The point of limited liability
Posted by Christie Malry on March 8, 2010 at 8:36 pm
Richard muses on limited liability.
Now they want the people of Iceland to repay them even though the banks in question had limited liability
Because Landsbanki operated in Iceland and as a branch in the UK, we want the people of Iceland to underwrite all bank accounts on the same basis. The government had proposed to underwrite only domestic accounts while ripping off accounts held by Brits. That's not fair.
In the comments, Demetrius writes:
What is happening is that the taxpayer now seems to have unlimited liability and those who run busted companies no liability at all.
This is typical bone-headed socialist thinking. Someone always has to have unlimited liability. If we want to allow entrepreneurs to enjoy limited liability then we must accept that that will sometimes mean that the parties with whom they contract will lose out. When it's the state, that means that the state must either accept unlimited liability, or that what it wants done won't get done.
So why, Richard asks, do we tolerate this?
This is easy. Because the alternatives are far worse. If we forced companies to honour onerous contracts, without being able to partition the risks into individual companies using limited liability, then they would enter into fewer contracts ('good', you might say. But this would mean less profitability, fewer jobs, lower employment...). Alternatively, they would seek to cover the additional risk by increasing prices. If the state did not allow investors to protect their personal assets from their investments, then they simply wouldn't invest. 'Carol Wilcox' might think that to be a good thing, but it would mean jobs never created, a smaller economy and lower growth.
Limited liability is a price worth paying for the huge multiplier effect it has on our economy. Without it, we'd all be much poorer.
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