Posted by: graemebird | July 31, 2009

When Limited Liability Is Not 100% Equity Financed This Makes The Initiation-Of-Force Inevitable.




  1. Getting natural law right would constitute (in part) getting your regulations sorted so well that there is no plausible need for regulations of the sort that constitute an initiation of force.

    We see right here that the average size of corporations would be a great deal smaller under natural law. The subsequent competition would eliminate a lot of the outrageous compensation we see amongst a lot of these HIGH-PRICED shareholders-employees. “Gardeners” as it were.

    And not because a CEO cannot produce massive amounts of wealth if he is a good CEO. And not even because there wouldn’t be some very very large Corporations around. Since after all some industries do lend themselves to great economies of scale.


    The perceived unfairness we see today is not a feature of capitalism properly considered.

    Now why would the average size of corporations be so much smaller under 100% equity finance and generally capitalistic conditions? Well sound money and the lesser cost of regulations sure. Compliance costs are largely fixed and price small companies out of the competition.

    But there is another even stronger factor. And we see what it would be by answering the question “WHAT CONSTITUTES ADDING SHAREHOLDER VALUE UNDER 100% EQUITY FINANCING?

    The answer is astonishingly simple. And its got almost nothing to do with the stock market share price. In fact share price under natural law becomes virtually irrelevant to the decision-making of management; except to the extent that a low share price will tell the management when to buy the shares back and retire them.


    Since the path to creating share-holder value becomes astonishingly simple and non-controversial this means that the decisions of management can be objectively judged to determine whether they are acting in accordance with shareholder interests. So the problem of agency can be brought down to almost trivial levels.


  2. “Your comment is awaiting moderation.
    No they are not people without a body.

    So right there since you are wrong about that there is really no use reading the rest of your spiel.

    Its quite simple for me. But apparently its not simple for you. Limited Liability companies having to one day phase to 100% equity does not breach anybody’s contract. So there is nothing in your above post of any intellectual merit whatsoever.

    Now are we quite clear that a corporation is not a person? Are we very clear a corporation is not a “person without a body”

    We know what a “person without a body” is called. Its not called a corporation. Its called a GHOST. I for one do not believe in the existence of Ghosts.

    Lets go over it again:

    Since the combination of equity financing and limited liability necessitaties great volumes of regulation, many of it of a pretty much arbitrary nature, to prevent management abuse of shareholders, it follows that allowing artificial persons to be debt financed cannot be in accordance with natural law. Since if we are in accordance with natural law we don’t need to go around pointing guns at peoples heads via regulation.

    Contracts cannot be made with other peoples property. Only with ones own. The principle of the non-initiation of force cannot even be interpreted without clarity in property rights.

    Hence a situation where the initiation of force is necessary is one in which property rights are unclear and or the law is not in accordance with what we might call natural law.

    Hence the situation of debt financing for limited liability companies must constitute an imposition on the market economy, as opposed to being a natural feature of a free society.

    We can see this quite clearly. Since if we could all trade under limited liability. And supposing we could then convince someone to lend us money, we could pay ourselves this borrowed money, see to it that the company be bankrupted, and in no way be liable.

    Now lenders can work around that. What nobody can work around is management taking advantage of a well-established company for the purposes of their own self-enrichment where debt-financing is part of the picture.

    Hence the institution of debt-financing, when coupled with limited liability, clearly must not be in accordance with capitalism and a just society. Because it makes inevitable a bewildering array of corporate law regulations, and it causes the shareholder to be an owner, virtually in name only.

    Once the shareholder is an owner, in name only, the entire operation can scarcely be seen as an extension of freedom-of-association, hence the corporation thereby is in a situation of dwindling legitimacy.

    These things are a matter of degree. But we can see here that to some degree modern corporations lack just legitimacy.

    This will of course go way over your head pedro. But we ought to be able to nail down one thing.

    Can we nail it down that a person without a body is called a ghost or a spirit.

    And the a corporation is neither one of these and does not resemble such a thing in this world or any worlds parallel that Edney could daydream about?

