kortina.nyc / notes
21 Apr 2022 | by kortina

Pistor // The Code of Capital: How the Law Creates Wealth and Inequality

Katharina Pistor’s The Code of Capital: How the Law Creates Wealth and Inequality is the best book by an academic that captures the “real” world of business that I have seen in corporate board rooms and AC Privileged emails with lawyers over my own brief professional career.

Most academic coverage of the regime of global corporate capitalism falls into two camps: it either (I think rightly) focuses on the unjust distributional outcomes that result or argues the costs of capitalism are worth it because they are the only incentives we can come up with to motivate humans to do work and invent new things.

Pistor’s book gets into all of the gory, technical, LEGAL details that dictate the incentives driving this train.

It’s excellent.

Here’s Pistor’s summary:

274 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. This works because states back and, if necessary, coercively enforce the legal code of capital, whether or not they had a direct hand in choosing the coding strategy for the asset in question.

Recognizing that capital is made, and not simply the product of superior skills, shifts attention to the processes by which different assets are slated for legal coding and to the states that endorse relevant legal modules and offer their coercive powers to enforce them. As I will show, this process is both decentralized and, in only seeming contradiction, increasingly global. Private attorneys perform most of the work on behalf of their clients, and states, for their part, offer their own legal systems as a menu from which private parties get to pick and choose. As a result, many polities have lost the ability to control the creation and distribution of wealth.

In the following chapters, I will illustrate this argument by showing how different asset classes have been coded as capital, starting with land (chapter 2) and moving on to firms (chapter 3), debt (chapter 4), and know-how (chapter 5). This survey sets the stage for unpacking the legal order that sustains global capitalism in the absence of a global state or a global legal system (chapter 6) and for exploring the rise of the global legal profession, the masters of the code (chapter 7). While law has been the foremost coding technique for the past several centuries, it is no longer the only contender for claims across time and space; the digital code has become a close competitor. However, as I will argue in chapter 8, its greatest powers will likely come not from offering an alternative to the legal code, but from using the legal code as a shield to protect private gains.

Pistor doesn’t only diagnose the problems. She also proposes incremental rollback strategies:

  1. The default answer to requests for new exemptions, special regulation, or preferential tax treatments [for capital] should simply be “no.” Claims that this would deny some actors the opportunity to increase the pie to the benefit of all should be eyed with suspicion, as past experience shows that even big pies are usually devoured in solitude or only by invited guests. Whoever claims that individual private gains will translate into social welfare improvement should bear the burden of proof for showing the mechanisms by which this feat will be accomplished. Enough of waving the invisible hand; as this book has shown, the legal infrastructure has long been put in place to allow savvy asset holders to reap the full returns of their selfish action.

  2. there should be far fewer opportunities for asset holders to go on a legal shopping spree. To achieve this end, coordinated action by states is desirable, but not absolutely necessary. The conflict-of-law rules that facilitate the legal mobility of capital are part of domestic legal orders and for the most part are not enshrined in international treaty law and may therefore be rolled back by one state at a time.37 Doing so may incur the wrath of foreign investors, and domestic capital holders may threaten to exit, but realizing these threats would be quite costly for many.

  3. Investor-state disputes should not be settled by private arbitration.
  4. The state should preempt capital crisis rather than resorting to bailouts after the fact.
  5. Empower parties suffering externalities of capital crisis to seek compensation ex post with treble and punitive damages, class action lawsuits, and injunctive relief.
  6. Rollback laws like the US Commodities and Futures Modernization Act of 2000 that make speculative contracts and wagers (eg derivatives) enforceable by law.
  7. Coordinate legal reforms across democratic polities to reduce the pressure “roving capital” puts on states when it forces them to compete for tax revenue with exceptions and exemptions.
  8. Consider alternative funding sources for law schools that make corporate law the current best option for paying back law student debt.

1543 These roll-back strategies may be less than some readers might have hoped for. And yet, one of the major lessons of coding capital is that persistent incrementalism has advanced the interests of capital holders; persistent incrementalism, I suggest, may also be a viable strategy to push back and ensure that democratic polities may rule themselves by law.

