The world would not be the same without limited liability companies: the veil behind which all debtors can hide.
Maybe it’s because we no longer read Dickens; but I think we forget that there was a time when failing to pay your debts resulted in jailing. I also recall a New Testament parable about a bad debtor that got his wife and children sold into slavery after being a knob.
And as for the sin of usury*, I maintain that the real biblical problem there was interest incentivizing creditors to encourage the rest to take debt and be spendthrift. Surely profiting off the ruination of the self-controlless creates a bit of a long-term crisis for the community at large?
Wise, those ancient Hebrews.
So debt was quite a lot of danger.
Until the world got large.
Suddenly, you weren’t just a guy with a blacksmith forge and an anvil that spent your days shoeing horses and sharpening the occasional axe. Enterprising craftsmen became the proud proponents of an Industrial Revolution: owning factories, gathering steam and generally colonizing Africa.
And with all this risk came the desire to ringfence it. After all – who wants to take the risk of transporting goods across the seas if one shipwreck could leave you ruined and languishing in debtors’ prison? Or more importantly, as was the case in Britain – the leader of the finance world at the time – how does a government persuade private enterprises to start producing guns in bulk to equip the Crimean War effort?
Cue: the concept of a limited liability company; where the investor’s losses were limited to the money he’d put in.
And slowly but surely, governments began to expand the concept of a limited liability company to include businesses other than shipping operations and arms manufacturers. Which became the start of the world of finance as we know it.
In more modern financial jargon, we would say that the world decided to hedge the risk of entrepreneurship with a derivative put option (the limited liability company**).
Let’s not kid ourselves when we talk about derivatives as new-fangled and bad. They’re at the core of our business ethic: that we should be able to take on debt without being liable for it.
How dangerous does that sound?
** In modern terms, that is exactly what a limited liability company is. The investor holds a put option*** to force his creditors to buy their debt back at a price equal to the money he’d invested.
***The right to sell something to someone at a given price.