John Stuart Mill and the Socialist Origins of the Limited Liability Modern Enterprise System

Discussion

Cui Zhiyuan:

"Few have noticed that Petit-Bourgeois Socialism was at the heart of the genealogy of the “modern enterprise system.” In fact, a petty bourgeoisie socialist J.S. Mill was the key figure to bring one of the main features of the “modern enterprise system” – limited liability for shareholders – into existence.

It was due to the concern for the development of workers’ cooperatives of his time that John Stuart Mill started to study the issue of limited liability. He first analyzed the so-called “en commandites” form of partnership. This special form of partnership had many proponents in England, the Christian Socialists perhaps being the most prominent among them. In this form of organization the “active” partners were subject to unlimited liability, staying with the idea of tying liability to responsibility, while the “sleeping” partners were subjected to limited liability, since they were not responsible for running the business. John Stuart Mill advocated this form of partnership because it would have allowed workers to form associations to “carry on the business [with] which they were acquainted” and also allow the “rich to lend to the poor.”

Mill argued:

- No man can consistently condemn these partnerships without being prepared to maintain that it is desirable that no one should carry on business with borrowed capital. In other words, that the profits of the business should be wholly monopolized by those who have had time to accumulate, or the good fortune to inherit capital, a proposition, in the present state of commerce and industry, evidently absurd.

In 1850, Mill testified before the Select Committee on Investments for the Savings of the Middle and Working Classes of the British Parliament. He proposed to establish the corporate regime with generalized limited liability for shareholders, because it would induce the wealthy to lend more freely in support of projects by the poor. The poor would also benefit by having the opportunity to invest their savings in producers’ or consumers’ cooperatives. As a result of the efforts of Mill and others, the British Parliament passed the 1855 Act of general limited liability for corporations.

This genealogy of limited liability has been almost forgotten by the contemporary economists. The point of retelling this forgotten chapter of economic history is to highlight that the “modern enterprise system” is not necessarily capitalist. If shareholders have only “limited liability”, it implies that they are not taking the full risks as “private owners” are supposed to do; therefore they should not enjoy all the profits of the enterprises.8 In other words, the shareholders are not the only risk-bearing group. The employee’s firm-specific human capital also runs at a risk. Moreover, shareholders can diversify their shareholding through a portfolio of different firms’ shares, but a single worker cannot work for several firms all at the same time. In this light, it may be argued that employees’ human capital runs a higher risk due to the lack of diversification. This opened the door to our understanding of the widespread institutional innovation in China’s rural industry – a “shareholding-cooperative system.”

• Essay/Chapter: Liberal socialism and the future of China. A petty bourgeoisie manifesto. Cui Zhiyuan. Chapter 9 of: The Chinese Model of Modern Development. Edited by Tian Yu Cao. [1]