The Code of Capital

An interesting book came out earlier this year by law professor Katerina Pistor called The Code of Capital. The book explains in detail the qualities that an asset has to have in order to generate wealth over time, and how the law can bestow such properties on an ordinary asset to turn it into a capital asset.

In other words, capital is coded via law, and a set of private legal institutions have been set up and used for centuries in order to to code certain things into capital. The first asset coded this way was land, but the code has been extended to more and more things over time, and it continues to be expanded.

I think the book is important because the standard libertarian argument relies on a misunderstanding of things like private property, money and capital as being somehow “natural” and a priori to the state.

But in reality, all of these things are created by human institutions, most particularly the state with its monopoly on coercive power. They are than artificial creations designed to arbitrarily privilege some groups over others.

Pistor’s book focuses on capital, and her conclusion is that the institution which creates capital is the legal system. In the book, she attempts to document exactly how this is done. It also has some interesting historical insights into how capitalism emerged out of feudalism with much of the original power relations more-or-less intact.

Capital is an asset that has some potential to generate private wealth. In order to create a capital asset out of an ordinary asset, Pistor argues that you need to do some legal encoding of that asset. This encoding of an asset—grafting onto an asset a particular set of ideas enshrined in the law—is what she refers to as the “code” of capital. The “code of capital” is what flips a simple object, idea, or promise to pay into a wealth-generating capital asset.

Over time, the code of capital has transformed more and more things into income-generating assets. The code was originally developed with respect to land to preserve the wealth of landlords from challenges to their power. Over time, these legal codes have been used to make capital assets out of things like financial instruments, debt and intellectual property.

Pistor argues that you need to encode three out of four of these concepts to flip an ordinary asset into a capital asset. They are:

1. Priority – Having more senior rights to an asset than other people. This is the fundamental rule you need in order to create a capital asset, or even to have private property.

Legal institutions create ranks and prioritize some claims over others. This matters in insolvency, for example, where claims are ranked from strongest to weakest. The strongest claims feed at the trough first, while the weaker “runt” claims get the leftovers, if anything. How those claims are ranked is determined by the law.

Priority rights are the minimum requirement. But to create a capital generating asset, you need more.

2. Durability – If an asset can end up easily on the auction block, the ability to accumulate wealth over time is limited. Durability protects assets and asset pools from too many counterclaims. It extends priority rights in time.

Durability was fist established using the entail in English common law to protect assets from being seized by creditors. See Fee tail (Wikipedia)

3. Universality – Priority and Durability need to be enforced against everyone, not only against the parties with whom you have directly negotiated these interests—erga omnes in the legal terminology.

Universality gives lawyers the ability to create assets that have priority rights that will be universally enforced not just against the contracting parties, but against anybody, whether or not they knew about the arrangement or were parties to the deal. Universality extends priority rights in space.

4. Convertibility – This allows you to not just be able to transfer an asset, but also to flip the asset into another, safer asset if necessary.

This is most obviously comes into play by turning an object into cash. State-issued currency retains its nominal (though not its actual) value. The ability to do this is especially critical in giving financial assets durability. Without being able to “cash out” paper assets, they might lose much, or even all, of their value. As Pistor describes, convertibility was especially critical in turning things like CDOs and other debt-based securities into capital assets.

When these four legal ideas are grafted onto an asset–any asset–it becomes an income-generating asset, that is capital. Any object, promise of payment or idea can be flipped into a capital asset using these legal tools–this “code”

A lot of these were first developed with respect to land, and then were grafted onto other assets: land, farms, debt, firms, know-how, and even data, with data being the most recent and ongoing.

The legal modules to do this have remained fairly stable over time. She enumerates them as: Property law, Contract law, Corporate law, Collateral law, Trust law and sometimes Bankruptcy law, which can mimic features of all the others.

This is also provides a useful definition of what capital is. Obviously, capital is the beating heart of our economic system. Yet, remarkably, people still argue over what it even is!

Marx entitled his masterwork Captial, and placed it at the center of his analysis. Following him, the overall economic system has been termed “capitalism.” But a solid definition of what does and does not constitute capital has remained elusive. Using the above, we might define it as an asset—physical or otherwise—that possesses three out of four legal properties of priority, durability, universality, and convertibility.

Economists often claim that the central factors of production are land labor and capital. But land and labor can be capital. In fact, anything can be capital if it is coded as such. She points out that one’s own labor can be coded as capital by establishing a corporate entity and issuing dividends to yourself as a corporation shareholder in lieu of a salary.

What this demonstrates that the law is intimately involved in the creation of capital.

“What are the functions that law plays? What you need to convert an asset into a capital asset is a credible commitment of enforceability. You want to make sure that you can enforce your rights at some future date in some place, and maybe even in some place outside your own jurisdiction. You need to have the institutionalization of the centralized means of coercion that private parties can use to organize their private affairs so that they can bank on enforceability. At some level, at every stage in the creation of capital and the creation of financial markets, I would say in the creation of markets in general, the state is deeply involved.”

