February 20, 2006

Libertarianism and Corporations

One of the key problems of strict (non-consequentialist) libertarianism is how the state is to successfully perform its function of protecting citizens from force or fraud without the funding acquired from confiscatory taxation schemes. The problem is that libertarian commitments in the region of political morality do not permit the government to violate the private property rights which individuals have in the hypothetical "state of nature," and in the state of nature individuals own all of their income, not just what's left after taxes. The government exists to enforce these property rights. Robert Nozick believes (see his book Anarchy, State, and Utopia) that the libertarian state is in fact itself a sort of business, the "dominant protective agency" in a given region. He argues from economic principles that an Adam Smith "invisible hand" process will lead to the existence of exactly one protective agency in any given geographic region, where a protective agency is a company whose sole or primary purpose is to enforce the (negative, libertarian) rights of its clients. Of course, such a company's clients must voluntarily choose to pay it for its services - the agency may not coerce this payment from anyone who doesn't wish to purchase its services. Nozick has a lengthy discussion of just what happens when an individual living within the protective agency's bounds chooses not to purchase its services. The short version is that Nozick believes, not implausibly, that the protective agency may prohibit people before the fact from performing "risky procedures" - that is, from doing things that have a high risk of violating the rights of its clients - rather than merely exacting punishment afterward, provided it gives just compensation to the affected party for the disutility it causes him. So, for instance, if we prohibit blind people from driving cars because there is a high probability of them injuring people other than themselves, we must compensate them for any disutility associated with the prohibition. (Of course blind people presumably wouldn't gain much utility from driving cars, since they would probably die.) Now, on the same grounds, the state may prohibit non-citizens from using risky procedures (or procedures it doesn't know to be safe) for determining the guilt or innocence of its clients and subsequently punishing them. For instance, if I am a client of the protective agency and you are not, and someone steals your television and you determine by reading tea leaves or chicken entrails that I am the guilty party and attempt to punish me, the protective agency may prevent you from doing so without first determining whether I am, in fact, guilty, but it must first compensate you for any disutility associated with this prohibition. The most sensible way for the state to do this is to agree that, although you are not its client and do not pay its fees, it will enforce your rights whenever they are violated by its clients (if you are violated by another independent or by a foreigner, you are on your own, unless you decide to pay the protective agencies fee).

Now, this model works, more or less, but there are a number of things that libertarians agree with everyone else are good that it is very difficult to accomplish on this scheme. For instance, it is good to preserve some wildlife habitats, it is good to provide education to everyone, it is good to end racial discrimination, it is good to break up or eliminate abusive monopolies, etc. In general, however, libertarians are quite adamant that these things are not the job of the government, and can be acheived in a "free market" sort of way, if enough people care, and of course they are right. That is, if enough people care, we can set up private foundations to preserve wildlife habitats, we can create private schools with scholarship systems for poor children, etc. Most people are (rightly) skeptical of the claim that this would actually happen, human nature being what it is, but the libertarian responds that the fact that people would not voluntarily give their money to these causes only strengthens his claim that it is wrong to take their money by force.

What I wish to examine here is the question of a particular way in which a libertarian state might justly acquire surplus wealth, and what it might justly do with it. My discussion will center around the concept of the limited liability corporation.

In the state of nature, there are no corporations. The defining feature of a corporation is that it is a "legal fiction" in which a company is treated as if it were a person. In the state of nature, all companies are sole proprietorships, unlimited liability partnerships, or joint-stock corporations (the latter two needing only contracts between the owners to work, no government cooperation is required), and the owner or owners (or perhaps in some cases some or all of the employees) have complete legal responsibility for all actions of the company. There is no distinction between company assets and individual assets. After all, companies are merely figments of our imagination, and the actions are in fact taken by people. (These considerations have the interesting consequence that on the Nozick model we can imagine a protective agency being a sole proprietorship, and thus we in fact have the theoretical possiblity of a libertarian dictatorship! Although he frequently uses the phrase "protective agency," as I have been, Nozick seems to favor the idea of a "protective association" where we all come to one another's aid, and the idea that this might grow into a case where we all put some money into the pot and hire police, etc., with it, which gives us the more familiar libertarian democracy.) Now, the protective agency, or rather, its members, may enter into contracts, as anyone may, on the libertarian understanding. Suppose the protective agency creates a class of contract called Type C contracts, that look like this:

