Anarchism and The Firm

This recent piece, Corporate Personhood, Limited Liability, and Double Taxation, is not Stephan Kinsella’s finest hour. The piece is riddled with problems and inaccurate representations.

Let’s begin by defining our terms, particularly with respect to this thing “left-libertarianism” which seems to be a perpetual bone of contention with Kinsella. In many respects, the political adjectives “left” and “right” are superfluous in terms of the libertarian political critique. We only resort to such decorative adjectives because of (1) the modern association of the term libertarianism with the American political right and (2) the oft apparent identity of civil society to be Wal-Mart minus the State.

Politically, libertarianism is by definition “left-wing” since it’s a rejection of the Status quo ante. Apart from politics, or the political critique, the terms “left-wing” or “right-wing,” however, have little relevance. “Left-wing” or “Right-wing” as adjectives in terms of describing property rights regimes offer little illumination. I certainly reject yeah or nay regarding property property to be the dividing line between left and right. That is to say, private property is not in any sense inherently a right-wing concept.

But let us recall our history. As I outlined in previous post, we can identify three libertarian wings that emerged from French liberal history: capitalist(Bastiat), Socialist(Proudhon), and Communist(Déjacque). We can plot these three wings on a line segment of sorts and then loosely bifurcate the segment into “individualist” and “social” parts. Both parts shared the political critique of the State, but they differed in regards to the natural, spontaneous order of civil society. The “individualist” side more or less accepted the liberal, bourgeois civil institutionalism of private property, capital, and markets. The individualists however viewed the State and state privilege as corrupting it. The “social anarchists,” however, viewed the liberal, bourgeois civil institutionalism itself as product of state privilege. So it’s not corrupted by the State; rather, it serves to corrupt the State. The “Individualist” side was predominantly American while the “social” side was predominantly European, although the latter did find significant import into the United States at the latter part of the 19th century.

This libertarian dispute over the natural products of civil society has been there from the start. However, Kinsella seems determined to ignore libertarian history. Certainly, “anti-capitalism” means something entirely in terms of the individualist perspective as opposed to the “social anarchist perspective.” The individualist or liberal perspective does not reject private property or capital, but it does reject the current Capitalist schema being representative of a “free market.” The “social anarchist” side does reject private property and the “free market”(read: economic rent) outright.

Unfortunately, Kinsella, in his many critiques of “left-libertarianism,” makes it practice to conflate the two spheres, even after being perpetually corrected on the matter. So, in the end, Kinsella seems intent on proving his point via the logical fallacy of the Straw Man argument.

Kinsella writes that “the standard leftist critique of the corporation is the ‘concession’ theory outlined by Robert Hessen in his seminal study In Defense of the Corporation.” This is certainly not true in my case. Hessen’s treatment is more or less a legal defense of the corporation. I’m more interested in a market and/or bargaining theory treatment of the corporation. Indeed, part of my critique is that defense of the corporation invariably retreats to a legal treatment, and not a market one. And Hessen, in his book, conceded that there was no market or strong contractual foundation of tort limited liability.

Kinsella makes a silly suggestion about left-libertarianism and the “Marxist labor theory of value.” It’s silly because (1) left-libertarians on the individualist side do not subscribe to the “labor theory of value,” at least not since the 19th century and (2) the labor theory of value is Adam Smith and David Ricardo; The labor theory of value is only Marxist in the sense that Marx himself was a Ricardian.

Rather than diverge on a rant over classical economics, it is more germane to point out Kinsella’s apparent confusing reading of Hessen. Kinsella equates shareholder liability with the “paternalistic” common-law doctrine of respondeat superior. Kinsella instead argues “each person is responsible only for his own torts, not for those of others.” But my reading of Hessen’s “In Defense of the Corporation” has Hessen specifically conceding the problem of such a contractual basis of limited liability in torts. Writes Hessen:

How, if at all, can limited liability for torts be integrated into a contractual theory of corporations? The answer is that it can’t–and it needn’t be. The question poses a false alternative: either limited liability for torts is a state-created privilege or it is a contractual(which it obviously is not). In fact, there is a third possibility.

Chapter II: Are Corporations Creatures of the State?

Hessen’s “third possibility” is a direct appeal to respondeat superior to resolve the agency problem of limited liability for torts. Investors and shareholders are only passive agents. The only pertinent agency is between the employer(or active management) and the employee, and the only relevant principal is the employer(or active management). The investor(or shareholder), as a passive agent, is thus outside the scope of the agency definition. Only in the event of the investor or shareholder becoming active in management does such an agent open itself up to tort liability as a principal.

