This article was published in the Autumn 1996 issue of Formulations
by the Free Nation Foundation
Business in a Free Nation
by Philip E. Jacobson

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Comments on the Five Forum Questions
---1) Bankruptcy
---2) Forms of Organization
---3) Assembling Capital
---4) Credit & Credibility
---5) Insurance
Other Institutional Changes

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Unlike most of the essays I have written for Formulations, this one is in direct response to a series of questions raised for a FNF Forum. Thus it is more like a list of answers than the development of a thesis. Nevertheless, there is a thesis which I think will characterize the shift of business activity from a statist society to a free nation. The thesis is that the business climate in a free nation will tend to encourage businesses to adopt a strategy of mutual self interest with their customers (and with many other businesses) instead of the antagonistic one which is encouraged by state interference. The form of the paper will follow the list of "official forum questions." I will first attempt to comment on each of the questions. Then I'll add some points not raised by the questions. Finally, I will comment again on the general theme.

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Comments on the Five Forum Questions

1) With no bankruptcy law (with the state not intervening to protect, and provide comfort to, those who fail, cheat, or pollute), what effect will this have upon investors, managers, customers, and neighbors? What institutions will emerge to ameliorate the problems which bankruptcy laws were intended to satisfy?

What are these "problems which bankruptcy laws were intended to satisfy"? Supposedly the idea of a bankruptcy law is to give a person a chance to start over, free from an "excessive" burden imposed by that person's debts. The main protection provided is protection from the state itself. The state is seen, in most debt situations, as protecting the creditor's right to collect, via the state's function as an enforcer of contracts. With bankruptcy law, the state absolves itself of this responsibility. When bankruptcy is declared a creditor will usually have made no other provision for contract enforcement, thus the debtor is freed from his obligation to pay. In a free nation with an advanced division of labor economy, contracts would still have to be made and some mechanism of contract enforcement would have to be established. To the extent "excessive burdens" ought to be removed from debtors, such removal would have to be coordinated through the new contract enforcement mechanisms.

Many libertarian theorists have discussed the idea of private arbitration as a method for resolving contract disputes. In such a system a contract would be enforced, in the event the parties to it disagreed, by an arbitration service designated in the contract itself. Such contracts would include all forms of recorded property title transfer (like deeds) and would be filed with the arbitration service or an allied record-keeping service. It is assumed in discussions of private arbitration that the two parties would feel morally obligated to abide by the decision. Despite moral pressure there would be some cases where a party to a dispute would fail to abide by the decision. What then? Possibly a bond would have been posted by one or all parties to the contract. Bonds could be held by the arbitration service and used to pay for non-performance of the contract.

Another useful mechanism would be for a second service to be provided, which I will call a "credibility bureau." This new service could be provided by the arbitration service or separately. A credibility bureau would hold files in the same way that credit bureaus do now. A person's credibility bureau file would contain any arbitration judgments against him. The credibility bureau file could also contain information

about successfully completed contracts. Credibility bureaus serving different communities could share file information, as credit bureaus do now. When persons sought to make contracts with others they would be able to consult these files. A bad credibility bureau rating might be the basis for refusing to do business with someone or for asking for a very high bond to be posted. In this way the "enforcement" system would emphasize avoiding contracts which are likely to be defaulted rather than punishing defaulters by force after the fact (as state-based systems do).

With respect to the notion of bankruptcy, not everyone agrees that bankruptcy laws should exist. A free nation's institutions should not force everyone to respect the notion of bankruptcy, but should allow for those who do see value in the idea of bankruptcy to use it in voluntary relations with others. This would be possible with the institutions described above. Some arbitration services could state that under certain conditions they would accept a plea of bankruptcy from a debtor. Contracts filed with such an arbitration service could include the provision that bankruptcy pleas would be possible. Even without such a contract, a debtor could have his case heard by the arbitration service which agreed to hear such pleas. If the arbitration service granted a bankruptcy, any contracts which indicated a respect for the notion of bankruptcy which had been filed with that arbitration service would be treated accordingly. The case would be filed with the credibility service. Those who respected the notion of bankruptcy would be able to take it into account when dealing with the debtor in the future.

It is not clear that many instances of bankruptcy would occur using this system. If there were very few of them, it would be an indication that the people of the free nation did not really have much use for the institution. But it is conceivable that an ethic of charity could emerge such that people would pledge to respect the notion of bankruptcy as a token of goodwill towards their fellow men. It would probably emerge from an interest group's public campaign to make this charitable attitude look especially virtuous and to encourage people to do business only with firms which took the pledge. If anyone took such a pledge it could be recorded at the credibility bureau and used by arbitration services, as a factor in judgments involving the pledger.

