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Thread: Limited liability in a free market society...

  1. #1

    Default Limited liability in a free market society...

    I was looking on Mises and was surprised that there is even a debate as to whether limited liability should be legal. Limited liability (ie. corporate personhood) is completely incompatible with libertarian philosophy IMO.

    The idea that company's like Bain can buy a company, rip away and sell off all it's assets piece by piece, have the company take out loans in order and use that money to pay themselves and then bankrupt the company, rinse and repeat while taking no personal responsibility for the bankruptcies sounds like crony capitalism at it's finest.

    Most of the problems associated with unlimited liability could easily be negated through liability insurance anyways.

    Thoughts?
    Last edited by Bohner; 11-29-2012 at 11:42 PM.



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  3. #2

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    Just like money, banking and finance, the history of corporations in America, and its ramifications toward the erosion of individual rights and liberties, is something for which very few people are aware.

    Excerpted from here...

    Initially, the privilege of incorporation was granted selectively to enable activities that benefited the public, such as construction of roads or canals. Enabling shareholders to profit was seen as a means to that end. The states also imposed conditions (some of which remain on the books, though unused) like these*:

    • Corporate charters (licenses to exist) were granted for a limited time and could be revoked promptly for violating laws.
    • Corporations could engage only in activities necessary to fulfill their chartered purpose.
    • Corporations could not own stock in other corporations nor own any property that was not essential to fulfilling their chartered purpose.
    • Corporations were often terminated if they exceeded their authority or caused public harm.
    • Owners and managers were responsible for criminal acts committed on the job.
    • Corporations could not make any political or charitable contributions nor spend money to influence law-making.


    For 100 years after the American Revolution, legislators maintained tight control of the corporate chartering process. Because of widespread public opposition, early legislators granted very few corporate charters, and only after debate. Citizens governed corporations by detailing operating conditions not just in charters but also in state constitutions and state laws. Incorporated businesses were prohibited from taking any action that legislators did not specifically allow.
    I didn't read the whole thing, so I don't know all of what their angle is, but the above quote is exactly correct. Corporations are creatures of the State, but we've so come to accept their place in the market, and their standing in politics and under the law, even going so far as to grant them equal status with individuals with RIGHTS--that we are now used by them routinely as human shields; as if all "persons" were created equal. Which they are not. But those lines are blurred beyond all recognition now, and free and natural individual Citizens are the losers every time. SCOTUS and the lower courts routinely uphold laws that relegate rights to privileges (often under the Commerce and Necessary and Proper Clauses), for no other reason than that it COULD apply to corporations.

    Limited liability is only one way that [now practically immortal] corporations have artificially surpassed Real Individuals in terms of their own superiority in the eyes of the law, in terms of rights, powers, duties and obligations. However, just like everything partisan stems from someone not wanting to part with their favorite artificial economic advantages, there are otherwise liberty loving people who can't tell the difference between themselves and a creature of the state--especially when they slop from the State privileges trough, and are one themselves. That's when cognitive dissonance kicks in, and they start rationalizing from their own self interest, which has nothing to do with a truly free market.
    Last edited by Steven Douglas; 11-29-2012 at 10:13 PM.

  4. #3

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    Limited liability is an invitation to fraud, as Bain demonstrated so skillfully.
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  5. #4

    Default

    Quote Originally Posted by Steven Douglas View Post
    Just like money, banking and finance, the history of corporations in America, and its ramifications toward the erosion of individual rights and liberties, is something for which very few people are aware.



    I didn't read the whole thing, so I don't know all of what their angle is, but the above quote is exactly correct. Corporations are creatures of the State, but we've so come to accept their place in the market, and their standing in politics and under the law, even going so far as to grant them equal status with individuals with RIGHTS--that we are now used by them routinely as human shields; as if all "persons" were created equal. Which they are not. But those lines are blurred beyond all recognition now, and free and natural individual Citizens are the losers every time. SCOTUS and the lower courts routinely uphold laws that relegate rights to privileges (often under the Commerce and Necessary and Proper Clauses), for no other reason than that it COULD apply to corporations.

    Limited liability is only one way that [now practically immortal] corporations have artificially surpassed Real Individuals in terms of their own superiority in the eyes of the law, in terms of rights, powers, duties and obligations. However, just like everything partisan stems from someone not wanting to part with their favorite artificial economic advantages, there are otherwise liberty loving people who can't tell the difference between themselves and a creature of the state--especially when they slop from the State privileges trough, and are one themselves. That's when cognitive dissonance kicks in, and they start rationalizing from their own self interest, which has nothing to do with a truly free market.
    Yup. The government-created corporate business form is a BIG problem. While it is certainly possible in a free market for two individuals to enter into an agreement whereby one or both of them have limited liability to each other, that is MUCH different than creating an artificial entity which BY LAW has limited liability automatically in every encounter, voluntary or not. And lives forever.