We thusly find Kinsella and Hessen to be actually at odds with one another. Hessen denies Kinsella’s contractual claim of limited liability for torts while Kinsella accuses “left-libertarians” of invoking respondeat superior– to justify a principal agent other than the causative agent–when it is actually Hessen who appeals to this common-law tradition to place the passive investor(as a principal) outside the agency definition.

I’ll readily concede the legal defense of the Corporation, in particular Hessen’s treatment(read: I’m not interested in debating his legal points). But as I previously mentioned, it is only the market treatment(and game theory strategic treatment) of the corporation that is of interest to me. From an economic standpoint, there is no consensus on the theory of the firm or why we even have them.

Oliver Williamson won the Nobel prize in Economics in 2009 for his theory of the firm that views them essentially as DROs(Dispute Resolution Organizations). I would contend this is probably the more accurate model than, say, Ronald Coase’s version of “transaction costs” model. In the Williamson version, the transaction costs are more a function of comparative governance costs.

This article, at The Libertarian Standard, Continued confusion over the “rights” of corporations, implies that Kinsella is more or less in agreement with the Williamson model. Writes the author:

As Stephan Kinsella has explained, corporations are nothing more than a series of contracts enabling a large number of people to work together toward common goals.

The corporation then is a form of economic governance. But we should be careful to avoid “the Corporation as Social Contract,” in that there is actually no strong contractual foundation of this DRO organ. A market analysis may show a net benefit for, say, purchasers and suppliers, to coalesce into DRO clumps as means to efficiently reduce the bargaining costs from the gains of trade in terms of the opportunity costs of asset allocation. Put another way: “I,Pencil” is a product consisting of a number components that have opportunity costs for alternative usage. It is likely more efficiently produced by corporations up the vertical chain than by a large set of independent purchasers and suppliers bargaining over the allocation of assets that are specific to each other.

No doubt, this can be a powerful market argument for “DRO clumping,” but we should also acknowledge that we can also end up with, “I, Solyndra,” which is a recent example of DRO clumping that gives us an example of a final product representing an allocation of assets that could have best been deployed elsewhere.

The Williamson bound on Firm Size–in terms of being an efficient DRO device–is demarcated both by the bureaucratic costs of delegation and erosion of entrepreneurial incentive, which more or less means the size at which (Economic Rent) –> 0. The problem with the Williamson bound is that in political economy, the costs of bureaucracy and loss of entrepreneurial incentive have little bearing on this limit of economic rent; indeed, they are usually necessities in the competition for artificial economic rent.

This leads us to the actual political economic critique of Hessen’s contention that Corporations are not “Creatures of the State”. Namely, the empirical fact that the investor class is not all that passive. It is a professional class with it’s own agency definition that includes its own principals that are quite active. The term “institutional investor” should familiar with everyone these days(although it was likely not quite so familiar at the time of the original publication of Hessen’s book, in 1979), and it denotes a largely corporate investment banking principal that specializes in being quite active in Washington, DC.

With the corporatization of investment banking, the advent of institutionalization of investment, and with corporations being the primary investors in other corporations, Hessen’s contention, in 1979, that the investment class constituted passive agents and thus were immune from the agency problem can only now be viewed as laughably naive and quaint. Today, we should understand that it is the institutionalization of the investment class which gives us “too big to fail.”

The obvious conclusion, from a libertarian perspective, is that any claims of a group or class to be outside the agency definition of a DRO is fraught with problems. Incredibly, Kinsella refuses the lesson and instead makes a utilitarian argument for the legitimacy of “Corporate America.” Writes Kinsella:

This is because, if you accept Mises’s calculation argument, a centrally run economy cannot be economically prosperous. If most of corporate America is “really” part of the state, then the calculation argument means we must be in a USSR-style shambles, despite appearances to the contrary. Sure, I realize the GDP measure has methodological problems, and that the state exaggerates and propagandizes, but what’s more plausible: that we are really all poor, living in a 1970s Soviet-Style morass with just faked prosperity (hey, maybe we never made it out of the Malthusian trap in the 1800s after all; maybe the whole Industrial Revolution is a mirage!); or that there is actually a vast amount of prosperity generated by the underling genuinely free market economy despite the state’s depradations? As far as I can see, the left-libertarians have to argue the former; I think most sensible libertarians will take the latter view.

That Kinsella invokes the “Misean Calculation Argument” to justify corporate America only reminds us why the “Misean Calculation Argument” is wrong and why Mises lost the original Socialist Calculation Debate. Figures like Oskar Lange used a similar utilitarian type argument against Mises to demonstrate the ability of the Walrasian auctioneer to “discover” prices. And Lange, even back at that time–the early part of the 20th century–defrayed the criticism of the “socialist incentive problem” by citing the capitalist incentive divisions, as an agency problem, between the investment class and the management class.

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