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Limited liability is causing unlimited harm

Katharina Pistor
Katharina Pistor2/14/2020 07:00 AM GMT+08  • 5 min read
Limited liability is causing unlimited harm
(Feb 14): In a recent tweet, Olivier Blanchard – a former chief economist of the International Monetary Fund – wondered how we can “have so much political and geopolitical uncertainty and so little economic uncertainty.” Markets are supposed to me
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(Feb 14): In a recent tweet, Olivier Blanchard – a former chief economist of the International Monetary Fund – wondered how we can “have so much political and geopolitical uncertainty and so little economic uncertainty.” Markets are supposed to measure and allocate risk, yet shares in companies that pollute, peddle addictive painkillers, and build unsafe airplanes are doing just fine. The same goes for corporations that openly enrich shareholders, directors, and officers at the expense of their employees – many of whom are struggling to make a living and protect their pension plans.

Are markets wrong, or are the red flags about climate change, social tensions, and political discontent actually red herrings?

Closer inspection reveals that the problem lies with markets. Under current conditions, markets simply cannot price risk adequately, because market participants are shielded from the harm that corporations inflict on others. This pathology goes by the name of ‘limited liability’, but when it comes to the risk borne by shareholders, it would be more accurate to call it ‘no liability’.

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