This is another advantage to a free nation's business climate over that of a statist society. Citizens would not be lulled into the belief that they can be protected only by state action. The energy currently going into lobbying the state would be applied to mobilize direct citizen action via ostracism campaigns against businesses with undesirable practices. As an example of this type of activism consider the results of pressure from animal rights activists on the tuna industry with respect to dolphin-safe fishing. Industry lobbyists successfully fended off government intervention against them, but activists got change through direct appeals to the consumer. It did not take even a majority of consumers changing their buying habits before the pressure worked. It became clear that tuna company's without dolphin-friendly policies had less profit than companies with dolphin-friendly policies. It is now hard to find tuna for sale which does not contain a claim that the fish were caught without harming dolphins. Any firm making such a claim falsely would be open to charges of fraud. In a free economy where a firm's credibility was being actively monitored and recorded, the firm's credibility would be more closely linked than now to its actual behavior. It would be much more difficult to regain market-share through public relations campaigns once a bad credibility record had been acquired and this data could be shared across many communities.

What advocates of statist philosophy often fail to realize is that it is usually easier for organized citizens to affect profits via boycotts than to affect legislation in a democracy. When a boycotting consumer takes his business away from a firm, that firm's profit drops faster than its sales drop. This is because many of the firm's costs are fixed and cannot be avoided even when sales are low. So the loss of even a significant minority of customers will greatly damage profit and can even produce losses for the firm. Laws, on the other hand, are passed by a majority in legislatures. And before voting for a law, a legislator must feel that support of a law will be helpful in getting support from a majority of voters at the polls.

If the abolition of state intervention caused citizens' energies to be redirected from lobbying the state for laws into organizing boycotts, the energies spent by business on lobbying would also be redirected. Businesses would be inclined to try to anticipate boycotts before profits were hurt. After monitoring the activists' groups for a while, the businesses would eventually be motivated to negotiate with the activists, before a boycott was called. Eventually firms would begin to realize that they could get a jump on their competitors by reacting early to activists' concerns, then receiving the activists' endorsement, which could be turned into an advertising plus. To some (and perhaps a great) extent, the formerly antagonistic relationship between activist groups and business leaders could become one of cooperation and mutual self-interest.

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2) If the state does not give special legal status to corporations, what sorts of business organizations will form? With no legislated boundary between insiders and outsiders, what relationships will evolve between insiders and outsiders?

I do not see much of a problem here. At present, corporations must say that they are corporations when doing business. In a free nation a group of people could still sign a contract with one another and call themselves a corporation. As long as someone who represented the corporation in a business deal made it clear that this was the case, any customer would be free to deal with them or not. It would probably become customary for the terms of any contract with a corporation to include a reference to any limitations on the liability that the corporation's members were assuming. I would not expect an arbitration service to enforce the notion of limited liability unless the contract specifically included this provision.

People do business with corporations now. Some people would probably continue to do so in a free nation. Of course the willingness of individuals to do so might be influenced by the rating a corporation had with a credibility bureau. Corporations would be more likely to need to post bonds in order to get contracts, until they had a long successful track record.

The biggest differences in the corporate environment I would expect to emerge in a free nation would be in the forms that corporations took. Currently, the state insists that corporations be run as a democracy among shareholders with each shareholder getting as many votes as they have shares. A majority of voting shareholders can use the assets of the company with no input from the rest of the shareholders and no requirement to issue dividends. This is not the only conceivable method of organization. Churches, for instance, use a much wider variety of control mechanisms. Some churches give their members (or even their priests) far less input in policy than corporations give stockholders, while other churches give each member one vote in policy decisions regardless of financial contributions or ecclesiastic rank. Other financial arrangements are also possible. Instead of issuing stock a limited liability company might, for instance, borrow from a money market fund in exchange for a percentage of profits.

Another organizational option which should be more attractive in a free nation than in a statist society would be businesses owned and operated by workers. With the state intervening in labor-management relations, both sides try to lobby the state to take their side. For labor this means a labor union which presumes conflict between the ownership of production and labor. Despite the Marxist or other socialist roots of many unions, it is rare that the union leadership wants to take on the responsibility of actually managing production. Instead union leaders act as politicians seeking special favors. The union leaders' behavior actually promotes workers' alienated from the means of production. Without the ability to ask the state to intervene, union leaders would find it far more tempting to establish worker control by using union funds to start factories owned by the unions. How successful this would be would be for the market to determine, but without the special favors granted by government to many stockholder-owned firms, firms with well-motivated worker-owners would stand a better chance.

In a free nation, corporations would be free to structure themselves any way they liked. Again, customers could deal with them or not regardless of their structure.

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3) If the state does not intervene (through legislation) to protect stockholders from liability for failings of corporations, will it be possible to assemble the capital necessary for large business ventures? How will investors satisfy their need for protection from liability?

