A Review of Katharina Pistor's 'The Code of Capital: How the Law Creates Wealth and Inequality'

This new, brilliant and clear (including for non-experts) book by Katharina Pistor is titled 'The Code of Capital' and explores, as the subtitle specifies, 'How the law creates wealth and inequality'. According to Pistor, capital is made from two ingredients: an asset (in a very broad sense, including any object, skill, or idea) and the legal code. The ‘code’ refers to the laws of property, contracts, trusts, financial intermediaries, and corporations that are able to transform an asset into capital and thereby generate private wealth in a capitalistic system. Because of its focus on the institutions of capitalism, the book could be rechristened ‘The Code of Capitalism’ (rather than of Capital). Doing so would also highlight that—as I believe and the author acknowledges—this book renews and extends many insights originally introduced by John Commons’s Legal Foundations of Capitalism (1924) and (only partially) developed by another outstanding scholar fascinated by the works of Commons: Oliver Williamson, especially in his work The Economic Institutions of Capitalism (1985).

The book shows the evolution of this coding in the history of capitalism, from the coding of traditional assets, such as land, then later to the coding of corporations. The evolution continued with less tangible assets, such as financial products and intellectual property rights. Finally, Pistor reflects upon future scenarios such as the smart contract and its coding based on blockchain technology. In all cases, according to Pistor, there are several common key attributes of capital, namely: priority, durability, universality, and convertibility. Priority ranks legal positions, privileging certain titles of one asset-holder over others. Moreover, rights over assets can be extended in time, lending them durability and allowing capital to grow—hence, durability adds a temporal component to the priority attribute. Universality ensures that priority and durability will be upheld against others. Finally, thanks to convertibility, asset-holders have an option to convert their assets into value (e.g. money). Thanks to these attributes that are coded in laws, any asset can be turned into capital and thereby create or increase wealth for asset-holders.

In addition, as wealth exists only by virtue of legal coding (the law’s definition and protection), so wealth inequality also derives from the legal coding of capital. Capital is, therefore, linked with the power of the lawmaker(s) and, as Pistor points out, lawyers are the keepers and the masters of the code. This favours those who can afford lawyers, especially lawyers trained at the best schools and hired by top law firms. Using the lens of the code of capital, global capitalism is therefore linked not only to the major players in global finance but also to the top global law firms.

Pistor’s book, I believe, is a welcome and great example in line with the tradition of Old Institutionalists, such as Adolf Berle, Robert Lee Hale, Thorstein Veblen and the above-mentioned John Commons. According to the Old Institutionalism, each economic transaction is based on legal rights over economic assets (see also Vatiero 2018); namely, using the terminology of Pistor, the value (or wealth) deriving from an economic transaction relies on the legal coding process. Moreover, each jural position has an adversarial/positional nature (see also Pagano and Vatiero 2019), such that the set of claims of one party imposes duties on one or more other parties. This produces asymmetries, namely benefits or advantages for the first party but also costs for others, resulting in inequalities. Then, the problem of growing inequality—to which French political economist Thomas Piketty’s book, ‘Capital in the 21st Century’ drew the world’s attention—ultimately derives from legal coding rather than economic factors, and this is the most important message of Pistor’s book (and institutionalists in general).

Massimiliano Vatiero (PhD, University of Siena) is an Assistant Professor of Political Economy at the Department of Economics and Management (DEM) of the University of Trento (Italy), and Senior Research Fellow at the Law Institute (IDUSI) of the Università della Svizzera italiana (Switzerland).