Peter
McMillan teaches English part-time and writes part-time.
Several books (fiction and non-fiction) published under
his name and a pen name (Adam Mac) are licensed under the
Creative Commons and available for free download as PDF
books.
n
The Code of Capital: How the Law Creates Wealth and
Inequality, Katharina Pistor, Professor of Comparative Law
at Columbia Law School, explains how the law — state
law and private law — establish, protect and increase
wealth. The 'code of capital' is the body of laws underpinning
and enabling wealth creation by means of assets (physical
and monetized stores of value). State law is passed by legislatures
and adjudicated in the courtroom, while private law is created
in private law offices. State law can be thought of as a set
of general rules which are fleshed out in greater detail by
private lawyers representing their clients' interests by crafting
'rules' to fill in the interstices of legislative and judicial
law.
In
the book's title, 'code' refers to a collection of legal rules
as in the "voluminous books that compile legal rules
. . . such as the French and German civil and commercial codes."
For the author, capital is more than just one of the two primary
factors (inputs) of production described in economics textbooks.
In other words, capital is not simply the set of familiar
tangible assets of plant, equipment, inventory and buildings.
[While] economists and accountants have clung to the notion
that capital is a physical input, one of the two factors of
production . . . capital has never been about a thing, but
always about its legal coding; never just about output and
input, but always about the ability to capture and monetize
expected return.
And so in this book, the code of capital concerns the legal
rules that recognize an asset as having value and thus constituting
wealth and facilitate the creation and accumulation of more
wealth. Contemporary examples of wealth are presented and
discussed, e.g., asset-backed securities and their derivatives,
such as the mortgage-backed securities that contributed to
the 2008 global financial crisis and the emergence of crypto
currencies as stores of value and potential means of exchange.
Coding capital is synonymous with creating the legal rules
for contracts, property rights, collateral, trusts, corporations,
bankruptcy and most of all enforcement by means of an unrivalled
authority of the state through the courts and policing. It
is crucial for the legal code to be effective that it be ‘backed
and enforced by a state.’
Max Weber explained the power of law by invoking the state’s
monopoly over the means of coercion. Through its courts, bailiffs
and police forces, states enforce not only their own commands,
but also private property rights and the binding commitments
private parties make to one another.
In the introductory chapter, the author outlines the main
themes of the book,
Capital is coded in law, and, more specifically, in institutions
of private law, including property, collateral, trust, corporate,
bankruptcy law and contract law. These are the legal modules
that bestow critical legal attributes on the select assets
that give them a comparative advantage over others in creating
new and protecting old wealth. Once properly coded, capital
assets enjoy priority and durability, are convertible into
cash, or legal tender, and, critically, these attributes will
be enforced against the world, thereby attaining universality."
With
respect to global capitalism,
“Capital’s global mobility is a function of a
legal support structure that is ultimately backed by states.
Many states have committed themselves under their own domestic
law, or in international treaties, to recognize the priority
rights that were created under foreign law. They regularly
enforce foreign law in their own courts and lend their coercive
powers to executing the rulings of foreign courts or arbitration
tribunals."
The author goes so far as to maintain that the existence of
capitalism depends entirely on the "coercive powers of
states."
But the relationship between the state and capitalism is symbiotic.
What does the state get in return? According to the author:
“The
fate of governments in democracies in particular has been
tied ever more closely to their governments’ ability
to produce growth. Growth rates, and the rise of stock markets,
not the distribution of wealth or indices of human development,
have become the standard measures for adjudicating success
or failure of elected governments—in itself an indicator
of the enormous cognitive sway capital has over polities.”
Thus, the legitimacy of the liberal state (as opposed to the
monarchial or dictatorial state) derives from the general
economic well-being of the citizenry, prosperity being the
promise of capitalism, though not necessarily, or even desirably,
in the equal distribution of economic outcomes.
Furthermore, the author provides analytical support for the
argument that it is laws — and these not limited to
the laws passed by governments but extending also to the private
laws created in the legal space left empty by public law —
that enable the creation of wealth. That is, it is laws that
that are the foundation for the forces of supply and demand
— the market-balancing invisible hand — that establish
and protect ownership of the inputs and products, i.e., wealth.
There is no natural law that directs endowments of wealth.
That allocation is man-made. Not only is the initial distribution
of wealth dependent on human rules, but the accumulation of
wealth is also dependent not on natural law but the laws of
human society.
The foundational analysis thus provides the means for a genealogical
account of the origins of wealth and wealth inequality —
a variation on Nietzsche's genealogy of morals adapted to
the economics of wealth — for both start when and not
owing to some cosmic destiny that is fortuitous for some but
not all.
How
does wealth get created in the first place? And once created,
how does is wealth maintained over generations? This is where
the coding of capital figures in, as it explains how the human
inclination to be better off than others — the impulse
for hierarchy — establishes the rules that favour the
generation, persistence and increase of wealth inequality
over time.
Economists do a fine job papering over the flawed origins
and self-sustaining practices of wealth. Reflecting on this
reviewer's distant university major and subsequent readings
in economics and political economy, it has become apparent
that there is much that economics has in common with human
religions. Both cloak human mendacity in respectable garb,
and both sanction the exercise of power to promote self-serving
behaviour, to perpetrate violence (physical, emotional and
economic) and to manage the social herd intellectually and
economically.
