Taking Liberties


in Features


Can capitalism be defended from the libertarian right?

The hostility of libertarians to the modern state is well known. Less well known are the objections that many libertarians have to modern capitalism.

The modern capitalist economy rests largely on two major government-created privileges bestowed on private firms and individuals: limited liability and intellectual property rights, like patents and copyrights. Limited liability, a legal privilege bestowed by the government, means that the owners of a government-chartered corporation are liable to creditors or plaintiffs in lawsuits only up to the amount that they have invested in the enterprise. In contrast, sole proprietors and partners in general partnerships traditionally have unlimited liability for all of the debts of the enterprise. By ensuring that investors in corporations do not risk personal ruin, governments in the 19th and 20th century enabled the rise of large, efficient industrial corporations that can access huge pools of private capital by means of flourishing stock markets.

Copyrights, patents and other intellectual property rights represent an even more striking intervention of the government in the economy, at the expense of freedom and commonsense notions of fairness. In order to encourage innovation, inventors and authors are granted temporary, state-enforced monopolies in machine designs, software, drug formulae or movies. Even though the cost of replicating the original might be minimal, everyone is nevertheless obliged by the government to pay the patent-holder or the copyright holder for a fixed term of years or decades. This sacrifice of fairness and interference with freedom is thought to be worthwhile, to the extent that it makes creativity profitable.

These two policies are far from perfect. Individual corporations may abuse their market power and political influence, and the costs of excessive intellectual property protection in some cases can outweigh the incentive to innovation they are intended to provide. Nevertheless, most mainstream progressives like most moderate conservatives accept state-granted limited liability and state-enforced intellectual property monopolies as legitimate tools that governments can use to promote economic growth and technological innovation. Libertarians, however, struggle to reconcile these pragmatic and widely-accepted elements of modern capitalism with an ideology based on a minimal state (minarchism) or no state at all (anarchism).

Henry Simons, one of the mid-20th century founders of the pro-market Chicago School of Economics, argued that what he called “classical liberalism” required the dismantling of large corporations. Given the contribution of limited liability laws to the emergence of huge corporations, this was not an unreasonable position for someone of his values to take. More recently in 2005, in the Journal of Libertarian Studies, Piet-Hein van Eeghen argued on libertarian grounds that “outside of the public domain of the infrastructural improvement of land, the corporate form should be withheld from private enterprise and only unincorporated proprietorships and partnerships should be allowed.”

Other libertarians have attacked the state-enforced monopolies that are intellectual property rights. The libertarian scholar Stephen Kinsella, himself a patent lawyer, has published a book with the Ludwig von Mises Institute entitled Against Intellectual Property, making the case for what he calls “libertarian IP abolitionism.” As Kinsella points out, notwithstanding the defense of copyrights and patents by Ayn Rand’s Objectivist school of libertarianism, there is a generations-old tradition of criticism of state-enforced intellectual property law by anti-statist libertarians and anarchists.

The counter-arguments Kinsella cites in his extensive writings on this subject tend to make his point for him, because pro-IP libertarians frequently abandon libertarian ideology altogether in order to make a utilitarian case for patents and copyrights. In doing so, they are following Thomas Jefferson, who as Secretary of State helped to shape the U.S. Patent Law of 1790, acknowledged that intellectual property could be justified only on utilitarian grounds. In an 1813 letter to Isaac McPherson, Jefferson wrote: “It has been pretended by some, (and in England especially,) that inventors have a natural and exclusive right to their inventions, and not merely for their own lives, but inheritable to their heirs. But while it is a moot question whether the origin of any kind of property is derived from nature at all, it would be singular to admit a natural and even an hereditary right to inventors.”

Citing his own experience with setting up the U.S. patent system, Jefferson concluded that state-sponsored monopolies of ideas are a necessary evil, justified only to the extent that they actually encourage innovation: “Considering the exclusive right to invention as given not of natural right, but for the benefit of society, I know well the difficulty of drawing a line between the things which are worth to the public the embarrassment of an exclusive patent, and those which are not.”

There is a generations-old tradition of criticism of state-enforced intellectual property law by anti-statist libertarians and anarchists.

The incompatibility of strict anti-statist libertarianism and modern corporate capitalism, which depends on state-created privileges, creates an obvious dilemma for libertarian think tanks and magazines funded by donors whose wealth is based on corporate ownership and also by those, particularly in the tech sector, whose fortunes are based on intellectual property rights.

It is not surprising, therefore, that some libertarians have argued that, mirabile dictu, limited liability and intellectual property rights are compatible with libertarian principles after all. But their attempts to banish the taint of statist coercion from limited liability and intellectual property rights are not convincing.

One argument of pro-corporate libertarianism is that the equivalent of limited liability could be negotiated by contract. Investors could agree to buy shares only on condition that they be immune to any liability for the corporation’s debts beyond the amount they invested. This is possible in theory, but it would eliminate the stock market in its present form.