Notes and quotes…


The key legal modules that make the construct of “capital” possible are:

160 The roster of assets that are coded in law has changed over time and will likely continue to do so. In the past, land, firms, debt, and know-how have all been coded as capital, and as this list suggests, the nature of these assets has changed along the way. Land produces foodstuff and shelter even in the absence of legal coding, but financial instruments and intellectual property rights exist only in law, and digital assets in binary code, for which the code itself is the asset. And yet, the legal devices that have been used for coding every one of these assets have remained remarkably constant over time. The most important ones are contract law, property rights, collateral law, trust, corporate, and bankruptcy law. These are the modules from which capital is coded. They bestow important attributes on assets and thereby privilege its holder: 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 and thereby protect their nominal value, for only legal tender can be a true store of value, as will be further explained in chapter 4.8


Knowledge should be a global commons. Instead, it is subject to enclosure (so it can be privately monetized):

933 [E]arly attempts to ensure that TRIPS would mediate between different approaches to defining intellectual property rights were rejected by private business from the global North. Their telling argument was that such alternative legal treatment offered “inadequate treatment of IP rights.”60 In their minds, there was only one way to configure intellectual property rights—the American way. In truth, there is no such thing as a generic property right, whether intellectual or otherwise. The Privy Council and the Supreme Court of Belize understood as much when they recognized indigenous land use practices as property rights—and the same principles could and arguably should apply to intellectual property rights. By endorsing a singular approach based on the business interests in the most advanced economy, the world missed a critical opportunity to create an intellectual property rights regime of meaningful diversity and, critically, to preserve at least parts of the global commons in knowledge. Then and now, the quest to monetize assets won over, requiring their coding as capital.


Patent applications (and the time spent arguing for the grant of provisional patents) grant software companies a temporary monopoly they can use to generate private data based on an algorithm that will eventually be public.

946 In essence, “data-generating patents” give the patentee a head start over others in building a huge, private database that will be enforced through trade secrecy law long after the patent itself has expired. In contrast to conventional intellectual property rights, trade secrets have no time limit.


Complex chains of shell companies protect assets:

672 Similarly, in the modern securitization business, trustees are not friends or family members of the trust’s settlor, but financial intermediaries. They don’t offer their services as fiduciaries for free but are paid a fee based on a small percentage of the asset value. Their new mandate to manage a portfolio of assets created new questions about trustee liability. Most of these issues were addressed in relevant contracts that specified the scope of their rights and responsibilities, including limitations on their liabilities. As always, new legal coding strategies such as these were developed in private practice by transactional lawyers; they made their way into case law only if and when challenged, but during boom times, litigation was a rare occurrence, and so the practice spread and became a new way of how business was done.

NC2’s trust sponsor, or settlor, was the Citigroup affiliate, CMRC, which had acquired the mortgages from New Century. The US Bank National Association, a Cincinnati-based private bank, was appointed trustee. In addition to the trustee, there was a “trust administrator,” a depositor, a custodian, and a credit risk manager. These various functions were filled in part by other Citigroup affiliates and in part by outsiders, and those on the inside at NC2 would often offer services as outsiders for similar trusts set up by their competitors. This way, financial intermediaries could be earning fees left and right, while protecting themselves from conflicts of interest by employing their competitors for services they could not provide themselves without running afoul of the law.

The NC2 prospectus circulated to attract investors discloses the volumes of mortgage-backed securities of the kind that were assembled in NC2 handled by the key players. According to the prospectus, CMRC (the sponsor) had already securitized assets worth $50 billion, and US Bank N.A. disclosed that it acted as trustee for “667 issuances of MBS/Prime securities with an outstanding aggregate principal balance of approximately $292,570,800,000.00.” The trust administrator, another affiliate of Citigroup by the name of Citibank N.A., was reported to manage “in excess of $3.5 trillion in fixed income and equity investments on behalf of approximately 2,500 corporations worldwide.”8


Pistor predicts the ultimate fate of crypto finance will benefit incumbents, for they have the most influence of the legislators:

1299 The NC2 prospectus circulated to attract investors discloses the volumes of mortgage-backed securities of the kind that were assembled in NC2 handled by the key players. According to the prospectus, CMRC (the sponsor) had already securitized assets worth $50 billion, and US Bank N.A. disclosed that it acted as trustee for “667 issuances of MBS/Prime securities with an outstanding aggregate principal balance of approximately $292,570,800,000.00.” The trust administrator, another affiliate of Citigroup by the name of Citibank N.A., was reported to manage “in excess of $3.5 trillion in fixed income and equity investments on behalf of approximately 2,500 corporations worldwide.”8


The rules that govern capital are the result of private, not public, choice:

1429 It is not difficult to understand why asset holders might want these legal privileges; after all, it gives them an edge over competitors in amassing and protecting their wealth. Less clear is why states fall for this and often create additional carve-outs for holders of capital assets over and above the privileges they already enjoy by virtue of the code’s basic modules. To some, the answer to this question will seem only too obvious. To Marxists, the question of power and rule is inextricably linked to class struggle and rule by one class over others. Once the bourgeoisie gains control over the state and its lawmaking apparatus, it will, of course, use it to entrench its power. On the other end of the spectrum, we find rational choice theorists who shift the analysis from social classes to individuals and from class struggle to bargaining. To them, scarcity is key and power is never absolute, because no one controls everything needed to retain it. This, they argue, is why the power wielders will inevitably enter into bargains with their likes.7 Whereas Marxists see law primarily as an instrument for exercising power, for rational choice theorists, law operates both as a constraint on and as an expression of power, and the balance between the two is struck through bargaining.

