Posted by: graemebird | June 17, 2008

The Place Of Limited Liability/Natural Law.

I’ve come to the conclusion that we would have been better off if limited liability companies had been disallowed from using debt financing. I think that this would have been fully consistent with the American constitutional concept of “equal protection” and I would expect that this is more in keeping with natural law.  So what I’m saying is that you ought to be able to have limited liability and debt financing, but not both at the same time.

This is going to be a hard case to make in the course of a single thread. So I’ll only be scratching the surface.



Corporations in 2008 have to be thought of as, at least in part, creations of government. Government regulates them and was involved in creating the legal framework for them as an historical matter. At least in their latest manifestation.  This is an extremely unfortunate state of affairs. The legitimacy of the company ought to be generated INTERNALLY.  The legitimacy of the company ought to come directly from its articles of association. In this way companies could be seen as a direct extension of freedom of association.  Since the legitimacy of a company ought to be generated internally the entrepreneur and his associates ought to spend immense time and effort drafting and honing these articles of association to a sort of gleaming perfection. Each man a founding father.


The case for companies is not one-and-the-same the case for limited liability.

Now from my point of view, if companies were not horribly regulated, it would probably be a better thing for anyone doing business to form one.  Even if you started out as a sole trader or a partnership IN INTENTION it would give you more flexibility later on if you set it all up as a company. But your accountant might advise against this. And the reason is that once you form a company you are subjected to all sorts of laws wherein the directors can be prosecuted for any number of things. These are laws that have been built up over a long period of time. So we will imagine that they are not there. If there were no such laws and charges it would likely be the best course of action to start out your business as a company.

Now supposing everyone did this in practice. Supposing everyone, or nearly everyone, formed a company when they went into business. It could be a non-limited liability company. Or it could be a limited liability company. Which would they choose? Would anyone be willing to choose the protections of the bankruptcy laws over the protections of limited liability? 

Obviously given the choice everyone would choose limited liability protection over bankruptcy law protection. Hence if we are in a world where some people were forced into the bankruptcy protection option,  while others were able to access limited liability protection these parties would not be equal before the law. So why limited liability in the first place? And how do we resolve this inequality before the law?

Our current answer to this question is CORPORATE LAW. And it is a poxy answer. The regulations that corporations are subjected to cannot possibly be confused with any notions of natural law. And what they do is put a ball and chain around small business as opposed to larger business. These laws tie down the established large businesses COMPETITORS. And so give big business a free ride. This is because compliance costs for these laws are relatively higher for a small business. So big business has tied its competitors down. Sole traders are disadvantaged because they lack limited liability. And smaller companies are disadvantaged through compliance costs.



What ought corporate law consist of? Well in a functioning anarcho-capitalist system with private enforcement of contracts and private redress of grievances we see that the enforcement agency, to make a profit, would have to pay a great deal of attention to how the articles of association were drafted. These articles of association would have to be very clear as to what each party within the corporation might expect from all the others and very clear as to the goals of the company. These articles of association would need to anticipate and pre-empt the sorts of conflicts of interest that might arise within the company. The reason for this is the enforcement agency, to make a profit, would hope to be able to take the insurance premium  and seldom have to do anything. Hence in a normal capitalist situation ( ie where there is a government regulator) corporate regulation ought to be to do with the founders having to get their articles of association very clear, and of a nature that problems down the track are easily resolved with reference to these articles.

This is merely an extension of freedom of association and its these articles which are going to set the contractual terms for this association. This is one half of what ought to be corporate law and the other half is really about not letting ones property spill over and despoil the other guys property. And not committing fraud against other persons or corporations. But these latter concerns are not special to the problem of companies. And so would be general and not corporate law.



We see here that the formation of companies is a natural extension of freedom of association. But limited liability is another matter entirely. In fact its a pretty arbitrary matter and to grant some people this privilege and deny it to others is not acceptable at first blush. So is limited liability necessary at all?

