February 13, 2020 25
How ‘Big Law’ Makes Big Money
Adam Tooze
The Code of Capital:
How the Law Creates Wealth
and Inequality
by Katharina Pistor.
Princeton University Press,
297 pp., $29.95
“There is an estate in the realm more
powerful than either your Lordship
or the other House of Parliament,”
one Lord Campbell proclaimed to the
peers in the House of Lords, in 1851,
“and that [is] the country solicitors.” It
was the lawyers, in other words, who
kept England’s landed elite so very,
well, elite: who shielded and extended
the wealth of the landowners, even
granting them legal protection against
their own creditors. How did they pull
off this trick? Through a nimble tangle
of contracts, carefully and complicat-
edly applied, as Katharina Pistor ex-
plains in her lucid new book, The Code
of Capital: by mixing “modern notions
of individual property rights with feu-
dalist restrictions on alienability”; by
employing trusts “to protect family
estates, but then [turning] around and
[using] the trust again to set aside as-
sets for creditors so that they would
roll over the debt of the life tenant one
more time”; and by settling the rights
to the estate among family members
in line for inheritance. Solicitors maxi-
mized their clients’ profits and worth
through strategic applications of the
central institutions at their disposal:
“contract, property, collateral, trust,
corporate, and bankruptcy law,” what
Pistor calls an “empire of law.”
The landowners themselves may not
have u nder stood th is mora s s of lega l re -
lationships, this web, in Pistor’s words,
of “claims and counter claims, rights
and restrictions on these rights.” No
matter: by lawyers’ legal codifications,
their wealth was increasing. The sort
of legal logic applied in nineteenth-
century England grows only more com-
plicated, and more profit- generating,
when the asset in question is not a
hectare of country land but stocks and
bonds and shares—when an entire or-
ganization is coded as a legal person
(who can own assets and who can sue)
through incorporation. The very form
of a corporation, “by encouraging risk
taking, by broadening the investor base
and thereby mobilizing funding for in-
vestments, and by creating the condi-
tions for deep and liquid markets for
the shares and bonds that the corpo-
ration issues,” maximizes profit. And
though today we live in a nominally
democratic society, Pistor argues that
a “feudal calculus” extends to our age:
superior legal coding—that is, fancy
private lawyers. Using the central in-
stitutions of private law, they make
certain assets more valuable, and more
likely to create value. “For centuries,”
she writes,
private attorneys have molded
and adapted these legal modules
to a changing roster of assets and
have thereby enhanced their cli-
ents’ wealth. And states have sup-
ported the coding of capital by
offering their coercive law powers
to enforce the legal rights that have
been bestowed on capital.Corporate law is “no longer primar-
ily a legal vehicle for producing goods
or offering services but has been trans-
formed into a virtual capital mint.” No-
where is th is more tr ue tha n i n fi na ncia l
services corporations.
In 2008, for example, when Lehman
Brothers investment bank failed, its
legal structure was byzantine. It con-
sisted of a parent holding company with
209 registered subsidiaries spread over
twenty-six jurisdictions. This structure,
constructed by some of the sharpest
legal minds on Wall Street, was a ma-
chine designed to minimize Lehman’s
regulatory burden by placing assets in
locations with lax oversight, while still
maintaining control over those assets
from its managerial base in Manhat-
tan. Lehman took huge but carefully
hidden risks and stretched its collateral
wafer-thin. When the going was good,
it was immensely profitable. It also
turned out to be dangerous—allowing
Lehman to take on giant levels of lever-
age that, when the subprime mortgage
market collapsed and liquidity dried up
in money markets, threatened not just
the firm and its shareholders, but the
entire financial system.Since the 1960s lawyers associated
with the school of “law and econom-
ics,” developed at the University of
Chicago by Aaron Director and Ron-
ald Coase, among others, have been ex-
plaining how legal devices are invented
to enable transactions to be conducted
more efficiently. The basic line of ar-
gument is clever but monotonous. In
case after case, the true function of a
legal construction is shown to be that
it aligns incentives of various economic
actors—businesses, consumers, work-ers, and governments—in efficient and
productive ways. For example, although
granting property rights secures a kind
of monopoly for owners, it encourages
investment because legal owners can
expect to reap the long-run benefit of
up-front expenditures.
