Reaction to Katharina Pistor’s book “The Code of Capital”

I recently read this book and decided that I will include it in the syllabus of my Economic Inequality course. A few days ago, when I indicated on Twitter my intention to write about the book in this blog, I was intending a review. However, I found good reviews online, to which my own review would have little to add. These are: a post in the Law and Political Economy blog by Sam Moyn, and this piece by Rex Nutting on MarketWatch. To these, I can add little of value from the point of view of a legal scholar, such as Sam Moyn, or a commentator on political economy, such as Rex Nutting. Instead, I will quote from the publisher’s online blurb, so you can get a quick idea what the book is about, before proceeding with my comments.

Capital is the defining feature of modern economies, yet most people have no idea where it actually comes from. What is it, exactly, that transforms mere wealth into an asset that automatically creates more wealth? The Code of Capital explains how capital is created behind closed doors in the offices of private attorneys, and why this little-known fact is one of the biggest reasons for the widening wealth gap between the holders of capital and everybody else.

In this revealing book, Katharina Pistor argues that the law selectively “codes” certain assets, endowing them with the capacity to protect and produce private wealth. With the right legal coding, any object, claim, or idea can be turned into capital—and lawyers are the keepers of the code. Pistor describes how they pick and choose among different legal systems and legal devices for the ones that best serve their clients’ needs, and how techniques that were first perfected centuries ago to code landholdings as capital are being used today to code stocks, bonds, ideas, and even expectations—assets that exist only in law.

I am intrigued by this book, in my capacity as an economist, for two main reasons.

  1. The book gives a new and insightful perspective on the nature of capital, not long after Thomas Piketty’s Capital in the Twenty-First Century, a book most certainly discussed in my course on economic inequality. One big criticism of Piketty’s concept of capital, leveled by other economists, is that it diverges from the standard use of “capital” in macroeconomic / growth theory, even though Piketty does appeal to some results from this theory in his analysis. Pistor offers in her book an intriguing definition of capital as the aggregation of a myriad strategies of highly-paid lawyers, who shop around existing legal systems to create encodings of assets into concepts that can be defended as being legal in some court of a recognized state, encodings that serve to make up assets out of “thin air” and make these assets long-lived, accumulating over time, and convertible to money when their owners desire. I am not a macroeconomist, but I am eager to see what my colleagues in that field will come up with by engaging with this definition. After all, Paul Romer’s 2018 Nobel prize was for his incorporation of ideas into growth theory, as boosting the productivity of all other inputs to production (yes, I am simplifying). Intellectual protection legal regimes matter for this for obvious reasons. Pistor essentially says that the ideas of lawyers are part of this process. She explicitly discusses how these lawyerly inventions have expanded the scope of intellectual property protection (simultaneously shrinking the public domain in the realm of ideas), but she says so much more about these lawyerly inventions that there ought to be plenty of material here for some new macroeconomic theory.
  2. The second reason this book intrigues me is that it suggests a diagnosis for the disease of ever-increasing inequality in incomes and wealth levels, with the attendant problems of social polarization, undermining of democratic systems and norms, and empowerment of more and more economic and political oligarchy. It is not the job of a law professor like Pistor to suggest to economists interested in political economy and mechanism design how to think about modeling a way forward to formulate effective social and policy responses to these trends. But she has done all such economists (and I do count myself as part of this group) a favor by her diagnosis. I hope the policy designs and suggestions from economists are not long in coming.

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