[Marxism] How ‘Big Law’ Makes Big Money

Louis Proyect lnp3 at panix.com
Sat Jan 25 07:53:11 MST 2020

NY Reviw of Books, FEBRUARY 13, 2020 ISSUE
How ‘Big Law’ Makes Big Money
by 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 complicatedly applied, as Katharina Pistor 
explains in her lucid new book, The Code of Capital: by mixing “modern 
notions of individual property rights with feudalist restrictions on 
alienability”; by employing trusts “to protect family estates, but then 
[turning] around and [using] the trust again to set aside assets 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 maximized 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 understood this morass of legal 
relationships, this web, in Pistor’s words, of “claims and 
counterclaims, 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 
complicated, 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 organization 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 investments, and by creating the conditions for 
deep and liquid markets for the shares and bonds that the corporation 
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 institutions 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 clients’ 
wealth. And states have supported 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 primarily a legal vehicle for producing 
goods or offering services but has been transformed into a virtual 
capital mint.” Nowhere is this more true than in financial services 

In 2008, for example, when Lehman Brothers investment bank failed, its 
legal structure was byzantine. It consisted 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 machine 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 Manhattan. 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 leverage 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 
economics,” developed at the University of Chicago by Aaron Director and 
Ronald Coase, among others, have been explaining how legal devices are 
invented to enable transactions to be conducted more efficiently. The 
basic line of argument 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, workers, 
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 property 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 enabling creditors to focus their attention on particular 
components of the business, thus achieving a better balance of risk and 

The analysis of property rights also informs grand historical accounts 
of the rise and fall of nations. According 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 narrow 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 
Chinese 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 economics 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 economy.” The “About” page of the Law and Political Economy 
blog, which arose out of a seminar led by Professor Amy Kapczynski at 
Yale Law School, declares, in what amounts to the cohort’s manifesto:

	Our blog begins from the observation that democratic political 
processes have lost control over fundamental decisions about how 
resources are allocated in our society. Legal doctrines enable champions 
of capital to subordinate democracy to “the free market.” We seek to 
develop a response by mapping how legal rules concentrate economic and 
political power amongst dominant social groups, and simultaneously build 
and expand modes of legal thinking which embed the economy in social life.

There is a similarity between this moment of agitation within legal 
academia and earlier moments in American history, such as the 
progressive era, when antitrust laws were first passed. But today’s 
critique of law has multiple sources beyond the muckraking tradition, 
and its point of attack is deeper. What is ultimately at stake is the 
alignment 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 
derived from Thomas Piketty’s history of inequality and recent thinking 
within so-called heterodox economics about the unstable nature of 
financial capitalism. 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 

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 
inalienable 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 investment in a 
business that couldn’t seek redress for major acts of vandalism or larceny.

In Pistor’s reading, the basic question is the reverse. What is decisive 
is which private claims to property governments have been willing to 
underwrite 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 implies a reconceptualization of capital. 
Whereas to a conventional understanding, capital is most readily 
conceived as a physical thing—a steel mill, for instance—that must be 
shielded against grasping hands, Pistor insists, quoting the University 
of Chicago historian Jonathan Levy, that capital is a “legal property 
assigned a pecuniary value in expectation of a likely future pecuniary 
income.” What turns a steel mill from a physical unit into a claim on a 
likely flow of cash income are laws, backed by the force of the state, 
establishing ownership of the mill and the means by which its products 
can be sold for profit.

For Pistor, as for others in the critical tradition, the entanglement of 
law, power, and property goes back to the moment that Karl Marx called 
“primitive accumulation.” Beginning in the sixteenth century in Northern 
Europe, land previously used in common was enclosed and made into the 
basis for a new, market-based agricultural system. As the Oxford legal 
comparativist Bernard Rudden put it:

	The traditional concepts of the common law of property were created for 
and by the ruling classes at a time when the bulk of their capital was 
land. Nowadays the great wealth lies in stocks, shares, bonds and the 
like, and is not just movable but mobile, crossing oceans at the touch 
of a key-pad…. In terms of legal theory and technique, however, there 
has been a profound if little discussed evolution by which the concepts 
originally devised for real property have been detached from their 
original object, only to survive and flourish as a means of handling 
abstract value. The feudal calculus lives and breeds, but its habitat is 
wealth not land.

