The Journal of Things We Like (Lots)
Select Page

I teach at a school most of whose graduates take jobs, at least for a few years, as associates in one of the 100 largest corporate law firms. Until their first stint as summer clerks, and even for some time thereafter, most of them know very little about the work firm lawyers do. Law schools don’t do much to enlighten them on these matters. Scholarly treatments of the social effects of business lawyering are rare. We have, of course, plenty of scholarship on substantive fields of business law – corporate law, tax, securities, intellectual property, and so forth. Sometimes practitioners come into our classrooms to help students understand how to structure corporate deals, such as a merger or initial public offering.  These are useful forms of training, but not much help if we are trying to understand the social and economic contributions of corporate lawyers. What is their role in society? What value do they add or as their critics would ask, subtract? Katharina Pistor, The Code of Capital: How the Law Creates Wealth and Inequality, identifies both the positive and the negative in their work.

The business lawyers I habitually talk to tend to respond rather vaguely to questions about their social functions. They identify themselves as among the professionals in the legal-and-financial-services industry like accountants, underwriters, or insurers who provide technical services to implement business decisions and deals of their clients. “We grease the wheels of capitalism” is a common phrase, or, as a law firm partner interviewing me for a job once put it, “We are the pants pressers for American business.” This formula identifies the lawyers’ role as auxiliary to the real movers and shakers, the entrepreneurs and investment bankers and managers of capital. Other business lawyers describe their job primarily as that of risk-managers: they help their clients identify sources of “legal risk,” such as potential adverse litigation, or regulatory and tax consequences of decisions. Competent risk managers, of course, aren’t just doom-and-gloom merchants: they try to help their clients structure their dealings so as facilitate their taking “good risks” and to avoid or minimize “bad risks.” Still others – often litigators – identify corporate lawyers with the classic paradigm of the libertarian champion of the free market, or the heroic defense lawyer resisting the authoritarian state and the greedy faux-populist plaintiffs’ bar. Rather less flattering accounts are sometimes heard from businesspeople who cast lawyers as operators of a vast protection racket, creators of dense complex webs of regulation that their expensive technical skills are then required to navigate.

In 1984, Ronald Gilson made a path-breaking contribution to theorizing the social function of the work-product of business lawyers, or at least of some business lawyers, with his Value Creation by Business Lawyers: Legal Skills and Asset Pricing, 94 Yale L.J. 239 (1984). He characterized the lawyers’ role in helping to structure business deals as that of “transaction cost engineers” who help to reduce the frictions of deal-making, e.g., by helping the parties to anticipate and provide for common risks and information asymmetries.

Now comes Katharina Pistor of the Columbia Law School, with a more ambitious theory. She promotes corporate lawyers from the role of helpful auxiliaries to that of masters of the “Code of Capital,” the legal modules that constitute capitalist economies and ensure their generation of wealth. “[M]ost observers treat law as a sideshow when in fact it is the very cloth from which capital is cut.” (P. 4.) Assets are turned into capital by legal coding, which confers on it the four attributes of priority, durability, universality, and convertibility. A legal claim that has priority is one that trumps others, such as priority in bankruptcy. Durability is the extension of priority claims in time, such as was conferred on landed wealth when it was protected by mortgage law and settlements in trust from being fully lost to creditors, or is now possessed by corporate owners with immortal life. Universality means rights against all the world. And convertibility is the legal guarantee that an asset can readily be turned into money. “There is no capital without law, because only law can bestow priority, durability, convertibility, and universality on assets, and thereby privilege its holders.” (P. 229.) Corporate law practice – some of it, anyway – is the business of combining and recombining these modules to create wealth and shield it from diminution – as, for example, corporation law is used to parcel assets and operations of an integrated economic entity in ways that lower the cost of debt finance, and minimize taxes and regulatory costs. (P. 47.)

Pistor’s account of legal coding relies on a rich store of examples taken both from history and from current practice. Her story of how land became the most important source of wealth in England focuses on the enclosure of common fields and the “strict settlement” devised by English country solicitors to protect these newly privatized assets from creditors. The sequel is the “second enclosure movement” in modern intellectual property law, the enterprise to convert knowledge and even Nature herself into capital assets. Her chapter on the legal alchemy that mints debt into capital assets starts with the scheme to securitize the debts of Junker landowners under Frederick the Great. Landowners joined the Landschaft, an association that assumed joint liability for payment of debts, and in return got certificates they could use to pay off debts to other creditors, backed by a guarantee from the King. (P. 93.) She then updates her principal thesis with detailed recent examples. One is Lehman Brothers, which created a huge number of special purpose sub-entities. These vehicles incurred debt, which the parent company guaranteed, using as collateral the shares it held in leveraged subsidiaries. The subs moved most profits back to the parent, leaving few assets for creditors. When Lehman went bankrupt, the guarantees disappeared, and the subs collapsed. The examples show how lawyers combine the modules – property law (rights to land and mortgages) and corporate law to partition assets, contract law to divide up the pool and sell different pieces to different investors. (P. 86.)

The next move for legal coders Pistor describes is going global. To simplify considerably, private parties can frequently minimize or escape states’ regulatory or taxing constraints by choosing their own law. Conflict-of-law rules generally allow sophisticated parties to specify what law will govern their deals, and most of them choose either New York or England. They may also choose tribunals, and many of them choose arbitration over adjudication, or investor-state dispute settlement tribunals outside their territories. (Ch. 6). If states impose regulatory restrictions, like labor or environmental or tax laws, coders just move the enterprise to a more favorable jurisdiction. (P. 160.)

