The Legal Foundations of Wealth - A Review of 'The Code of Capital'
Review of Katharina Pistor's 'The Code of Capital, How The Law Creates Wealth and Inequality'
“… the legal protections capital enjoys are arguably the mother of all subsidies. Without the code’s module and the possibility to fashion them to one’s liking, neither capital nor capitalism would exist.”
- pg. 222
What makes an asset an ‘asset’? Is it its ability to store value? To expand it? Is it how good it is at giving the holder returns? What if these properties change? Will it still be an ‘asset’? Who determines what an asset is?
The Code of Capital locates the answers to these questions squarely within the law, taking you through the legal basis of assets from land to intellectual property rights. In this, Pistor shows the hidden legal power of private law, which turns ‘ideas, skills, know-how, even processes, into capital’ with the helping hand of a state authority. One of the clear implications of this exposition is the pressing need to reimagine how we view assets, where they come from, and their reliance on public (state) power. This recognition of the public foundations of asset formation and wealth creation, she argues, is fundamental in reshaping the discourse in policy discussions around the broader redistribution of (making public the private gains from) the returns from these assets.
Land: The Original Asset
Pistor takes on the task of surgically exploring the role of law in the rise and fall of land as an asset, the contemporary dominance of debt markets, and the growing disputes in defining and protecting intellectual property rights. While all these were tempting to review in-depth, I settled on focusing on land simply because it was the first section of the book I enjoyed reading.
This analysis of land as an asset was fascinating for a number of reasons. First, it was interesting to see that land has not always been owned exclusively by private individuals. For example, before the 17th century and the subsequent enclosure movements, land was owned (and only transferred) by the king, meaning that even when landlords reaped the fruits of the land, they could not sell or make substantial changes to it. Secondly, I was surprised to learn that this shift from royalty-exclusive-absolute land property rights to the current private property rights was not smooth but characterised by both physical and legal resistance, with the commoners’ argument of long-term use and occupancy being upheld in certain pockets and time periods.
A peculiar dimension of this legally facilitated shift towards this exclusive notion was that it wasn’t always ‘won’ in the same way. For example, while in England, landlords used the argument of their ‘seniority’ of rights - which I understood as the ability to dictate land use patterns over commoners to claim ownership of land, colonialist settlers argued against this, in turn leaning on land discovery and improvements as the basis for their claim on land. Of course, this is because the ‘seniority’ argument here would have meant that the ownership of the land would be given to the Indigenous people of these colonised lands, who had historically been on the land, collectively determining what it is used for. Thus, the law is not a neutral and apolitical device that facilitates market operations but a flexible tool constantly interpreted and reinterpreted to cater to the interests of those with the power and resources to do so.
This aspect as mentioned above of the law is seen most acutely in its role in conferring protections or the eventual stripping of these, all of which is contingent on the politics of the time. The socio-political dominance of landlords was reflected in the safeguards given to land, which cloaked it with the durability necessary for any dynamic asset. This was done from legally sanctioned penalties for trespassers and poachers to legal innovations such as entails - ‘an inheritance of real property which cannot be sold by the owner but which passes by law to the owner's heir upon his death.’ The use of the latter ‘turned land from a commodity that could be freely sold into a keep-safe for family wealth.’ Economically, this legal trick meant that while (English) landowners could mortgage their land to get credit, as they were legally only recognised as life tenants and not necessarily the owners, ‘they could not possibly transfer the right to seize all the property to a creditor.’ Land, therefore, could be used to create more wealth without the added risk of losing it.
“Fundamentally, capital is made from two ingredients: an asset and legal code.”
- pg. 2
On the other hand, the waning influence of landlords in the aftermath of the depression of the 1870s was mirrored in the Conveyance and Settled Land Act, which stripped away its hard-fought protections, as typified by the rollback of the legal shield of the entail.
“From one day to the next, the same land that had served as the primary source of wealth for centuries was turned into an ordinary asset, a simple commodity that could not only be freely bought and sold but could easily end up on the auction block.”
- pg. 39
My favourite takeaway from this discussion of land was Pistor’s illustration of how you need to save property rights from itself essentially. By this, I mean that you need to exclude some land from the reach of property rights to guarantee that the rights are enforceable because universal private property rights could lead to unsustainable inequality, boiling into massive social unrest and rebellions. This can be seen in some colonised territories, where pockets of land were off-limits for the colonial settlers in what were called areas of autonomous governance.
Other Assets & The Globalisation of Law
The discussion of the other assets follows a similar pattern to the analysis of the legal origins of land as an asset. For example, in Cloning Legal Persons, she looks at the legal innovations, battles, and concessions behind the corporate firm’s dominance and, consequently, its fundamental role in the success of capitalism.
Pistor points out how the law has given corporations the necessary protections and tools to thrive. This, she argues, can be seen in its ability to limit exposure to creditors by using subsidiaries (whose debt can not directly placed on the parent company), ability to exist forever (with shareholder lock-in and the vibrance of the secondary market for these), ability to limit losses (seen best by government bailouts in times of crises), and finally the ability to chose how they will be regulated or taxed, through the dominance of incorporation theory which lets them decide where they are headquartered.
