Contemporary Commentary on Limited Liability
Chapter 14: Contemporary Commentary on Limited Liability
Marx makes no proper evaluation of the merits or otherwise of the limited liability privilege granted joint-stock companies by the Acts of 1855, 1856, and 1862. 7 But he makes explicit reference in 1856 to the privilege in France as applicable to industrial as well as banking enterprises and writes quite generally of “a tendency to start as many such societies as possible . . . ” (above, p. 436). Having in mind the well-publicized debate surrounding the British legislation, it is inconceivable that
6 Mises may well have had in mind the following famous passage in Capital 1 regarding the historical process:
Along with the constantly diminishing number of the magnates of capital, who usurp and monop- olise all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working class, a class always increasing in numbers, and disciplined, united, organised by the very mechanism of the process of capitalist production itself. The monopoly of capital becomes a fetter upon the mode of produc- tion, which has sprung up and flourished along with, and under it. Centralisation of the means of production and socialisation of labour at last reach a point where they become incompatible with their capitalist integument. This integument is burst asunder. The knell of capitalist private property sounds. The expropriators are expropriated (MECW 35: 750).
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he was unaware that registration under the Acts of 1855 and 1856 carried with it limited liability. His elaborate observations regarding the expansion of the stock- company form, evidently took for granted the limited-liability privilege as a factor explaining its growing popularity, of which the “credit system” took advantage. Had
he expanded on this feature, he might have reinforced his case against the “credit system” by referring to some of the arguments addressed by Lord Overstone and others opposed to limited liability.
Debate concerning limited liability turned partly on the question of high risk entailed by the generation and exploitation of new techniques. In the early 1830s Babbage had already adduced an argument for limited liability turning on the gen- eration and application of invention (1835: 361–2). This perspective is encapsulated thus by Payne in discussing the pressures that by the 1840s were militating against the non-corporate enterprise: “Foremost of these pressures was the growing cap- ital requirements necessitated by the exploitation of new techniques. In itself, the raising of large capitals apparently did not constitute so much of a problem as that feature of the English law of partnership that made each contributor fully liable for the losses of the enterprise” (Payne 1978: 194).
As for Marx, we recall his ascribing responsibility to the credit system for exac- erbating crises and encouraging the growth of large stock-companies as part of the process of “expropriation” and “centralization,” and with it the undermining of a system wherein the capitalist owner “anxiously weighs the limitations of his private capital in so far as he handles it himself ” (above, p. 439). We also recall that the “speculating wholesale merchant risks . . . social property, not his own” in conse- quence of the ready availability of credit (Conclusion p. 469). In both contexts, Marx implicitly expressed concern with the interests of the creditors of a company, assuming the disintergration of traditional industrial arrangement.
These perspectives immediately bring to mind Lord Overstone’s arguments against Limited Liability, namely that such a privilege encouraged irresponsible behavior since the subscribing owners are not liable for the debts of the enterprise in the event of failure to the extent of their wealth, and was by the same token “unfair to creditors” (Overstone 1856). Moreover, the encouragement to keep only an “insufficient reserve out of profit as an insurance against risk,” would result in “a transfer of capital from ‘concerns now constituted and conducted with cau- tion and prudence which the sense of unlimited liability generates to Joint-Stock companies.’ ” And there is the problem of aggregative instability, in that limited liability by undermining “the sober and substantial virtues of the mercantile char- acter” and enabling speculators “to take all the gains but little of the losses of an undertaking,” would destroy “the due equipoise between the restraints and the stimulants of enterprise and speculation” and – at times of monetary pressure –
result in disastrous crashes.” 8 Bagehot’s later account of credit and crises paints a bleak picture wholly in line with Overstone’s (Bagehot 1962 [1873]: 77–8).
8 But see Overstone 1971: 641–2 for evidence of dissatisfaction with the speech : “I was guilty
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As mentioned, one of Overstone’s concerns was the potential danger of the Lim- ited Liability Corporation to creditors. By contrast, J. S. Mill – and also Robert Lowe – favored Limited Liability on grounds of the self-interest principle: “If a number of persons choose to associate for carrying on any operation of commerce or industry, agreeing among themselves and announcing to those with whom they deal that the members of the association do not undertake to be responsible beyond the amount of the subscribed capital; is there any reason that the law should raise objections to this proceeding, and should impose on them the unlimited respon- sibility which they disclaim?” (Mill 1963–91 [1848]: 898). Mill was persuaded that since prospective creditors “are in general perfectly capable of taking care of them- selves,” there was “no reason that the law should be more careful of their interests than they will be themselves.” Marx’s view that the wholesale merchant speculat- ing with borrowed funds puts at risk “social property, not his own,” when applied to the limited-liability issue, points away from the perspective of Mill, though unfortunately Marx did not engage in the debate.