Over the fold, another extract from my book-in-progress, Economics in Two Lessons. Encouraging comments appreciated, constructive criticism even more so.
Predistribution and profits
As we’ve seen in previous sections, the social constructions of property rights and institutions surrounding employment makes a big difference to the determination of wages and working conditions. These social constructions affect ‘predistribution’, the distribution of income and wealth that arises before the effects of taxes and public expenditure are taken into account.
Predistribution is equally relevant to the other big source of personal income: profit derived from private businesses and corporations. Without legal structures designed specifically to protect businesses from the risks of failure, profits would be far less secure, and the difficulty of establishing and running a business much greater. Corporate profits are not a natural outcome of a market society, but the product of specific structures of property rights introduced to promote corporate enterprise.
The risks of running a business in the 18th century, and well into the 19th, were substantial and personal. There was no such thing as bankruptcy: a business failure meant debtors prison, where debtors could be held until they had worked off their debt via labor or secured outside funds to pay the balance.
After a brief and disastrous experiment in the early years of the 18th century (the South Sea Bubble), joint stock companies were also viewed with grave suspicion.
The prevailing view was Quoted in John Poynder, Literary Extracts (1844), vol. 1, p. 268. [1]
Corporations have neither bodies to be punished, nor souls to be condemned; they therefore do as they like.
This is often misquoted as
“Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked?
Adam Smith was similarly scathing, though with more of a focus on the principal-agent problem
The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own…. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.
Exceptions were made only for specially authorised quasi-governmental ventures like the East India Company, focused on foreign trade. In general, limited liability companies were not permitted in Britain or most other countries. The partners in a business were jointly liable for all its debts.
These same rules applied in Britain’s American colonies and continued to prevail in the United States until the middle of the 19th century. The introduction of personal bankruptcy laws put an end to debtors prison, greatly reducing the risks of running a business. The creation of the limited liability company was an even more radical change.
These changes faced vigorous resistance from advocates of the free market. David Moss, in When All Else Fails, his brilliant history of government as the ultimate risk manager, describes how the advocates of unlimited personal responsibility for debt were overwhelmed by the needs of business in an industrial economy. The introduction of bankruptcy and limited liability laws took much of the risk out of starting and operating a business.
By contrast, in Economics in One Lesson, Hazlitt doesn’t mention limited liability or personal bankruptcy and seems to assume (like most defenders of the market) that these are a natural feature of market societies. More theoretically inclined propertarians have continued to debate the legitimacy of bankruptcy and limited liability laws, without reaching a conclusion.
This debate over whether bankruptcy and corporation laws are consistent with freedom of contract is really beside the point. The distribution of income and wealth is radically changed both by the existence of these institutions and by the details of their design. In particular, the massive accumulations of personal wealth made possible by capital gains from share ownership would simply not exist. Perhaps there would be comparable accumulations of wealth derived in some other way, but the owners of that wealth would be different people.
A crucial policy question, therefore, is whether current laws and policies relating to corporate bankruptcy and limited liability have promoted the growth of inequality and contributed to the weak and crisis-ridden economy that has characterised the 20th 21st century. The combination of these factors has produced absolute stagnation or decline in living standards for much of the US population and relative decline for all but the top few per cent.
There can be little doubt that this is the case. As recently as the 1970s, a corporate bankruptcy was the last resort for insolvent companies, typically leading to the liquidation of the company in question. As well as being a financial disaster, and a source of shame for all those involved. For this reason, nearly all major companies sought to maintain an investment-grade credit rating, indicating a judgement by ratings agencies that bankruptcy was, at most, a fairly remote possibility.
Since that time, bankruptcy has become a routine financial operation, used to avoid inconvenient liabilities like pension obligations to workers and the costs of cleaning up mine sites, among many others. The crucial innovation was “Chapter 11”, introduced in the Bankruptcy Reform Act of 1978.
The intended effect of Chapter 11 was that companies could reorganise themselves while going through bankruptcy, and re-emerge as going concerns. The (presumably) unintended effect was that corporate managers ceased to be scared of bankruptcy. This was reflected in the spectacular growth of the market for ‘junk bonds’, that is, securities with a high rate of interest reflecting a substantial probability of default. Once the preserve of fly-by-night operations, junk bonds (more politely called ‘high-yield’) became a standard source of finance even for companies in the S&P 500.
At the same time, legislative changes and the growth of global capital markets greatly enhanced the benefits of corporate structures, while eliminating many of the associated costs and limitations. At the bottom end of the scale, the ‘close corporation’ with only a handful of shareholders, became the standard method of organising a small business. This process was aided by a long-series of pro-corporate legislative changes and court decisions (notably in Delaware, which has long led the way in this process, and where vast numbers of US companies are incorporated). At the top end, the rise of global financial markets from the 1970s onwards allowed the creation of corporate structures of vast complexity, headquartered in tax havens and organised to resist scrutiny of any kind.
At the behest of these corporations, governments have negotiated agreements supposedly designed to ensure that corporate profits are not taxed twice in different jurisdictions. In reality, using a combination of complex corporate structures and governments (notably including those of Ireland and Luxembourg) eager to facilitate tax avoidance in return for a small slice of the proceeds, the effect has been to ensure that most global corporate profits are not taxed even once in the countries where they are earned.
What can be done to redress the balance that has been tipped so blatantly in favor of corporations. The obvious starting point is transparency. Havens of corporate secrecy, from Caribbean islands to US states like Delaware must be made to reveal he true ownership of corporations, in the same way that tax havens like Switzerland, used mostly by wealthy individuals, have been forced to disclose the ownership of previously secret accounts.
The use of complex corporate structures to avoid tax is a much more difficult problem to tackle. Some measures are being taken to attack what is called “Base Erosion and Profit Shifting’, but past experience suggests that slow-moving processes of this kind will at best keep pace with the development of new forms of avoidance and evasion. It’s necessary to re-examine the whole structure of global taxation agreements. Instead of focusing on the need to avoid taxing corporate profits twice, the central objective should be to ensure that they are taxed at least once, in the place where they are actually generated.
More generally, though, the idea that corporations are a natural part of the economic order, with all the human rights of individuals, and none of the obligations needs to be challenged. Limited liability corporations are creations of public policy, useful to the extent that they promote the efficient use of capital but dangerous to the extent that they facilitate gross inequalities of income and opportunity.
{ 87 comments }
James 05.13.16 at 8:49 am
Great summary, but I think it deserves more focus on the rise of LLC as pass-through entity for tax purposes where owners get all the benefits of limited liability, but none of the double taxation of the corporate structure. Here is one of the first hits on a google search: http://taxfoundation.org/article/america-s-shrinking-corporate-sector
As such, by focusing mainly on the corporate entity form, I think you are going to quickly date the message of the book, when, in fact, modern structures include an array of corporate and non-corporate entities.