Again, there is nothing to prevent people from voluntarily agreeing to do business with an organization which insists on making limited liability a part of all its business dealings. It is only important that such a firm make this policy known to those who do business with it, so that it cannot be accused of fraud.

With respect to the raising of capital, it seems that this might be easier in a free nation. Corporations, partnerships, or other businessmen could still borrow money by issuing bonds or through other mechanisms. But additionally, as mentioned above, a limited liability business could offer a share of profits in exchange for a loan without offering any form of "ownership" or other control of the firm. If insufficient money came from individual investors, it could still be solicited from collective sources via banks or money market funds.

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4) With no state meddling in decisions to extend credit, what institutions will emerge to satisfy customers' needs for financial privacy, while at the same time satisfying vendors' need to collect debts?

Credit and credibility bureaus, along with performance bonds and arbitration services will probably satisfy the needs described in the question. But in the absence of government involvement other systems will probably emerge to provide greater assurances of privacy and security. A business could probably attract more customers by promising not to give out information about any customer without that customer's permission, as long as the customers fulfill their own contractual obligations. Yet statistics about a firm as a whole could still be collected, then used internally or given to outsiders.

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5) With the insurance industry deregulated, and with the state no longer setting itself up as everybody's protector of last resort, what new offerings can we expect from the insurance industry? What needs will we satisfy through voluntary institutions for sharing risk?

The biggest change in the insurance industry in a free nation may simply be the ease of entry. Government regulation of insurance is extreme and arcane. To enter the industry it is not enough to be skilled in the calculation of risks and the investment of funds. The would-be insurance entrepreneur must be familiar with the art of lobbying. Entrepreneurial energy is largely confined to lobbying and to local agents' efforts at aggressive high-pressure salesmanship. One would expect a lot more choice of insurance policies, and more effort to match the customer's real needs to the policy.

Innovations ought to include efforts to associate insurance policies with services which physically address the risks concerned. Professionals in the medical community, for instance could work with insurance companies to reduce customers' health risks and thus their insurance premiums. Currently, both professionals and insurers tend to wait for physical problems to fall upon the customer before providing more than a brief health exam and a lot of paperwork. Professionals and insurers enter into conflict with one another once remedial health care is needed as each seeks to maximize profits. The professionals seek to provide as much service as possible while the insurer seeks to minimize the service paid for under the customer's policy. In the case of the medical industry, insurers should work with doctors to give policy holders incentives to use more preventative medicine. The three elements of the relationship - customer, professional, and insurer would thus enter into an win-win (positive sum) relationship rather than the current antagonistic one.

The same benefits could be gained in other arenas. Private security guards and insurers could work together with homeowners to make homes more burglar proof. Similarly firefighters could work with insurers to reduce the risk of fire. Car manufacturers and local mechanics could work with insurers to encourage customers to keep their cars safe. Customers could be encouraged to minimize the effects of natural disasters by insurance companies allied with contractors who build in places or in ways which minimize such risks.

Government functions to create antagonistic relationships between the insurer, the physical service professional, and the customer. Increased regulation encourages citizens to feel that only government can make choices about the services they receive, that government must fight with service providers if quality service is to be obtained.

A service provider learns that it is easier and more productive to lobby for legislation which favors the service-providing firm at customers' and other firms' expense than it is to build customer confidence with better service. The role of the insurance company is often to compensate customers who are the victims of poor service either by government or private firms. In doing so the insurers still need to calculate risks in order to set premiums, thus giving them valuable data on how such risks could be minimized. But the incentives of government regulation motivate insurers to concentrate their efforts on pressuring legislators for undeserved favors and customers for overpricing contracts and underpaying service, pitting the insurer against the customer and the service provider.

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Other Institutional Changes

In addition to those institutional changes noted in answers to the "official FNF forum questions," there are other institutional changes that would occur in a free nation's business environment. Business involves the exchange of property. Usually this involves finance. It always involves the need for clear titles.

The notion of finance which is not a function of state-owned or state-licensed institutions has been addressed under the heading of "free banking" by many libertarian theorists quite thoroughly. I do not have a lot to add to it. The biggest change might be restoring the right of private banks to issue currency with no connection to a state, and restoring to citizens the right to accept or reject a given currency as they see fit with no official "legal tender." As with insurance, the fact that the state is no longer regulating financial institutions will result in easier entry by new firms. Membership in a credit union, for instance will determined by policies set by the credit bureau itself rather than being artificially limited by government to those who are members of occupational or other special groups. Again, credibility bureaus could play a major role in helping consumers choose which firms to trust.

