Pistor, Katharina. The Code of Capital: How the Law Creates Wealth and Inequality. Princeton: Princeton University Press, 2019. # Progressive Summary Pistor started investigating the workings of the financial system after the 2007 crisis. Everywhere she looked, she found 6 legal codes that explained much of what was happening: - contract - property - collateral - trust - corporate - bankruptcy When she traced the story of these institutions back to their origins, she understood that they explained not just the workings of the modern financial system, but how capital was created in the first place. These 6 modules are used to give some asset holders a comparative advantage over others. The roster of assets may change, but the methods remain the same. The code is crafted by private lawyers, but states use their powers to enforce them. Law is the hidden force which creates both wealth and inequality. It helps wealth holders shield their assets from redistributive mechanisms such as progressive taxes, and also buffers them from business cycles. # Essential Questions - Who has access to the best legal code? - Why is it that capital is able to survive the ups and downs of business cycles? # 6 Legal modules The most important legal codes are: - contract law - property rights - collateral law - trust law - corporate law - bankruptcy law. # 4 Attributes of Capital They confer the following attributes: - [[priority]], which ranks competing claims to the same asset - [[durability]], which extends priority rights in time - [[universality]], which extends them in space - [[convertibility]], which operates as an insurance device that allows holders to convert capital into state money > Accumulating wealth over long stretches of time requires additional fortification that only a code backed by the coercive powers of a state can offer. > Not all assets are equal; the ones with the superior legal coding tend to be "more equal" than others. > Not the asset itself, but its legal coding, protects the asset holder from the headwinds of ordinary business cycles and gives his wealth longevity, thereby setting the stage for sustained inequality. Fortunes can be made or lost by altering an asset's coding, by stripping some modules from an asset, or grafting them onto a different asset. `Nitzan, Jonathan, and Shimshon Bichler. “New Imperialism or New Capitalism?,” n.d., 87.` `Nitzan, Jonathan, and Šimšōn Bikler. Capital as Power: A Study of Order and Creorder. RIPE Series in Global Political Economy. London: Routledge, 2009.` `Rudden, Bernard. “Things as Thing and Things as Wealth.” Oxford Journal of Legal Studies 14, no. 1 (1994): 81–97.` `Pistor, Katharina, Yoram Keinan, Jan Kleinheisterkamp, and Mark D. West. “The Evolution of Corporate Law: A Cross-Country Comparison.” SSRN Electronic Journal, 2003. https://doi.org/10.2139/ssrn.419881.` # Depersonalization Depersonalization is an important process which gives modern corporations the ability to be a nexus of contracts, but which shields shareholders from liability. Before the 19th century, depersonalization was not available for most businesses. In the 16th century, states granted depersonalization as a privilege to some companies for the purposes of enforcing trading rights abroad (eg East India Trading Company in 1600). Depersonalization was also given to organizations that served a public benefit, such as hospitals and schools. Prior to 19th century, the most notable example of widespread depersonalization was in ancient Rome. In the 2nd century BC, Roman law allowed for a partnership structure in which partners could assign assets to a slave. > Two partners would set up a business, which was run by a slave, whom they jointly owned. They would allocate certain assets, bundled together and given the legal label of a peculium, to this business with the result that the partners’ liability for any business loss was limited to these assets. Creditors of the firm could not enforce against the partners’ personal assets and, conversely, the partners’ personal creditors had no access to the peculium. The business could survive a turnover of its partners and an exchange of one slave for another as the manager of the business. As such, the slave-run firm had key attributes that characterize the modern business corporation; most important, it used asset partitioning and shielding devices to limit the reach of creditors to the assets of their immediate contractual parties and prevented them from seizing assets that were protected by a legal shield. > In the twelfth century, canonist scholars conceived of the church as a corporate legal entity that conferred legal powers on ecclesiastical officers, including the pope, but also on churches and monasteries independent of their relations to secular powers. In a similar vein, kings chartered towns, granting them legal personality and the right to govern their own affairs. > The modern business corporation was not born with legal shielding devices, limited liability, and other props that grant it the legal attributes of priority, universality, and durability firmly in place. It acquired these attributes over time and through many legal battles. Over the course of the nineteenth century, most legal systems in Western Europe and North America allowed for the creation of a legal entity without governmental approval [this is known as free incorporation]. It took another century for a corporate law to evolve that gave the company’s founders so many options that legal scholars have called it an “enabling” corporate law, almost contractual in nature: the corporate law of the tiny US state of Delaware.14 Most of the large, publicly traded US corporations are incorporated in this state, which has also become a hub for foreign business organizations