The rule of law. That should be a familiar phrase for anyone who lives in a democratic society, where law is supposed to be a leveling influence, backed up by the power of the state, protecting citizens from abuses of power from both the public and private sectors alike. It is an idea firmly embedded in our society, from governmental institutions (think Law and Order) to the boardrooms of corporations that drive the global economy. In the latter private sector, rule of law is sacrosanct, giving legitimacy to the transactions they conduct on a daily basis in the form of all-important capital. What exactly is capital, and what role does the law have in a capitalist economy? Columbia Professor of Comparative Law Katharina Pistor's latest work, The Code of Capital: How the Law Creates Wealth and Inequality (2019), answers these questions and more in her exploration of the legal mechanisms used to help generate wealth for private sector entities and clients.
It just so turns out that lawyers are very crafty at finding loopholes within the legal regimes that private entities run on in the form of bankruptcy, collateral, contract, corporate, and trust laws and property rights. Their job is to maximize monetary returns for their clients. How do they do this? By incrementally pushing and stretching the limits of said law, just short of the red-line drawn by past case law, where it can be claimed, if challenged in court or in private tribunals, that it is still technically legal, whether based on past court precedent or the absence of an expressed prohibition of a certain practice.
Before we get ahead of ourselves, what is capital, and where does it come from? Capital is the combination of "an asset" and its protecting "legal code," with assets taking the form of anything from an object (such as land or a house) to a skill or idea (for example, the idea of the internal combustion engine or the discovery of a cancer-causing gene) with the potential to be commodified and monetized (Pistor, 2019, p. 2). To get from land to money, or from a cancer gene to a windfall, the key is the legal mechanism used, drawn from the above listed areas of law, that can generate wealth and weather the downturns by conferring on assets the coveted traits of "priority, which ranks competing claims to the same assets; durability, which extends priority claims in time; universality, which extends them in space; and convertibility, which operates as an insurance device that allows holders to convert their private credit claims into state money on demand" (Pistor, 2019, p. 3).
In other words, the key to generating sizable wealth is the ability to protect one's accumulated assets from a hoard of creditors, or conversely, to recover one's assets in the case of another party not being able to hold up their end of the bargain (think defaulting on a loan, for example). And also, to being able to translate said asset's market value into one's currency of choice.
Better yet, the legal shield provided by lawyers, whom Pistor calls the "master of the code," are often backed up by state powers internationally, because recognizing the law an asset was protected by in one country in another provides the impression of legal certainty for asset-holders. Because of this relative legal stability, these investors are more likely to invest in another state's economy and potentially expand their tax revenues, granting upon its population greater prosperity (Pistor, 2019, p. 20). Sound familiar?
However, when states recognize an asset's home legal coding (primarily taking the form of law found in England and the United States), or even go further in adding other sweetening incentives for businesses, growing economic inequality is often the result. Clients and their lawyers are in the game of maximum returns, and as a result, states trying to regulate the excesses of such practices are often playing a game of whack-a-mole, as lawyers rediscover centuries-old feudal economic law or a more innovative legal method to evade taxes and continue to grow their personal fortune.
Moreover, because capital exists largely in law (i.e. is a construct), legal mechanisms often make assets artificially more valuable than they really are. This can be devastating when these assets are found to have been over-valued, with a resulting market adjustment to an asset's actual value often conferring increased clean-up costs on the general public over the asset-holders themselves, who often can cash-in in advance when they see the economic-writing-on-the-wall and escape with minimal losses.
What are we to do when this kind of legal coding has become deeply intertwined within the international financial and political systems? As in my previous posts, looking at books whose authors have increasingly defended the liberal system of incremental reform over calls for the sudden overthrow of the system, even as it becomes ever more unpopular, Pistor advises a similar approach. Despite her largely frustrated undertone to her even-handed look at the current economic landscape, she advocates for a slow-burn course of action that would require a leveling of the playing field for everyone below the rich and powerful, including boosting access to the lawyers and legal mechanisms the privileged use, as well as increasing oversight of current practices to ensure that they are contributing more to greater societal prosperity than to personal fortunes.
Absent concerted reforms now and into the future, Pistor warns of revolution or "the further erosion of law's legitimacy" to a public growing increasingly frustrated and desperate, seeking scapegoats in foreigners or immigrants when the fault really lies with the excesses of today's economic kingpins (Pistor, 2019, p. 234). And that is a dangerous future for all of us.
Works Cited:
Pistor, Katharina. (2019). The Code of Capital: How The Law Creates Wealth and Inequality. New York: Princeton University Press.
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