At least in the USA, since the 60s/70s, the tendency has been toward increasing the penalties for any imaginable crime: murder, rape, smoking pot, misstating income, jumping a turnstile when trying to get on a subway - all of these have seen increasing penalties. (For 1st degree murder, the death penalty was reinstated.) The penalties against drugs were increased to the point that the majority of people now being held prison are held for non-violent crimes.

The trend toward heavier penalties has effected business, and will effect it more so in the future.

Some people find it satisfying to think that criminals will have to face severe penalties, but past a certain point, the law becomes so punitive that rational people will be afraid to take leadership roles, fearing the legal consequences that they may have to face as leaders.

The article says:

"An institutionalized system of skewed incentives allowed Wall Street bankers and other corporate executives to gamble with America's wealth and then get away largely scot-free after the house of cards came tumbling down, plunging the U.S. into the worst economic crisis in decades and destroying trillions of dollars of wealth worldwide."

Tolerance of failure is the first pre-requisite of a dynamic economy. Imagine the kind of laws that would be required to punish every business person who takes large gambles with credit and then fails - I think you would have to say goodbye to the culture of startups that now exists in the USA. Most entrepreneurs take large risks, and most fail during their first attempt at a startup.

The implication of Joseph Stiglitz's words is that we should do away with the "limited liability" of the modern corporation. Instead, when corporate officiers gamble with credit and fail, Stiglitz suggests that they face jail time. Certainly, getting rid of limited liability would be in keeping with the trend towards greater and greater punishments. What is limited liability but an impediment to inflicting punishment on people who have gambled and failed? But think this through to the end: do we want to go back to the system we had in the early 1800s, before limited liability was introduced? Do we want to bring back debtors prisons, and all the other awful punishments that once kept the economy semi-frozen? Limited liability has been part of the extraordinary economic dynamism that the world economy has seen over the last 150 years.

Tolerance of mistakes, failures and screw-ups is essential to a dynamic economy.

If you have any friends who have attempted to launch a startup, ask yourself under what circumstances you think your friends should go to jail. If they gamble with credit and fail, and go bankrupt, should they go to jail? In other words, if they act like a normal startup, should they go to jail? Certainly, their bankruptcy will harm others - the money came from somewhere, after all. Shouldn't they be punished for doing harm to others? I get the reasoning that might lead some to say that such failures should be punished, but please realize the end result will probably be a stifling of innovation.

This issue has come up on Hacker News before, and I've written my thoughts about it before:

http://www.teamlalala.com/blog/2009/12/24/laws-such-as-sarba...