I also think that more should be said about corporate raiders and the private equity industry and the effect on corporate governance. Some of the shadier practices of the private equity industry came to light when Mitt Romney was running for president and the public learned that one of the best ways to make money would be to find a company, load it up with debt for special dividends to the private equity owners then push it through bankruptcy to kick out union contracts and pensions and try to start again. There was also a bit of a splash when this happened to Hostess, the maker of Twinkies, was forced into bankruptcy by the private equity owner to get rid of the union contracts.
Speaking of secrecy, check out the response of the governors of Delaware, Wyoming, and Nevada to the Panama Papers case. These onshore tax havens are some of the worse offenders. I have a co-worker in the Cayman Islands setting up structures through the US all the time for just these reasons.
Peter T 05.13.16 at 11:08 am
Would it help to illustrate the way the LLC made possible very large production? Before the LLC, large-scale production was the domain of government (state factories) or firms very closely tied to government – not just the East India Company, but the major contractors like Carron or the military provisioning firms. Outside these, there were very few firms of any size at all. Quite simply, if one were to run a railroad, no single person or group of persons would be able to raise the capital as a partnership.
Robert 05.13.16 at 11:21 am
John,
Have you read Robert Reich’s new book, Saving Capitalism: For the many, not the few? I have a review. It has similar themes, although yours sounds more analytical and more to my taste.
que_es 05.13.16 at 12:17 pm
First, I’m no economist but I’ve always found it fascinating and telling that taxation and the dispursement of tax receipts are generally described in the economic literature as “redistribution.†Built into this rhetoric is the notion that who owns what at any given point—a product of our “social constructions†of contrived property rights and clunky economic systems—is correct, even natural. Taxation is thus presumptively taking from those who properly own wealth and giving it to those who don’t. I know there’s nothing new in that thinking. But now JQ uses a term with which I’m unfamiliar in this context—predistribution. Wikipedia (might be wrong) tells me the word was coined by Jacob Hacker, whose popular work I generally admire. But I think that term actually reinforces the notion that our socially constructed property laws and economics are presumptively correct. It seems to encourage the thinking that although we might have to tweak the “pre†(or maybe the “reâ€), the distribution itself is what’s right. But at what point do we move from predistribution to distribution to redistribution and why is this sort of framing necessary? Does it aid in clear thinking about these social constructions? Wouldn’t it be better to call it all distribution?
Second, it seems to me that if you are going to address the effect of laws on the distribution of spoils that the legal notion that corporations and other such legal fictions are run for the sole benefit of the shareholders or other “owners†(and that the corporate duty to those owners is to maximize profits) is at least as important limited liability and bankruptcy. Perhaps this is addressed elsewhere in your book.
marcel proust 05.13.16 at 12:52 pm
This reminds me of a statement that I read sometime in the last 25 years, and which I doubt I could locate. The speaker was Mexican, IIRC a liberal or at least nationalist member of the elite, perhaps a leading member of the PRI or a diplomat. The statement was to the effect that in the US, historically, labor was foreign born while capital was owned by the native born, so the laws protected capital at the expense of labor. In Mexico, historically, labor was native born while capital was owned by the foreign born (or indeed by foreigners), so the laws protected labor at the expense of capital.
(Whether Mexican laws were effectively enforced would have been another matter altogether; I just found this take on legal structure interesting enough that it has stuck with me through the years).
jake the antisoshul soshulist 05.13.16 at 1:00 pm
“The (presumably) unintended effect was that corporate managers ceased to be scared of bankruptcy. ”
That is a big presumption.
Even if you do assume that the intention of the laws “governing” corporations was to
promote investment and economic activity, this has resulted in investors and corporate officers being able to not only mitigate risk, but to avoid many costs of operation and even personal legal liability. Or as we like to say, socialize cost and privatize profit.
Robert 05.13.16 at 1:02 pm
“the legal notion that corporations and other such legal fictions are run for the sole benefit of the shareholders or other ‘owners’ (and that the corporate duty to those owners is to maximize profits)”
This notion is not true of all across corporations across time and space. I think Peter Drucker may have started out his career, of professionalizing management, with a broader notion of the stakeholders of a corporation. You can find Milton Friedman in 1970 arguing against the notion that executives in a corporation have any social responsible other than maximizing profits. And you can find related ideas being put forward by Michael Jensen in 1976. These theories had an effect on the world-view of corporate managers, how their compensation packages were structured, and so on in the USA.
matt regan 05.13.16 at 1:03 pm
Very interesting. I remember first hearing the idea that the corporation’s only responsibility was maximum return to its investors in Business Associations class, second year law school, 1977, and thinking “Whaaaa?” I do not recall the having heard the strong form of the argument before then.
And apropos of not much, I have played the Duke of Plaza-toro (ltd.)
que_es 05.13.16 at 1:45 pm
Robert: “This is not true of all across corporations across time and space.”
You are correct and my point is that the shift to the shareholder-centric, profit maximizing view *as a matter of law* is what has caused a great many distribution problems. James mentions above the practices of the private equity industry and Mitt Romney. The notion of “shareholder value” built into the legal rights of shareholders is what enabled these shenanigans.
H Horan 05.13.16 at 2:40 pm
Qibble on bankruptcy. Your draft says the legislation authorizing chapter 11 was the watershed, and then things got taken further by Delaware and other politically driven courts. I think emphasis should be reversed. A lot of airlines entered chapter 11. The ones that entered in the 80s and 90s were subject to a entirely different set of challenges than the ones post-2000 after the courts had dramatically rewritten the law. The earlier set (Continental, Eastern, Pan Am, People Express) went in knowing the hurdles they’d have to meet to emerge were very high, and any reorganization plan would require considerable pain and downsizing. The company had to perform major surgery to excise the parts that had no hope of justifying new investment (and repaying creditors). When United, Delta and American went bankrupt the “would liquidate without court protection” requirement had been changed to “losing a lot of money”; previously the courts would not agree to management/creditor demand to cancel existing labor contracts without abundant evidence the company would quickly liquidate (and contracts were only cut back to the point the liquidation risk was gone) modern cases gave management the automatic right to impose the worst labor contract terms of any competitor without any liquidation test. I could go on. There had been no legislative changes. Most of the judicial rewriting came from the 2nd circuit in New York (the most capital friendly). As with many other “neo-liberal” reforms in the 70s, the original chapter 11 law made a lot of needed improvements, and could have served as a reasonable base going forward, but the corporatist right aggressively hijacked the process and the “liberal” academics and lawyers who gave the original reforms a “bipartisan” flavor stood by and did nothing. I think this second piece (the corporatist ascention and the capture of the judiciary by movement conservatives is the more important.