“Making bets on an unknown future is a risky business; economic downturns should, therefore, keep a natural check on the ability to maintain and grow wealth over a long period. Business owners, however, have found ways to capture the upside while shifting the downside to others: to their various contractual creditors - including employees, tort creditors, and the public at large.”
- pg. 59
Therefore, from land, the corporation, and financial assets to intellectual property rights, beyond the illusion of merit, is a basis of attributes that have been granted by law. An asset can only be recognised as such when given fundamental properties by law.
Most attributes discussed can often only be granted in a specific jurisdiction. But we live in a globalised world, with globalised production and globalised commerce. This raises important questions that can be encapsulated as follows: if capital is coded in law, how can global capitalism exist in the absence of a global state and global legal system?’
The most straightforward answer would be harmonisation, the adoption of the same laws and legal structures globally. However, while this has been seen in places like the European Union, it isn’t easy to carry out politically due to different countries’ differing social and political priorities.
What has taken center stage in mediating the local and global legal apparatus is simply putting in place conflict-of-law rules that govern cases that go beyond one jurisdiction. Thus, convergence in this means a more or less similar way of operating in a globalised context. This is best seen in corporate law, where founding shareholders can choose the law their entities will be governed by.
“For roving capital, the law of a given state is just an option, which its holders and their master coders will exercise only if it promises greater wealth than the laws of another state.”
- pg. 221
However, it must be noted that these gains by global capital have been consistently fought over, from the political lobbying for them under the pretext of efficiency to the rollback of crucial advantages in the aftermath of crises. This tassle is best seen in the failures to globally converge the politically sensitive areas of law, such as property rights, intellectual property rights, or even bankruptcy laws. Thus, while the march of global capital has continued, this has not been unchallenged, not only from the activists and trade unions but also from states themselves.
Public Power, Public Good & Empirics
From these key discussions, Pistor lays bare the fact that actors with access to good lawyers take advantage of the law's indeterminacy and malleability - to insulate themselves from losses and amass more wealth. However, the analysis also highlights the public dimension of everything built on this shaky and dexterous foundation - from the recognition to enforcement of the law both locally and internationally to the state’s consistent extension of lifelines in times of crises. In essence, ‘capital is inextricably linked to law and state power, because in its absence, the legal privileges capital enjoys would not be respected by others.’
Therefore, after setting this backdrop, Pistor argues that law must not be enclosed for private benefit. She recommends using policies such as limiting legal privileges to assets only with evidence of clear social benefit and withdrawing choice of place for corporations to reduce regulatory and tax arbitrage, to mention a few.
The Code of Capital is, therefore, an eye-opening depiction of the need to rethink how we look at the law and who we give the tools and powers to reshape it. Despite the incredible work it does pointing this out, there were some aspects of her argument that I would have loved if she engaged with further.
For example, by now, you might realise that the kernel of Pistor’s discussion is that the ones with access to the best lawyers are the ones that not only amass wealth but also define what wealth itself is. She argues that ‘realising the centrality and power of law for coding capital has important implications for understanding the political economy of capitalism. It shifts attention from class identity and class struggle to the question of who has access to and control over the legal code and its masters’. While she does this, she doesn’t substantiate the distinctiveness of the main analytical groups of the two theoretical approaches. She does not offer statistics on the different compositions of these two groups - the capitalist class and ‘those with access to the best lawyers.’ Isn’t there significant overlap between the two categories? If not, then where exactly does the difference lie? If yes, then wouldn’t a class analysis yield roughly similar results?
This gap is also evident in her critique of the Marxist tradition. Although she admitted that they had a better handle on the concept of capital — viewing it in a relational sense — she goes on to say that they still fall short. She argues that the law is an indispensable machinery that gives capital its properties, and Marxists underappreciate the importance of this. Secondly, she points out that holders of global capital do not occupy direct positions of power, but indirectly utilise state power, which she says is ‘contrary to Marxist analysis’.
Although I understand these arguments, I do not think, in their essence, they are not necessarily incompatible with Marxian analysis. I would say Marxists are often more focused on what happens after the law works its transformative magic. I have always thought the law and any other state instrument in Marxian analysis is understood as a tool to further the interests of the capitalist class, whether directly or indirectly. Thus, while there is an urgent need to emphasize the role of law within this tradition, its shortcomings are more likely an issue of this relative lack of emphasis than it being contrary to Marxist principles.
Conclusion
Despite being dense in some areas, The Code of Capital is an in-depth illustration of the legal foundations of wealth and the public power that holds this together. I would recommend this to anyone interested in understanding wealth inequality and other distribution-related questions. My only warning would be that there will be stretches of text that you might not fully grasp, but the overarching premise of the book is easy to follow. Otherwise, you are guaranteed a fresh perspective of the public versus private sector dichotomy prevalent in most economic and social policy analyses today.
