This is one of two related articles inspired by the history of limited liability companies. The other is called Putting Skin Back into the Game.
I find it astonishing how much we take for granted what has been around for a long time. Political institutions, social practices, economic structures, cultural values — once something has been part of the mainstream for generations, we tend to accept it as an immutable fact of life in almost the same way as we accept the laws of nature. Can you imagine what nation-states would look like without three branches of government? Transportation without cars? Commerce without corporations? Education without schools? Many people struggle to imagine a radically different world, and I’m no exception.
Yet most of the things that define the modern human experience — except for biology, at least for now — are social constructs. We create them either deliberately by convention, or they emerge from the countless decisions we make every day. In either case, what we choose as a society creates our non-biological realities.
The story of the world’s gravest challenges — climate change, social inequality, health and nutrition, environmental pollution — is also the story of rigidity in the institutional and structural fabric of our world. As we succumb to a false belief in the permanence of social constructs, we widen the mismatch between their form and their function — at great peril for humanity.
By recognizing the root causes of this fallacy and studying the history of social constructs, we can reaffirm our capacity to act (what sociologists call agency) and rekindle our imagination to better cope with the issues of the 21st century.
Intellectually, we understand that we can reverse, advance, or abolish any of our social constructs if we choose to do so. Yet we rarely consider — let alone devise and execute — profound alternatives to the brainchildren of our past. At best, we entertain incremental change to improve what’s already there. But in a time of accelerating change, incrementalism becomes dangerous. Our political and economic structures are simply not dynamic enough to deal with the relentless issues afflicting our world.
Our bias for preservation emerges from an innate fear of change — or rather from the uncertainties that change brings. Most people prefer gradual shifts, not radical ones. It is thus no surprise that we seldom have conversations about the paradigms, goals, and rules that define the foundational systems of human civilization.
Yet history tells us that only bold and courageous ideas have succeeded at propelling the human species forward. The problem is that most of us are unaware of how these ideas have come about, what incumbent constructs they replaced, and what alternatives had been considered. Our lethargy is thus mainly a result of ignorance, and this ignorance deprives us of a sense of agency over our future.
Professor Marie-Laure Salles-Djelic of the French research university Sciences Po argues that if we want to grasp the fragility and contingency of entrenched institutions, all we need to do is deconstruct their history. Doing so through a social movement lens will remind us that the ultimate power to change the course of history doesn’t lie with politicians or managers — it lies with the people.
One particularly powerful example to illustrate Djelic’s point is limited liability — the idea that society doesn’t hold individuals accountable for their actions in full. During most of human economic activity, entrepreneurs bore the full risk of their commercial undertakings, risking the livelihoods of themselves and of their kin. Unlimited liability was seen as the best way to make people behave fairly and honorably. It represented both a virtue and a necessity — a kind of moral insurance policy.
This all changed in the 19th century when limited liability became mainstream across Europe and North America. Today, we accept the concept as an immutable fact of economic life. We take it for granted — it’s how we do business. This isn’t surprising given how much wealth and progress limited liability has produced for humankind. The Economist called it the “key to the modern world.”
What we tend to forget is that such a positive outcome had not been obvious to 19th-century lawmakers. In fact, a fierce debate about the virtues and vices of limited liability preceded its widespread adoption.
In the United Kingdom, for instance, the debate first centered around the fundamental technical aspects of limited liability. Proponents believed that capping liability would attract private investment and encourage risk-taking in commercial enterprises. This would expand markets and industry and generate wealth and progress. Opponents — which included the father of modern capitalism, Adam Smith — thought the concept contradicted a philosophical hallmark of common law, that he who feels the benefit should also feel the burden. They believed that the dissociation of risk and reward would lead to negligence, mismanagement, and risky or fraudulent behavior.
When the technical debate ended in gridlock, the focus shifted to social considerations. The main issue was whether limited liability should be granted to cooperatives and partnerships — vehicles predominantly used by working-class entrepreneurs — or to joint-stock companies, which required capital and were thus mostly of relevance to members of the upper class.
Two political factions fuelled this social movement. The Chartists argued on behalf of laborers, stressing the importance of giving the working class an opportunity to lift themselves out of the misery of factory life. The Liberals argued on behalf of the upper class, promoting economic development and the “progress of the market.” Both factions championed the same legal innovation but their framing was fundamentally different.
A series of fortuitous circumstances eventually resolved the stalemate. The Chartists gradually lost enthusiasm for the cause and started to focus on other social issues, such as the education of the working class. The Liberals took advantage and intensified their lobbying efforts. Eventually, a rotation in government brought a Liberal to the helm, who persuaded parliament to assign limited liability to joint-stock companies but not to cooperatives and partnerships.
The history of limited liability teaches us two important lessons. First, institutions that are dominant today often have accidental origins. In 19th-century Great Britain, limited liability had almost been reserved exclusively for the working class. It was only because the Chartists had become complacent and distracted that the “enfranchisement of capital” triumphed over the “enfranchisement of men.” So what may feel as a natural order of things might, in fact, be a product of serendipity.
Second, institutions are often created or changed in the wake of social movements. In Europe and North America of the 1800s, the time had come to abolish the regal privileges of incorporation and limited liability and to enfranchise society at large. Likewise, social movements have instigated and catalysed many institutional re-designs throughout history. In the French Revolution, the Third Estate overthrew the monarchy and established a republic. Suffragists brought women the right to vote. The American Civil Rights Movement scored important victories to enforce the constitutional and legal rights of African Americans. More recently, social movements addressing LGBTI+ discrimination, sexual harassment of women, ecological destruction, and other social injustices have successfully advocated for changes in laws and in public opinion.
So where to go from here? As for limited liability, the question is whether dissociating decision-making from risk exposure is still a future-proof strategy. As the global economy has started to erode our natural and social capital, risk-taking and recklessness have become anachronistic virtues.
There are other institutions that warrant review. GDP is no longer useful as a metric measuring social and economic performance in a world stricken by climate change. Current parliamentary structures fail to neutralize the lobbying power of corporations and are breeding grounds for corruption. Quarterly reporting requirements in business promote short-termism and inhibit sustainable resource-allocation. Schools emphasizing knowledge over competencies are at risk of teaching students skills that are outdated at graduation.
These and other decade-old paradigms survive only because of our bias for incrementalism, because we believe that what has served us well in the past will also serve us well in the future. Yet the world is changing faster and more profoundly than in decades past, and incrementalism doesn’t cope well with revolutions.
All our social constructs exist in the complex adaptive system that is society. That’s why it’s neither trivial nor obvious to identify future-proof alternatives. The journey ahead is one of exploration and experimentation.
The first step on this journey is to abandon the idea of institutional permanence. We need more constructive and informed conversations about the virtues and perils of those powerful institutions we take for granted today — in the pub around the corner as much as in the halls of parliament or the offices of corporations.
We then need a type of institutional entrepreneurship that explores possible substitutes, both intellectually and experimentally. Like car owners conducting check-ups of their vehicles once a year, institutional entrepreneurs should check the parts that make up the machine of modern human civilization — and find out how to repair or replace those parts that are no longer fit for dealing with the challenges of the 21st century.
Our world is full of pseudo-permanent social constructs. To spot them, we need to pay attention. To change them, we need awareness of our own agency and the courage to imagine a different future. Studying history will give us the keys to both.
Unless indicated otherwise, all facts about the history of limited liability are sourced from Salles-Djelic’s 2013 article When Limited Liability Was (Still) An Issue: Mobilization and Politics of Signification in 19th-century England