Matt 05.13.16 at 4:37 pm
Robert’s point above is an important one. You can find a short and helpful (if not, I think, fully beyond debate) discussion in this piece by Lynn Stout. The ideas are developed at greater length in her more properly scholarly work. (I should add that I’m pretty skeptical that the so-called “stakeholder view”, at least as it’s been developed over the last 30 years or so, is all that plausible, for reasons aptly summed up by people like Eric Orts, Alan Strudler, and Joseph Heath.)
Some other brief points – “closely held” corporations were the more common sort for a long time. “Publicly traded” corporations came later and were an invention at the time. I’m not sure that this is important for your account, but is worth noting. I’m brushing over a lot of nuance here, but you don’t want to give the impression that the “modern” publicly traded corporation was common from the start. They were not.
Another perhaps more important point – at one point, “going public” was a very important way for a company to gain new capital and expend. These days, however, that seems to not be the case. Now, “going public” is largely a way to provide large pay-days to early insiders, and not primarily done to raise new capital. Money for expansion is much more likely to be gained by taking on debt. There are many reasons for this, but I think it’s plausible that it contributes to growing inequality and may provide some reason for adjusting how we think of corporations.
bruce wilder 05.13.16 at 5:16 pm
Matt @ 11
“from the start” implies a start, while the actual history seems one of infinite regress into the dark of feudalism.
Corporations for a long time were a legal method of delegating state power and privilege to anonymous and self-(re)producing groups or “companies”. The distinction from proprietorship was long blurred. Jurisdiction and eminent domain and monopoly were the immediate prize. A marketable common stock may have been unusual but was salient from at least the 17th century.
Matt 05.13.16 at 5:24 pm
A marketable common stock may have been unusual but was salient from at least the 17th century.
That’s true, but not the distinction that I’m getting at (nor, I think, the one John is getting at, though I can’t say for sure.) “Closely held” corporations can and do sell shares, but not on exchanges. What’s distinctive about “publicly traded” companies, as that term is most commonly used, is the mass sale of shares to a wide-spread number of people, with very little to no control as to who buys the shares. This is a relatively new thing, and came about only some time after corporations stopped being “chartered companies”. (The rise of so-called “institutional investors” and mutual funds is also probably important to this story, but in a way I’m not completely sure of. They do seem to have made some important changes to how stock markets work, for example.)
bruce wilder 05.13.16 at 6:30 pm
Matt @ 13
Yes, I see — you are looking for the boot straps of financialization. But, I do not think it starts from any red letter day event, per se. It evolves from experience. We can understand why some practices survive with the aid of theory and thus give conceptual foundations to the system, and those theories become part of the evolutionary course.
The original bits of arbitrage associated with portfolio management, separation of control and ownership, and so on, as a matter of historical precedent go back to the 17th century. The first stock markets traded shares in the Dutch and English East India Companies, and those shares with their near-certain dividends and liquidity over an extended period created the precedents for the scheme of arbitrage in trading in government stock that later formed the basis for Bank of England (by way of the South Sea Bubble).
The evolution is driven by strategic gaming of the system on the front end balanced by conceptual governance on the back end. People in their greed try a gambit and other people reform institutions in the aftermath of some undesired result. That chain of evolution goes a long way back and some of the advantages of a publicly traded stock were on display while many corporations were medieval guild-dominated proto-municipalities.
The separation of ownership and control creates an arbitrage opportunity from an efficiency gain. As Mark Twain observed, you may be as well-advised to keep all your eggs in one basket and watch that basket closely as to not keep all your eggs in one basket. Switching from one strategy to the other as circumstances warrant can afford opportunities for financial arbitrage or engineering. Whether one can distinguish such financial engineering from fraud is a nice question, but hardly the only one.
mjfgates 05.13.16 at 7:55 pm
> As well as being a financial disaster, and a source of shame for all those involved.
Perhaps, “As well as being a financial disaster, this was a source of shame for all those involved.” ?
Kurt Schuler 05.14.16 at 1:45 am
As you remark, “corporate profits are not a natural outcome of a market society, but the the product of specific structures of property rights introduced to promote corporate enterprise.” We can observe, though, that the countries that introduced those structures have generated a lot more wealth than those that have not. I’ll take them any day over the debtors’ prison, or over comprehensive state ownership of enterprises.
John Quiggin 05.14.16 at 4:07 am
@17 And as the OP serves, the expansion of corporate rights in the 1970s has been followed by outcomes for everyone outside the 1 per cent that have ranged from disappointing to miserable.
Peter T 05.14.16 at 6:53 am
Kurt (but also generally)
The issue is not the superiority of one or another form of economic organisation over all others, but the balance between them, and the conditions of operation in each. To illustrate:
Roughly, in advanced economies
– 30 per cent of economic activity is carried out in households, without prices or command;
– another 20 per cent is government (paid by taxation);
– a little less than 10 per cent is not-for-profit (charities etc);
Of the other 40 per cent, 75 per cent by employment is carried on in large (over 200 employees) corporations – so 30 per cent of the whole;
The remaining 10 per cent of the whole is carried out by small and medium enterprises, which operate most closely under the rules of the market.
The mix has shifted over time – towards the market and away from the household up to 1850 or so, then away from the market towards government and corporations after that. And, within each sector, there have been shifts in operation. Government and corporations have gone from contracting to direct provision and now back to contracting.
What suits where, when, is a matter for particular circumstances. Steelworks in China may need to be denationalised, health care in the US may be better nationalised. It’s the details and the circumstances that count.
Commenter 05.14.16 at 9:27 am
” the expansion of corporate rights in the 1970s has been followed by outcomes for everyone outside the 1 per cent that have ranged from disappointing to miserable.”
Disappointing outcomes for the middle class are an international phenomenon affecting people across a lot of countries that did not change, e.g., their bankruptcy codes. Automatization and the rise of China are much more promising culprits.
You don’t seem to have any actual evidence for the causal relationship you posit. Instead, you are blaming bad outcomes on developments you are ideology opposed to. Sort of like a committed right winger blaming the same outcomes on the decline of the traditional family and affirmative action.