    To me, the whole idea that an imaginary, immortal entity can own property and enter contracts is bizarre and not at all consistent with any concept of property rights that I can embrace. Only human beings should be able to own property or enter contracts.
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  6. #5

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    I think it's a mistake to say either way would happen, I think such a market would see both and in the end a market strictly regulated by it's consumers i.e. a free market would favor the better of the two, or invent a third.

    The problem is right now we don't have a choice because there's just too much danger in risking your personal assets.
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  7. #6

    Default

    Quote Originally Posted by Bohner View Post
    have the company take out loans in order and use that money to pay themselves and then bankrupt the company


    Thoughts?
    In a real free market banks who were stupid enough to loan companies like this money would soon be bankrupt themselves. I have no problem with limited liability. Just make sure you know who you are entering into a contract with, corporation or individual.

  8. #7

    Default

    Quote Originally Posted by Bohner View Post
    I was looking on Mises and was surprised that there is even a debate as to whether limited liability should be legal. Limited liability (ie. corporate personhood) is completely incompatible with libertarian philosophy IMO.

    The idea that company's like Bain can buy a company, rip away and sell off all it's assets piece by piece, have the company take out loans in order and use that money to pay themselves and then bankrupt the company, rinse and repeat while taking no personal responsibility for the bankruptcies sounds like crony capitalism at it's finest.

    Most of the problems associated with unlimited liability could easily be negated through liability insurance anyways.

    Thoughts?
    did you notice the contradiction?

    How can a company have personhood but take no responsibility? That's not the problem with either limited liability or corporate personhood, it's double standard and inconsistency, which is incompatible with any law and order.

    But perhaps limited liability was created specifically to prevent insurance companies from exploiting high risks or un-payable debts.

  9. #8

    Default

    Quote Originally Posted by thoughtomator View Post
    Limited liability is an invitation to fraud, as Bain demonstrated so skillfully.
    Elaborate.

  10. #9

    Default

    Quote Originally Posted by Bohner View Post

    The idea that company's like Bain can buy a company, rip away and sell off all it's assets piece by piece, have the company take out loans in order and use that money to pay themselves and then bankrupt the company
    They bought the company. What's wrong with destroying the company you bought yourself?

    If they didn't buy the company, then you must ask who was the stupid board of directors that let them bear debt with no benefits?

    See? It's that simple, either Bain owned the company and it was theirs to destroy, or they did not, and the company's board is responsible for keeping their assets, liabilities and integrity. The idea that Bain somehow did all the bad things and suffered nothing is nonsensical, and anybody who allowed it is probably too stupid to be protected by any law.

  11. #10

    Default Not so simple

    Quote Originally Posted by Tpoints View Post
    They bought the company. What's wrong with destroying the company you bought yourself?

    If they didn't buy the company, then you must ask who was the stupid board of directors that let them bear debt with no benefits?

    See? It's that simple, either Bain owned the company and it was theirs to destroy, or they did not, and the company's board is responsible for keeping their assets, liabilities and integrity. The idea that Bain somehow did all the bad things and suffered nothing is nonsensical, and anybody who allowed it is probably too stupid to be protected by any law.
    Not so simple because NOBODY owned it. No real human being ever owned the business itself. It was owned by a fictitious entity. No individual human being was ever responsible for what was done. The corporate business form not only sequesters liability, it also divides ownership from management of the fictitious entity. The result is that managers are transitory (as are the owners, by the way). The result is a tendency for managers to manage in a way that makes the company LOOK good on paper in the short term so they can either flip the corporation or themselves (moving on to another corporate management job on the basis of their "turnaround" of the last corporation).

    Overall the result of the dominance of the government-created corporate business form has been a loss of concern for long-term growth, loyalty to the customer, loyalty to employees, concern for the community, and development of better goods and services. Instead, folks like Bain capital engage in a paper game of accounting tricks and short-term stripping of companies to book unsustainable profits quickly and then move on.

    Henry Ford once counseled businessmen to strive to give consumers MORE for their dollar rather than less. The corporate business form encourages just the opposite.
    The proper concern of society is the preservation of individual freedom; the proper concern of the individual is the harmony of society.

