The Fabled Free Lunch

In today’s NY Times, Simon Johnson reports on an emerging new consensus among the global finance elite.  I receive his blog “Baseline Scenario,” so when I saw him pop up on the Times, I read it.  Interesting enough.

He describes the perspectives of various  contributions to a new book from the London School of Economics,  “The Future of Finance and the Theory That Underpins It.” ( downloaded free.)  Of Martin Wolf of the FINANCIAL TIMES Johnson  comments, “The essence of limited liability — a cornerstone of modern economic development — is that your downside losses are capped.”

That just about says it all.  I posted a comment on this TIMES column as it troubles me greatly.

Let’s take an example.  A resource extraction company has limited liability.  In the course of extracting resources, it causes physical as well as chemical damage to the local inhabitants and adds toxins to the streams.  As a limited liability corporation, its liability is capped.  It may go bankrupt, but its liability is still limited.

However, the damages are real.  Who pays for the damages remaining after the limits of the corporation’s liability are reached?  Who pays?  The local inhabitants with poor health.  The taxpayer.

There is a serious distance between the limits of the corporation’s liability and the actual damage it causes.  Herein is found the fabled ‘free lunch.’  –Also well known among physicists as the perpetual motion machine.

AS this new emerging consensus is built on the cornerstone of limited liability, we can expect more of the same.

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