Clarifying the boundaries of prop-
erty rights prevents arguments over
who owns what and thereby reduces
transaction costs. The hidden logic
of Lehman’s complex legal structure,
according to a law and economics
analysis, was that it allowed assets to be
assigned to separate entities, thus en-
abling creditors to focus their attention
on particular components of the busi-
ness, thus achieving a better balance of
risk and return.
The analysis of property rights also
informs grand historical accounts of
the rise and fall of nations. Accord-
ing to a long line of Whiggish authors,
regimes that recognize encompassing
and stable property rights will prosper.
Those that succumb to the rapacious
interests of short-sighted rulers or nar-
row special interests will undercut the
incentives for productivity growth.
They are doomed to stagnation and
ultimately to failure. According to its
Western critics, even the mighty Chi-
nese Communist Party will have to
bend to this historical logic. If it does
not establish secure private property
rights and the predictable rule of law,
China’s growth will grind to a halt.
For fifty years the law and econom-
ics movement has had a huge influence
on America’s law schools. But today it
faces a challenge from a new cohort of
radical legal thinkers who gather under
the banner of “law and political econ-
omy.” The “About” page of the Law
and Political Economy blog, whicharose out of a seminar led by Professor
Amy Kapczynski at Yale Law School,
declares, in what amounts to the co-
hort’s manifesto:Our blog begins from the obser-
vation that democratic political
processes have lost control over
fundamental decisions about how
resources are allocated in our soci-
ety. Legal doctrines enable cham-
pions of capital to subordinate
democracy to “the free market.”
We seek to develop a response
by mapping how legal rules con-
centrate economic and political
power amongst dominant social
groups, and simultaneously build
and expand modes of legal think-
ing which embed the economy in
social life.There is a similarity between this
moment of agitation within legal aca-
demia and earlier moments in Ameri-
can history, such as the progressive era,
when antitrust laws were first passed.
But today’s critique of law has multiple
sources beyond the muckraking tradi-
tion, and its point of attack is deeper.
What is ultimately at stake is the align-
ment between a rights-based model of
political and social organization and the
highly unequal political economy that
the crisis of 2008 so starkly exposed.
The Code of Capital brings together
the ferment in American law schools
and the more broad-based continental
critical tradition, with concerns de-
rived from Thomas Piketty’s history of
inequality and recent thinking within
so-called heterodox economics about
the unstable nature of financial capital-
ism. The result is nothing less than a
crisis theory of law. Law as it currently
functions is, for Pistor, constitutive of
the order that creates and perpetuates
inequality, opacity, dysfunction, and
crisis, and ultimately puts at risk the
legitimacy of the rule of law as such.
Her rethinking of the purpose of law
starts from the ground up. In the liberal
account of property rights, the crucial
question is how far law and the courts
can protect private property against
the capricious, self-interested, and
short-sighted acts of the government.
Individual property must be protected,
in this view, not only because of the in-
alienable right to enjoy what one owns
without fear of damage or theft, but
also because if there were no guarantee
of this right, economic progress would
be impossible. Few would make an in-
vestment in a business that couldn’t
seek redress for major acts of vandal-
ism or larceny.
In Pistor’s reading, the basic ques-
tion is the reverse. What is decisive is
which private claims to property gov-
ernments have been willing to under-
write with the force of the law and what
consequences those decisions have for
wealth creation and distribution and
the development of the economy at
large.This shift in perspective also im-
plies a reconceptualization of capital.
Whereas to a conventional understand-
ing, capital is most readily conceived‘He’s a better businessman than I am’; cartoon by Abner Dean from
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