Imagine that there were two types of company. The full-liability company subject to bankruptcy protection only by any of its shareholders. And the limited liability company.

For large projects the full-liability company would begin to become untenable. Since you might have only a few thousand dollars invested in this company and yet if things went wrong you could suddenly face your house being sold. All shareholders big or small would be liable to such a great degree for what the company did. If you had more property to claim you would be more liable than those people who held little property and were renting. So full liability companies are restricted as to the people who could rightly buy their shares and the level of activities they could involve themselves in. This would likely be economically inefficient for those cases wherein it was only natural to grow the business larger to take advantage of economies of scale. And if these full-liability companies were competing with larger foreign competitors then they may be at a disadvantage.


I think that the solution is to give companies a choice. They can have limited liability status if they are 100% equity companies. Or they can be full-liability companies (or sole traders, or partnerships) and be allowed to use debt finance. I think this solves an immense amount of problems that we are seeing now on the corporate scene.


No. The leverage would simply be withdrawn from the internal workings of the limited liability companies. So you could borrow money to buy shares in a limited liability company. Thats what would supply the leverage were it needed. The shares would tend to be priced in accordance with their RETURN ON TOTAL ASSETS. And their expected return on total assets down the track.


If you had to choose a single metric that management were to follow, in order to deliver benefits to the wider community,  it would be the maximizing of the return on total assets. But this is not now the goal that our current managers seek. Their main goal, after lining their own pockets, is almost officially to maximize the return on shareholders funds. How does this differ from maximizing the return on total assets?  Well the main difference is simply through gearing. But with a great many managers working to maximize return on shareholders funds and using gearing to do so, this is not as socially as effective a goal as maximizing the return on total assets. They may be growing their companies larger through gearing than what the goal of maximizing return on total assets would have caused them to grow. And I would say this distortion has come about via an inequality of businesses (and legal entities) before the law as described above.

Supposing the managers, under the new dispensation, knew that their primary goal was to maximize return on total assets? Well this would now be the same goal as maximizing return on shareholders funds since there would be no gearing.  So would the shareholder be missing out in any way? No we have already seen that the shareholder can himself employ gearing without distorting the company mission and behaviour,  by using loan money to allow himself to purchase more shares.



The sharemarket is a powerful mechanism for capital allocation in an economy. It is also akin to a casino. It is neither one nor the other. It is both together. We see if a company is using debt-financing the valuation of the company would change a great deal if you expected monetary policy to be one way and then that policy changed. A highly geared companies non-market valuation would bounce around in response to what you thought monetary policy would be.  It would bounce around a lot as well in terms of what you expected the future revenues of the company to be. Is it any wonder that the share price bounces around so much when even non-market valuations would themselves bounce around all over the place in accordance to what you were expecting from monetary policy? 

100% Equity financing would enhance the ability of the sharemarket to allocate capital effectively by taking some of that casino aspect out of the picture. And of course the elimination of fractional reserve would help that along a great deal as well.

I would like to emphasize again that this in not way detracts from the shareholders ability to take advantage of gearing. It simply quarantines gearing to the outside of the limited liability company.



  1. bird you are sounding more like a leftist everyday. leftists are always parroting that a corporation is granted by the state so the state should be able to exercise whatever control they want over corporations. you don’t like debt so you want the state to stop corporations trafficing in debt.

  2. interesting piece. I will need to read it carefully to see if there is something to it.

  3. Right Scrooge. But I’m not saying that. I’m saying that a company is an extension of freedom of association. And that in forming it the founders need to pay immense attention to the articles of association. Hence the company becomes an extension of freedom of association. The articles of association become like a constitution. They ought plan for failure as well as success.

    As an historical matter though we would say that the modern company is a creature of government. Hence we ought to look askance at the idea of building a free society based on those creatures unless we can get to the core of natural law and freedom of association that ought to animate their being.

