That Rep. Alexandria Ocasio-Cortez, D-N.Y., isn’t quite up to speed with the realities of capitalism is one of those things we already know. That she’s not quite got the most basic understanding of simple economic concepts wasn’t quite so apparent, not until she decided to question the Wells Fargo CEO at least. She asked Wells Fargo CEO Timothy Sloan why Wells Fargo shouldn’t be held responsible for a leak in the Dakota Access Pipeline. His answer, that they didn’t operate it so weren’t responsible for it, didn’t seem to please the freshman member of Congress.
But the question itself betrays an ignorance of how large scale projects have to work. It’s to question that very idea of limited liability which is the only way we can have a large-scale economy.
Think through this. We’ve a number of ways that we can organize a business venture. We can have a partnership – each owner not only gets the profits but is also liable for any losses. We can have a limited partnership, whereby losses are limited to only what is first put in. A limited company is not hugely different. The shareholders can only lose the amount they have originally contributed, no one can go back to them for more. That’s just what limited liability means.
The reason the limited liability company is sometimes called the third great human invention after agriculture and the scientific method is that it’s the only system that allows large-scale cooperation.
Say we want to build a pipeline that costs billions of dollars. Or, hey, why not, a grand new hospital, or an electric grid fully capable of dealing with intermittency from renewables. To finance this, we’ve got to mobilize the economic resources of millions of people. We may be an unequal society, but not even Bill Gates could pay for that last thing on his own.
So, how many people would put up everything they own, right down to their last shirt button, to make such an investment? That’s what unlimited liability does mean, as all too many who invested in the Lloyd’s insurance market on such terms found out. Vast swathes of Middle England went entirely and thoroughly bust paying out to U.S. asbestos claims.
Limited liability is the only way that we can gain that sort of size of finance. Banking too. If Wells Fargo is liable because they financed the Dakota Access Pipeline, then Wells Fargo shareholders are liable for Dakota, and so on. We simply cannot engage in large-scale economic development without this concept, it’s absolutely central to any form of size in an economy. It’s not even a purely capitalist construct either. The workers who own WinCo Foods would be deeply unimpressed with the idea that creditors could come after their own cars and houses if the company failed.
The congresswoman was showing herself to be, to put this mildly, less than reflective in even asking the question.
We can also make much the same point more directly for her. There is indeed this reason we have these firewalls. For which politician would care to be personally financially responsible for the effects of each and every one of her decisions?
Say the Green New Deal turns out to be that $93 trillion waste of money. Do we get to come after Ocasio-Cortez’s pension? That’s what unlimited liability does indeed mean. You were vaguely involved, it failed, now we’d like everything you’ve got.
Actually, I’m all in for taking everything off politicians who get it wrong, but I’ll do them a favor. Retain this limited liability that even allows us to have a large-scale economy and civilization, and we’ll let you share a bit of it. Although I do think it would help a bit if you thought, even a little, about what it is that allows us to be, as we are, the richest large group of people that ever walked the planet. You know, these varied human inventions that have got us to where we are, things that work like capitalism, markets, and even limited liability.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