Jonathan Monroe 05.14.16 at 10:47 am
I think describing modern chapter 11 law as pro-capital at the expense of labour is somewhat misleading. It is a lot easier to blow off obligations to banks and bondholders than it is to current workers (as it should be) with retirees somewhere in between. But modern chapter 11 (Horan at #10 is good on this) makes it easier to screw over all three groups than it is, for example, in England. And of course non-manager shareholders get nothing in chapter 11.
US bankruptcy law benefits management and well-connected insiders (such as the grandfathered old-contract union workers at GM) at the expense of outsiders, with ordinary lenders (banks and public-market bondholders), tort creditors, and retirees being worst hit.
I have worked as a risk manager at a large bank covering this type of situation, and the bankers’ view is that repaying an unsecured bank loan (or a secured bank loan if the assets securing the loan are something the bank wouldn’t want to own) is basically optional for a US business whose owners and managers are sufficiently close to each other. One of the reasons why private equity has the role it does in the US system is that it is much harder for Bain Capital to rip off a bank than it would be for a random multimillionaire private investor – at least we could threaten to stop lending to Bain’s other portfolio companies if they pulled something too ‘The Producers’ on us.
I think this is part of a general trend of US capitalism enriching a managerial elite (including both owner-managers and salaried managers) at the expense of both workers and outside investors (both of whom, per Marcel Proust at #5, are relatively likely to be foreign)
Felix FitzRoy 05.14.16 at 11:15 am
Surprised to find no mention of German co-determination, a major modification of traditional capitalist power structures, with almost equal labour representation on supervisory boards of large corporations, and elected works councils in units with more than 5 employees, with extensive legal powers, all formally separate from union organisation. Co-determination is generally credited with supporting co-operative industrial relations and high levels of skill and training.
Employee ownership, though rare, also deserves mention, as the radical reversal o f contemporary power structures, and radical alternative to state socialism. Successful examples include the Mondragon co-ops in Basque Spain, and the leading retailer John Lewis Partnership in the UK.
James Wimberley 05.14.16 at 11:49 am
“… the weak and crisis-ridden economy that has characterised much of the 21st century..” Typo for 21st? The 20th century was certainly crisis-ridden, but “weak” isn’t the first adjective that comes to mind. Countries that managed to stay out of the world wars like Sweden and Switzerland did very well, as did a good many of those that fought. Argentina’s woes were self-inflicted.
A side-issue. Is there a coherent alternate history in which corporate structures were designed to favour cooperatives rather than capital-controlled limited- liability companies?
James Wimberley 05.14.16 at 11:51 am
Dammit, the quotation has 20th. Would that blogs had souls and could be damned for not allowing edits in comments.
que_es 05.14.16 at 12:11 pm
Jonathan Monroe: “And of course non-manager shareholders get nothing in chapter 11.â€
This is misleading. I know your point is that no actual money payments are made to the shareholders in this situation but they get much from it.
A major function of the corporation is limiting liability for the owners of a business. Thus the corporate form is adopted, the owners become shareholders and the corporation takes on the legal fiction of personhood.
A corporation borrows money. Financial problems develop and the corporate debtor seeks the protection of federal bankruptcy laws. Those laws protect the corporate debtor and attempt to treat the creditors fairly given that most will not get the benefit of their original bargain with the corporate debtor. But the debtor is protected most of all.
So it is not the case that any shareholders get nothing. They in fact have a double layer of legal protection here. First, their personal assets are protected from the creditors of their business solely by virtue of the corporate form. Second, this corporate person (for which they have no personal liability) is protected as a debtor by the bankruptcy laws. What policy could possibly be served by giving them something more?
jake the antisoshul soshulist 05.14.16 at 2:59 pm
What we have now is the economic tail wagging the economic dog.
For now, I will not comment about the magical thinking around
markets.
I think economists, and particularly conservative economists
forget that the purpose of economic activity is to provide provide products
and services that people want/need. It seems that they are operating from
the concept that the purpose of economic activity is to create wealth for the
holders of capital and that those services/products are almost a byproduct of
wealth creation.
I do think we have seen enough evidence to determine that a state monopoly
on capital is even more problematic than the concentrations of capital that
result from market capitalism.
alfredlordbleep 05.14.16 at 6:50 pm
Very useful all.
It would be useful as well to gather the key changes ’78-‘8? that propelled the enormous enrichment of the managerial class such as, in addition:
“…under SEC Rule 10b-18, adopted in 1982, companies receive a ‘safe harbor’ from market manipulation liability on stock buybacks if they adhere to four limitations: not engaging in buybacks at the beginning or end of the trading day, using a single broker for the trades, purchasing shares at the prevailing market price, and limiting the volume of buybacks to 25% of the average daily trading volume over the previous four weeks… [but] the SEC doesn’t collect data that would let it know whether companies breach even these generous limits.â€
alfredlordbleep 05.14.16 at 6:54 pm
apologies for the wholesale bold face above.
Bernard Yomtov 05.14.16 at 10:57 pm
The introduction of bankruptcy and limited liability laws took much of the risk out of starting and operating a business.
Having started and operated some businesses, I can confidently say this is at least one order of magnitude overstated.
In particular, the massive accumulations of personal wealth made possible by capital gains from share ownership would simply not exist. Perhaps there would be comparable accumulations of wealth derived in some other way, but the owners of that wealth would be different people.
I’m not sure that would necessarily be so, and even less sure that the alternate system you imply would be better than what we have.
A crucial policy question, therefore, is whether current laws and policies relating to corporate bankruptcy and limited liability have promoted the growth of inequality and contributed to the weak and crisis-ridden economy that has characterised the 20th century.
Did you mean 21st century?
In any case, current laws and policies could stand a change, and I think the most useful would be in the direction of making managers more accountable, in a number of directions, for all sorts of things.
Collin Street 05.15.16 at 12:10 am
Having started and operated some businesses, I can confidently say this is at least one order of magnitude overstated.
This… doesn’t prove what you think it proves. Your actual observation, “you had difficulty running businesses”, is correct, but your conclusion isn’t. JQ made an observation on relative rates, then-vs-now; with only “now” data, without any “then” data, you can’t come to any conclusions about then-vs-now, can you?
[and, seriously, “at least one order of magnitude overstated”? No order of magnitude was stated! You look like a twelve-year-old, [mis]using words you barely understand.]
Sebastian H 05.15.16 at 12:52 am
Collin, I think you are misunderstanding what BY was saying. “Much of the risk” is usually interpreted in the US as meaning “the greater part of the risk”. Bernard is saying that you are no where near getting rid of the greater part of the risk when he says “at least one order of magnitude” (which may be an overstatement or not, but it isn’t the “does not compute as words in a sentence” that you seem to be saying).