    “leftists are always parroting that a corporation is granted by the state so the state should be able to exercise whatever control they want over corporations…”

    Which is the opposite of what I’m saying.

    “… you don’t like debt so you want the state to stop corporations trafficing in debt…..”

    You might want to read it a number of times until you understand matters a bit better.

    I’m not against debt. Thats not true. Fractional reserve is not debt. Its a counterfeiting racket. Under what I’m advocating individuals could get into as much debt as they wanted to.

  4. i think removing debt from limited liability companies would make things even more volatile. i’d hate to be trying to get money from the capital markets in a hurry.

  5. Well any hasty changes can cause problems sure. For example a rapid scaling down of debt would likely mean a collapse in the money supply unless the matter is handled well.

    But thats not the point. Transitioning from one system to another is not the same as figuring out what the best system is.

    For example I want to get rid of fractional reserve. But if you at first outlawed fractional reserve and did nothing else that would destroy the economy.

  6. But no you would be wrong if you think that the proposed system would be more volatile than the current one.

  7. Think about these massive killings that the hired help is making these days. Think how unlikely that would be under this system. Since we recognize that the natural law justification for the company comes from within…… comes from its articles of association and not from the government, then we would pay far more attention to the articles of association. Hence these matters of gardener and butler compensation would be well thought out in advance. And the hired help couldn’t delude themselves that they could take over the estate and put together these rapacious compensation packages. And yet the owner manager could still make a killing which is how it ought to be.

    But also these uber-Butlers couldn’t make an artificial profit through gearing. And in concentrating on return on assets they would be leaving it to the shareholders to each choose their own level of gearing.

    In combination with this setup and with 100% backing/Growth-Deflation there just wouldn’t be the largesse for the top guys to launch these running raids. Plus even if there were that sort of largesse the articles of association would presumably spelled out in a far superior way to what is standard now and this would preclude this self-aggrandizement of the pockets of the hired help.

  8. In the end it all comes down to fractional reserve. good god. you’re a one hit wonder.

  9. Well of course it does. What do you want me to pretend thats not the case? It has to be mentioned because its relevant. I just don’t know how you can maintain this level of ignorance of monetary economics for so long. Its as if its by zen thought control or something.

    Obviously gyrating money-supply and velocity sits directly at the heart of all commerce. It affects everything. Screws everything up. And obviously so.

  10. hey Graeme
    why don’t you apply for this job? they might allow you to publish your ideas to the wider world and you get to work with Don Arthur

  11. I cannot get Club Troppos. What’s the job all about?

  12. Don’s post:

    If you’re interested in social policy and have a strong commitment to social justice then here’s a job you might be interested in. Catholic Social Services Australia is looking for a new policy officer.

    CSSA is looking for an appropriately qualified and experienced person to:

    Undertake social policy research with an emphasis on the causes, incidence and consequences of aspects of poverty and disadvantage in Australia, and on policy options to redress these (Examples of relevant issue areas include: employment policy, welfare policy; locational disadvantage; education; mental health; and the interaction of government policies on welfare benefits, taxation and industrial relations).
    Prepare policy papers, submissions, briefings and other written material that develop and promote Catholic Social Services Australia policy positions.
    Maintain awareness of current research and developments in social policy and relevant programs.
    Liaise as appropriate with Program Managers and other key personnel at National Office in relevant policy areas.
    Liaise with, collect data from, and assist coordination of research activities undertaken by, Catholic Social Services Australia — most specifically with Catholic Social Services Australia’s own Members.
    Maintain networks with Catholic Social Services Australia Member organisations, academics, social service providers, government contacts, social policy researchers, welfare NGOs, Catholic bodies, other Churches, and others concerned about Australians in poverty.
    Represent Catholic Social Services Australia at relevant conferences, networks, public forums, sector meetings, and other forums.
    For full position description click here. For more information, call CSSA on 02 6285 1366. Applications are due Monday 23 June 2008.

    Personally, I think this is a great job — in fact it’s almost exactly like the job I do. CSSA employs two policy officers and I’m one of them.

