King for a Day

Will Pate asks and Tim Oren responds. A long fun Just So story. Maybe he doesn’t answer the question but at least he illuminates it. “So why do shareholders have limited liablity?

The nugget in his story is that limiting share holder liability lowers the risk for shareholders of investing their capital.

Sounds like moral hazard to me. I.e. it’s an invitation to investors to engage in morally suspect behaviors because they know they can avoid the consequences of those behaviors.

Tim’s story is fun because he’s entirely honest that this benefit for investors came about because it was a benefit that King’s enjoyed. When kings take risks that bear foul fruit the peasants smile cheerfully and eat the fruit. When power began to devolve from the king into the hands of the wealthy the limited liability corporation was a way to get the same benefit for the corporation’s investors.

There are many models of what a corporation is. For example some folks think of a corporation as a knot of contracts. But clearly one model of the corporation is that it’s a license to investors take a risk and dodge the full liabilities there in. A chance to pretend to be king for a few days.

Of course risk taking is necessary part of economic growth; so it’s in societies best interests to make choices of where and how much risk to license.

To hear Tim tell it America – pause for a moment of silent respect – would not exist if not for this devolution of kingly powers unto the investor class. It’s a story that takes my breath away.

Actually, to be a bit more accurate Will’s question was “What is the best reasoning behind why shareholders have limited liability for a corporation’s environmental and social costs? …”

In my noodle that collides with Tim story of early english colonialism’s corporate roots. I find myself remembering things. after the european-asian germs wiped out most of the native populations. That the European earth worm spread across the continent and wiped out much of the ecology. The slave trade. The cod. The elm. The beech.

Nothing is simple.

8 thoughts on “King for a Day

  1. Ben Hyde

    “Few native earthworms exist in the nothern-most reaches of the continental United States. Most species were forced south in the last major glaciation, which ended 10,000 years ago.

    While American earthworm species have been slow to recolonize the northern-most reaches of the U.S., European earthworm species, first introduced by colonial settlers, have made themselves at home in the country’s northern climes for several centuries.”
    http://news.nationalgeographic.com/news/2003/01/0102_030102_earthworms.html

    I think I first read about this example of displacement in Reading the Forested Landscape, which I can’t too highly recommend.

  2. Jamie McCarthy

    Fascinating, thanks. I’ve added the book to my wishlist, laboriously.

    I found myself thinking about how we were told last year that the dividend tax was “double” taxation, which seems to me to presume that corporate investors are part of the corporation, in the way that my liver is part of my corpus: indivisible, with no benefits provided to the investor-corporation relationship by the government. Being reminded of the liability limitation makes it easier to realize that dividends are a transaction like any other, not akin to a corporation shuffling paper to move funds from one department to another, but an actual payment for services that are regulated.

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