Any group of people jointly owning a company (an unlimited liability partnership or joint-stock corporation) may apply to enter a contract of Type C with the state. Such a group of people will be called "stockholders." Henceforth the state will treat the company as though it were an individual person, giving the company the ability to own property, be a party to contracts, and so forth. The state will hold the company responsible for its actions and contractual obligations, the stockholders having no liability in such matters.

May the libertarian state do this? It seems so. But what about the independents (i.e. those who are not clients of any protective association)? Suppose a corporation violates the rights of an independent. The independent is not a party to the contract forming the corporation, and so from his perspective his rights were violated by an individual - the corporation does not actually exist. The state, however, prohibits him from punishing the individual who violates his rights. The state, in exchange for his observation of the prohibition has agreed to enforce his rights for him. On the other hand, the state has an obligation not to hold the stockholders liable for the corporations actions. So the state must then confiscate the corporation's property, and not the stockholders' individual property, and thus force the corporation to make restitution to the individual. It may be further necessary to punish the corporation somehow. The independent should be satisfied with this provided that (a) his property is restored, or he is justly compensated for the violation of his rights, and (b) the individual who is actually guilty is seen to be punished in the course of the punishment of the corporation.

Now, what if the corporation is unable to make restitution; that is, what if it is bankrupt? The state's contractual obligations prohibit it from exacting punishment on any of the individual stockholders for the corporation's actions; it may not confiscate the stockholders' personal property to pay the corporation's fine, but it must nevertheless see that restitution is made to the independent. Where is the money to come from?

In order to avoid this situation, the state might require, as a term of the contract, that corporations carry liability insurance, which they might purchase from the state (since it is, after all, the state who is required to come up with the money to make restitution to the violated independent), or another corporation, or a private individual (provided the corporation or individual were capable of making the relevant gaurantees). None of this necessarily occurs if the violated individual is a client of the state, because in this case that individual is a party to the contract and has agreed to treat the corporation as a person; thus, from his perspective, he was violated by the corporation, not by an individual, and if the corporation is bankrupted and ceases to exist it is as though the individual who violated him has died, leaving no estate and having no heirs. He cannot justly expect to receive any restitution. Of course, I say necessarily. The state could, and probably would, define the contract with the stockholders, and also its contracts with its individual clients, such that its clients received the same or better treatment, as compared to independents.

What this discussion points to, to me, at any rate, is that it is the state that creates corporations and thus the state may define the contract which corporations must accept in any way it chooses without violating anyone's libertarian rights (provided it keeps its obligations under the contracts it has previously been a party to). Suppose, therefore, that the state says, "in order to enter this contract, the corporation must pay X% of its profit in taxes each year." If people don't like the terms, they will not form corporations. If, however, very large and profitable corporations DO form, the libertarian state - which, you will recall, does nothing other than protect its citizens from force or fraud - may find itself in possession of a great deal of money. Now, since the state is making an offer to potential stockholders of corporations, and can make whatever offer it chooses, it could do lots of other things as well. In an extreme case, it could reserve the right to change the contract whenever and however it saw fit. Presumably no one would sign that contract. Perhaps instead the state would specify that when it makes such changes a limited liability corporation may choose to revert to a joint-stock corporation rather than accept them. If the government changed its offer over time without changing old contracts, it would have the effect of putting corporations formed at different times on different footing, which would have interesting (probably bad) economic effects.

