Limited Liability


Someone I know who is an avowed socialist told me he'd be much more sympathetic to libertarian views if we didn't need big government to protect us from big business.

This set me to thinking: are large corporations a necessary feature of a free society?

Big business didn't become a dominant presence in the economy until the 19th century, so something must have happened to make that possible.

While doing some research and thinking on the topic, I think I found the fulcrum: limited liability.

What limited liability does is prevent someone who is harmed by corporate activity from seeking unlimited damages from the owners and directors and managers of the corporation. In effect, limited liability means that losses are limited but profits are theoretically unlimited.

That doesn't sound like a recipe for personal responsibility, does it?

Indeed, the artificial legislative construct of limited liability enables the owners and directors and managers of a corporation to do pretty much whatever they please, secure in the knowledge that they won't be held accountable.

Oh, and the first limited liability legislation was passed in 1811 in New York State (I'd bet at the behest of crony capitalists), followed over the next few decades by other U.S. states, England (in 1855), etc. So the timing works out, too.

In the absence of such legislation, would extremely large corporations exist? I have my doubts, because the owners and directors and managers would not want the organization to grow so large that they could not have direct, personal oversight of its operations (without such hands-on management, they wouldn't understand their potential liabilities).

Thus it seems to me right now that in a completely voluntary society, individuals would not willingly cede their right to seek appropriate damages against organizational activity and thus that our current regime of limited losses and unlimited profits (with its attendant huge corporations) would not exist.


Peter Saint-Andre > Journal