Corporate limitations
Wikipedia defines a corporation as “an organization authorized by the state to act as a single entity. One of the most attractive advantages business corporations offer to their investors is limited liability, meaning a passive shareholder in a corporation will not be personally liable for obligations of the corporation, or for torts (involuntary harms) committed by the corporation. There is significant concern that limited liability in tort may lead to excessive corporate risk taking.”
The last line is significant, because limited liability is a fiction in the interconnected real world, where all actions have consequence. As capitalist theory has devolved over time, the corporate obligation has been narrowed to prioritize only shareholder returns, without regard for any other part of society. In fact, a special category of corporation had to be created to allow a company to consider employee, social, and environmental concerns, in the face of shareholder legal pressure for maximum short-term return on investments.
The limiting of liability encourages investors who might be too cautious to make more speculative investments, thus furthering economic development, but it legalizes irresponsibility. When the impact of a corporation’s actions exceeds the valuation of the limited liability, the corporation has no further fiscal or legal responsibility, which means someone else has to pay the price. This capitalizes the profits, and socializes the losses.
For example, a mining company can operate until the profitability of the deposit drops, then declare bankruptcy and close the mine, leaving a mountain of mining tailings leaching toxic waste into nearby rivers or groundwater. The investors in the company have taken the profit, but leave the extensive cleanup costs to “someone else”. A more recent example in the news is abandoned oil wells. Thousands of wells that are no longer economically profitable have been abandoned without incurring the cost of safely plugging the wells. The consequences of such irresponsible, but legal, corporate actions are born by the larger society in the costs of an actual cleanup, or in a degraded environment and higher health care costs if nothing is done.
Two methods have evolved to minimize the social costs of corporate irresponsibility after the profit is gone: regulations to address the issue before it occurs, and taxes to extract funds in advance.
Regulations, with the power of legal penalties, impose limitations on corporate activities that are risky or socially expensive. This forces mitigation costs to be factored into the profit pricing structure while there is profit to be made, which actually saves money overall. For example, it is cheaper to remove pollution from water during a manufacturing process than it is to try to treat ground water after it has been polluted. The difference is who foots the bill. But regulations can be difficult to define and time consuming to pass into law. In addition, corporate economic power quickly captures regulatory boards, which are subject to political forces, shifting the system from preventing harm to the society into one defining how much harm will be permitted.
Taxes are the other way society defends against corporate irresponsibility, providing funds from the profitable portion of the economy to pay for the social and environmental damage done by irresponsible corporate activities. This is less targeted, since all profit making is taxed to pay for the actions of a few. But it does fund some cleanup costs, which would be even more costly if left unaddressed.
Republicans, who are quick to point out the “moral hazard” of giving people health care or extended unemployment benefits, never address the moral hazard of legalizing corporate irresponsibility. They focus on the exclusive gain portion of business, completely disregarding the social costs. As a result, we have been subjected to decades of attacks on “job killing regulations”, without ever considering why these regulations were imposed in the first place. There has been a similar long-term assault on taxes.
Capitalism looks for the profit in any activity, then expands to maximize the take, and the economy has benefited as a result. But the unaddressed costs have expanded as well, and have now reached the level where they can no longer be ignored. We are eroding the habitability of the entire planet in the pursuit of short-term profits for a few. If humanity doesn’t address this imbalance on our own, nature will surely address humanity. There is no planet “B”.
The limiting of liability encourages investors who might be too cautious to make more speculative investments, thus furthering economic development, but it legalizes irresponsibility.