    "Who would be free, themselves must strike the blow." - Byron

    "Who overcomes by force, hath overcome but half his foe." - Milton

  12. #11

    Default

    I find it odd that people these days assume a business is a corporation these days, and claim it has tax benefits. For a small one man operation like myself, Sole Proprietorship offers me more tax protections because I am exempt from most federal taxes. No SSI, No Medicare, No Income Tax. Just capital Gains, which I can avoid by not showing profit.
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  13. #12

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    It depends. I believe the owners of corporations should be 100% liable for all damages they do to people they did not make a contract with. For instance in environmental cases, etc.

    However, I do believe that it's ok to go bankrupt and not be liable with all your private money, as long everyone who gave you a loan signed a contract in which you made it clear that you are not liable with your private wealth, but only with the value of the company itself. Voluntary contractual agreements should be above any law, as long as they don't affect anyone who didn't sign the contract. Obviously in a free market, we would assume that these kinds of contracts are going to be to better terms for companies where the owner is completely liable. But even if not, it's not my problem if anyone wants to lend out his money uncarefully.

    In regards to Bain, I don't really see any problems with it. Nor did Ron Paul, when I remember correctly. If it was indeed more valuable to loot the company's assets than to continue business, then that's exactly what should have been done. In fact, I don't see why anyone even sold his company to bain, if the value of it's assets was higher than what Bain was ready to pay for it. Why didn't they sell the assets themselves and followed the Bain-playbook? Are there any paragraphs in US-bankruptcy law that I don't know that would have only made the initial owner liable, but not Bain? That seems a little odd. The way I see it, nobody lost his rightful property, except a few banks foolish enough to agree to contracts with entities that are not entirely liable. These people should have seen it coming.

  14. #13

    Default

    Correct me if I'm wrong, but isn't limited liability designed to protect the shareholders of a company, so that they can't owe more than their investment? I thought the main issue was that government has worked to support management at the expense of the shareholders by requiring those planning a "hostile" takeover to report their intentions to the SEC?

  15. #14
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    In very general terms, if you limit liability for one's actions, you lower the costs of somebody taking those actions and will make them more likely to engage in the particular behavior which lead to the liability. In a truely free market, both individuals and companies should not be protected from consequences of their actions.
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  16. #15

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    The kinds of limited liability that would exist in a free market are not the same as the kinds that exist as government creations.

    I don't think you can say you have freedom if you have some law preventing people from forming corporations, which, by definition, would have to have some kind of corporate personhood.
    Im not a libertarian. Im not advocating everyone run around with no clothes on and smoke pot.

  17. #16

    Default How?

    Quote Originally Posted by erowe1 View Post
    The kinds of limited liability that would exist in a free market are not the same as the kinds that exist as government creations.

    I don't think you can say you have freedom if you have some law preventing people from forming corporations, which, by definition, would have to have some kind of corporate personhood.
    I don't advocate banning corporations, just get government out of it. But then tell me how a free market handles non-human ownership?

    Is it okay for a dog to enter a contract? No? Then why is it okay for my imaginary friend? Neither is a sentient being. Neither can sign its own name. That's all a corporation is - an imaginary friend who the government mandates must be treated like a real human being able to sign contracts and own property. How would a free market accomplish that?

    On the other hand, the free market could very easily create partnerships among real human beings. Under existing common law those partnerships could combine capital, divide management, own property, sign contracts, etc. But they would not be immortal and would not have limited liability unless they negotiated it with each individual with whom they did business.
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  18. #17

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    Quote Originally Posted by Acala View Post
    I don't advocate banning corporations, just get government out of it. But then tell me how a free market handles non-human ownership?
    A group of people enter a contract with each other where they all invest various amounts of money in a business in exchange for commensurate shares of ownership of it and they delegate the decision-making of spending that money to run the company to a board they elect and hire.

    They give that company a name, and it enters into other contracts as its own entity. Other people and other companies freely and knowingly enter into contracts with it, even when such contracts include stipulations limiting the company's liability to its own assets, and not all the assets of all of its owners. These include contracts where the company buys, and thus, owns, things.

    The owners of the shares of this company have the right to sell their shares to others. And it becomes potentially immortal.
    Last edited by erowe1; 12-01-2012 at 12:47 PM.
    Im not a libertarian. Im not advocating everyone run around with no clothes on and smoke pot.

  19. #18

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    Quote Originally Posted by Tpoints View Post
    They bought the company. What's wrong with destroying the company you bought yourself?
    It's more about if you use a corporate person to take out debt, use some of that loan to pay yourself, company goes bankrupt, and the creditors and other people the corporate person screwed over can't get their money back because the corporate person doesn't have it.... YOU DO!!!