But what do we mean by law? Law is a particular institutionalization of the central state’s coercive powers. Pistor distinguishes three dimensions in which we have institutionalized law:

1. Top-down vertical ordering – the state enforces order among its citizens through a monopoly on coercive violence.

But the flip side of this vertical dimension is that, in rule-of-law based constitutional systems, citizens can also use the law to protect their interests against the state. This aspect is often ignored. Top-up vertical ordering allows private actors to supersede the state; to “tie its hands” as it were.

The centralization of the means of coercion on the one hand, and the allowing of individuals to avail themselves of the legal system to protect their private property rights against the state through civil and political rights, was an enormous institutional revolution.

2. Horizontal ordering – Private parties can employ the coercive properties of the state to organize their own private affairs. This means that private relations can be structured much more forcefully than they otherwise could be by private parties availing themselves of the state’s legal system.

Pistor traces this legal coding all the way back to the thirteenth and fourteenth centuries in England. For whatever reason, England developed a very powerful private legal profession very early on. Wealthy landowners commonly availed themselves of legal services provided by professional attorneys much more often then their continental counterparts. On the continent the legal profession was less empowered. France controlled them in a top-down fashion, and Prussia halved the private legal profession in the eighteenth century because they were seen, correctly, as a threat to state power.

As Pistor depicts it, many of these laws originated for the benefit of the large, aristocratic landlords to, in essence, to preserve the power relations under feudalism. They enshrined these pre-modern, pre-legal, pre-constitutional power relations into law. The lawyers who did this were often descendants of these very same aristocratic landowning families, so its obvious whose side they were really on.

This adds an interesting perspective on the libertarians’ “year zero” problem. They usually argue for a “night watchman” state that only protects private property rights and lets everything else just sort of work itself out. But where do these property rights come from in the first place? Why do some people have priority over others?

Matt Breunig makes this same point:

Perhaps the most interesting thing about libertarian thought is that it has no way of coherently justifying the initial acquisition of property. How does something that was once unowned become owned without nonconsensually destroying others’ liberty? It is impossible. This means that libertarian systems of thought literally cannot get off the ground. They are stuck at time zero of hypothetical history with no way forward.

How Did Private Property Start (Jacobin)

Pistor’s book fills in some of the gaps in that process. It was through law that such priority rights established, and legal decisions usually favored certain stakeholders over others. These decisions can in no way always be said to be “fair.” Rather, she argues that they come from whatever legal arguments happen to carry the day in court.

During the sixteenth-century in England there was a legal dispute over who had better property rights to the land—the landlords or the commoners. Who had priority rights over the commons, the peasants or the aristocracy?

The commons was an area where multiple, overlapping stakeholders had multiple, overlapping claims, and those claims were balanced against one another for centuries by traditional customs without written legal precedent determining ownership. So whose claims would take priority if one side defected, and whose claims would be downgraded, or even dismissed?

At first, this dispute was conducted in a decentralized fashion in hundreds of sporadic conflicts all up and down the British Isles. The landlords attempted to assert their rights over the commons. The commoners rebelled. There was violence, breaking fences, and digging hedges. The “Diggers” were so-named because they dug under the fences and hedgerows planted by landlords to mark their territory.

Eventually, these disputes wound up in the courts. The attorneys—by and large children of the nobility—argued on behalf of the landlords. The landlords won. The argument that carried the day in the court was seniority—the landlords had the stronger claims to the land because their rights took precedent. In essence, they were there first. Another strike against commoners is that they were not organized into a single, coherent corporate entity, so unlike the landowner, they could not assert collective rights. They were simply seen as numerous private individuals by the courts. More recent scholarship has shown that by the early seventeenth century, already two-thirds of arable land in England had been enclosed even before the major Enclosure Acts were passed.

These decisions gave the landlords priority rights. But you also needed to have shielding devices to create sustainable value.

To this end, the landed elite in England learned how to entail their land to preserve it down through time. Lawyers took a page from feudal law and argued that the contracts that potential creditors had entered into were with the “life tenant” rather than the person who gained the profit off the land. The life tenant, however, was not the real owner, they said—he only holds the asset for future generations. Under the feudal law, this meant that you could only seize 50 percent of the land, and never the family mansion.

Entailment gave English landlords durability. When the land was no longer able to generate sufficient revenue thanks to the repeal of the Corn Laws and the flooding of the market with cheap grain, the landlords could shield themselves from creditors and keep land in the family. This caused a debtor crisis by the mid-nineteenth century. In 1881 the English courts declared that the the life tenant was the true owner and therefore creditors could seize all of the land. After the Land Settlement Act and the Land Conveyance Act were passed, almost 20 percent of land changed hands. The repeal of durability greatly affected the value of land as a capital asset.

