Adam Smith is on a bit of a roll across the political spectrum. The Governor of the Bank of England, Mervyn King, courted controversy by putting him on the back of the £20 note, though that had more to do with the fact that Smith was Scottish than his views on the invisible hand. Prime Minister Gordon Brown has made a point of seeking to show that the 18th century economist, who hailed from his home town of Kirkcaldy, could be recaptured from the Right and made a champion of “progressive globalisation.”

Mr. Brown is right. There was much more to Smith — and the Wealth of Nations — than his support for specialisation, self-interest, and free trade, although these have certainly tended to be the ideas that have been most frequently cited.

We tend, however, to hear much less — from his champions on the Left or Right — about Smith’s views about the way corporations are organised and run. These were not just trenchant but, from today’s perspective, heretical. Smith, for example, would have found it outrageous that the shareholders of Kwik Save could escape any responsibility for paying employees who have worked for nothing for the past month in an attempt to save the company from collapse.

He would, one suspects, have been equally caustic about the way in which some of the poorest people in Britain lost out in the scandal surrounding the collapse of the Christmas savings club Farepak without any comeback for the shareholders.

It is likely, too, that Smith — like Keynes — would have looked askance at an economy gripped by speculative fever, with the emphasis not on making things but on buying and selling, making a turn, churning, taking a punt, sweating an asset.

Smith, indeed, predicted what might happen in the Wealth of Nations, when he supported the idea of private companies (or copartneries) against joint stock companies, the equivalent of today’s limited liability firm. In the for mer, Smith said, each partner was “bound for the debts contracted by the company to the whole extent of his fortune,” a potential liability that tended to concentrate the mind. In joint stock companies, Smith said, shareholders tended to know little about the running of the company, raked off a half-yearly dividend and, if things went wrong, stood only to lose the value of their shares.

“This total exemption from trouble and from risk, beyond a limited sum, encourages many people to become adventurers in joint stock companies who would, upon no account, hazard their own fortunes in any private copartnery. The directors of such companies, however, being the managers rather of other people’s money than their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.”

The counter argument is that limited liability and the equity-financed model of the firm it has encouraged have been the bedrock of industrial capitalism. Without them, so it is said, there would never have been the rapid economic growth of the past two centuries. Smith would have had little time for this argument; his view was that a society should not exempt some people from the general laws of the land simply because their business may do well as a result.

A new paper from Dan Plesch and Stephanie Blankenburg for the RSA goes further. It argues that industrialisation was well under way in Britain and America before the advent of limited liability and that there have been successful examples of development, in Europe and Asia, where limited liability has not been the predominant model. Instead, Mr. Plesch and Ms. Blankenburg say, limited liability was a way for the rich to entrench their own wealth and power at the expense of other groups in society. The consequence, they say, is a structure that encourages corruption and speculation while being fundamentally unfair.

Ironically it is the unfettered rise of corporate power that is the biggest threat to free markets, and the ability of free markets to promote individual freedom, equality before the law and equitable prosperity. Limited liability is at the heart of this rise: a blanket exemption of a special interest group — owner shareholders — from accountability for the actions of their companies. While the mantra of “no rights without responsibilities” is used to regulate the behaviour of poor people who benefit from social security payments — from single mothers to the unemployed, from the homeless to the “self-inflicted” sick — the unaccountable few enjoy feudal privileges.

Limited liability, Mr. Plesch and Ms. Blankenburg argue, has only one purpose: “To shift the cost of taking risks from those earning the profits, when things go well, to society, when things go wrong. Not only does this violate the basic legal foundations of a free society, it also encourages reckless free-riding and corrupt behaviour by the few at the expense of the many.”

There is, it must be accepted, not the remotest chance that the paper’s call for the abolition of any limitations for those in control of their actions on their liability for damages towards others (a reform that would avoid targeting those who contribute to pension funds).

Nor would there be many takers for the system operated in California before 1931, where shareholders were liable for the debts of the company in proportion to the size of their shareholding.

That’s a pity. —

Guardian Newspapers Limited 2007

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