The Code of Capital: How the Law Creates Wealth and Inequality 
by Katharina Pistor 
Princeton University Press, 2019

For much of the 20th century the literature of political economy was about comparative economic systems rather than attentive, almost sociological (in the Weberian sense), analyses of legal, financial, political, and social institutions. After the fall of the Soviet Union the field started to become more institutionally, and even ethnographically, informed. Even so, there have been few books written on the relationship between the law-making process and the economic process, probably because few lawyers are economists, and few economists are lawyers – although some of the best economists were trained in law. So it is all the more notable that Katharina Pistor has written The Code of Capital: How the Law Creates Wealth and Inequality which is precisely that kind of book and places itself firmly in the tradition of the new political economy. 

So much discussion around wealth and inequality involves gawking at statistics people don’t understand. Katharina Pistor offers a fascinating argument as to why inequality is increasing, and does so “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.”  She does not dispute these paradigms (although it isn’t hard to discern where her sympathies lie when you notice her presentation of the concept of capital is informed by people with last names like Polanyi, Harvey, Hobsbawn, Veblen and Stiglitz), rather she argues that “they ignore the central role of law in the making of capital and its protection as private wealth. . . 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.”

The skeleton of her argument is this: 

The term “code” is used to “show how certain legal institutions have been combined and recombined in a highly modular fashion to code capital” using modules such as “contracts, property, collateral, the law of trusts and corporations, as well as bankruptcy laws” which operate to grant assets with the attributes of priority, durability, convertibility, and universality. These attributes give their holders a “comparative advantage in accumulating wealth over others.”

Priority rights rank claims, privileging certain titles to an asset or others, such as secured over unsecured creditors.

Durability adds a temporal component to priority rights. Pistor tells us that “legal coding can extend the life span of assets and asset pools, even in the face of competing claimants, by insulating them from too many creditors.” For example, if a corporation defaults on a loan, their creditors can seize assets, but shareholder’s, or the shareholder’s personal creditors, cannot. 

Universality ensures “priority and durability will affect the parties who agreed to be bound by them” and “that these attributes will be upheld against anybody.” 

Lastly, convertibility “gives asset owners an explicit or implicit guarantee to convert their assets into state money when they can no longer find private takers,” and is especially important for financial assets.  

So Pistor is arguing that “capital is a legal quality that helps create and protect wealth.” Therefore, choosing assets and imbuing them with the above attributes “is tantamount to controlling the levers for the distribution of wealth in society.” Capital is linked with power because this process can only be achieved by the state or else “the legal privileges capital enjoys would not be respected by others.” 

The key thing to understand is that the selection of assets is “a matter of private, not public, choice.” For example, Pistor points out that “private law is imbricated with a constitutional order,” and that there is an incompleteness to the law in any country because “a changing world will always leave even the most carefully statutory or case law incomplete.” However, this means there is “fertile ground for legal creativity and imagination” on the part of lawyers, who are “the masters of the code,” to join “the modules of the code onto new assets for which they were never designed, or to reconfigure existing assets to ensure that they can sidestep new regulations designed to limit the excesses of past coding strategies.”

This favors those who can afford lawyers, and lawyers trained at the best schools. 

It is very difficult to disagree with the fact that law does code capital and that this causes inequality. Pistor is very convincing on this point especially in its application to intellectual property as well as globalization, helping us understand why these are exacerbating inequality.   

Outside of this there is very little in the book that is agreeable. The term capital is not well defined. It is treated like a category rather than anything specific: Sometimes it is an asset, sometimes a legal characteristic, and sometimes it is referred to anthropomorphically implying it simply means ‘business.’ Either way, Pistor places credit for its existence entirely with the state. She says, “there is no capital without law, because only law can bestow priority, durability, convertibility, and universality on assets, and thereby privileges its holders.” However, “the roots of capital’s ability to rule by law run deep and lie in the emergence of modern rights as private rights,” around which our current legal systems were built.

The problem with this view is that private property rights become just one legitimate basis on which assets can be coded. She says:

It is easy to agree that the state should protect property rights and enforce contracts. More important, but less often asked, is the question, who determines what assets or claims deserve to be coded as property or receive legal protection on par with property rights. 

More to the point, she tells us that private property rights are “dependent on state power yet have become dislodged from the social preferences of the citizens of the states that make them.” Any theory of property must specify if there is to be private or public ownership, there is no third way. Like so much literature coming out of the new political economy, Pistor opens the door for “social preferences of the citizens” to determine what will be “coded as property.” That is, the very decision of public or private ownership. In short, the possibility of expropriation through democratic means.  This may sound dramatic, but Pistor knows this. She writes: 

Similarly, attempts to transform our current system of subjective rights…will undoubtedly trigger massive claims for compensation, because altering existing rights will likely be declared an expropriation that requires adequate compensation, lest they will be deemed unconstitutional. 

But the ability to “transform our system of subjective rights” is precisely what is being given away when “the social preferences of the citizens” is what “determines what assets or claims deserve to be coded as property.”

The Code of Capital offers smart and interesting arguments as to why law can create inequality, and is worth a close read for that. In fact, it is likely that most new literature on the matter will have to grapple with her arguments. It is, however, also worth a close read because if her political arguments are taken too far by policy makers we will again find ourselves concerned with comparative economic systems. 

—David Murphy holds a Masters of Finance from the University of Minnesota.