in search of a benign (read manager-friendly) corporate law. 3 features contribute most to the success of the modern business corporation: - entity shielding - this creates priority rights over distinct asset pools, each with creditors who don't have access to the larger pool - while it is illegal to hide assets, or transfer them when creditors come chasing, it is perfectly legal to use pre-emptive shielding - Romans used the peculium, English landowners used the trust (and its sibling - the strict family ettlement), and Renaissance Florence used the partnership system (sistema di azienda) - creditors actually like partitioning, because it allows them to focus only on one aspect of a business - imagine if a single owner had multiple lines of business under one roof, such as textile manufacturing, trading, and money lending, a failure in one area can spill over into another; a creditor would have to monitor everything - if each line of business was behind a separate legal shield, a creditor could focus on the business of their choice - entity shielding leads to expansion of credit - The Florentine partnership system emerged around 1380, and triggered a major credit boom. The Medici Family, which ruled Florence from 1434 to 1530s, exploited the partnership system to great advantage. - loss shifting - allows owners to limit their losses and shift the risk of doing business to others, such as contractual creditors or the public (through government bailouts) - In the UK, free incorporation was introduced with the 1844 Joint Stock Companies Act. The Act was revised in 1855 to introduce shareholder limited liability, but Parliament reversed this 2 years later because of shoreholder abuse. Limited liability was introduced again in 1862 to permanent effect. - In the US, limited liability was introduced in New York in 1811, and in California in 1932. - prospect of immortality - companies have to be put to death by creditors in a bankruptcy proceeding, or by shareholders in a voluntary dissolution. # Capital = Asset + Legal Code Why is inequality so great today? There are Marxist explanations, anti-globalization explanations, Thomas Piketty. But no one explains the genesis of capital. Where did it come from? How is wealth created? Why does capital survive so many shocks and crises? Capital is made from 2 ingredients: an asset, and the legal code. An asset can be any object, claim, idea or skill. With the right legal coding, any asset can be turned into capital, thereby increasing its ability to create wealth. While the nature of assets has changed, the legal coding has remained remarkably constant. # The metamorphoses of capital Fernand Braudel traces the concept of "capital" back to the 13th-century, when it was used to describe a fund of money, or goods, or money rented out for interest. (Anti-usury rules have been common in the West until the 19th-century. At first, [[Usury was not allowed in Europe until 1545]] was restricted to members of the same faith. Then lawyers figured out how to transact around them.) ^[Koyama, Mark. “Evading the ‘Taint of Usury’: The Usury Prohibition as a Barrier to Entry.” Explorations in Economic History 47, no. 4 (October 2010): 420–42. https://doi.org/10.1016/j.eeh.2009.08.007.] Capital is not a thing. It cannot be traced back to a specific time period, political regime, or a set of antagonistic relations between proletariat and bourgeoisie. Capital has gone through many transformations, but the source code remains the same. The legal institutions used to code capital were invented during feudalism. (Feudalism lasted from the 9th to 13th centuries. It is a system in which land is held in exchange for services or labour. Nobility held lands from the Crown in exchange for military service. Peasants held land from the nobility in exchange for their labour.)^[Hodgson, Geoffrey. Conceptualizing Capitalism] Understanding capital in terms of law is useful, because it shifts the debate away from class identity and class struggle. It is now about who has access to the best legal code: banks, traders, property owners, corporations, shareholders who shelter behind a corporate shield, non-bank financial intermediaries who issues complex derivatives andv yfc dvc gb g6cv4 securities, etc. # Empire of law Two legal systems dominate the world: English common law and the laws of New York State. All the top 100 global law firms are located in these 2 jurisdictions. When the world is run by one or two powers, we call it empire. Law's empire does not need troops. It just needs the social agreement that the law is absolute. And its rallying cry is, "But it's legal." Global capitalists love this system because they can pick and choose which laws are most favorable to them, and they don't have to invest in the expensive business of influencing local politics. The empire of law is patchwork. It is made up of many domestic laws, stitched together by [[conflict-of-law rules]] and [[international treaty law]]. This decentralisation means that global finance and commerce can function without a global state or global law. > The empire of law severs the umbilical cord between the individual's self-interest and social concerns. \- > Capital coded in portable law is footloose; gains can be made and pocketed anywhere and the losses can be left wherever they fall. Metaphor: Legal code is the software, and states are the hardware that run it. A code can be created locally, but as long as there is a state willing to run it, then wealth holders are free to pick and choose which code they want to run. States are willing to run the code because it has proven to be a creator of wealth. > ... an empire of law has been built that is made primarily of domestic law but remains only loosely tied to specific states