When England started seizing lands from aboriginal peoples all over the world, obviously the “they were here first” argument wouldn’t hold water. So the attorneys switched up their arguments to improvement and discovery. Improvement is the argument made by John Locke, i.e. you combine your labor with the land to make it productive, so that gives you ownership rights to the land. Discovery is a sovereign territorial claim. It boils down to, essentially, “finders keepers.”

Note that this is the inverse of the priority rights that were argued during the enclosure movement. Under the feudal system, it was by-and-large the labor of the commoners that brought forth the fruits of the land. Yet back then, this gave them no special claims to ownership! Landlords had some legal and administrative duties back during the feudal era, but the Crown (i.e. the state) had largely taken over those functions by the time these disputes showed up in the courts. Thus, landlords contributed very little labor to the land, and yet they claimed exclusive ownership rights over it, and won in court!

And, of course, how does the labor theory of property apply to a financial asset?

In other words, what justifies one’s claim to an asset appears to be whatever the apologists for those with power argue it should be. And that obviously favors those already with the power.

Pistor highlights the fight by the indigenous Maya to encode their collective use rights as property rights in the Supreme Court of Belize. The constitution of Belize—as most constitutions do—says that property rights will be protected. But it does not define what counts as property—it simply assumes it. The supreme court of Belize eventually recognized the priority claims to the ancestral lands by the indigenous Maya. But what they didn’t do was use the state’s coercive power to back up those claims. Instead, Mayan land continued to be bought and sold by outsiders.

In telling this story, Pistor’s core point is this: what we recognize and what we do not recognize as property is a political decision that we make. In making these decisions the state tends to favor the rights of those who will generate more wealth for the state.

Since the end of the nineteenth century in Britain, we’ve shifted from protecting the landowners and their capital to protecting the credit claimants. By elevating creditor claims above all other claims, we have allowed financialization to occur. This has subsequently engendered all the “exotic” financial instruments based on debt that we see circulating today.

Pistor goes into detail about how these legal coding techniques were used to turn exotic financial instruments into capital assets via law. In doing so, the features of durability, universality, and convertibility became paramount in turning paper claims into capital assets. In fact, it was in trying to understanding the exotic financial instruments underlying the global financial crisis that she discovered the code of capital. For example, the “code” allowed the mortgage debts of millions of ordinary homeowners were turned into capital assets that could be traded and used for wealth generation. Her arguments here are fairly complex, so if interested you should look further into the book.

An important point she makes is that land and other tangible, usable objects are still usable in a certain way even without any legal coding. You can grow crops on land. You can drive a tractor. You can milk a cow.

However, intellectual property rights and financial assets only exist in law. These are entirely creations of the law.

And so, she notes, we’ve created a legal system where we create brand new assets ex nihilo through the law, and then further enhance these assets with the additional attributes of priority, durability, universality, and convertibility to turn them into wealth-generating assets. Of course, this benefits certain people over others.

Finally, she addresses the issue of universality. Private law is domestic law, but we live in a global capitalist system. And so how can you have domestic law sustaining a system of global capitalism when we don’t have a global state?

Pistor argues that as long as all global states choose to recognize the features of a specific legal system, you can, in theory, have legal universality even without a single, global legal system. For financial capitalism, the legal systems that currently serve this purpose are the laws of England, the state of New York, and Delaware for corporate law. Thus globalization turns out to be a very parochial system of coding rooted in just two legal systems! This gives Anglo-Saxon firms a legal advantage in crafting these types of assets, including financial assets. The world’s largest and most powerful law firms are all headquartered in Anglo-Saxon countries, where most of the legal coding work is done.

“The globalization of legal practice which is the very foundation of our global capitalist system is ultimately a globalization of Anglo-Saxon, particularly American legal practices.”

What started centuries ago in land has been extended to corporations, to financial assets, to intellectual property rights, to data, and potentially to many more things. As she notes, even exotic things like DNA are being eyed as potential capital assets.

As a result, citizens of various states increasingly feel as if they’ve lost control of their own domestic destiny. With everything around them being rapidly turned into capital assets for international markets left and right, they feel helpless. They feel that collective self-governance has fallen by the wayside under this system. Pistor points out that Brexit was rooted in the idea that the people have lost their legal sovereignty. She argues that this perception was essentially correct, but it was not really a takeover by Brussels (the EU headquarters) but more accurately a takeover by London.

The Code of Capital illustrates that the neofeudal order that is coalescing today is not some inevitable force of nature, but an imposition of a specific legal code on all of us to turn the entire world into capital assets owned and traded by an international oligarchy of wealth, while local communities are steadily hollowed out. It is the endgame of global capitalism; the final gutting of civil society. Despite the assertion of neoliberals and libertarians, there is nothing “natural” about it. It is blatantly obvious for whom the state’s monopoly on coercive violence is now serving, and its not the citizens of the world’s various counties, but a transnational investor elite.

Ive taken the above information from YouTube talks and interviews given by professor Pistor.

Talk at the Watson Institute:

Talk in Brussels:

Majority Report interview:–ck

Book review from the London School of Economics

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