePoet))

Most modern business transactions involve at least one corporation, limited liability company or similar entity. When originally invented, the corporation was permitted only in very special circumstances, because its inherent and enormous dangers were regarded with awe and trepidation. Now, the corporation is omnipresent in our society, but its dangers—still fully present—have been forgotten.

Both the intent and the effect of a corporation is, above all else, to allow participants in an activity to enjoy the fruits of the activity without having to bear the full costs associated with it, specifically, liabilities incurred in the process of conducting the activity. But the costs don’t just disappear. Somebody does bear those costs: everyone else. The people around the corporation—contractors, tort victims, etc.—bear the burdens that would otherwise fall on those who are protected by the corporate shield.

It’s hard to name other instances in our society in which we allow people to have their cake and eat it too, or, phrased more accurately, to have their cake while someone else pays for it. But this is exactly the purpose and result of transacting business through a corporation. It’s equally hard to articulate why we would want a system in which one person gains what others purchase.

Nonetheless, the corporation actually institutionalizes the very externality and free-rider problems that economists teach us to avoid, the same “moral hazards” that legal scholars urge us to minimize.

From both an economic perspective and a moral perspective, the rise of the corporation will go down as one of the most destructive legal developments in recent centuries. Our descendants will reflect upon the many laudable legal advances of the late second and early third millennia, such as the abolition of slavery and universal suffrage, and they will wonder how, amidst such progress, the corporation pandemic was allowed to run unchecked for more than a century while the earth and its inhabitants were abused, contaminated, depleted and destroyed with the impunity afforded by a profoundly bad idea.

Apologists for the corporation will point out that the modern corporation has some desirable qualities, such as shared ownership and unlimited longevity. But these virtues are completely severable from and can be accomplished without limiting liability and are therefore no justification for such limitation.

Others will argue that limitation of liability encourages people to pursue activities they would otherwise not pursue. To which argument the rebuttal is simply, “Exactly!”