The enduring entanglement of modern property law with this original 
“feudal calculus” is a thread running throughout Pistor’s book. Most 
importantly, it informs her skepticism about the alignment that is 
commonly assumed in liberal grand narratives among progress, property 
rights, and the rule of law (understood in the sense of the universal 
applicability of general rules, such that no one class received 
preferential treatment by the state). There have been revolutionary 
moments, Pistor concedes, in which property owners did line up behind 
the demand for general rights—the American and French Revolutions being 
cases in point. But once their property was established, owners became, 
like their feudal predecessors, defenders of privilege. They have 
advocated not universal binding rules, but what Max Weber called a 
“modern particularism,” finding ways around the law when it suited their 

In the twenty-first century, examples of this modern particularism are 
rife. Pistor describes, for instance, the exceptions from general 
bankruptcy rules negotiated by the derivatives industry. In normal 
bankruptcy cases, secured creditors can claim access to their collateral 
first, and unsecured creditors have to divide what remains of the 
company or estate. For fast-moving financial transactions, that 
procedure is too cumbersome, so the collateral pledged in derivatives 
deals is granted an exemption from the usual queue of claims. In cases 
of bankruptcy, it is transferred directly to the counterparty, leaving 
unsecured creditors empty-handed. Another example would be the right 
claimed by foreign investors to challenge the normal operation of 
national courts in their host countries. Or the deals negotiated 
annually with the authorities by large taxpayers over what their tax 
bill will actually be. Or the haggling between regulators and banks over 
whether they meet the criteria laid down by the Dodd-Frank legislation 
of 2010.

The result is a legal order that is relentlessly insistent on the 
priority of rights and of property rights above all, and yet shot 
through with exceptions and reservations. Indeed, in the unwinding of 
Lehman’s derivatives holdings, it turned out that so many creditors 
could claim exceptions to the normal bankruptcy rules that the value of 
the privileges themselves was put in question.

The modern network of powerful property owners is knit by the clique of 
“big law” firms that operate around the world, above all from bases in 
London and New York. The legal codes that they prefer are the English 
common law and the law of the state of New York. What lets them choose 
their code, regardless of where their operations are legally domiciled, 
are so-called conflict-of-law rules that allow the parties to a contract 
to choose the legal code by which they wish to be governed. The standard 
framework contract, or “Master Agreement,” devised by the International 
Swaps and Derivatives Association to govern trades running into the 
hundreds of trillions of dollars, specifies that the parties should 
agree to be bound either by English law or the law of New York State. 
For tricky issues like intellectual property, which is granted through a 
patent by a particular government, special treaties have been arranged 
in order to protect patents abroad.

Across this patchwork empire of law, the same tools (which Pistor calls 
“modules”) are employed again and again to “code” property and assets, 
such that they are protected as sources of private wealth and future 
income. The four principles of the coding procedure that Pistor 
identifies are priority, durability, universality, and convertibility. 
The priority of claims regulated by law is what ultimately confers 
ownership: the priority of my claim to an asset allows me to remove an 
asset from the common pool and privatize it. Durability gives assets a 
life that may extend beyond the biological lifespan of their owners. 
Trusts and corporations are classic modes of ensuring legal longevity. 
Universality provides that contracts between two parties are recognized 
by erga omnes, i.e., all others. It is a claim that presupposes a 
third-party guarantor in case of disputes over the agreement; in the 
last instance, the state can compel the parties to abide by its 
interpretation of the contract. Finally, convertibility is the most 
attractive link in a chain that starts with the transferability of 
property. If it can be bought and sold between private parties, property 
can circulate. Once it circulates widely enough, it can serve as a means 
of payment. But the ultimate means of payment is state-issued cash. 
Convertibility is the privilege of certain classes of preferred 
financial assets—such as highly rated debts—that ensures they may be 
exchanged for cash at close to face value.

The modules are abstract and capable of reinterpretation. Lawyers are 
creative, and contracts are incomplete. They always fail to capture some 
unexpected feature of reality. So there is plenty of room both for 
innovation and for confusion and dispute. But that by itself is not 
enough to explain the recurrence of capitalist crises. For that we need 
to add a further dimension: how law facilitates the gigantic speculative 
dynamic of modern finance.

As Pistor puts it, “Debt, the private money that has fueled capitalism 
since its inception, is coded in law and ultimately relies on the state 
to back it up,” by way of the courts under normal circumstances and 
through bailouts if a debtor is too big to fail:

	The history of debt finance can therefore be retold as a story about 
how claims to future pay have been coded in law to ensure their 
convertibility into state money on demand, without suffering serious 
loss…. By dressing private debt in the modules of the legal code of 
capital, it is possible to mask the liquidity risk for a while, but not 
forever. Whenever investors realize that, contrary to their 
expectations, they may not be able to convert their debt assets into 
cash, they head for the exit; and if many do so simultaneously, this 
will precipitate a financial crisis.