    Can we at least nail down that much if the above proves too difficult for you.

    31 Jul 09 at 6:41 pm”

  3. “Bird now wants corporations to be 100% equity financed.

    Good idea Bird. Another brain wave.”

    Yes it is a good idea. Thankyou. We see its a good idea since its not something you are capable of arguing successfully against.

    But then Cambria, you are seldom capable of arguing sucessfully against ANYTHING.

    We see that comprehensive deregulation of business is not a plausible goal without phasing out debt-financing where limited liability is concerned. And whether or not you wish to seek the goal of a free society is really immaterial to the justice of this goal. Your personal feelings on the matter are irrelevant. As is your belief that your gut reaction to any proposal is the very height of sound epistemology itself.

    The debt-financing of limited liability companies turns out to be incompatible with the free and just society.

  4. “Steven,

    Output doesn’t create its own demand because involuntary accumulations of inventories can occur. There can be excess supplies. Government purchases can restore demand and deal with recessions.”

    Harry nothing you say here is true,right or sensible:


    Output doesn’t create its own demand because involuntary accumulations of inventories can occur……”

    This inference doesn’t follow. Output creates its own demand. But not in the face of the unstable monetary conditions brought about by fractional reserve and typically compounded by government behaviour in addition to that inherent instability.

    Output creates its own demand. But this does not mean that a collapse in the supply of a fiat money isn’t going to overide that principle.

    When the fiat money supply collapses, or under modern conditions SLOWS, the demand for cash for holding reasserts itself. At the same time the profitability of banks, trading under conditions of insolvency suddenly takes a dive. Since far and away their greatest profits come from new-money-creation. Not from a cut of the interest. This may not seem so in Australia where we are all over a barrow where variable home rate loans are ubiquitous.

    “There can be excess supplies…..”

    No there can NEVER be excess supplies. Thats like being too rich. There can however be a swing in spending flows. Brought about largely by Keynesian-inspired monetary management. There can never be a general excess supply. Rather there can be a sudden collapse in demand, as well as a sudden swing in what is being demanded. But this is only a feature of fractional reserve and government action.

    “…… Government purchases can restore demand and deal with recessions………”

    No they most certainly cannot. Consider the situation you are describing. The one in which there is a sudden buildup of inventories.

    Businesses are hurting. They need access to “distress loans”. They need tax relief. The last thing you want is for the government to be gobbling up all the loanable funds, REAL RESOURCES, and increasing the burden on the private sector.

    Also consider the surrounding environment in this narrative. The situation that you describe happens in conjunction with an overblown price for producer goods. PRIOR Producer and investment goods inflation will be higher than consumer goods inflation. Hence government gobbling up loan funds puts off the day when a balance can be reached since loanable funds makes up part of the demand typically for PRODUCER GOODS more than consumer goods (although in this credit card age that may not be strictly true anymore.)

    Government cannot increase demand overall through fiscal measures. It can swing the demand towards the consumption end of things. But consider what you are asking them to do here. This is a situation where the inventories have piled up for two reasons.

    1. Total spending has collapsed.

    2. Rational spending behaviour has been RESTORED apart from the fact of total spending collapsing. So if you try and swing things back to what they were prior you are buggering a necessary adjustment. You are doing great harm. The retail end will just have to wear it. If parasitism is reduced then cost reductions can work backwards from the retail end and profitability can be restored at retail that way.

    3. The focus is clearly not on swinging spending in some irrational fashion to the retail end. Let them liquidate their stocks, get some distress loans and experience some sort of shakeout and if their suppliers can cut their costs have their margins restored that way.

    4. The focus has to obviously come from getting total spending up. Not retail spending. Not government spending. In fact these ought to be slashed. Since we want to increase total spending only monetary policy can do it. We must find out where gross domestic revenue had peaked and bounce and flatten at that former peak. Just hit that peak and flatten out at that peak for the time being. And let what bankruptcies ought to occur; occur.

    The Austrians are way too harsh at this point. They would have spending implode and adjust around the new lower level.