Bernard, I tried to answer your question in the recent other thread as well, but I’m not sure you’re checking it as it is otherwise dead.
roger gathmann 05.15.16 at 1:13 am
John, this sentence is particularly striking:
” In particular, the massive accumulations of personal wealth made possible by capital gains from share ownership would simply not exist. Perhaps there would be comparable accumulations of wealth derived in some other way, but the owners of that wealth would be different people.”
You put this in the context of limited liability and bankruptcy. At one point in American history, however, the issue was more about speculation vs. production. The progressive movement of the 1890s through the 1910s was particularly exercized about the enormous fortunes made by share ownership. They felt the ability of traders to put any price on stocks, in separation from the “real value” in terms of assets and earnings, was itself pernicious. The phrase watering stock has mostly disappeared from our vocabulary, but it was very important to people who grouped themselves under Teddy Roosevelt. As Lawrence Mitchel in the Speculation Economy explains, the fight then was seen as one of subjugating finance to industry, or, in general, production. Here’s an interview with Mitchell that mentions your issues: http://www.thefreelibrary.com/Origins+of+the+Speculation+Economy%3A+an+interview+with+Lawrence…-a0175548437
“As America industrialized, and especially as the railroads began to grow and be financed mostly with debt, the corporate form became especially useful because it protected its shareholders with limited liability–meaning shareholders were not personally liable for the harms caused or debts owed by the corporation. Of course this also led significant numbers of railroad promoters to suck off the debt into their own pockets and leave the railroads without enough operating capital. t first, the railroads were financed by their founders with some equity, but debt rapidly became the major form of permanent finance. Railroads have huge fixed costs. You’ve got constant track maintenance and repair, constant needs for rolling stock and the like, and that kind of money just wasn’t available in the United States. A lot of railroads, especially right after the Civil War, began issuing bonds abroad. Europeans were comfortable financing railroads; there was something to secure the collateral. And the corporate form gave the founding shareholders limited liability, so they could raise all this debt and if the railroad went under–as many did–the shareholders wouldn’t be liable for the consequences. That’s really the original, significant use of a corporation. “
roger gathmann 05.15.16 at 1:17 am
Interestingly, in Mitchell’s account, much depends on the laws of the individual states. New Jersey, being perpetually broke, began to attract corporations by extending the implied power of corporations – the power to do more than is in their charter. And this became a sort of neo-liberal model in the 1880s.
J-D 05.15.16 at 9:41 am
Ze K @14
‘Well, this is, like, an autopsy. Those with power (capitalists) will use their power (enact laws, build institutions) to their own benefit. If it’s not LLC, it would’ve been something else, with similar results. Surely there must be many ways to skin the cat…’
If slavery did not exist, the holders of power would make other arrangements for their own benefit (and where slavery does not exist, they do). If secret political police, indefinite incommunicado detention, and institutionalised torture did not not exist, the holders of power would make other arrangements for their own benefit (and those things do not exist, they do). Every human society has inequalities of power, and every human society has institutional structures that advantage the holders of power. And yet, despite those universal phenomena, the disempowered are not equally badly off under every set of institutional arrangements, and there is no situation in which change that benefits the disempowered is impossible (just as there is no situation in which change that benefits the holders of power to the detriment of the disempowered is impossible).
Evan Neely 05.15.16 at 10:19 am
This might seem like an overly nitpicky criticism, but I think it’s worth avoiding use of the word “earn” when talking about the allocation of profits prior to taxation, as in your sentence “the effect has been to ensure that most global corporate profits are not taxed even once in the countries where they are earned.” It slightly undermines your point about the fact that the laws of allocation aren’t natural, since it puts an evaluative spin on that initial moment of acquisition that bolsters the gut feeling of people who make the case you’re arguing against.
Collin Street 05.15.16 at 10:44 am
Collin, I think you are misunderstanding what BY was saying. “Much of the risk†is usually interpreted in the US as meaning “the greater part of the riskâ€. Bernard is saying that you are no where near getting rid of the greater part of the risk when he says “at least one order of magnitude†(which may be an overstatement or not, but it isn’t the “does not compute as words in a sentence†that you seem to be saying).
But he has no evidence for that. He would need knowledge of how much risk people used to have, and in normal conversational practice[1] if he had had that knowledge he would have mentioned it.
His conclusions don’t follow from the information he’s claimed to have. That’s indisputable. He may have based them in part on information he had but hadn’t claimed, but, obviously, if he’s got information he hasn’t mentioned then he hasn’t mentioned it, and while I’m generally all for charitable reading… it’s really pushing it. People who know “A and B together imply X” simply just don’t say “A implies X”, that’s not how people talk or write.
[1] Linguistic pragmatics.
John Quiggin 05.15.16 at 10:55 am
Collin Street @36 is right. Unless Bernard has a basis for comparing his experience to debtors’ prison, he can’t make the comparison he claims.
To several commenters, thanks for the catch on C20. Fixed now.
Ebenezer Scrooge 05.15.16 at 12:19 pm
One historical point. Corporation law was far more advanced in the early US than in the UK. The UK didn’t need corporations as much as the US–there were far more local rich people, who could reasonably employ partnerships.
This pattern–legal innovations in “less developed” regions that were later taken up by the core–is not a rare one. Virginia, in 1645 or thereabouts, understood the concept of “setoff” far better than the Mother Country. The “condominium” concept so popular in the US was swiped from Puerto Rico law. Etc.
J-D 05.15.16 at 12:56 pm
Ze K @35
‘The point is: if slavery didn’t exist in one specific legal incarnation, it would’ve emerged in some different form …’
Even if this were true, it would not automatically follow that every possible form of slavery is equally bad for the slaves. It would not be true to say that it is impossible for work by anti-slavery activists to produce any benefits for the disempowered. Equally, it would not be true to say that it is impossible for changes to corporate law to produce benefits for the disempowered.
J-D 05.15.16 at 9:47 pm
Ze K @41
Disempowerment is a relative concept, not an absolute one; there is not literally a binary division into two categories of people, one having no power whatever. Also, it is not correct to say that it is impossible for some people to make changes that benefit others; it is not correct to say that changes that benefit the disempowered can only ever be made by the disempowered themselves.
There is not (and never has been) such thing as ‘an environment where slavery is clearly the most efficient mode of production’. Anti-slavery activists can’t be erased from existence just by the kind of notice you choose to give them.
bruce wilder 05.15.16 at 10:01 pm
J-D: There is not (and never has been) such thing as ‘an environment where slavery is clearly the most efficient mode of production’.
