The Second End of Laissez-Faire -- Bootstrapping Nature of Money and Inherent Instability of Capitalism

"Globalization" can be interpreted as a grand experiment of the laissez-faire doctrine of neoclassical economics that the wider and the deeper markets cover the capitalist economy, the more efficient and the more stable it would become. The "once a hundred years" global economic crisis of 2007-9 stands as a testament to the grand failure of this grand experiment. Following the lead of Wicksell and Keynes, this article argues that capitalist economy is subject to an inevitable trade-off between efficiency and stability because of its essentially "speculative" nature. First, while financial markets need, for their risk-diversifying function, the participation of a large number of risk-taking professional speculators, competition among professionals can be likened to Keynesian beauty-contest that constantly exposes financial markets to risks of bubble and bust. Second and more fundamentally, it is the very use of "money," which is the ultimate source of efficiency for capitalist economy, which is also its ultimate source of instability. To hold money is the purest form of Keynesian beauty contest, because we accept money only because we expect everybody else accepts it as money. When there emerges a speculative bubble on money, it plunges the real economy into depression, and when there emerges a speculative bust on money, it eventually leads to hyperinflation. Indeed, Wicksellian theory of cumulative process shows that any disturbance in monetary equilibrium triggers a disequilibrium process that drives all the nominal prices cumulatively away from it. Keynesian principle of effective demand then demonstrates that it is the stickiness of nominal wage that saves capitalist economy from its inherent instability, albeit at the expense of full employment. This article also contends that in the current global crisis such monetary instability has manifested itself in the form of the collapse of liquidity in the financial markets as well as in the form of the loss of confidence on dollar as the global capitalism's key currency.

"The Nature of the Business Corporation--Its Legal Structure and Economic Functions"

There is a fundamental difference in legal structure between the classical firm and the business corporation. While the former consists of a single ownership relation between owners and assets, the latter consists of two overlapping ownership relations ] one between shareholders and the corporation and the other between the corporation and corporate assets. The legal relation between shareholders and assets is indirect and only through the intermediary of the corporation that legally performs the dual role of a thing and a person. The main purpose of this paper is to show how such two-tier ownership structure of the business corporation has fundamental effects on the form of its organization, the ways and means of its governance, and the efficiency of its performances.

"What is Corporation? ---The Corporate Personality Controversy and Comparative Corporate Governance"

The law speaks of a corporation as a 'legal person' -- as a subject of rights and duties capable of owning real property, entering into contracts, and suing and being sued in its own name separate and distinct from its shareholders. For many centuries there have been a heated controversy between corporate nominalists and corporate realists as to the 'essence' of this soulless and bodiless person. The first purpose of this paper is to end this age-old 'corporate personality controversy' once and for all. It is, however, not by declaring victory for one side or the other, but by declaring victory for both. The key to this claim is the observation that an incorporated firm is composed of not one but two ownership relations: the shareholders own the corporation and the corporation in turn owns the corporate assets. The corporation thus plays a dual role of a 'person' and a 'thing' in the system of law. This paper then shows how this person/thing duality of corporation is capable of generating two seemingly contradictory corporate structures -- one 'nominalistic' and the other 'realistic.' The second purpose of this paper is to reexamine the theory of corporate governance. The fact that an incorporated firm is characterized by two-tier ownership structure implies that corporate managers cannot be regarded as agents of shareholders. They are instead 'fiduciaries' of the corporation. Indeed, this paper advocates the return to the pre-Law&Economics orthodoxy, maintaining that the foundation of every corporate governance system should be the managers' fiduciary duties to the corporation and that the law governing these duties should be essentially mandatory. It also argues that a variety of corporate governance systems across countries is due to the difference in governance mechanisms that supplement the costly implementation of fiduciary law by courts.