As the operations of the legal code of capital create wealth for some, they also produce inequality. See, again, enclosure laws, which made it possible for landowners to finance improvements and speculative investments by borrowing against their land but also displaced and impoverished millions of commoners, who fled to America or Australia or to the slums and factories of the cities, or simply starved. Or, our IP laws permit pharmaceutical companies to develop drugs with the aid of taxpayer-financed research, patent them, and charge monopoly rents to health providers and consumers. The banks that securitized the mortgages of homeowners and sold them off in tranches to investors while taking extravagant fees for every transaction, left the owners with collapsed home values – and also made it so that the owners were still liable on their notes and subject to foreclosure. As Pistor says, supposedly negative rights against the state are actually “a claim for positive protection by the state against intrusion by others, including fellow citizens.” (P. 229.) Ordinary contract law is a mechanism whereby the strong can not only coerce the weak to surrender their rights, but also characterize the surrender as a voluntary choice that the weak have made, and the strong can pretend to disclose all possible risks so that suckers cannot claim they didn’t know about them. Besides these inequalities conferred by the general law, the well-heeled repeat players have exceptional access to lawyers, legal processes like litigation and arbitration and, not least, political influence. Some lawyers like to claim that they defend clients against state tyranny. But in fact much more lawyers’, and lobbyists, effort goes into seeking favors from the state: subsidies, privileges, contracts, exemptions from or limits on liability, and safe harbors from bankruptcy. Besides creating inequality, the coding of capital tends to create periodic crises, as speculative bubbles burst and optimistic predictions that property values will always keep rising or that emerging economies will not all go broke at once are falsified. But holders of the most privileged assets can usually count on the state to bail them out if the entire system is in peril of collapse. Gains are privatized, losses socialized.

Pistor’s account of the centrality of law and lawyers to wealth creation is a departure from standard economists’ accounts, which as she says treat law as a “sideshow.” It is closer to, but also different from, standard Marxist accounts, in which law is treated as epiphenomenal, part of the “superstructure” or “ideological state apparatus,” supporting and legitimating the ruling classes that control the means of production. The tradition to which Pistor’s work belongs is that of Karl Polanyi and, as she acknowledges, the early institutionalist schools of Thorstein Veblen and John Commons (I would add a Columbia Law School predecessor of hers, the lawyer-economist Robert L. Hale). The social divide is not between capital and labor, but between the holders of privileged assets protected by the code, and everyone else. And the centrally important players in the system are lawyers – specifically the partners of the largest law firms, most of them in the U.S. and England. These modestly pretend to the be valets of their corporate clients, but are actually the “masters of the code,” because they are or have been its architects, its curators, its innovators who ceaselessly extend its modules to create novel forms of capital

This book is a powerful – and brilliantly illuminating – study of the social effects of corporate lawyering. In a couple of respects it could be improved. First, it has surprisingly little to say about the classic subject of Marxist analysis, the legal mechanisms that have been used to elevate the rights of capital over those of labor. Some of these are wonderful examples of adaptation-by-analogy of code modules, such as the way in which late nineteenth-century courts transformed management’s rights to future income streams from contractual relations with customers into property, protectible by injunctions enforced with criminal contempt sanctions against striking or picketing workers. The likely, if depressing, explanation for this omission is that labor has now been so cowed into submission (at least in the U.S., less so in Canada and Europe) by the weakening of labor law, the outsourcing of work to low-wage, low-labor-protected countries, and above all, by the evaporation of the credible threat to foment socialist revolution, that it simply no longer poses much of a challenge to the owners of capital. Second, the monograph doesn’t always distinguish between the inequality-producing effects of what have become the routine operations of the private law code of property-contract-trust-bankruptcy law, and the additional inequalities produced by aggressive rent-seeking. Lawyers and others press legislators and regulators to bestow ad hoc special privileges – in addition to the almost-invisible privileges conferred by ordinary private-law rules – on classes of capital assets and their holders.

Now, as Pistor repeatedly emphasizes, capital does not always win its legal battles. Sometimes countervailing interests actually secure a favorable judicial ruling or legislative victory. Workers may assert a property in their own reliance-based expectations to future income. Scientists may try to protect commons in discovery or resist attempts to patent genes. Indigenous peoples may claim traditional land rights against developers. Tax reformers may lobby for more progressive tax schedules. These are uphill battles, however, since capital holders can often work around democratic constraints by relocating to friendlier venues as well as by deploying lawyers to loophole regulations into nullities. Pistor runs rapidly through a list of possible directions for reform (see generally Ch. 9): limiting the legal choices available to capital, granting special protection to neglected assets and their holders, and refusing to grant special exemptions and preferences. She urges more skepticism about claims that special privileges, like drug patents, will benefit everyone. She proposes changes in the conflicts-of-laws rules to limit parties’ ability to choose governing law. She endorses limits on the use of arbitration in cases of major social concern, or between unequal parties. She proposes legal mechanisms, such as compensation schemes or class actions, to “give voice to those who have most to lose in a crisis.” (P. 227.) She proposes more cooperation between countries to rein in the excesses of regulatory and tax arbitrage.

And finally – and perhaps her most important challenge to law teachers – she teases with the possibility of building a new profession of corporate lawyers, rethinking the funding of legal education, and the economics of law practice, to reduce incentives for lawyer to be servants of the code. (Pp. 228-29.) This was the challenge taken up by many professionals during the last great movements for reform of the code of capital and the devising of new careers for reformers, the Progressive movements of the early 20th century culminating in the New Deal. This is the challenge that lawyers associated with the Law and Political Economy movement are beginning to theorize. What jobs, what institutional practice settings, what careers, could be devised to support this new profession? Those of us who study the profession and educate its future members need to take up this challenge as well.

Download PDF
Cite as: Robert Gordon, Masters of the Code, JOTWELL (September 28, 2020) (reviewing Katharina Pistor, The Code of Capital: How the Law Creates Wealth and Inequality (2019)),