  20. #19

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    A corporation would have to pretty well run to be immortal.
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  21. #20
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    Quote Originally Posted by erowe1 View Post
    Other people and other companies freely and knowingly enter into contracts with it, even when such contracts include stipulations limiting the company's liability to its own assets, and not all the assets of all of its owners. These include contracts where the company buys, and thus, owns, things.
    How would tortious liabilities incurred with respect to persons not party to any such contracts be handled?
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  22. #21

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    Quote Originally Posted by Occam's Banana View Post
    How would tortious liabilities incurred with respect to persons not party to any such contracts be handled?
    I'm not sure. But like I said, it's not that there wouldn't be such a thing as limited liability, just that it would be of a different kind.
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  23. #22
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    Quote Originally Posted by erowe1 View Post
    I'm not sure. But like I said, it's not that there wouldn't be such a thing as limited liability, just that it would be of a different kind.
    I get what you're saying. And I agree. So long as limitations of liability fall entirely within the purview of voluntary contractual arrangements between the parties involved, there is no problem.

    It's when liabilities fall outside the purview of prior voluntary agreements that the idea of "limited liability" falls apart (and this is true regardless of whether we assume a statist or anarcho-capitalist context).

    While a range of solutions could evolve to deal with such problems under anarcho-capitalism, under statism we are bound to end up with a system increasingly rigged to benefit incorporated "entities" at the expense of unincorporated individuals & groups (as aptly noted by Steven in post #2).

    That's the source of my own skepticism of and antipathy towards the notion of limited liability. I suspect the same (or something much like it) is true of most or all of the critics of limited liability in these here parts.
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  24. #23

    Default maybe

    Quote Originally Posted by erowe1 View Post
    A group of people enter a contract with each other where they all invest various amounts of money in a business in exchange for commensurate shares of ownership of it and they delegate the decision-making of spending that money to run the company to a board they elect and hire.

    They give that company a name, and it enters into other contracts as its own entity. Other people and other companies freely and knowingly enter into contracts with it, even when such contracts include stipulations limiting the company's liability to its own assets, and not all the assets of all of its owners. These include contracts where the company buys, and thus, owns, things.

    The owners of the shares of this company have the right to sell their shares to others. And it becomes potentially immortal.
    You could do all of that with partnerships - except the immortality part.

    I don't have a problem with this kind of contract as long as it specifies that the "corporation" is really just shorthand for the owners who are bound by the contract per its terms. But there must be some obligations on real human beings or there is no contract.

    But how can a corporation own real property? The ownership of real property has always involved some system for having community recognition of the person taking ownership. Once upon a time it involved a ceremony where the owner passed ownership by giving the new owner a clod of dirt from the land. Nowadays, in the USA at least, it involves a title document recorded with the county. So you would have the county recognize ANY entity as an owner? So a parrot could own land? If not, why is that different from an imaginary person?
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  25. #24

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    Quote Originally Posted by idiom View Post
    A corporation would have to pretty well run to be immortal.
    The Catholic Church is a corporation - going on, what, 1500 years now?
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  26. #25

    Default

    Quote Originally Posted by Acala View Post
    The Catholic Church is a corporation - going on, what, 1500 years now?
    And you don't think it would continue to exist in a free market?
    Im not a libertarian. Im not advocating everyone run around with no clothes on and smoke pot.

  27. #26

    Default

    Quote Originally Posted by Bohner View Post
    It's more about if you use a corporate person to take out debt, use some of that loan to pay yourself, company goes bankrupt, and the creditors and other people the corporate person screwed over can't get their money back because the corporate person doesn't have it.... YOU DO!!!
    Explain to me, how do I "use" anybody, or any entity to "take out debt"?

    Either I am the board and responsible for the debts, or I am not, and I'd have no right to use them. How can a person ever USE a shield to take out debt without the responsibility of his actions? And who would allow it?

    How does Bain, or Romney, or whoever the scapegoat is, "pay himself" without the board saying something? If they ARE the board, then who else do they owe?

    If what you're basically saying is "I use my company to loan money, but because limited liability let's me walk away as long as the company name is empty, and file for bankruptcy", then yes, I agree that limited liability, as well as the concept of bankruptcy protection, is a loophole that allows a person to owe money and never pay it back. this is really no different when a person owes money on a credit card (the credit card, or the person's line of credit, is basically the limited liability shell).

    "Company goes bankrupt", ok, so is it better to not let the company go bankrupt and force the company to pay every penny even if it means they (and their grandchildren) have to becomes slaves for life?