There have certainly been times and places where the ruling class found it both highly expedient and profitable. “most efficient” is an impossible criteria, but that’s a criticism of economics and its theoretical method, not slavery, per se. Ze K, presumably, was making a point about the logical entailment of the term, “disempowered”, which seems, on its face, absolute. If you are making a point about the structure of the economy being the context for a negotiation, fine, but let’s not bury it under naïve idealism.
J-D 05.16.16 at 1:10 am
bruce wilder @43
There have been times and places where some people have found slavery to be to their advantage; indeed, this time is one of those times, which is part of the reason that slavery still exists. However, it is not the case that the activities of opponents of slavery (including slaves) go unnoticed (or unnoticed except for ridicule) in those times and places. I am not sure what it is that I wrote that you think constitutes (or possibly constitutes) naïve idealism; it is not naïve idealism to observe that there have been instances in which the activities of opponents of slavery have contributed to the amelioration of the condition of slaves, with or without legal abolition of the institution.
Brett Dunbar 05.16.16 at 2:51 am
Slavery is a response to a labour shortage. It isn’t the normal response in a capitalist society. That tends to be an increase in the price of labour. One notable feature of capitalism compared to other economic systems is that capitalism tends to rule out the use of forced labour, which the various attempts to establish a socialist system relied on extensively.
David Wallace 05.16.16 at 2:55 am
I did an outside minor in Corporate Finance at a major business school back in the mid 80s (while getting a degree in a (mostly) unrelated subject), and our textbooks back then noted that a manager would maximize shareholder value by running the company lean enough that bankruptcy was a live possibility, to maximize shareholder value at the expense of the bondholders/lenders. (They also noted that intelligent bondholders/lenders would attempt to attach various covenants to their loans to keep management from doing too much of this.) In short, MBA students back then were being taught to think of bankruptcy as a strategic option, rather than a disaster to be avoided except as a desperate last resort. The texts didn’t discuss the use of bankruptcy to void union contracts or loot pension plans – I believe those “innovations” were pioneered in some of the leveraged buy-outs happening around that time – but I do wonder how that viewpoint interacted with the legal changes that Horan mentions above.
J-D 05.16.16 at 3:11 am
Brett Dunbar @45
I was not attempting to evaluate capitalism, so it appears to me that your remarks (true or false) have no relevance to my earlier comments.
Collin Street 05.16.16 at 7:55 am
> Slavery is a response to a labour shortage.
There’s no such thing as a labour shortage. The relationship between total labour and total demand is for all practical purposes fixed over any reasonable timeframe; changes to labour supply are matched, precisely as if through a mathematical identity, to changes in demand.
Slavers take slaves because they don’t want to pay the price. Same as any other sort of for-profit thief or robber.
Collin Street 05.16.16 at 7:58 am
Which is to say: slavery is one of the possible outcomes you can get when a bunch of narcissistic bullying pricks get control of the levers of power. They claim “labour shortage”, but that’s just self-serving bullshit: you have the labour supply you have.
J-D 05.16.16 at 8:57 am
Ze K @48
The atoms of a person all flying off in different directions and then coming back together again to form a different person is the kind of event that has never been observed: it is a statistical impossibility.
Some people making changes that benefit other people is the kind of event that has been repeatedly observed.
J-D 05.16.16 at 8:59 am
Ze K @51
I read the same thing in Marx For Beginners.
Peter T 05.16.16 at 9:20 am
Slavery – and other forms of coercion – are answers to the question of how to erect a socio-economic hierarchy where productive capacity is low or diffuse (imperial Rome, Russia, Thailand and many others), or conditions such that no wage would be enough (mine slaves in classical times and Peru, sugar in the West Indies). Sometimes – not often but sometimes – it’s hard to see that a better solution was available.
Bernard Yomtov 05.16.16 at 10:04 am
JQ @38
Unless Bernard has a basis for comparing his experience to debtors’ prison, he can’t make the comparison he claims.
And what is your basis for the comparison? Is it really the case that the risk of going to debtor’s prison was ever the largest part of the risk of starting and operating a business?
Sebastian is correct when he says I read “much of the risk” as “more than half” of it.
Collin Street @30
Your actual observation, “you had difficulty running businessesâ€,
This was not my observation. My observation was that I had experience doing this, and thus I claim to have an understanding of the risks.
You look like a twelve-year-old, [mis]using words you barely understand.
And you look like a smug pedant, who is apparently totally unfamiliar with the notion of figurative speech.
J-D 05.16.16 at 9:13 pm
Peter T @54
No slavery is always better than slavery. Some people benefit from slavery; but not the slaves.
J-D 05.16.16 at 9:17 pm
Ze K @55
Sometimes people’s behaviour is predictable; being predictable is not synonymous with being non-existent, or meaningless, or ineffectual.
You’re a rotten guesser; I have the good fortune of never having been to a motivational seminar in my life.
Peter T 05.16.16 at 11:42 pm
J-D
I mostly agree, but there are odd exceptions. Read, say, the first chapter of Richard Pipes’ “Russia Under the Old Regime” for the challenges of state-building in Russia. In that environment, serfdom was key to building a state strong enough to keep the Tatars, Poles, Germans, Swedes etc out.
J-D 05.17.16 at 12:22 am
Peter T @59
That leaves open the question of whether the serfs were better off (even after allowing for what it’s like to be a serf) for having the Tatars, Poles, Germans, and Swedes kept out …
… a question which may find an answer in the book, which I’ll take a look at if I get a chance.
Bernard Yomtov 05.17.16 at 1:46 am
Peter T,
Sometimes – not often but sometimes – it’s hard to see that a better solution was available.
Huh? Better solution to what? One alternative is simply not to produce the good that cannot be produced without slave labor. That is always available, and is in fact demonstrably superior, by simple economic logic, to using slaves.
Louis 05.17.16 at 2:59 am
You write: “The distribution of income and wealth is radically changed both by the existence of these institutions and by the details of their design. In particular, the massive accumulations of personal wealth made possible by capital gains from share ownership would simply not exist.”
I am generally sympathetic — the point is plausible — but this is an important point at which it might be nice to offer your reader some evidence and an accompanying argument.
Grammar troll found typos:
– “As well as being a financial disaster, and a source of shame for all those involved. ” Sentence fragment. (Perhaps intentional, for rhetorical effect?)
– “What can be done to redress the balance that has been tipped so blatantly in favor of corporations.” Should be a question mark.
J-D 05.17.16 at 6:37 am
Ze K @62
You wrote ‘Individual ants crawl in seemingly random directions; nevertheless, the colony develops in predictable ways’ as if you thought this predictability was relevant to the foregoing discussion; I wasn’t sure how it was supposed to be relevant, so I guessed.
