The capitalism of turbulences and the over-limited liability of the too big to fail corporations: A property economics note on the working of moral hazard

Abstract

In the corporative realm of the organization of firms, endemic to modern capitalist economy, a common allegation is that “limited liability”, State historically allowed for political or fiscal reasons, would (though asymmetrically) incite stockholders and managers to overconfidence in their characteristic profit-driven endeavours. It is asserted that the corporative judicial-legal shield absorbs risks and unleashes moral hazard, eroding the genuine market capitalism (gambling, greed, monopolism, wickedness). In this article, we will re-examine the moral hazard around modern corporation, starting from an “institutionally neutral” analysis of the interpersonal asymmetry of knowledge, and shifting over to the domain of “comparative inter-institutional” judgements, opposing two counterfactual mutually exclusive frameworks: the one respecting naturally defined private property rights and the other one hampering them through State-made regulatory interventions. We will add more precision to an old classical debate upon the “illiberalism of corporations”, arguing that, along with the factors fuelling the modern boom-bust business cycles by means of easy money and credit, guilty as well for instability in the global markets is some sort of “over-limited responsibility” of corporations (for instance, in finance and banking industry), granted with those “too big to fail” privileges, invoking their “systemic importance” in terms of resource allocation or employment dynamic.