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

Intro (00:00:00)

• The core concepts of the book, two case studies, global capitalism, the role of lawyers, and potential solutions to the issues discussed.

• The speaker asks the question "what is capital?" and provides a definition that capital is something that can generate wealth.

• The speaker identifies four qualities that an asset needs to have to generate wealth: priority, durability, universality, and convertibility.

• The speaker explains that an asset needs at least three out of the four qualities to generate wealth.

• Priority means that someone has stronger rights to an asset than everyone else.

• Property rights are the easiest institution to think about in the context of priority.

• Priority becomes most important in insolvency situations, where it determines who gets paid first.

• Legal institutions create ranks and prioritize some claims over others.

• Durability means that an asset is protected from too many counterclaims.

• If an asset can easily end up on the auction block, the ability to accumulate wealth over time is limited.

• Durability protects assets or asset pools from too many counterclaims.

Durability (00:03:11)

• Capital assets are characterized by priority rights, durability, universality, and convertibility.

• Financial assets can achieve durability through convertibility, such as access to central bank liquidity or bailout options.

• Contemporary financial markets rely on legal institutions like property law, collateral law, trust law, corporate law, bankruptcy law, and contract law.

• Various assets, including land, debt, firms, knowledge, and data, have been transformed into capital assets through legal encoding.

• The law provides a credible commitment of enforceability, enabling private parties to organize their affairs and create capital.

• The state plays a crucial role in creating and enforcing capital assets through its centralized means of coercion.

• Individuals can use the law against the state to protect their rights and property through civil and political rights.

• The book focuses on how private parties can use the coercive power of the state to organize their private affairs and create assets with priority rights.

• The author discusses the concept of capital and how it is created through legal institutions, focusing on four assets: land, farms, debt, and know-how.

• Property rights, collateral law, and trusts are legal institutions used to code assets as capital.

• Property rights are absolute rights backed by the state and create a hierarchy of ownership.

• Collateral law is a subset of property rights that allows for secured interests in assets, such as mortgages.

• Trusts are contractual devices used to create or alter property rights and are particularly useful for coding capital.

Trust (00:11:14)

• The civil law creates a stricter separation between contract and property.

• Trusts were created to circumvent inheritance laws, such as primogeniture, which required all assets to be left to the firstborn son.

• A trust involves transferring formal title of an asset to a trustee, who holds the legal ownership but not the economic benefits.

• The economic benefits of the asset are given to a beneficiary, such as a younger child or daughter, upon the death of the original owner.

• Trusts protect assets from creditors of the original owner, the trustee, and the beneficiary until the beneficiary receives the asset.

• Trusts are still used today to protect private wealth from taxes and creditors and are important in securitization structures.

Land (00:13:37)

• In 16th-century England, the enclosure of common land by landlords led to legal conflicts with commoners, resulting in two-thirds of arable land being enclosed by the end of the century.

• Landlords used trusts (entails) to protect their family wealth from creditors until 1881 when reforms treated life tenants as true owners and land as chattel, making reallocation easier.

• The introduction of property rights and land ownership occurred in England in the 16th century, while similar reforms in North America were implemented much later in 1881.

• The "debt recovery act" of 1732 in colonial North America allowed creditors to evict tenants who failed to pay their debts, leading to the breakup of southern estates and the emergence of slave auctions.

• Property durability, which acts as a legal subsidy, is often overlooked in development debates but is a key factor in wealth creation as it allows individuals to protect their property from creditors and utilize legal protections without explicit permission.

Houses (00:20:37)

• Securitization of mortgages in the US involves homeowners granting mortgages to creditors, which are then sold to large banks and bundled into trusts.

• The process creates different classes of investors with varying risk and return profiles, known as tranches, to attract a wider range of investors.

• Government-sponsored entities like Fannie Mae and Freddie Mac play a role in securitizing mortgages to lower credit costs and make homeownership more affordable.

• The private sector introduced complex securitization structures, slicing cash flow rights with varying priority and risk levels.

• Securitization involves pooling assets, such as mortgages, and issuing securities backed by those assets.

• All tranches of the securities must be placed to complete the securitization process and move on to the next one.

• Lower mezzanine tranches are challenging to place due to their risk profile, making it difficult to find suitable investors.

• During the peak of securitization, lawyers handled numerous such structures in a week, indicating the mass production of mortgages and the need to place all tranches quickly.

Corporate shell (00:26:34)

• The financial crisis of 2008 was caused by complex financial instruments created by lawyers to attract investors and increase profits.

• The global capital system is sustained by the laws of England, New York, and Delaware.

• The top 100 global law firms, located in London and New York, control the global financial system.

• The legal system enables individuals to choose legal systems that suit their clients' needs, advancing capitalist interests.

• This system allows private parties to use state power for their private wealth interests, rather than the common good.

• The tension arises between collective governance and the invocation of state powers by sophisticated individuals with the best legal representation.

