Beware the decline and fall of limited liability

If you could only take five inventions back in time to the Roman empire, what would you take that would be most useful in building a modern society?

I once thought the best five technologies would be electricity, the internal combustion engine, and other hardware. But over the years of asking this question of my economics students, their insightful responses made me rethink what is truly valuable. Software, or in other words, the intangible rules of a sovereign economy.

There can be little argument that one of the greatest and unceasing “institutional” technologies is the idea of a corporation. It allows multiple owners to share the control and/or profits of an productive organization. More importantly, it limits their individual liability. Thus the notion of the “limited liability” company would be the first technology on my list — it enhances innovative activity and risk-taking, while still punishing companies themselves for defective and dangerous activity.

Sadly, the fate of limited liability is not as secure in the U.S. as we might hope. Consider this tale about the super-magnetic Buckyballs that were a big hit in 2009. Sohrab Ahmari  in the WSJ describes the saga of the entrepeneur behind the product. Regardless how dangerous you think Buckyballs are, it is the treatment of inventor Craig Zucker that should chill every reader:

Nonetheless, the commission pressed ahead with its war on Buckyballs. Most infuriating was the commission’s argument that a total recall was justified because Buckyballs have “low utility to consumers” and “are not necessary to consumers.”

“Two and a half million adults spent $30 on a product,” Mr. Zucker says. “This wasn’t a $5 impulse buy. This was a product that American adults thought had value and wanted it. It’s not the government’s place to say what has value and what doesn’t in a free society.”

Maxfield & Oberton resolved to take to the public square.On July 27, just two days after the commission filed suit, the company launched a publicity campaign to rally customers and spotlight the commission’s nanny-state excesses.

Online ads pointed out how, under the commission’s reasoning, everything from coconuts (“tasty fruit or deadly sky ballistic?”) to stairways (“are they really worth the risk?”) to hot dogs (“delicious but deadly”) could be banned. Commission staff were challenged to debate Mr. Zucker, and consumers were invited to call Commissioner Inez Tenenbaum’s “psychic hotline” to find out how it was that “the vote to sue our company was presented to the Commissioners on July 23rd, a day before our Corrective Action Plan was to be submitted.”

“It was a very successful campaign,” says Mr. Zucker, “just not successful enough to keep us in business.” On Dec. 27, 2012, the company filed a certificate of cancellation with the State of Delaware, where Maxfield & Oberton was incorporated, and the company was dissolved.

But in February the Buckyballs saga took a chilling turn: The commission filed a motion requesting that Mr. Zucker be held personally liable for the costs of the recall, which it estimated at $57 million, if the product was ultimately determined to be defective.

Rule of law, anyone?

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