    5. There is no fiscal way to bounce up to a former peak in aggregate demand. There is no fiscal way to so much as increase or reduce aggregate nominal demand. Monetary means must be used to bounce up to the former peak and flatten there.

    6. What people call monetary policy today isn’t monetary policy at all. Its nothing more than outrageous bank subsidies. Mostly ineffectual and harmful. And clearly unjust. The only way to bounce to the former spending peak in this situation is new cash creation via debt retirement, combined with a reserve asset ratio, that allows us to hit the spending target aimed at, but that does not allow an overshoot.

    Says law holds absolutely if the mediums of exchange are market goods. And if they are not pyramided upon via fractional reserve. Anything can happen to total nominal aggregate demand under fiat fractional reserve.

    Says law was invented when fractional reserve pyramiding wasn’t quite so ubiquitous as it is now. And in a country where this pyramiding was less a feature than in the English-Speaking world.

    Jean Baptiste Say lived from 1767-1834. In other words he grew up and died prior to the watershed in international gold production, which was the California gold rush. From the California gold rush on the perception had to be with the banks that more gold on average would arrive in their vaults most years. Heretofore the problems and scams to do with fractional reserve were more to do with the following situations:

    1. Banking starting up in some area of Europe. Like in Venice under the Republic. Or Florence under the Medicis. Whenever this big startup and expansion of banking occurred you’d have these supposedly inexplicable periods of mass unemployment. And not a trade union or minimum wage believer in sight.

    So that was one cause of monetary mischief. The expansion of the banking industry in some area or another.

    2. Another cause of monetary mischief prior to the Californian gold rush was where a country decided to try on the central banking scam. Usually with some proto-Keynesian shyster like John Laws.

    3. Another occasion came with Holland banks, not including the bank of Amsterdam. The reason being that the bank of Amsterdam was the only bank anyone in the whole world could trust. And the Dutch were also offering free coinage of bullion. So gold and silver started flowing in from all over the world. And no doubt the other banks went hog wild in a frenzy of fractional reserve since they would have gotten the expectation of new gold showing up all the time.


    Only really after the 1840’s would you expect a normal sane banking industry, without central banking or really bad government behaviour to lead to the realities of fractional reserve becoming an everyday impingement on peoples lives in normal times.

    Since the banks then had an expectation of new gold coming in they could therefore be tempted into taking more and more risks, in lending eachother more and more money, which is part of the pyramiding scam.

    So Jean Baptiste Say talked about his law when monetary conditions for him were that of a market good being traded for other market goods. The supply of gold did not normally grow perceptibly year to year. Corporations hadn’t taken over peoples lives except those with government charters. Non-government connected banks were tiny. Maybe about 4 people involved. The scope for a lot of fractional reserve just wasn’t there in most time periods not involved with some scandal or other. Since fractional reserve has to involve all the banks running credit lines to eachother. It has to involve a good proportion of an unbacked loan coming back to the big banks that make those loans. It cannot be much of a feature without big corporations. Not unless you have some sort of nationwide cartel.

    So the point was Say’s law is totally correct. Tautologically correct in fact. And it would have been seen to be so at the time. Since they were trading goods for goods. The medium of exchange being itself a market good. And Jean Baptiste Say particularly being a Frenchman. Where the constituency for hard money was particularly strong after the revolutionary disaster and so they didn’t go in much for the shenanigans that may have been a bit more frequent in British and American life.

    So for Jean Baptiste Say supply creates its own demand. There is really just no doubt about that. Only the insertion and then the disappearance of phantom medium of exchange goods makes it seem otherwise to the ignorant and the Keynesians.

    31 Jul 09 at 8:16 pm

  5. Your comment is awaiting moderation.
    “You don’t need GMB legislating a special 100% equity financing, which would not change things anyway.”


    Why do people say stupid stuff like this? It would change everything radically. RADICALLY. It would greatly simplify corporate management. It would make value-creation for shareholders totally transparent. It would virtually wipe out the problem of agency. It would restore the shareholder back as owner, in principle, and as an actual reality.

