I’m hearing the phrase “limited liability†a lot lately. It’s part of the BP strategy for dealing with the massive oil leak it’s created in the Gulf of Mexico. Phase one: blame somebody else. Phase two: if the general public and even the government refuse to accept that, stage a media blitz casting BP as responsible corporate citizen. Clean-up efforts may be necessary to preserve the ads’ message, but are to be kept to the minimum necessary to be seen to be “doing something.†Simultaneously, executives should hold press conferences in which they make frowny faces and shake their heads in worry over the problem, but must not admit any actual responsibility. Phase three: if that doesn’t work, thanks to those no-goodniks on Wall Street who triggered such widespread anti-corporate sentiment, circle the wagons, call out the lawyers, and make sure BP doesn’t actually have to pay for its mistake in any material fashion.
That’s where limited liability comes in. Apparently, several states limit the total damages one may suffer in court, even if wholly responsible for causing much greater damage to plaintiffs. Poison thousands of people, destroy whole industries throughout a region, cause New England to sink into the ocean—you won’t have to pay more than several hundred million.
The irony is that the biggest supporters of limited liability are the same ones who argue that unregulated markets are self-correcting. Even in the most idealized and abstracted interpretation of Adam Smith’s “invisible hand,†markets can only correct through punishment, specifically by ensuring that every individual (or corporate body) bears the full cost of his (or its) actions. The full cost. Otherwise, someone will hurt others for profit. Not “might†hurt others, but “will.†Profit is made in the margins, and if there’s a margin between the money you can make despoiling the environment or otherwise mistreating your fellow man and the personal costs one incurs doing so, actors will be drawn to exploit that profit in the inevitable logic of Smithian economics.
If, to pull a number out of the air, you can lose no more than $100,000,000 in liability lawsuits, that’s easily enough to ruin you or me. But a large corporation wouldn’t bat a metaphorical eye to pay that if, as in the case of offshore drilling, it can make more than $100M incurring those lawsuits. The free market is a poor regulator of human misbehavior. But a market in which actors are shielded from the full cost of their business is a poorer one yet. It positively encourages misbehavior, especially misbehavior on a massive scale, because that’s where the margin lies to be exploited.
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