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.

A new website on microeconomics

There is a wealth of fascinating research being produced by microeconomic theorists. It is really hard for nonspecialists to understand it, though, as it tends to be presented in esoteric journal articles full of difficult math and jargon. Even applied economists and economic policy makers have a hard time absorbing the lessons of cutting-edge microeconomics research. I was glad to find out today, via a post by Al Roth, about this new website which has the mission of bridging this exact gap. It’s not easy; I should know, having tried for years to make difficult mathematical papers in microeconomics digestible to students. But it is a worthy endeavor.

News organizations provide positive externalities, but we stand to lose them

Adblockers. They’re all the rage in discussions about the future of news organizations. This post on Medium by Dave Pell is one more restatement of the positive externalities generated by news organizations. While it is eloquent, it has no suggestion of how to deal with the problem. That’s because the problem of externalities is a genuinely hard one for our market-based economic organization (and way of thinking). Activities that generate positive externalities (and by extension public goods) are constantly under-provided and are likely to continue to be under-provided for the foreseeable future.

Reacting to “Finding Equilibrium” by Till Düppe and E. Roy Weintraub

Another title for this post could be “Why people who talk about general equilibrium theory should always mention the Arrow-Debreu-McKenzie model, without omitting McKenzie”.

Prompted by a post by Joshua Gans, which I saw first on Google+, I recently bought the book Finding Equilibrium, as on the title of this post. The book contains an insightful discussion of the problem of assigning scientific credit in economics, as the book’s subtitle makes clear: Arrow, Debreu, McKenzie and the Problem of Scientific Credit. I finished the book today. It was published by Princeton University Press very recently, in 2014.

The authors continue an old project of the more senior of the two, Weintraub, that dates from the early 1980s. It has to do with why the Arrow-Debreu paper on the existence of general equilibrium gets more airtime in economic theory circles than McKenzie’s paper, even though the latter was submitted to Econometrica and published a bit earlier than the former.

I must disclose here that Lionel McKenzie was a member of my doctoral dissertation committee. I defended my dissertation at the University of Rochester in 1988 to earn my Ph.D. Furthermore, the professor responsible for my applying (and being accepted, I am sure) to the graduate program in economics at Rochester, Emmanuel Drandakis, was the second person to receive a Rochester Ph.D. in economics after McKenzie created the economics department and graduate program there in the late 1950s. Thus, I was immersed in the story of McKenzie’s unfair treatment in not receiving a Nobel Prize, unlike Arrow and Debreu. The story was “in the air” at Rochester, but I did not hear McKenzie himself talk about it, to the best of my recollection. This accords with my memory of McKenzie as a perfect gentleman; in the book I am talking about here, he is described as “classy” by one of the economists quoted there.

I enjoyed the book and read it in a couple of days, even as it came in the middle of a week that started with some worries in my personal life. It gave me the idea of writing a paper about the now ignored general equilibrium approach as it, I think, should be revived in conjunction with extensions to make it properly include collective goods and externalities (an approach that should proceed with techniques not only limited to the axiom-and-proof ones that were the hallmark of the emergence of general equilibrium in the 1950s). I have worked in this area before, myself, so I may have something new of interest to say by revisiting it. However, I did not want to wait to post here until I wrote a paper; that would mean quite a long wait!

Apart from the inclusion of some jargon from the sociology of science and (naturally) from economics, the book is very well written for a general audience. It flows well and is very instructive. The authors make the best of the fact that their topic allows them, by its very nature, to tell it as a story of people and their interactions. Readers always want stories (as we must remember every time we have to teach abstract ideas in the classroom).

As someone who is well versed in general equilibrium theory (although I’ve been neglecting it lately), I found the exposition of the theory’s inception in the book well done. Furthermore, it gave me a few perspectives and some context I did not already have. If I were to teach general equilibrium again, I would be sure to assign parts of this book to complement the rather dry and scary (for students) mathematics that dominate the theory.

Gans’s post that led me to this book concluded that, of the three main protagonists, Debreu emerges in the most unfavorable light. That is indeed my impression and it comes from documentary evidence of his behavior as a referee of McKenzie’s paper for Econometrica and also vis-a-vis his own co-author, Kenneth Arrow, from whom he kept secret his knowledge that McKenzie was already working on his own paper on pretty much the same topic. By contrast, McKenzie emerges clearly as the wronged party and Arrow as quite generous in giving credit to scholars who preceded him.

So, for the very few of you who say “Arrow-Debreu”, please do remember to say “Arrow-Debreu-McKenzie” when talking about general equilibrium theory.

[Edited 2014-09-29 to correct some infelicities in my use of English.]

On the useful work many economists do

Noah Smith has a good article on the useful parts of economics, mostly microeconomics and its offshoots.  He highlights specifically the usefulness of expertise in game theory, statistics, financial economics, and policy analysis based on microeconomic analysis.

As I am gearing up to teach an intermediate microeconomics course for the first time in several years, it caught my attention and I will be sharing it with my students before the first class. The article is at the link below:

http://theweek.com/article/index/255013/why-economics-gets-a-bad-rap

RIP Ronald Coase (1910–2013)

I am late to the commemoration of Ronald Coase’s contribution to economics, on the occasion of his death yesterday at the age of 102 years. You will find a large number of online posts about this with a simple search. The New York Times publishes its obituary here. The Economist points to its article published two years ago on the occasion of Coase’s 100th birthday.

After reading a number of other posts on Coase’s legacy, I decided to offer here this fantastic piece by Kevin Bryan. I heartily recommend a careful reading of it and the links it offers. In the Toolbox for Economic Design there are several cautions against taking the “Coase Theorem” seriously. After studying Bryan’s post and the links he offers in it (especially that to McCloskey’s article), you will have a better idea why this nomenclature (Stigler’s baby, Coase proclaimed no theorems) is wrong and misleading, while Coase’s contributions to institutional economics, stemming from his 1960 article The Problem of Social Cost, are important.

Let us also not forget Coase’s 1937 (!) article The Nature of the Firm, an early and fundamental contribution to the way economists ought to view the limits of the efficacy of markets.

New books for teaching microeconomics to graduate students

I recently got a copy of John G. Riley’s Essential Microeconomics and today a copy of Microeconomic Foundations I: Choice and Competitive Markets by David M. Kreps. While I am pleased that Riley’s book covers standard general equilibrium approaches as well as game theory and mechanism design, I am intrigued by Kreps’s book, which covers “only” the necessities for a deep understanding of general equilibrium under certainty and uncertainty. From a very quick skimming, it appears that Kreps has incorporated in his latest book his famous lecture notes on decision theory of many years ago.

Even more, I am intrigued by the vague promise by Kreps in the preface of his book that he is planning two more volumes; one on “strategic interaction, information, and imperfect competition” and one on “institutions and behavior”. Given that I see less and less reason to teach the (admittedly quite beautiful) theory of general equilibrium, I am very impatient for the promised volumes to appear, as Kreps is a great explainer.