For the author, law is very much about the exercise of power
— how it is created and used to dominate and subjugate
citizens domestically as well as the citizens and entrepreneurs/investors
globally. The metaphor of war — as the ultimate exercise
of domination — is a key leitmotif in the book, wherein
economic and legal 'warfare' is described as having supplanted
military conflict. At various turns in the book, one may be
reminded of the Monty Python pirate skit, The Crimson Permanent
Assurance, and its satirical take on hostile corporate takeovers.
Pistor speaks of the global empire of capital wherein troop
strength and armaments are less important than the authority
of the law, "and its most powerful battle cry is 'but
it is legal.'" Here the reader may recall Dickens' fictional
recounting of Jarndyce v Jarndyce, a complicated estate case
in the English chancery court system of Bleak House,
which may be regarded as legal combat or a Kafkaesque absurdism—two
sides of a bad coin. Continuing the metaphor of power and
war and extending it to empire, the author repeatedly reminds
the reader that the legal system of English common law and
New York State law "dominate the world of global capital"
— as centres of the empire of the code of capital.
With respect to indigenous property rights, Pistor cites the
2007 Mayan court victory on land-use rights in Belize and
then observes that "[t]he Maya won a battle [in the courts]
but were unable to win the war against their own government."
Then revisiting US-Native American legal relations, she draws
attention to the discovery doctrine to characterize America's
Manifest Destiny as:
“One of the greatest "conquests by law"
had been achieved by altering the cause for recognizing
a superior right: discovery and improvement extinguished
first in time claims. Discovery and improvement became the
winning arguments for settlers who had bet all along that
aggressive capture would give them title eventually.”
Similar
references are made to the "battle over land enclosures
in England in the sixteenth century" during which ordinary
citizens fought to protect the openness of the common lands
from the appropriation of the landed gentry. And then the
author brings the reader up to date in the 21st century with
a brief discussion of the 2017 Eli Lilly v. Canada patent
law decision by a NAFTA tribunal that recognized that "Canada
won the battle; [though] it is not yet clear who will win
the war and have the final say in making property rights:
sovereign states or private agents."
The author also notes the trend towards copyrights and patents
— temporary state-protected monopolies — being
extended indefinitely into the future by means of supplementary
patents and copyright extensions. For now, in Eli Lilly, the
extension of a monopoly patent was found to be limited across
international legal jurisdictions. Here the reviewer's short
fiction, “The Marketplace for English,” published
in the Newer York in 2014 — a now defunct experimental
lit e-magazine not to be confused with the illustrious The
New Yorker — depicting a bizarre situation where
commerce and copyrights have extended their domain into the
realm of everyday language provides some comic relief.
The significance of the war theme is part of an overall pessimism
that the author has about the prospects for the future of
re-coding capital so that the great disparities in wealth
can be ameliorated and so that the economic value of a relatively
stable and predictable marketplace requiring the cooperative
participation of the masses of law-abiding and productive
citizens can be factored into the accounting ledger of entrepreneurs
and investors. In other words, the investment climate itself
is a precondition for successful commerce, and the maintenance
of that climate is a social good which should be recognized
as worthy of earning a reward in the same way the entrepreneurs/investors
rationalize their rewards for risk-taking.
The author's parting words, resonating with Nietzschean overtones
of the will to power and the struggle — not for survival,
but for superiority — offer little consolation though.
The second trajectory may, sadly, already be under way, as
illustrated by the rampant attacks on independent judiciaries
and the free press, not only in relatively young democracies,
such as Poland and Hungary, but in countries with a long tradition
of democracy and the rule of law, such the United Kingdom
and the United States. If these trends continue, naked power
will once more gain sway over legal ordering, as it has done
over most of human history—and we will all be worse
off for it.
At this point, one might be roused by memories of the asymmetric
application of debtor law—formerly imprisonment (well
illustrated in Dickens’s fictional description of the
Marshalsea debtor prison in Little Dorrit) and modern
day bank foreclosures and asset liquidation for the defaulting
individual contrasted with the asset shielding coded in private
bankruptcy law to protect the personal wealth of entrepreneurs/investors
in limited liability corporations and the government bailouts
that intervene to prevent the 'catastrophic' failure of 'too
big to fail' banks and most recently automobile manufacturers
during the 2008 financial crisis.
The
Code of Capital is not an easy read but it is a worthwhile
read to better understand, from an analytical perspective,
how and why economic inequality is an intrinsic part of the
allegedly laissez-faire economic system of capitalism, 'allegedly'
because state interventions are fundamental to the creation
of the preconditions for capitalism and equally importantly
the sustainment of the capitalist system. To assist the lay
reader, despite the risk of boring some, the author provides
multiple recapitulations of the book's main line of arguments
over the course of the book.
A useful introduction to some of the ideas in this book can
be found in The New York Times' Ezra Klein Show interview
with Katharina Pistor on January 13, 2023. The audio and audio
transcript are available at https://www.nytimes.com/2023/01/13/podcasts/
transcript-ezra-klein-podcast-katharina-pistor.html.