  13. Yeah it does sound very good.

  14. Jason. Could you reproduce Don’s link. So interested in human welfare am I that I cannot go to Troppo to click the link.

    Now what are you saying? Are you saying that both you and Don work for this outfit?

  15. Graeme
    that was the reproduction, I just copied and pasted Don’s article. I don’t work for it.

  16. Right. So the job I’d be going for would be to work with Don Arthur is that right? Ha Ha. What would he think about that I wonder.

  17. Mr Bird, they are talking about you

    JC said:
    We’ve seen one go the other way. Bird could be now seen as a Marxist with a sprinkling of One Nation.

  18. Yeah well JC has been saying softheaded things for some months now. I cannot myself read troppo. They blocked me since I used to go there and tell the truth. Feel free to cut and paste from there more extensively so I can read what they are saying.

  19. I have seen the light thanks to you Bird. I repent from my former leftist ways. JC has lost his mind.

  20. Good to have you come in from the cold. Its not going to be easy on you. Former friends will never forgive. They will hate you far more than they hate me.

  21. Tell me about it, man. I have had wine thrown in my face at dinner parties. I’ve had former friends spit at me.

    But you are the light and the way and I have seen my sins as if carved on stone.

  22. It sounds like you’ve ruined Parkos’ life, Graeme.

  23. Good post Graeme.
    As corporations are recongized as persons in law how does this jibe with your internal legitimacy notion?

  24. Meaning incoporation means that a company achieves legal status as a person. Hence they are a creation of government. Can they be otherwise?

  25. I wish you would apply for and get that CSSA job, Bird. A Jesuistic outfit as I understand it, their track record of adopting any 20 year-old scatterbrained socialist concept doing the rounds needs challenging by someone like you.

  26. Wondering if my gravatar still works…

  27. Yep!

  28. Bird:

    But how could you work there if you don’t believe in god?

  29. Well JC, I’m culturally Christian. And the Catholic church has accepted Thomism as its core doctrine. Well thats me all over. Even the way that dude would explain things is very much in accordance with my notions of convergence. Plus we’ve been very fortunate with our last two Popes.

    “Good post Graeme.
    As corporations are recongized as persons in law how does this jibe with your internal legitimacy notion?”

    Well thats fine. Your articles of association would spell out what all members within the organisation are to expect from all the others. This is to align the interests of the members with the external goals of the corporation. The corporate goals are seperate entirely from the individuals goals. Yet the internal workings are spelled out in such a way that those goals are aligned. Seperate but aligned. Most particularly, any conceivable internal disagreement, or conflict, out to be resolvable in unambiguous fashion by reference to the articles. Hence with such attention paid to internal cohesion its only right that we think of the organisation as a seperate legal entity. And so long as the articles are followed it ought to have the right to be a seperate legal entity. Since it is merely the expression of freedom of association.

    “June 18, 2008 at 9:38 am
    Meaning incoporation means that a company achieves legal status as a person. Hence they are a creation of government. Can they be otherwise?”

    Well yes. Of course. But as an historical matter they were, at least in the Anglo-Saxon world created via the legal framework set by government. Which was the right thing for governments to do. But there are problems with it that will likely only get worse over time. However we are not saddled with some sort of original sin here just because the government at one time helped set the legal framework up. It doesn’t matter who got there first. What matters is that these companies can be conceived of as an expression of freedom of association so long as the articles are clear and comprehensive enough and so long as they are adhered to.

    Now Adrien? Now do you see how the CEO’s pay packets could be more brought into line? And do you see perhaps at least some of the reason that historically they have been able to get so much out of whack?

  30. “They blocked me since I used to go there and tell the truth.”

    Have you tried using Google translator:
    It can work as a proxy server at times… or something…

  31. Actually I downloaded firefox yesterday and I found I could read them again.

  32. No lying on this forum Mark you moron.

  33. I said no lying.

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