Nowadays, however, the corporation is omnipresent in our society.
The rights and powers of a corporation have been expanded enormously through the influence of the 19th century robber barons and their successors.
But the dangers inherent in the corporation — still fully present — have been forgotten.
Why We Have Corporations
Both the intent and the effect of a modern business corporation are to allow participants in an activity to enjoy the fruits of the activity without having to bear the full costs — specifically, the risks — associated with conducting the activity.
But these costs — liabilities incurred when these risks materialize—don’t just disappear.
Somebody does bear those costs: everyone else.
Specifically, all the people around the corporation — such as those who are killed or injured by the company’s environmental and personal torts — bear the burdens that would otherwise fall on those who are protected by the corporate shield, namely, the owners.
In short, when things go right, the owners win. When things go wrong, everyone but the owners loses.
It’s hard to find other instances in our society in which we allow people to have their cake and eat it,too, or, phrased to fit this context, to have their cake while someone else pays for it.
But this is exactly the purpose and the 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, oftentimes dearly.
America: The Sick Version of Communism
Aren’t we Americans supposed to be the world’s most staunch believers in the “self-made man,” in individualism, in capitalism, in being allowed to get what we deserve?
How, then, would we have created a system where one group gets the rewards while another group takes the risks?
It’s kind of like a sick version of Communism in which, instead of giving to each according to his need, we stick one person with another person’s needs.
Whatever the rationale, 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.
Separation of Ownership from Management, Control and Oversight
While outside of the focus of this article, one should also note that the other primary function of corporations — allowing large numbers of owners so as to achieve greater capital aggregation than an individual could muster — also introduces problems.
In particular, the originally laudable aim of pooling resources to achieve a large goal has evolved into a system wherein ownership and management are largely separated, the actions of the one being often unknown to the other.
The results: Enron and such.
A Monster of Our Own Creation
From both an economic perspective and a moral perspective, the rise of the modern business corporation — with its wildly over-expanded powers — will go down in history as one of the most destructive legal developments in recent centuries.
Our descendants will reflect upon the many worthwhile legal advances of the late second and early third millennia — such as the abolition of slavery and universal suffrage.
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 maimed, killed, rendered extinct, 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 the aforementioned capital-raising power of shared ownership and unlimited longevity.
But these virtues — to the degree they are 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!"
S.E. Harrison is the author of “Plutonomics: A Unified Theory of Wealth.” (http://plutonomics.wordpress.com/).