Clear entitlement to property is a topic which libertarian theorists discuss far less than finance. At a minimum two trading parties need to anticipate that they will retain possession of the properties and/or services being exchanged. Usually a service, once provided, cannot be lost by the recipient. But tangible property can lose its utility to an owner if that owner's right to exclusive use of it is disputed. In statist societies, the state claims the right to resolve property disputes. In fact property title held in a statist society is retained through other means as well. Ultimately, the best protection an owner has to his property title is the respect of his fellow citizens for that title. If the general citizenry does not respect property titles, as defined by the state, that citizenry will conduct a kind of guerrilla war (largely non-violent) to redistribute property (or to block its redistribution by the state). Black markets and smuggling, among other institutions, arise as vehicles for this war.

How would a free nation guarantee property rights to its citizens? Advocates of statist societies argue that a stateless society is simply a surrender to chaos, a surrender to the guerrillas. One flaw in this argument is the claim that there needs to be a monopoly on the power to enforce property rights, that this function cannot be decentralized. The very fact that there is more than one state society on the surface of the earth proves that monopoly is not necessary. But the primary flaw in the argument for state monopoly is that it assumes that there is one absolute "proper" or "natural" distribution for property which everyone can agree to. Throughout the history of civilization, indeed throughout the known history of mankind, this has never been the case. Most societies are composed of many smaller communities each with different views on what a proper property code should be. A state's effort to enforce a single code on all of these communities is either an effort to elevate one of the them to an elite status by enforcing its code on the others, or a compromise wherein each community's local code is suppressed to some extent. In either case the result is the guerrilla war mentioned above.

The challenge of a free nation is not to end the differences between the communities, as states have tried to do, but to accommodate them. This is a problem for a "diplomatic system," not for a "judicial system." The main innovation required has been mentioned above a system wherein private agencies keep records of contracts. Each arbitration service will tend to do this as well as to develop a relationship with specific communities which it serves. The arbitration service will need to learn the property code of each local community in order to properly interpret contracts made within each community. Probably this will evolve as a form of precedent-based or "common" law.

Additionally, arbitration between people from different communities will have to be done from time to time, which will require that each arbitration service have some degree of familiarity with neighboring property codes. And the style of arbitration between communities will have to be seen as a diplomatic rather than a judicial process. The pattern for this at a very formal level has already been established between local jurisdictions within many large statist nations as well as between statist societies internationally. At an informal level this pattern has already been in effect since the beginning of human society.

For the citizens of small nations, international commerce has been an economic necessity for centuries. They have witnessed the benefits of lowering the governmental barriers to international commerce. And they have learned to thrive while doing business between communities with differing legal traditions. Citizens of larger nations have traditionally been able to conduct a great deal of commerce without crossing international borders. But in recent years, international trade has become vital to even the giant states. It may be that the style of international commerce will become common world-wide even before a free nation emerges. Either way, it is clear that the need for businessmen to think internationally is increasing for purely economic reasons and will continue to increase independently of the success of our movement to create a free nation. The fact that businessmen in a free nation will need to behave like today's international traders rather than like traditional local businessmen under the regime of a huge state is not a problem for the development of a free nation. It is an asset. It means that the image of a free nation is, at least in this one way, already guaranteed to be an image of the future.

In statist societies, business is seen as being plagued by "bad" people who are always looking for a chance to steal or defraud. The state's philosophy about this problem is that the bad people should be punished after they have hurt others. Often this takes the form of seizing the funds of people who have allegedly profited from "bad" economic transactions in the past and passing a part of the seized funds to alleged "victims." An additional "service" of the state is to seize funds from overly "lucky" people to give to "unlucky" people. While "fixing" the problems caused by "bad profit" and "too much" or "too little" luck, the state manages to put more money into the hands of bureaucrats and lobbyists than into the hands of the "victims" and the "luckless." In statist societies, the state pits citizens against one another, encouraging them to view both politics and economics as a zero-sum game, one where the growth of the economy is not a real factor in players' decisions, where one player's profit is usually produced by reducing another player's piece of a limited pie.

Relations between people should be based on voluntary cooperation rather than coercion. A free nation would not have a place for lobbyists to ply their trade. Entrepreneurs would compete (but also cooperate) with one another and with customers to create more products and services for each unit of customer spending rather than seeking to make laws which force customers to spend more for less. In other words, business would be a positive sum game, a game where the players create more value as they play. The institutional changes mentioned above, like credibility bureaus and alliances between insurance companies and service providers, would still allow for the punishment (via ostracism) of people who victimize others or present bad risks to others, but they would also allow the rewarding of behavior which enhanced customer satisfaction something the negative incentive-based systems of government rarely achieve. D

Phil Jacobson has been an activist and student of liberty in North Carolina since the early 1970s. For a living he sells used books, used CDs, and used video games.

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