Peter T 05.17.16 at 7:36 am
Bernard
Sure – Europeans could have done without sugar, or silver from Potosi. But in the Russian example (there are a few others like it), the “good” being produced is the common defence. Bit hard to do without.
J-D 05.17.16 at 9:15 am
Peter T @64
If there is (or was) a situation where the ‘production’ of common defence required slavery/serfdom, that still leaves open the question of whether the consequences of a failure to achieve common defence are worse (for the slaves/serfs) than the consequence of enslavement/enserfment.
J-D 05.17.16 at 9:17 am
Ze K @65
If there are topics you want to avoid, the best way of doing so is not to approach a discussion of those topics and introduce other topics but to avoid the discussion entirely.
Peter T 05.17.16 at 9:39 am
J-D
In the Russian case, the defence was against the Tatars, who treated Russia as a people farm: raid every few years, round up people, kill the unsalable ones, sell the others to the Ottomans. So, yes, worse for the slaves, and for everyone else too. It’s not a situation that economics deals with well.
J-D 05.17.16 at 10:03 am
Ze K
What I should have written is this:
It is not clear how your comments —
‘The ideas of societal evolution, institutional patterns, common socioeconomic processes, and so on, are introduced exactly in order to avoid getting into the minutiae of “people’s behaviour†or whether ‘some people make changes that benefit others’’ (@68)
— and —
‘Individual ants crawl in seemingly random directions; nevertheless, the colony develops in predictable ways’ (@55)
— are supposed to be relevant to the foregoing discussion.
James Wimberley 05.17.16 at 12:12 pm
alfredlordbleep in #28. If writing in ALL CAPITALS is shouting, what’s the social-gaffe equivalent to excessive use of boldface? Interrupting? Double underlining would be hitting the lectern with your shoe.
Bernard Yomtov 05.17.16 at 1:02 pm
Peter,
But in the Russian example (there are a few others like it), the “good†being produced is the common defence. Bit hard to do without.
Yet nations manage to defend themselves without slavery. They may use conscription, which is certainly forced labor, but the length of service is normally limited. Also, the conscripts’ lives during peacetime, or when they are too old or young to fight, are not generally constrained.
It’s hard to see why the national defense requires individuals to spend their lives as serfs so that some number will be available for wartime service.
bianca steele 05.17.16 at 1:42 pm
Interesting that Peter T @ 54 says exactly the same thing as Ze K @ 51 with one addition: that slavery is best thought of as a particular kind of coercion, and that then he goes on to defend coercion generally as necessary for the well-being of the group (including the worst-off), the unstated and unacceptable inference that defines the boundaries of discussion being that this necessarily implies any particular form of coercion is necessary for group well-being.
bianca steele 05.17.16 at 2:36 pm
viewing people’s actions as voluntaristic, outside of the institutional socioeconomic context
For what it’s worth, these aren’t the same thing.
J-D 05.17.16 at 9:34 pm
Ze K @71
It is not clear to me whether you are suggesting that people’s actions are not voluntary (which isn’t true), or that people’s voluntary actions have no effect (which isn’t true), or that the effects of people’s voluntary actions are irrelevant to the institutional socioeconomic context (which isn’t true), or something else.
J-D 05.17.16 at 9:38 pm
Peter T @69
I’ve had a look at the text you cited, and what I find there is a description of how serfdom developed in Russia in the period from 1550 to 1650, which is the period following the Russian conquest of the Tatar khanates of Kazan and Astrakhan; the development of serfdom is not described there as a response to the Tatar threat, it’s described as a response to one of the consequences of the elimination of the Tatar threat (namely, peasant flight from the centre of Russian territory to the lands made available for peasant settlement by the conquest of the Tatars) — and as having a negative effect on the enserfed peasants.
Peter T 05.18.16 at 12:06 am
bianca
No. Ze K is the standard Marxist line, which history no longer supports (it was a reasonable guess at the time, but we know a lot more now). I’m pointing out that, in some circumstances, a group can only maintain itself if some people in it are coerced. But I’m not generalising this claim – just saying that sometimes there are no other options (there often are, but not always, and the commonly cited parts of the western European experience do not by any means add up to a universal rule).
Bernard, J-D
The issue was defence against the Crimean Tatars (and the Poles and Swedes), not Kazan and Astrakhan. Building an effective state in Russia required prolonged service by the gentry, foreign exchange to import modern technologies, and long-service conscripts. Given low productivity, open borders, poor communications, low administrative capacity and hostile neighbours, tying labour to the land and to gentry service was probably the only feasible solution.
bianca steele 05.18.16 at 12:42 am
Peter:
I think your “and other forms of coercion” was distracting, and discussion accordingly followed that. I don’t see that much daylight between your comment and Ze K’s. Both of you have some theory about why work-related coercion is (or can be) more-or-less justified. ZK’s suggests that some kinds of coercion are out of bounds in some times and places though they weren’t in the past, which seems plausible enough (and historicism isn’t inherently Marxist), especially by comparison with what seems to be your “it just has to be done sometimes.” Neither of you confronts the reasons why slavery is considered far outside the bounds of acceptability today, though it wasn’t at some times in the past.
It might be true that serfdom (which isn’t quite slavery) was an improvement for the poorest at the beginnings of the Russian state. It’s not, however, as if people in charge got together and discovered a reasonable way to move forward that helped everybody. If the seizure of power against the Tatars hadn’t been more efficient, it would have been tried anyway, but it might have failed. If it hadn’t been an improvement for the serfs, it would still have been tried. It just happened to have turned out in the long term to have been an improvement (for the time being).
In any event, you’ve shifted over to serfdom now (as Bernard’s shifted to military conscription, though I’m not sure why), so I’d say your argument is irrelevant to a discussion of slavery, unless you see all forms of labor coercion as equivalent–which is obviously absurd.
Peter T 05.18.16 at 1:07 am
bianca
The utilitarian framework assumes that total well-being can be summed from individual well-being. It’s a good idea to make that so. But societies (of any kind) have structures and, some kinds of structures only work if some people are coerced. The alternative is to have some simpler structure, but that may make everyone worse off (that’s the thrust of the Russian example). Economics is really bad at analysing social structures, since the default start point is individual exchange.
Slavery covers a very wide range. Arguably, Russian serfs were worse off than slaves in some times and places, although certainly better off than slaves in the US south. That’s why I used the term coerced labour.
bianca steele 05.18.16 at 1:23 am
Peter:
Ah. Thanks for clarifying.
