Mercadente, The Illiberal Nature of Limited Liability: A Libertarian Critique

by Stephan Kinsella on March 29, 2025

Bryan Mercadente, “The Illiberal Nature of Limited Liability: A Libertarian Critique,” The Libertarian Alliance [UK] (22 March, 2025). Excerpt:

https://libertarianism.uk/2025/03/30/the-illiberal-nature-of-limited-liability-stephan-kinsella-replies/The question I have been set is why, if it is as wonderful as I claim, capitalism produces immense inequalities and waste? Why is it so harmful to the environment? Since the purpose of the question appears to be a requirement for me to explain in more detail certain points I have argued in class, I hope I shall be forgiven for putting aside its exact wording in favour of what I think a more productive question. Before doing this, even so, I will make some effort to deal with question as set—even if my effort here will be brief.

The argument from inequality is easily answered. If one looks at the Lorenz curves for those countries that have economies based even slightly on free market principles, they show more equality than those countries that do not allow free markets. The correlation between economic freedom and prosperity is undeniable. Consider, for example, Switzerland and South Korea—two countries where markets are moderately free. Both have high GDP per capita and a large middle class. Compare them to command economies such as North Korea or Venezuela, where wealth is concentrated in the hands of the political elite, and the general population is impoverished. To be precise, capitalist countries, by any honest measurement, both richer and more equal than non-capitalist countries.

I discuss these matters in various posts collected at Corporate Personhood, Limited Liability, and Double Taxation.

I have time now for one comment. Mercadente writes:

shareholders have the legal right to run the business like a Greek democracy, voting on every matter. If they decline to do so, this is negligence, not a lack of ownership.

I have no opposition to vicarious responsibility. I defend this notion in Stephan Kinsella, “Causation and Aggression,” ¹ arguing against libertarians who would argue, for example, that Hitler himself was not liable for acts of aggression committed by troops under his command; after all, he “just gave orders.” I also criticize the views of Walter Block and Rothbard for having too stingy a notion of vicarious responsibility, e.g. in the case of incitement. ²

The question is: why is someone the state classifies as a “shareholder” or “owner” really responsible for torts committed by employees of the firm in which he owns shares? Why is he an “owner,” just because the state calls him this? ³ What distinguishes him from others who are involved in the corporation, such as lenders, suppliers, customers, and employees? We need a general theory of responsibility for actions of others that would show why a typical shareholder, by virtue of merely having the right to vote and to receive dividends and assets upon a winding up (which are all the rights shareholders have), makes this person vicariously responsible for torts committed by employees of that firm—not an ad hoc one that relies on state classifications—one that would explain why FedEx or McDonald’s employees, “independent contractors,” suppliers and vendors, lenders and creditors, partners, and customers are not liable but “shareholders” somehow are—one that is not based on the argument “well the state calls them owners so they must be.”

My view is that the names and classifications and categories given by the state’s legal system is irrelevant; it is the underlying reality of control and relationships of people in a hierarchical system that matters. (This is also one reason I also reject Block’s and Rothbard’s ad hoc rejection of liability for the “inciter”; it depends on the context.) What matters is the context, the substance of the issue. There are cases in which a powerful creditor or customer can exert influence over the actions of a corporation. Employees other than managers or directors can play a causal role in another employee’s negligent actions. Same with customers, and vendors and suppliers. And “independent contractors” (libertarianism doesn’t distinguish, legally, between a service provider called an “employee” and one called a “contractor,” as these are only practical, functional, and economic concepts, not legally relevant distinctions). Why accept the classification of a “shareholder” as an “owner” just because the state and some economists categorize them that way? What about a shareholder who never gave money to the firm at all, but just bought shares from an original shareholder? Does she “aid and abet” the corporation as much as a supplier, lender, employee, does? What about a shareholder who is comatose and cannot vote? Or one who votes against the current slate of directors?

This is my objection to automatically assuming shareholders have vicarious responsibility for torts of employees of firms they “own” shares in: it is ad hoc. The default presumption is that every person is responsible for his own actions and only his actions unless there is a particular reason to hold him vicariously liable for the actions of another: such as a parent for the actions of his child, or a manager who supervises an employee, or the mob boss or President who orders an underling to commit a crime (even if it is not coerced!), someone who incites a mob, someone who lies on the stand to help convict an innocent person. That is, some causal role, in an appropriate framework such as I try to lay out in “Causation and Aggression.” A causal role that relies on context and reality and function, not on arbitrary legislative classifications or even roles assumed by economists and finance types.

We must keep in mind that ownership means the right to control—more technically, the (legal) right to exclude. ⁴ The right to control does not automatically imply “responsibility”; we are responsible for our actions, whether the actions employ means that are owned, or not. ⁵ This is why the thief who steals my knife is liable for harm he causes with it, even though he does not own it; and why I am not liable, even though I do own it. Ownership is a right, not a responsibility; we are responsible for actions, not for “things.” ⁶

Likewise, just as ownership is a legal and normative right to exclude, it is distinct from the descriptive and economic concept of control. ⁷ Crusoe on his island controls but does not own resources; yet he acts, he causes things to happen. A murderer is responsible for actions he performs whether he “owns” the means or not. Ownership specifies the rights one has; action has to do with what one does, what one is responsible for. Crusoe causes food to be grown or fish to be caught using causally efficacious means at his disposal, not because he owns but because he controls them. Ownership only makes it easier for someone in a social context to act; it gives rights, not responsibility. Hitler and Truman did not own the underlings who killed people but did play a causal role in the acts of aggression their underlings committed, at the principals’ direction in a hierarchical context. Ownership has nothing to do with responsibility; it is only a right. It is the use and employment of means that one possesses that makes on liable for harm caused by one’s actions that employ these means. Expressions like “I own that,” meaning I caused that or am responsible for that, are confusing and misleading expressions and metaphors. ⁸

This is why the focus on shareholder vicarious liability for actions of employees of the firm should be on the actual control exerted by the shareholder over actions of the negligent employees, and this question cannot be answered by asking whether the state’s positive law uses the word “owner.”

Note: Sean Gabb has kindly posted a version of this response on the Libertarian Alliance site.