The limited liability company: greatest invention ever?

One of the items in the collection of the United States Holocaust Memorial Museum in Washington, DC is a machine manufactured by IBM. The machine, known as a Dehomag Hollerith Machine, used punch-card technology enabling information to be sorted and arranged before computing the required outputs.

During the late 1930s and early 1940s, more than half of the profit of IBM worldwide was likely derived from the sale of these machines to Nazi Germany and occupied Europe. The machines were used to classify who was Jewish, which facilitated the mass incarceration and ultimately extermination of 6 million Jews. Without these machines it would not have been possible for the Nazis to have carried out genocide on the scale that they did (Black, 2001: 352).

The concept of private property that emerged within liberal societies protects a company’s right to contract with other agents in order to generate an income stream from its assets. Since the 19th century this legal framework has been accompanied by the development of the limited liability of shareholders. In 1911, the Nobel Peace Prize winner Nicholas Murray Butler, who was then the President of Columbia University, said in a speech that the limited liability corporation is the greatest single discovery of modern times. He noted that even steam and electricity were far less important as they would be reduced to comparative impotence without it (Micklethwait & Wooldridge, 2003: 9).

The key success factor of this change was to dramatically increase the amount of investment, which arose as shareholders were no longer liable for claims arising from the result of poor decisions taken by the company directors. Although this increase in investment has been central to economic growth and the improvement in living standards, limited liability has also created a dilemma given that company directors may act in ways that are ultimately not in the interest of the company, and more importantly not in the interests of a liberal society.

Eucken was hostile towards the concept of limited liability as he thought directors ought to be accountable for their decisions, thereby reducing power concentrations and promoting a free society maintained through personal responsibility.