In future, since you apparently have no arguments about social cohesion other than “it’s necessary in order to implement utilitarian principles,” maybe you shouldn’t say anything more specific than that. Otherwise, it sounds like you’re offering a generalized argument that “whenever someone suggests social coercion is improper, remind them that sometimes it’s necessary.” That might annoy people who are discussing something more specific, and give them the wrong idea about what you’re up to.
J-D 05.18.16 at 1:39 am
Peter T @78
I repeat, that’s not what I find in the text you cited.
If serfdom was established in Russia between 1550 and 1650, it correlates not with the period when Russia was threatened by the Tatars but rather with the period in which that threat had disappeared (the Crimean Khanate largely ceased to be a threat to Russia after the decisive result of the Battle of Molodi — in 1572). The reason given in the text for the establishment of serfdom was the one I mentioned earlier — peasants were abandoning the centre of Russian territory to colonise the lands newly made available for peasant settlement by recent conquests, and the Tsars didn’t like it.
Peter T 05.18.16 at 3:05 am
J-D
see
https://en.wikipedia.org/wiki/Russo-Crimean_Wars
Note last major raid close to Moscow was 1633. Raids continued up to 1690s or later.
J-D 05.18.16 at 3:09 am
Peter T
It is still not the case that the text you cited gives that as the explanation for the introduction of serfdom in Russia; it gives a different explanation, one which does not suggest any benefit to the enserfed.
Peter T 05.18.16 at 4:15 am
J-D
I cited Pipes because he gives a good overview of the difficulties faced in establishing a modern state in Russia. The serfs were individually worse off (and there was a great deal of resistance to its establishment). But they were collectively better off, in that the state freed them from Tatar slave raids or the threat of subjugation by the Poles, and allowed expansion into much better land. This is an old trade-off – it’s seen in the transition to agriculture, for instance, where people get poorer and less healthy as individuals, but more numerous, more organised and (probably) less subject to violence as members of the group.
Peter T 05.18.16 at 4:31 am
bianca
you apparently have no arguments about social cohesion other than “it’s necessary in order to implement utilitarian principles,â€.
First, I presume you meant “coercion” rather than “cohesion”.
Second – my argument is that utilitarian principles do NOT adapt to the coercion required to erect and maintain complex social structures. This is not an excuse for coercion – I’m strongly in favour of the least possible degree of coercion in all walks of life. It’s just an awareness that “the least possible degree” varies considerably – and I have a great deal of sympathy for those trapped by unfavourable circumstances (even where these are partly of their own making).
J-D 05.18.16 at 4:35 am
Peter T
You may be right about this, or you may be wrong, but it’s not what I’m seeing in Pipes.
The part about Russia, that is.
On the subject of the transition to agriculture, interpreting it as a trade-off between becoming poorer and less healthy on the one hand but more numerous, more organised, and less subject to violence on the other makes sense if ‘poorer’ and ‘less healthy’ are both clearly disadvantages (which they are) while ‘more numerous’, ‘more organised’, and ‘less subject to violence’ are all clearly advantages. But are they? ‘Less subject to violence’ (if true — is it?) obviously is an advantage, but what about ‘more numerous’? How is that an advantage? And ‘more organised’? Is that definitely an advantage across the board, as opposed to just sometimes?
Peter T 05.18.16 at 6:47 am
J-D
The disadvantages are at the individual level. The advantages are at the group level. Group-level competition can get pretty intense among humans.
reason 05.18.16 at 10:21 am
I’m inclined to wonder if the most pernicious outgrowth of limited liability is not hedge funds, which allows rich investors to gain all the benefits of huge leverage without limited risk. I’m inclined to think that we need specific legislation to stop this – limited liability should mean limited leverage.
reason 05.18.16 at 10:29 am
oops
should read … WITH limited risk …
J-D 05.18.16 at 11:34 am
Ze K @89
‘History does nothing, it “possesses no immense wealthâ€, it “wages no battlesâ€. It is man, real, living man who does all that, who possesses and fights; “history†is not, as it were, a person apart, using man as a means to achieve its own aims; history is nothing but the activity of man pursuing his aims. ‘
Peter T 05.18.16 at 11:50 am
Ze K
what J-D said
bianca steele 05.18.16 at 12:27 pm
Peter:
My time is limited, but at a first stab at a response:
I see when you say “societies (of any kind) have structures” you don’t have anything related to “social cohesion” in mind, as instead you keep returning to the idea of “coercion”. Okay.
Second, “adapt” doesn’t seem to be the right word in that sentence.
Third, you’ve been asked, I think, to consider an argument that some forms of coercion are always wrong, and can’t be justified by “collective good,” and as I noted, this goes against your belief in social structures and the need for coercion and so on. Okay. I’m not sure, though, why you’re still arguing this, since as far as I can tell you’re agreeing that I’ve stated your position accurately: you believe that utilitarianism leaves no room for considerations of the morality of coercion and other acts, only for considerations of more and less, and considerations of need for purpose (I think this is simplistic, but I see its appeal). Is there something else you feel you need from me?
Bernard Yomtov 05.18.16 at 7:55 pm
Reason @90
I’m inclined to wonder if the most pernicious outgrowth of limited liability is not hedge funds, which allows rich investors to gain all the benefits of huge leverage without limited risk. I’m inclined to think that we need specific legislation to stop this – limited liability should mean limited leverage.
I think this is a point worth exploring.
Of course, one problem with saying that hedge funds, or investment firms in general have “too much” leverage is that someone, after all, has to lend them the money, and those lenders are not unsophisticated, and like being paid back.
It may well be that the lenders’ limited liability contributes as much to imprudent levels of borrowing as the borrowers’. A corporate lender whose concern is showing healthy profits to the stock market will be looser about these things than one who is lending his own money, or borrowed money he will have to pay back regardless.
There is also pressure on large institutions due to their size. Citigroup isn’t going to reach its objectives with car loans and lines of credit for small businesses. As Chuck Prince, its former head, famously said, “As long as the music is playing, you’ve got to get up and dance.”
reason 05.19.16 at 2:56 pm
Bernard Yomtov,
yes I suspect the move of investment banks from partnerships to limited companies played its part as well.
Peter T 05.20.16 at 12:52 am
Ze K
IIRC, what J-D said was what Marx said.
When I said history no longer supports Marx, I was not referring to some metaphysical realm, but to the fact that historical investigation has moved on from Marx’s formulation, because the evidence no longer supports them (they were pretty good at the time). Simple notions of feudalism, slavery as the ancient mode of production, and Wittfogel’s “hydraulic despotism” are no longer found in serious works. They don’t fit with what we now know.
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