  28. #27

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    Quote Originally Posted by Acala View Post
    Not so simple because NOBODY owned it. No real human being ever owned the business itself. It was owned by a fictitious entity.
    And who owns the fictious entity? Who derives benefits from the fictitious entity? It can't be nobody.

    No individual human being was ever responsible for what was done. The corporate business form not only sequesters liability, it also divides ownership from management of the fictitious entity.
    Basically what you're saying is give corporations MORE rights and responsibilities, not less. Instead of letting corporations exist as ficititious, ambiguous, or liability free entities, make them only legal to exist IF they are attached to a responsible person (or in short, corporations/companies/businesses can only function if they have an owner).

    The result is that managers are transitory (as are the owners, by the way). The result is a tendency for managers to manage in a way that makes the company LOOK good on paper in the short term so they can either flip the corporation or themselves (moving on to another corporate management job on the basis of their "turnaround" of the last corporation).
    This is solved with the doctrine of "piercing the veil".

    http://en.wikipedia.org/wiki/Piercin...corporate_veil

    While it is possible for people to use shells to sheild their liability, the same way a person can use trusts to protect money they know they cannot, the law is very wary of people who act in bad faith or fraudulently abuse protections and privileges.

    Overall the result of the dominance of the government-created corporate business form has been a loss of concern for long-term growth, loyalty to the customer, loyalty to employees, concern for the community, and development of better goods and services. Instead, folks like Bain capital engage in a paper game of accounting tricks and short-term stripping of companies to book unsustainable profits quickly and then move on.

    Henry Ford once counseled businessmen to strive to give consumers MORE for their dollar rather than less. The corporate business form encourages just the opposite.
    This is not a privilege of either a corporation or LLC, it's the problem inherent with forgiving debts, or allowing irresponsible debts. The alternative is to either force debtors to pay back through use of force, or restrict loans and debts if one suspects the debtor cannot pay back. (in other words, either force gamblers to pay what they bet, or not allow them to bet at all).

  29. #28

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    Quote Originally Posted by Steven Douglas View Post
    Just like money, banking and finance, the history of corporations in America, and its ramifications toward the erosion of individual rights and liberties, is something for which very few people are aware.



    I didn't read the whole thing, so I don't know all of what their angle is, but the above quote is exactly correct. Corporations are creatures of the State, but we've so come to accept their place in the market, and their standing in politics and under the law, even going so far as to grant them equal status with individuals with RIGHTS--that we are now used by them routinely as human shields; as if all "persons" were created equal. Which they are not. But those lines are blurred beyond all recognition now, and free and natural individual Citizens are the losers every time. SCOTUS and the lower courts routinely uphold laws that relegate rights to privileges (often under the Commerce and Necessary and Proper Clauses), for no other reason than that it COULD apply to corporations.

    Limited liability is only one way that [now practically immortal] corporations have artificially surpassed Real Individuals in terms of their own superiority in the eyes of the law, in terms of rights, powers, duties and obligations. However, just like everything partisan stems from someone not wanting to part with their favorite artificial economic advantages, there are otherwise liberty loving people who can't tell the difference between themselves and a creature of the state--especially when they slop from the State privileges trough, and are one themselves. That's when cognitive dissonance kicks in, and they start rationalizing from their own self interest, which has nothing to do with a truly free market.
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  30. #29

    Default depends

    Quote Originally Posted by erowe1 View Post
    And you don't think it would continue to exist in a free market?
    Depends on what you mean by a free market and in what form the church would exist. I think only human beings should be able to own property or enter contracts. Certainly groups of people could get together and own property jointly and call it a church. But can they create an artificial entity that can itself own property, sign contracts, etc? I don't know why that would exist in a free market.
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  31. #30

    Default no

    Quote Originally Posted by Tpoints View Post
    This is solved with the doctrine of "piercing the veil".

    http://en.wikipedia.org/wiki/Piercin...corporate_veil

    While it is possible for people to use shells to sheild their liability, the same way a person can use trusts to protect money they know they cannot, the law is very wary of people who act in bad faith or fraudulently abuse protections and privileges.
    Actually, the problem isn't solved by this doctrine. Courts RARELY pierce the corporate veil. In my thirty years of law practice, including a year as a law clerk for a Federal judge when I saw hundreds of lawsuits with corporate defendants, I can't recall a single instance when a court pierced the corporate veil. That would mean plaintiffs would actually get to seek out stock holders personally and that just doesn't happen.
    The proper concern of society is the preservation of individual freedom; the proper concern of the individual is the harmony of society.

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