Note that the law does not just constitute and codify claims to 
property. In Pistor’s reading, the function of law in finance is to 
sustain a fiction. It is to “mask,” or “dress up” and “garnish” claims 
by packaging debt-ridden assets into products such as derivatives. And 
she roots this in a familiar impulse: “The dream to create something 
from nothing is as old as mankind. Alchemists have long searched for 
recipes….” But it is not just private creators of credit who succumb to 
the lure of debt alchemy. States too create purchasing power by 
monetizing debt. As Pistor points out, the difference is that “states at 
least have the power to impose obligations on their citizens to make 
good on these promises.” States can impose taxes to generate the revenue 
necessary to service their debts. By contrast, “private parties do not 
possess such powers…. They imagine fantastic returns in the future, but 
in fact will have to obtain new loans to cover old debts”

Lawyers, therefore, sustain a fiction by dressing up claims and placing 
them in opaque asset-backed legal entities and applying an alphabet soup 
of labels—SPVs, MBS, CDOs. But, Pistor insists, there is a basic 
constraint on this exercise in the nature of the assets that underlie 
such entities: “At the other end of the deal, there are still the same 
little old houses, which their owners can barely afford and that may not 
hold their value once the funding machine that helps fuel prices in real 
estate dries up.” The fantasy that a subprime mortgage could be turned 
into a AAA-rated security collapses, just like the alchemical promise to 
turn lead into gold.

Pistor thus lays out a double indictment of the law. On the one hand, 
the law codes the original violence of enclosure, such that something 
that was everyone’s becomes one person’s legally protected private 
property in perpetuity. On the other hand, the law is the conjurer of a 
delusion. By creating securities out of debt, the law preys on our 
desire to believe that something is ours that is not real at all, that 
value can be created ex nihilo.

This is a powerful polemic. But is it enough to deliver on Pistor’s 
subtitle, to account for the structure of wealth and inequality in 
modern society? What about the more routine drivers of growth and 
inequality, such as the unequal rewards to labor and capital and the 
extreme divergence between different types of managerial and routine 
labor? Once we pose the question this way, what is remarkable is how 
little space Pistor gives to what was once the central terrain of 
critiques of capitalism, namely production, labor, and accumulation. 
Once upon a time, if the question was how law created wealth and 
inequality, the focus would have been on labor law and how the state and 
the courts systematically favor the employer over the employed. But the 
only mention that labor law receives in The Code of Capital is a brief 
discussion of the role of noncompete clauses in distorting competition 
in Silicon Valley.

In seeking to mark her position off against Marxist arguments that the 
capitalist state creates inequality by sanctioning “primitive 
accumulation” and exploitative labor practices, Pistor claims that her 
focus on the process through which private law is used to code capital 
allows her to “explain the political economy of capitalism without 
having to construct class identities, as Marxists feel compelled to do.” 
But any Marxist would surely reply that this is a sleight of hand. If 
one confines the thrust of one’s analysis to issues like derivatives 
regulation and intellectual property, class identities are, indeed, 
unlikely to play an important part. What is at stake in those deals is 
the distribution of surplus within the capitalist class. When that goes 
wrong, it can have a disastrous impact on the entire economic system. As 
we saw in 2008, it can even cause an enormous financial heart attack.

But no one ever claimed that markets for interbank lending were the main 
arena in which the line between the haves and the have-nots is drawn. In 
the modern world, in which so much production has been outsourced, the 
main arena for class conflict in the classic sense is probably in the 
factories of East Asia, and the function of law in that struggle is far 
from obvious. Where Pistor does address important areas of 
distributional struggle, notably with regard to land enclosure, she 
unhesitatingly invokes distinctions between landlords and 
peasants—precisely the kind of class categories she claims to be able to 
do without. The violence of that moment of early modern enclosure and 
expropriation no doubt echoes down to the present, but that can explain 
only part of modern-day inequality.

The closest that Pistor comes in The Code of Capital to analyzing what 
might be called a site of production is in her interesting discussion of 
intellectual property. Once again, she gives us fascinating insights 
into the role of legal lobbyists in the construction of the global 
intellectual property rights regime. The Agreement on Trade-Related 
Aspects of Intellectual Property Rights (TRIPS) secures extraordinary 
protections for large Western firms in their dealings all over the 
world, on the pain of sanctions by the United States.

In Pistor’s reading, it is a classic instance of “modern particularism” 
writ large, the “feudal calculus” extending to the very cutting edge of 
modern science, as in the case of patents on synthetic cDNA molecules. 
Fittingly, her chapter title “Enclosing Nature’s Code” harks back to the 
struggles that founded agrarian capitalism in early modern England. Yet 
there is a subtle but crucial shift. In manipulating the patent system 
and applying it to parts of the human genome, lawyers are up to their 
usual tricks. They are repurposing the modules of their code to create 
new capital. But what creates the opportunity for profit in this case is 
neither the conquest of someone’s ancestral grazing ground nor legal 
artifice of the type on display in the construction of derivatives 
contracts and asset-backed securities. What creates the opportunity for 
profit is a major scientific innovation, backed by the industrial 
infrastructure of labs and hospitals that generate the value of the 
discoveries by manufacturing and selling them.

