Chapter 5 Homework Shaw And Barry Discuss How Adam Smith

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CHAPTER 5

Corporations

Glossary

1. corporation: A limited liability company. A company with one or more

shareholders who share ownership while enjoying limited liability.

2. externalities: Unintended positive and negative effects done to third parties from

business transactions, such as pollution.

Chapter Summary Points:

1. The modern business corporation has evolved over several centuries and

incorporation is no longer the special privilege it once was.

2. Corporations are legal entities, with legal rights and responsibilities similar but

not identical to those enjoyed by individuals. Business corporations are

limited-liability companies—that is, their owners or stockholders are liable for

corporate debts only up to the extent of their investments.

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6. The debate over corporate responsibility is whether it should be construed

narrowly to cover only profit maximization or more broadly to include acting

morally, refraining from socially undesirable behavior, and contributing actively

and directly to the public good.

9. Advocates of the narrow view stress that management has a duty to the owners

(stockholders) of a corporation, which takes priority over any other

responsibilities and obligates it to focus on profit maximization alone. Critics

challenge this argument because (a) they fear the damage that can be done from a

narrow focus on profit maximization, (b) they see nothing absurd in requiring

corporations to have a broader view of social responsibility, and (c) they don’t

think the management-stockholder relationship should forbid people from taking

moral considerations seriously other than profit-maximization.

10. Three arguments in favor of the narrow view are the invisible-hand argument, the

let-government-do-it argument, and the business-can’t-handle-it argument.

Finding flaws in each of these arguments, critics claim there is no solid basis for

restricting corporate responsibility to profit making.

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efficiency. This is particularly true when there is an imbalance of knowledge

between the buyer and the seller.

Teaching Suggestions

In Chapter 5, Shaw and Barry examine the nature of corporations and the relationships

that either do, or ought to, exist between corporations and the societies with which

corporations interact. As usual, you can help the students analyze and discuss the

arguments, theories, assumptions, and examples involved. I will examine arguments for

1. Three moral justifications for corporations. The moral justification for corporations

originally involved the fact that corporations existed to benefit society, but for-profit

corporations no longer exist for that purpose. Moral justifications for the legitimacy of

for-profit corporations include (a) our right of association, (b) the invisible hand

argument, (c) to encourage investment, and (d) investors shouldn’t be required to know

(a) Shaw and Barry mention that Nineteenth century reformers argued that

corporations should no longer be a special privilege given to certain people to serve the

public good (and are morally legitimate) because of our “right of association.” Shaw and

Barry do not discuss this argument in detail, and it’s unclear (i) why a right to association

would give us the right to enjoy limited liability for our investments and (ii) if we have a

This raises the questions: Do we have a right to associate? If so, does such a right imply

our right to enjoy limited liability?

(b) Shaw and Barry discuss how Adam Smith and Alexander Hamilton used an

invisible hand argument to justify the existence of for-profit corporations without being a

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Nonetheless, limited liability itself might be incompatible with the “free market.”

Companies are motivated to be profitable and to avoid harmful behavior in part because

they can be held responsible and lose their money. The fact that investors can‘t lose their

This raises the questions: Are corporations compatible with the free market or are they an

unfair advantage enjoyed by investors at the expense of society? If they are compatible

with a free market, are they likely to benefit society more than other sorts of companies

(without limited liability)? Does the invisible hand function as well as Adam Smith and

others believe?

“encourages investment.” A shareholder could be afraid to invest her money if she could

lose her personal fortune in addition to her investment in a company. Investment seems to

This raises the question—does encouraging investment benefit society enough to morally

justify the existence of limited liability?

(d) It is often pointed out that investors rarely know much about the corporations they

invest in and shouldn’t be held morally responsible for immoral acts committed by the

corporations they invest in because of “plausible deniability.” It is said that it’s wrong to

blame investors for immoral acts because they are ignorant of the wrongdoings.

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This raises the questions: Do investors have any moral responsibilities to investigate

potential wrongdoings? Does limited liability violate the moral requirements of being an

investor?

2. Objections to corporations. Shaw and Barry don’t discuss objections to having

corporations, but at least three objections can be discussed:

(a) Limited liability violates our responsibility to pay full reparations for the damage

we do to others. Some people could say that limited liability helps investors “socialize

losses and privatize profits” because the profits attained from corporations can be enjoyed

by investors, but the losses suffered by corporations can be paid for by the public rather

These objections are relevant to the following discussion questions: Do we have a

responsibility to pay for the full damage we cause others? Are we entitled to

compensation when others harm us? Does limited liability encourage immoral or risky

behavior? Do investors have a responsibility to investigate the companies they invest in?

When, if ever, is willful ignorance an appropriate reason to avoid responsibility? Is

limited liability an unfair advantage given to wealthy people? Does limited liability help

people privatize profits and socialize losses?

Questions for Discussion

The Limited-Liability Company

Corporations are clearly legal agents. They can enter into contracts, own property, and

sue and be sued. But are they also moral agents? And whereas corporations have definite

legal responsibilities, what, if any, social and moral responsibilities do they have? The

text has some suggestions but what do you think?

And the law recognizes them as “persons.’’ Do they have moral obligations just as

individual human beings do? Can they be held morally responsible, not just legally liable,

for the things they do? The answer to these questions hangs on another question, namely:

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Vanishing Individual Responsibility

If, then, it makes sense to talk about the social and moral responsibilities of corporations,

Rival Views of Corporate Responsibility

Just what responsibilities does a corporation have? Is its responsibility to be construed

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