Both camps have marshalled a lot of evidence to buttress their respective claims. My goal here is not to dispute them, but to suggest that both theories suffer from a similar blind spot. They ignore the central role of law in the making of capital and its protection as private wealth. Using the analytical lens developed in this book, it is possible to explain the political economy of capitalism without having to construct class identities, as Marxists feel compelled to do, or to make heroic assumptions about the rationality of human beings, as rational choice theorists would have it. The key to understanding the basis of power and the resulting distribution of wealth lies instead in the process of bestowing legal protection on select assets and to do so as a matter of private, not public, choice. There will, of course, be times when the state strikes a bargain with the wealthy, or state agents succumb to side payments that are meant to grease those wheels of the bureaucracy that directly benefit them. There are also times when we can observe powerful private interests obtaining direct control over the state, but these sporadic events are better described as epiphenomena. Of course, the choice of assets is not random; the point is that powerful interests need not bargain with the state; all they need are good lawyers who master the code of capital.

The roots of capital’s ability to rule by law run deep and lie in the emergence of modern rights as private rights that are dependent on state power yet have become dislodged from the social preferences of the citizens of the states that make them. The essence of these modern rights is not their content, but their form as individual, or subjective, rights, as the German philosopher Christoph Menke has shown in his recent Critique of Rights.8 Autonomous law has become “the law of rights,” whatever its contents might be. This does not mean that no attempts are made to justify why certain interests, but not others, are cloaked in the authority of law. In the Western legal tradition, a natural state of the world that preceded the legal order typically serves as a justification. The imagined natural state was legalized and what was once natural has been turned into a subjective right that is enforceable irrespective of the social effects it might have.

They became the foundation for a new economic and political order. “Without the legal form of the subjective right capitalism would not exist,” according to Menke;9 and neither would the political order that sustains capitalism, an order in which subjective rights are enshrined in the constitution and state power is directed to protect them.

Put differently, the modules of the code may be part of the private legal order, but private law is imbricated with a constitutional order that has elevated subjective private rights to foundational principles.10 Public and private law are intertwined and jointly constitute the system we call capitalism. To see this more clearly, the following section discusses how the process of coding and recoding capital in private law relates to its public law foundations.


Victims of capital crimes often lose arbitration because it requires private funding:

1462 The power of private law in coding capital is further evidenced in how infringements of this law are policed: it lies in the hands of private parties, not the state. There is no public agency that monitors ordinary breaches of contracts, infringements of property rights, or shareholder rights. The state, through its police force, prosecutors, or regulators, intervenes only when breaches reach the threshold of theft, fraud, or embezzlement—and even these boundaries are constantly under attack. Victims of lesser transgressions have to take the law into their own hands; and they will often have to bear the costs for doing so.17 This is both a source of freedom for resourceful parties and the reason weaker parties—in terms of economic and legal prowess—so often have to seize their rights to them.


Likewise, legal and regulatory action are not fair playing fields:

1504 In addition, legal and regulatory competition are not equally available to all. Albert Hirschman illuminated the power dynamics in organizations, a firm, an association, or a state, by suggesting that any member of such an organization has essentially three options: exit, voice, and loyalty.32 Members can vote with their hands or with their feet; if neither works, they have no option but to be loyal. In large organizations with many members, only few have an effective voice. This is why exit is such an important option to have. Not everybody, however, has the same exit options. It takes resources to move physically, and it takes law and good lawyers to move legally. Moreover, the current legally constructed global order allows asset holders to fully exploit the benefits of legal and regulatory competition, while confining natural persons to the country of their citizenship. Legal persons can easily roam the globe and enrich their owners, and the holders of capital can search for the legal order that gives it the best protections. In contrast, natural persons are held up at borders and can cross only, if at all, with visas. If only some have a viable exit option, they can turn this into a bargaining chip, even into a business strategy. If they do not get what they want from one state, they threaten to leave, either physically or, cheaper yet, by adopting another country’s laws for their coding purposes. 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.



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