Much of the money I have saved for retirement is invested in index funds which buy and sell shares of many corporations, tracking the market as a whole. I have no idea which particular companies I own minuscule pieces of at any given moment and I don’t care, as long as my overall return meets my goals. Like countless other passive investors in mutual funds and pension funds, I do not need to worry that I as an owner of part of many corporations will be held personally liable if one of the many corporations I partly own goes bankrupt or loses a lawsuit. At most the value of a particular stock in my fluctuating portfolio will go down or vanish. The possibility that creditors or plaintiffs might be able to go after any of my other assets would be a deterrent to investment on my part.

Maybe this problem could be solved by investments only in companies which negotiated private, contractual limited liability arrangement agreements with their shareowners. Or maybe we don’t need mass share-ownership at all, just rich investors scrutinizing specific companies.

But the third-party problem still remains. What happens if the corporation injures a third party, who then sues the corporation?

Some pro-corporate libertarians argue that liability insurance could achieve the goals of limited liability. But in a world without limited liability, what would prevent the plaintiff from seeking compensation out of the personal assets of the owner-shareholders, once their liability insurance was exhausted?

Some pro-corporate libertarians attack the tort law principle of respondeat superior, which holds an employer responsible for actions committed by employees in the course of employment. Why, they ask, should someone victimized by a corporate employee be allowed to sue corporate shareholders, who did not know or approve of the action? Isn’t this just a matter of going after deep pockets? Isn’t tort law just….socialist redistribution?

Stephen Kinsella, who combines libertarian opposition to intellectual property rights with the argument that libertarianism and corporate capitalism are compatible, put it this way in 2009:

If the FedEx truck driver negligently runs over you, is the shareholder responsible? Well, why would he be responsible in the first place? Because he gave a bit of money to the company? But so do customers. And banks. And suppliers.

According to this theory, the relatives of passengers killed by Andreas Lubitz, the Germanwings pilot who crashed the airplane he was co-piloting into a mountain in the Alps last April, might be able to sue the personal estate of the dead pilot. But the grieving relatives could not sue the company he worked for. After all, the shareholders didn’t order him to kill himself and everyone on board! The guy was crazy!

Isn’t tort law just…
socialist redistribution?

Responding to Kinsella, Sean Gabb, an anti-corporate libertarian, demolished Kinsella’s argument:

My correspondent raises doubts about the effective control that shareholders have over their companies, and wonders if they should not rather be placed in the same category as employees or lenders or contractors.

My answer is to assert that they are the natural owners of their companies. They have not lent money to them. They are not providing paid services. They are the owners.

Libertarians can’t have it both ways. Shareholders can’t be owners of a corporation for some purposes and mere arm’s-length lenders for others. Likewise, a corporation cannot be an artificial, unitary person with legal rights for purposes of profit and contracts and taxes, and at the same time, when it comes to liability for the misdeeds of managers and employees, a collection of natural persons with no responsibilities for the organization as a whole.

It is possible to imagine a world without limited liability corporations and state-enforced intellectual property rights. Such a world would look very much like the world that existed before the mid-19th century. Most private enterprises would be small, risk-averse partnerships among people who knew and trusted one another. Enterprises that required scale—infrastructure companies, large-scale factories—would tend to be public agencies or quasi-public monopolies. Publicly-funded government and university research labs might become more important if the profit motive were removed from innovation by the abolition of intellectual property rights. As all of this suggests, one paradoxical result of the abolition of the state-created private privileges of limited liability and intellectual property might be a much greater role for the state in the economy.

Clearly it is difficult if not impossible to justify “statist” institutions essential to modern corporate capitalism like intellectual property rights and limited liability on the basis of libertarian principles. To be sure, individual libertarians — even those whose salaries are not paid by legally-privileged state-chartered corporations or by intellectual-property rentiers whose fortunes are created by government-enforced monopolies — might throw consistency to the wind and grant the utilitarian arguments for these two state-sponsored props of modern capitalism.

But once libertarians start admitting utilitarian rationales for deviations from perfect libertarianism, why should they stop at these two deviations? Why not also consider utilitarian justifications for Keynesian demand management, and a generous welfare state, and a global system of military alliances? The anti-corporate, anti-IP libertarians are surely right. The utilitarian justification for limited liability and intellectual property rights is a gateway drug for progressive statism.

You can support dynamic modern corporate capitalism and private sector innovation enabled by limited liability and intellectual property rights, as mainstream progressives and conservatives do. Or you can call yourself a libertarian. You can’t do both. •

Photo of the installation “Capitalism Works for Me!” by Steve Lambert (Cleveland, OH. 2011.) courtesy of Spaces Gallery via Flickr (Creative Commons)