• Rhode Island's legal system was criticized for its extraordinary laws that resembled a democratic tyranny, potentially influencing Article 1, Section 10 of the US Constitution.

• Rhode Island was hesitant to ratify the Constitution due to mutual ill feelings but eventually did so under pressure from the national government.

• "The Code of Capital" presents a compelling argument about the role of law in creating wealth and inequality, resonating with scholars interested in capitalism's history.

• Questions arise regarding the consequences of these legal frameworks for democratic self-governance and society's future.

The game over (00:39:18)

• The terrain of conflict in capitalism is as much over the means of payment as the means of production.

• Commodification and financialization require work and should be studied as outcomes of power, not as the result of inexorable market forces.

• The transition of land from entail to fee simple transactions and the emancipation of slaves were outcomes of power and law, not simply market efficiencies.

Law as a mode of ruling (00:40:53)

• The new institutional economics focuses on the formal and informal rules that organize and structure exchange.

• Professor Piore argues that these rules are fundamental to the operations of power and are a mode of ruling rather than simply a means of creating new efficiencies.

• Lawyers played a crucial role in the development of capitalism, making their expertise a prerequisite for lawmaking.

• Morton Horowitz's work focuses on the developmental bias of the law and the increasing movement of the law out of the realm of democratic adjudication into the realm of unelected courts.

The Code of Capital (00:43:08)

• The code of capital refers to how capital is encoded in the law, allowing for legal bad behavior and perpetuating inequalities.

• In the 19th century, the judicial system shifted from focusing on community fairness to a contract theory where agreements between parties are considered valid.

• Capitalism and the state are intertwined, with the state creating regulatory regimes, declaring legal tender, and using military power to establish open markets.

Administrative Capture (00:45:06)

• There are two perspectives on the relationship between the state and capital:

• Administrative capture: Capitalists have taken over the means of producing law and the administrative components of the state to create regimes that privilege them.

• State makes itself: The state organizes the economy to create its sovereignty, mobilize capital, and set boundaries on its territory.

• The state and capital are bound to one another, with each group benefiting from the relationship.

• States have an investment in capital and the code of capital, just as capital has an investment in the state as a mechanism for making the world safe for investment.

Making Law (00:47:43)

• Law is made in multiple places, including legislatures and the judicial branch.

• Over time, certain matters have shifted from the purview of one branch to another.

• State legislatures have historically passed laws that prioritize certain creditors and attempted to create new financial regulations.

• The question arises as to where law should be made to serve the many rather than reinforce the power of the few.

• State legislatures could potentially play a crucial role in unmaking the code of capital in the future.

Conclusion (00:50:45)

• The relationship between the code of capital, the law, and staying power is complex and multifaceted.

• The argument that things have gotten progressively worse may be oversimplified, as there are different ways in which these elements are configured.

• The increasing reliance on legal opinions and interpretations of outdated decisions, rather than new precedents, creates a system that is attenuated from its source of power.

• Despite these challenges, there are still entry points for change, particularly through individual states exercising their legal sovereignty.

• States can roll back outsourcing through conflict of law rules, choice of law, and private arbitration, and engage in more imaginative lawmaking.

• While individual states in the US have limitations due to the commerce clause and the requirement to open their territories to everyone, they could still do more than they currently are.

• Sovereign states or states within the US are potential spaces for pushback against the negative effects of the code of capital.

Reactive (00:54:57)

• China's economy is growing rapidly, and it may not play by the same rules as other countries.

• This raises the question of how democratic societies will respond to these changes.

• The private sector in the United States wants to create its own currency.

• This is economically plausible but contextually ridiculous.

• It is hard to imagine governments giving up their power over money.

• These two forces are coming together, and it is unclear how society will react.

Global Constitutionalism (00:57:25)

• The debate on global constitutionalism and transnational law gained prominence in the 1990s, focusing on the self-organizing power of legal systems, but its enforcement remains a challenge due to the absence of a global law.

• The decoupling of private law from democratic legislators and the state has raised concerns about the democratic deficit in the European Union.

• The rise of digital currencies, such as Libra, threatens monetary sovereignty and challenges governments' control.

• The conflict of law rules, private international law, and bilateral investment treaties require states' participation, making it a symbiotic relationship.

• China restricts the ability to choose different laws, while civil law systems tend to define state interests, and common law systems allow private parties to define their interests.

• The rise of trust institutions and the ability to choose laws through conflict of law rules blur the distinction between civil law and common law systems.

• The localization of master coders is related to historical differences in the organization of the private legal profession between different legal systems.

• Tax law has been a battleground where lawyers have honed their skills in circumventing rules and regulations.

• The Code of Capital explores how the law creates wealth and inequality, highlighting the use of legal tools by private attorneys to create new capital assets.

• In France, judges cannot make law, and the pre-enactment constitutional assessment of bills introduced in 2007 may not be entirely effective in anticipating the effects of laws.

• Europeans still believe that legislatures can fix all problems and are less exposed to the extent of private law theory, emphasizing the need to exercise control over significant legal changes.