Suppose the government wanted to institute in this way some of the things libertarians complain about most; say, income tax and affiirmative action. Of course, in this case the government wouldn't technically be taxing an individual's income; rather, it would be taxing the corporation on its pay to employees. In the affirmative action case, again, the government would merely say "if you don't want to treat people of various races equitably (according to our definition of equity) don't accept this contract." No one's rights are violated, per se. Most libertarians can be expected to respond with the charge of reverse discrimination, but, of course, the government could just as easily require corporations to treat races unequally. This would be an injustice in some important sense (as would reverse discrimination), but the government would not exceed its authority or violate anyone's libertarian rights. Moreover, we must remember that the government we are discussing is not the titanic state common today, but rather small and limited in power. Presumably if the government enforced unfair hiring practices on corporations, principled people would not form them. Since sole proprietorships would not pay the same kind of additional taxes corporations did, they might be on equal footing. However, if there was a serious social problem, our hypothetical government might try to address it by this sort of means, just as real governments have sometimes begun by enforcing standards on their own hiring practices, rather than on the hiring practices of everyone in their country. I'm not completely convinced one way or another as to whether the government ought to do such things, I'm simply arguing that its doing so would violate no one's libertarian rights.

Now, in addition to the extra power the government has gained by being able to define the agreements which form corporations, the government has gained a great deal of money. Whatever it does with this money, if it behaves just as any group of people is permitted to behave, and it honors its contractual obligations, it will violate no one's rights. The government could enter competition with private businesses in various industries, it could start it's own schools, it could offer scholarships to private schools, and so forth. These would violate no one's libertarian rights. The government could also help the poor, or set up orphanages, or other similar social programs, or depending on exactly how it was constituted it might distribute the surplus back to its clients equally. In the case of the familiar libertarian democracy, the clients of the protective agency would also be joint owners of it, and so any profit it did not reinvest would go to them. As has been previously mentioned, there's no reason on Nozick's system why private ownership of the government would violate anyone's rights. Of course, I think that it would be a very rare individual indeed who could convince people not to opt out of such a government. I think some of the tiny principalities in Europe have extremely popular royal families who might perceivably get away with such a thing.

Of course, if the government used its excess money or its power to define the corporation to do things that someone strongly disagreed with, or if its activities "on the side" caused it to become less effective in performing its primary function as the dominant protective agency, people would begin to opt out in large numbers, and might eventually form a rival protective association, leading to a possible war. (Nozick envisions that one reason the market would lead to a single protective agency in a given area is that if there were more than one they would sometimes disagree on whether a given person was guilty, and they would fight wars as a result, with one side trying to punish him, and the other to protect him. Since the protective agency that most often won battles in a given area would, ipso facto, be better able to enforce rights in that area, it would win in the market as well as on the battlefield, and the lesser agency would go out of business, or be restricted to a different area.) This would result either in the serious diminution, or the complete overthrow of the formerly dominant protective agency.

I suppose that, at bottom, the most important point made by the above considerations is that according to libertarian theories of political morality (at least on the Nozick model), present day governments violate individual rights not because of the way the system is set up per se but, first and foremost, because the individual has no ability to opt out of the system. His options are (a) pay the government to protect him from events such as, say, someone kidnapping him and holding him against his will, or (b) being kidnapped and held against his will (by the government, in prison). In this way, libertarians hold, present day governments are not terribly dissimilar with mobsters who collect "protection" money - if you don't pay for protection, you will need to be protected from the so-called protectors! This, above all, is the nature of the libertarian objection.

Posted by Kenny at February 20, 2006 12:50 PM
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Comments

You should check out an article by Robert Holmes, "Nozick on Anarchism" that was in Political Theory volume 5, no. 2

if you have jstor access:
http://links.jstor.org/sici?sici=0090-5917%28197705%295%3A2%3C247%3ANOA%3E2.0.CO%3B2-U

Posted by: Lewis Powell at February 22, 2006 8:11 PM

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