or their citizens. States have actively torn down legal barriers to entry and offered their laws to willing takers and have thereby made it easier for asset holders to pick and choose the law of their liking. # Can humans be capital? Combining the insights of Marx and Polanyi, and adding the centrality of law, we can now assert that legal coding is the key to commodification. It can do this using priority and universality alone. But for utmost legal protection, durability or convertibility must be added. > Capitalism, it turns out, is more than just the exchange of goods in a market economy; it is a market economy in which some assets are placed on legal steroids. Neoclassical economics describe production as the sum of capital (K) and labor (L), which together produce goods (Q). But with the right legal coding, labor can become capital. > Many a freelancer, for example, has discovered that she can capitalize her labor by establishing a corporate entity, contributing her services to it in kind and taking out dividends as the corporation's shareholder in lieu of a salary – thereby benefiting from a lower tax rate. Intellectual property rights are nothing else but the legal coding of human ingenuity. # Slavery and capital Humans are often excluded from the definition of capital because they cannot offer themselves as collateral. But when slavery was legal, slaves were not only owned, they were used widely as collateral to secure loans. Even investors in the Northern, slave-free states did so, thereby sustaining an inhumane system, even as they condemned it in public. Priest suggests that in colonial America, about 35.6 percent of the wealth in Southern states were slaves and 48.6 percent held in the form of land. The history of slavery demonstates the malleability of law, which can adapt itself to any social system or structure. Ref: Priest, Claire. “Creating an American Property Law: Alienability and Its Limits in American History,” n.d., 75. # How the law crept into the concept of capital Thorstein Veblen defined capital as an asset's "income-yielding capacity". John Commons defined capital as "the present value of expected beneficial behavior of other people." In the late 19th century, US courts extended the notion of property rights beyond the right to use an object at the exclusion of others. It now included the right to future returns. Once this move was made, future returns could be taxed, exchanged, and re-invested. The law was critical in making the behavior of other people more reliable, thus securing expected returns. > Jonathan Levy defines capital as "legal property [that is] assigned a pecuniary value in expectation of a likely future pecuniary income." In short, capital is a legal quality that helps create and protect wealth.^[Levy, Jonathan. “Capital as Process and the History of Capitalism.” Business History Review 91, no. 3 (2017): 483–510. https://doi.org/10.1017/S0007680517001064.] # What is code? ![[code]] # Enforcement of rights Before bankruptcy law, the first creditor to arrive on the scene would lay claim to assets when an insolvency occurs. Bankruptcy law imposes a simple rank order. But modern economies are built around a complex network of legal rights of different standing that are backed by coercive state power.^[Arruuada, Benito, Giorgio Zanarone, and Nuno M. Garoupa. “Property Rights in Sequential Exchange.” SSRN Electronic Journal, 2017. https://doi.org/10.2139/ssrn.3075131.] Arruñada, Benito. “Property as Sequential Exchange:,” n.d., 36. When trade and commerce take place in tight knit communities, formal law enforcement is not necessary. Everyone knows who has priority. > Laws is a powerful social ordering technology; it has been used for centuries to scale social relations beyond close-knit communities and to assure strangers that they can risk transacting with one another to the tune of billions of dollars without ever having come face to face. # Exorbitant privilege This phrase was coined by French president Giscard D'Estaing in reference to the status of the US dollar as the global reserve currency. It was used as the title of a book by Barry Eichengreen. > The legal code confers attributes that greatly enhance the prospects of some assets and their respective owners to amass wealth, relative to others – an exorbitant privilege. Choosing the assets and grafting onto them the legal attributes of priority, durability, universality, and convertibility is tantamount to controlling the levers for the distribution of wealth in society. Lawyers are the true masters of the code of capital. Only the best-paying clients can hire the most skillful lawyers. The specifics of how assets are coded are rarely scrutinized, hidden within the offices of big law firms, and not in the public gaze of courts and parliaments. States provide the legal tools for lawyers to use. They offer their law enforcement apparatus. By the time new asset codings have been challenged and struck down, they have already made fortunes for their holders. > Many a state has fallen for the promise that expanding the legal options for some, including offering them exemptions from general laws and other legal privileges, will enlarge the pie and offer prosperity for all. \- > ... the coding of capital occurs typically in a much more dentralized fashion than Marxists would have it. Asset holders do not need to capture the state directly, much less win class struggles or revolutions; all they need is the right lawyers on their side who code their assets in law. \- > Law is the predominant means by which democracies govern themselves; yet the law they furnish is used by private parties, the holders of capital assets and their lawyers, to advance their private interests. # Land in feudal England Most countries’ constitutions presume property rights, but don’t specify who gets to define them. They usually protect existing property rights from arbitrary deprivation. Land has been around long before people. In order to establish property rights, there must be rules that establish who gets exclusive use of a piece of land. This is called priority. Should priority be given to people who have lived on the land for a long time, who depend on it for sustenance, and who contribute to its health? This was the general rule under feudalism. Property rights are usually negotiated on a case by case basis. Actual practices have to be matched to legal concepts. Before the Norman conquest, England followed Roman law, which treated land like other property rights. Under Roman law, property rights conferred the right to use, possess and alienate an asset. After the Norman conquest, from 1290 to 1490, the terms “property” and “ownership” stopped appearing in court cases regarding land. These terms continued to be used for “chattel”, ie goods and animals. During this feudalist period, land was assigned in exchange for military services and loyalty. Only use rights were given, such as to the output of the peasants who worked it. The rights could only be transferred upon death to the eldest son. Only the king could have an “absolute right” to land. # The Enclosure movement By the end of the 1600s, anyone could possess an “absolute right”. The holder of such a right could assert it against anyone in the world. In England, enclosure of the commons began in 1500s. Landlords began asserting “absolute rights” (see below) over land they formerly shared with commoners. They built hedges and fences, and petitioned local courts for title based on “first use”. By 1600, most arable land in England was already enclosed. This paralleled a shift from thinking of nature as an organism to thinking of it as mechanistic and dead (Carolyn Merchant) There was no land registry in England before 1881, and even then it was voluntary. It became mandatory in 1925. Landlords and commoners waged a war over land rights on the basis of custom. Long-term occupancy and current land use were considerations. But if landlords efforts to hedge and fence-off land went unchallenged for too long, then courts could decide in their favour. In the long run, the commoners lost, because the landlords described them as rioters, and argued that they stood in the way of greater prosperity for all. The landlords also had access to better lawyers, and most lawyers came from the same social class. # Property rights in the colonies When Europeans began colonizing the world, the settlers would argue in courts for their right to own land inhabited by indigenous peoples. They argued that they “discovered and improved” the land, and that this trumped the “first use” principle. This was sealed by a monumental decision by a US Supreme Court in 1823 in Johnson v. M’Intosh. Justice Marshall wrote: > the United States … have unequivocally acceded to that great and broad rule by which its civilized inhabitants now hold this country. They hold, and assert in themselves, the title by which it was acquired. They maintain, as all others have maintained, that discovery gave an exclusive right to extinguish the Indian title of occupancy either by purchase or by conquest; and gave also a right to such a degree of sovereignty, as the circumstances of the people would allow them to exercise. In 1830, Congress enacted the Indian Removal Act of 1830. > American Indians were forced into reservations, and their land was carved up into plots that were zoned and titled into individualized property rights ready to be used for monetary gain; the Indians' land was turned into capital. M'Intosh was later overruled, but by that time the settlers "owned" all the land. Whereas in England, seniority trumped everything else, in the Americas, seniority was shoved aside in favour of discovery and improvement. This increased the amount of credit available in the colonies by a massive amount, and contributed to their economic growth. # The end of seniority in England In the 19th century, coal mining overtook land as the most important factor of wealth. This led to the Land Conveyance Act of 1881, which allowed creditors to seize land from insolvent families, disrupting centuries of custom in which land had to be passed to heirs. This stripped land of [[durability]]. 20 percent of land changed hands within two decades following the reforms. # Patents and Trade Secrecy Patent law is a descendant of the enclosure laws that allowed the commons to be partitioned into private property. Trade secrecy laws are derived from laws that forbade guild members from transferring trade secrets to other guilds. In concert, patent laws and trade secrecy laws have generated vast amounts of wealth. Patent laws give the holder of a patent a huge first-mover advantage. Even if the patent is later contested, or expires, it can be the nexus of much business activity that is then protected by the trade secrecy laws, which have no such limitation. > The old limits to intellectual property rights—the antierosion walls around the public domain—are also under attack. The annual process of updating my syllabus for a basic Intellectual Property course provides a nice snapshot of what is going on. I can wax nostalgic looking back to a five-year-old text, with its confident list of subject matter that intellectual property rights couldn’t cover, the privileges that circumscribed the rights that did exist, and the length of time before a work falls into the public domain. In each case, the limits have been eaten away. > - Boyle, James. “The Second Enclosure Movement and the Construction of the Public Domain.” _LAW AND CONTEMPORARY PROBLEMS_ 66: 42.