The Code of Capital by Katharina Pistor

Rating: ★★★★

Pistor lays out a history of how law turns mere assets into capital that grows and is durable across generations. She makes a convincing argument that to understand inequality and recent market crises, we need to understand how law works and how it’s changed. I thought it was great, and I’d recommend it to those who have an existing interest in law or economics.

I'd like to see somebody write about landlording and law with the same lens that Pistor uses in this book.

Here are some ideas I found particularly interesting:

Why lawyers avoid courts

Lawyers depend on state law, but they avoid courts because it would put their legal inventions to the test. This is bad for anybody who isn't a lawyer. Settlements benefit attorneys more than anyone because if there aren't cases that clarify the law, their advice will be needed more.

"When cases are no longer vetted in the open, the law becomes stale and judges lose expertise, thereby giving lawyers and their clients even more reasons to avoid them."

Legal strategies developed by transactional lawyers only become case law when challenged. But in boom times litigation is rare, so practices spread and simply become new way of doing business.

It's better for investors to sell their shares than withdraw cash from a business

Early joint stock companies were explicitly temporary, and they pooled resources for a single voyage. The English East India company operated in a similar way – while the business continued for multiple voyages, they allowed investors to withdraw cash at any time. The Dutch East India Company, on the other hand, did not allow investors to withdraw cash, but they could sell their shares. The result was far more growth for the Dutch East India Company which could focus on expansion than the English East India Company which had to make shorter voyages and smaller investments to ensure liquidity for shareholders who could withdraw cash at any time.

Global corporations can choose laws

Global corporations can pick and choose laws that are favorable to them without having to capture the state or invest in politics to bend law. They can choose their jurisdiction, and this optionality means it's hard to make rules that run against shareholder interest. States engage in regulatory competition to retain corporations, and this dynamic erodes state power.

It's worth noting that normal people can't choose their jurisdiction and tax rate without physically moving. Meanwhile, orporations can just create legal entity in jurisdiction with a low tax rate and book income to that account.

State capture is unnecessary

Contra Marxists, asset holders don't need to capture the state directly. Instead, they need only to rely on lawyers who use law to wield state power indirectly. These lawyers prefer not to lobby for explicit legislative change unless totally necessary.

And legislators are typically already deferential to asset holders' interests. "This willingness to bow to the interests of capital makes outright capture of lawmakers and law enforcers almost unnecessary."

Public regulation via private institution

The ISDA (a private organization for swaps and derivatives) made counterparties agree to pay out to derivatives traders before any other creditor. This was not really legal by existing bankruptcy laws, so they then lobbied to change the law. So the ISDA first created not-really-legal contracts and then had laws changed to line up with these contracts, which is the opposite of how things work in more mainstream narratives.

This caused problems in the global financial crisis becuase derivatives traders got money first and cashed out immediately, reducing the assets that could be used in reorganization (this was a risk known to the BIS in the late 90s). After the crisis, states worked together to regulate derivatives to prevent this again. They used the ISDA, a private organization, to make market participants follow new rules. "The fact that sovereign states had to co-opt a private business association, namely ISDA, to achieve their regulatory goals, indicates the extent to which states have lost control over the governance of global finance."

The state should monitor private debt

"Debt, the private money that has fueled capitalism since its inception, is coded in law and ultimately relies on the state to back it up. States should realize this and keep the inflation of private money under control, because the more they bend to the will of private debt minters in boom times, the more they will be on the hook when it turns out that the economy cannot sustain the debt burden they created."

On incrementalism

"[O]ne 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."

Tight-knit communities don't need formal law enforement

"When trade and commerce take place primarily within tightly knit communities, formal law enforcement may not be needed"

US lawyers' international advantage

US lawyers have an advantage when dealing internationally: because domestic US laws varies by state, lawyers are better equipped with the fragmented landscape of international law.

US laws around labor are asymmetrical

"On one hand, US labor law endorses "employment at will," which gives employers great flexibility in firing workers, on the other, it allows employers to restrain employees' ability to re-deploy their skills."