    The performance of the management would be judged on one metric alone.

    That is how they have been able to change the ratio of book value to the outstanding number of shares.

    But notice here book value becomes TOTAL ASSET VALUE. Even this becomes simplified.

    So all the management has to do, and all the owners have to see to it that they perform…. the one and only metric you have to worry about pretty much….

    .. is to improve the ratio of total assets over outstanding shares.

    The easiest way to do this is to buy the shares back when they are valued at less than book value. You could increase the book value. But that would be hard to do without reducing your margins. You could reduce book value so long as you reduced outstanding shareholding more than that.

    Hence increasing gross margins would be very important. Since you would not be allowed to buy back the shareholding with debt. You have to make a profit. You have to increase margins. But at the end of the day you are only judged on the ratio total asssets to outstanding shares.

    Hence the easiest path for big companies with small gross margins would be to become smaller and smaller with larger gross margins and using those gross margins and the sale of business segments, to buy back the shareholding.

    The average size of companies would therefore wind up a lot smaller than it is today. The supply of CEO’s with relevant experience and proven track record would multiply. Their compensation would fall as their collective wealth creation grew.

    The shares would be priced a great deal better. Leverage would be there but OUTSIDE the company. Better share pricing equates to better allocation of resources, equates to greater wealth creation.

    There would be no plausible need for much regulation. Which would not end governmental predation but it would make it easier to fight.



    I don’t know where you guys get this sort of stuff from.

    31 Jul 09 at 8:39 pm

  6. “….Look , i just proved to you that there are entire sectors which use virtually 100% equity financing while others don’t. In other words management decides what is the most optimum capital structure…”

    What is your point? What is your argument? Under natural law limited liability would mean 100% equity finance. And its likely that limited liability started out that way where companies were formed and run without government initiative.

    So you’ve pointed out that some sectors have almost 100% equity financing…. And then your inferential leap is………..

    Well Cambria?

    I’m waiting?

    You point out that some sectors use nearly 100% equity finance. At that somehow bypasses your need to make a logical point?

    I mean you point out this fact? And you are absolved of the need to even think or debate?

    On account of the great specialness of this observation you are making?

    “Look , i just proved to you that there are entire sectors which use virtually 100% equity financing while others don’t.”

    Thats the fact? What logical argument flows from this fact?

    Silicon valley uses almost all equity finance and venture capital. Traditionally the newspapers were highly geared?

    What could this mean to Cambria? What argument could flow from that? Cambria will not say. What it means to me is that newspapers used to get very steady and riskless revenues.

    Since there operational risk was very low the bigshots took on a lot of financial risk to take over a lot of newspapers. Concerns that Adrien just raised would not be a feature under natural law as a result.

    So from your fact I just deduced the lack of operational risk leading to the taking up of financial risk.

    What did you conclude from that same fact?

    Tell me sometime Cambria. I’ll be so powerfully interested.

    31 Jul 09 at 9:40 pm

  7. Your comment is awaiting moderation.
    “The concentration of media ownership, of the ownership of culture, illustrates this. We have the spectacle of increasingly centralized control of information and cultural products and where have we see that? But it’s the ‘private sector’ so it’s ‘freedom’.
    Yet the results bear a resemblance to totalitarian propoganda departments.”

    Right. Well its a matter of degree. But do you see how things fall into place Adrien. The concentration of media happened because of the lack of operational risk in the newspaper and television game. This lead to the media mogul who took over strings of papers using debt. So at the same time as leaving a great deal of power in a few media hands, by these moguls being so powerfully in debt, it meant that they can wind up kowtowing to the various regimes.

    So for example so many Western companies winding up being pretty gutless in the face of the Chinese communists. Even Rupert having to back down to this crowd.

    Whereas under natural law there would never have been this concentration of ownership. But the owners would be fearless in the face of the government menace. They would hold no debt. And it is equally as rewarding for a company without debt to have half the assets and half the income just so long as they have half the outstanding shares too. Such companies cannot be intimidated. They are a true extension of their shareholders.

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