The Code of Capital: How the Law Creates Wealth and Inequality

Katharina Pistor is Edwin B. Parker Professor of Comparative Law and the director of the Center on Global Legal Transformation at Columbia University. Her most recent book, "The Code of Capital: How the Law Creates Wealth and Inequality," examines how assets such as land, private debt, business organizations, or knowledge are transformed into capital through contract law, property rights, collateral law, and trust, corporate, and bankruptcy law. "The Code of Capital" was named one of the best books of 2019 by the Financial Times and Business Insider. She is a leading scholar and writer on corporate governance, money and finance, property rights, comparative law, and legal institutions. There is no shortage of books explaining issues of inequality in 2020, but they fail to address some of the more fundamental questions about the genesis of capital: How is wealth created in the first place? And, relatedly, why does capital often survive economic cycles and shocks that leave so many others adrift, deprived of the gains they had made earlier? “The Code of Capital” seeks to uncover the relationship between capital and law and the impacts such a relationship has on inequality. The legal code took tangible and illiquid assets, such as land, and made them into intangible and liquid assets, such as patents, copyrights, and securities. Prof. Pistor explains the essential properties of assets in order to be transformed into capital: priority, durability, universality, and convertibility. How have these modules influenced the code and the nature of capital over the centuries? Underpinned by the wave of globalization and financialization since the 1980s, derivatives, collaterals, trusts, and many other forms of institutions and instruments emerged, and lawyers could easily pick the laws and legal systems for each specific client in order to protect their capital. The status quo legal structure engenders inequality, and reforms are desperately needed. Insightfully, Prof. Pistor wrote that “what makes the concepts of capital and capitalism so confusing is that the outward appearance of capital has changed dramatically over time, as have the social relations that underpin it.” It’s much easier for one to understand how the physical and intangible representations of capital have transformed over the centuries, but much harder to realize that there are social relations embedded within capital. Here, we try to define such social relations, and we go in depth explaining the views on capital and capitalism by two intellectuals – Karl Marx and Karl Polanyi. Marx explained the commodification process of goods and labor, while Polanyi disagreed with Marx about classifying them as commodities. In his famous book “The Great Transformation,“ Polanyi talked about this important concept of “social embeddedness.” He wrote the book between 1940 and 1944 and believed that the market economy had to be socially embedded. Even Piketty devoted huge paragraphs in his book ”Capital & Ideology” to explain Polanyi’s vision: “In the case of the labor market, this meant that wage setting, worker training, limits on labor mobility, and collectively financed wage supplements were all matters to be settled by social and political negotiation outside the sphere of the market.” How would Prof. Pistor characterize the legal embeddedness of markets? Or the social/financial embeddedness of the legal system? Lastly, we also touch on digital and cryptocurrency and the political theory of money. In Prof. Pistor’s article “Facebook’s Libra Must Be Stopped,” she wrote that “Facebook has now unveiled a cryptocurrency and payment system that could take down the entire global economy.” Why does she think that one new digital currency could wreak havoc on the international economy? What’s Facebook and Libra’s plan? How can we respond to the Libra threat? Here, we also cite Georgetown Professor Stefan Eich’s fascinating works in political theory of money.