Limited liability as a socialist phenomenon

Although limited liability is at the heart of capitalism, it is a socialist phenomenon.  And, ironically, this socialist mechanism is at the root of many of the ills of capitalism.  So weirdly, the socialists only have themselves to blame for capitalist woes and the capitalists have to thank their nemesis for the wealth they have.  How’s this work?

A lot of the ills of capitalism arise from scale – from corporations being big.  As lines of command stretch and decisions are made impersonally, the attitude of decision-makers to suffering changes.  A simplistic example: Mr Macdonald would not sell a burger to his kid or his neighbour because he doesn’t want them eating crap.  But he doesn’t mind selling it to someone he doesn’t know.  So as businesses become big, their decisions become less decent.

“Big government”, loathed by people on the right, is in part a response to the existence of “big corporate”.  A kind of arms-race:  when big corporate begins to wield great influence, it cannot comport itself on a large scale as it would over a small scale and it is often unable to restrain itself.  An example: Tesco in the UK has a reputation for building out of town shopping centres which upset the commercial balance of small towns.  That leads to a reduction in social capital.   Now, because Tesco is big, it can send top lawyers to each planning meeting in each town.  Lawyers that no small community can hope to compete with.  So people, locally impotent, appeal to government to intervene.  Hence, big government is, in part, necessitated by the overbearing power of big corporate.

Where does big corporate come from?  It comes from economic benefits of scale (both factual benefits as well as an underestimation of the disadvantages of scale, due to imbalanced teaching in business schools).  The kind of scale which big corporates enjoy today is only possible because of limited liability.

Now, limited liability is a deal with society.  Society says to investors: “Investment and commerce are good.  You build important assets for society, you give people purpose and employment.  So if this is what it takes for you to invest (for the benefit of society), we will grant investors limited liability.  So even if their enterprise loses more than the amount of capital you have committed to, you will not be called upon to make good those losses.”

Well, if society guaranteeing investors against losses isn’t a socialistic mechanism, I don’t know what is.  It is ironic that limited liability is at the heart of modern capitalism yet it is a socialist mechanism.

It follows from this that big government (a socialistic mechanism which we don’t like) results from limited liability (a socialistic mechanism which we do like).

So those who promote small government must be do so in a modest way and not too dogmatically; they need to be mindful of the compromise of limited liability which they all benefit from – that is, if you enjoy benefitting from something which is contrary to your dogma, then you must be humble when you proclaim your dogma.   Big business must act with restraint so that citizens don’t feel forced to demand the intervention of big government.

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