Australian Lefty on Politics, Governance, Science and Info Management

Loss Socialization from Entrepreneurs – Criminal v Capitalist

Posted by Dave Bath on 2010-05-14

Imagine, for a moment, that the concept of the limited liability company was applied not only to corporation law, but to criminal law, and conversely, that the notion of being responsible for the result of one’s actions applied to capitalist activities.

The unspoken purpose of limited liability in corporate law is to socialize risk, turning the worst liabilities of improper, sharp, or negligent practice into burdens on the community, in particular, the most vulnerable in society.  Modern capitalism could not exist without this institutionalized moral hazard.

The whole point of limited liability is that only the investment is at risk, there is no real impact on investors if liabilities, including damages to others, far exceed the assets of the particular construct called a company.  The James Hardie asbestos "settlement" demonstrates just how hard it is to extract compensation for damages – and it only succeeded because the company did not fold completely.

A gang of armed robbers is a group of investors that expects a return from activity.  The investment in their enterprise is little more than the cost of weapons, a getaway car, and a few balaclavas.  If only these investments were at risk, and that "plant and equipment" subject to asset-stripping, then there is no incentive for the enterprise to avoid damage to others – indeed, there is incentive to kill as many witnesses as possible to both avoid detection, and to increase the intimidation that promotes victim compliance.

Organized crime provides an example of how criminal activity can acquire the benefits of limited liability.  The "customer-facing" staff are provided with tools by investors, income is stripped from the revenue-generating construct to "parent company"  Those at the top of the criminal food chain operate little differently from "institutional investors".

Whereas a criminal, even with no assets (such as an impoverished drug addict), is broke, then society still imposes penalties in proportion to harm done or losses to others created by that criminal: victim impact statements are taken into account, and punitive sentences are given . That sentence could be seen as equivalent to greater thanthe revenue stream, whether by employment or social welfare benefits, that the criminal could otherwise have expected.

If a corporation causes loss to others, and has no assets (common after "stripping" a failing company), then creditors wear some of the losses, but consequential damages, such as loss of a revenue stream to suppliers and tax departments, and even the domino effect of unemployment and stress-induced ill-health, are shouldered by the government.  This burden, in capitalist economies with voters opting for minimal social benefits, inevitably affects the most vulnerable through decreased services from government.

The only real difference between corporate and criminal law is that the government, in response to voter demands, creates deterrents for losses caused by enterprises that are criminal, but supports constructs that encourage losses caused to others by enterprises clothed as corporations.


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