And here the oldest defense of the law enters back in. It can hardly be 
denied that the search for profit does fire a large part of research and 
development, on which productivity growth across the economy depends. Of 
course, that is not the only motivation for research. Pistor highlights 
the explosion of scientific creativity in molecular biology since Crick 
and Watson’s discovery of the double helix. And public funding on both 
sides of the Atlantic helped keep the human genome in the public realm. 
But precisely because the goal of this research was not profit but 
scientific discovery, the human genome is hardly a typical case of 
research and development. Especially given the decline of publicly 
funded science, most research is now done by universities and 
corporations and directed from the outset toward the generation of 
profit, for which the legal protection of patents or the shroud of trade 
secrecy is essential.

But Pistor waves that kind of argument aside. We have seen, after all, 
how the doctrine of improvement has been implicated in the brutal 
process of dispossession and enclosure all over the world. The 
self-serving justifications of the pharmaceutical industry for their 
excessive drug pricing have gone a long way toward discrediting the 
patent system altogether. As Pistor says, we need no more such “fairy 
tales” to justify the privatization of common property. That is 
certainly true. But when one treats biotech patents as equivalent to 
Elizabethan land enclosure and equates modern finance to alchemy, and 
when one gives pride of place to these as opposed to accumulation and 
labor as modes of producing and distributing wealth, one is engaged in 
one’s own kind of storytelling. The question must surely be what purpose 
that storytelling serves.

The work that the apologetic discourse of law and economics does in 
justifying the status quo has been starkly revealed by the crises of the 
last decades. In the name of efficiency, high-powered legal academia 
justified both dangerous financial practices and the creation of 
monopoly. If instead, like Pistor, we attribute the production and 
distribution of wealth to a combination of legalized theft and an 
elaborately veiled ponzi scheme that moves money around without creating 
anything of real value, we are certainly speaking the language of the 
left, but it is a language with a distinctly populist tinge. A true 
Marxist would at this point interject that only a politics that grasps 
exploitation at its root, not in the sphere of distribution but in the 
sphere of production itself, can really offer any escape from prevailing 
conditions of inequality. But Pistor holds Marxism at a distance both 
analytically and politically. Understandably enough, she dismisses any 
prospect of a Marxist revolution against capitalism. Leftist populism, 
on the other hand, is enjoying a substantial vogue both in Europe and 
the Americas. And perhaps the best way to read Pistor is as offering a 
highly sophisticated program for a leftist economic populism.

Pistor concludes her powerful book with a list of practical policy 
suggestions. Their basic aim is to make clear and visible the ultimate 
dependence of private assets on public legitimation, to subject private 
coding of property rights to public scrutiny, and to undercut the 
monopoly of “big law” on legal coding. Specifically, she argues that 
there should be a clear rule banning any further extensions of 
capitalist legal privilege in legislation and treaties. There should be 
obstacles put in the way of corporations choosing the jurisdiction of 
greatest convenience. The role of private arbitration in settling 
disputes between corporations and consumers should be curbed in order to 
assert the sovereignty of state courts. Private legal arrangements that 
generate large externalities—costs borne by others, such as 
environmental damage—for the public should be subject to restraint. The 
outsized influence of lobbyists should be redressed. Old limits on 
coding capital such as the nonenforceability of purely speculative 
contracts should be revived, however hard it may be to draw such a line.

These are technical suggestions. But their ultimate aim is political—to 
offer an effective answer to right-wing populism. As Pistor says, in 
recent years we have seen “rampant attacks on independent judiciaries 
and the free press, not only in relatively young democracies, such as 
Poland or Hungary, but in countries with a long tradition of democracy 
and the rule of law, such as the United Kingdom and the United States.” 
These, in Pistor’s view, are political responses by electorates 
“desperately trying to regain control over [their] own destiny.” The 
nightmare she invokes is Karl Polanyi’s diagnosis of the interwar 
backlash against the predominance of capital that in his view spawned 
both fascism and communism.

But the promises this right-wing populism makes of “taking back control” 
are dishonest, since power usually ends up concentrated in few hands and 
with little oversight from the people. The best response to the appeal 
of this kind of populism, Pistor suggests, would be a real demonstration 
of popular sovereignty. And what prevents that demonstration are not the 
bugbears of national populists: international treaties, the EU, or an 
influx of foreigners. The main limitation is capital. What is required, 
therefore, is a “rolling back” of laws favorable to wealthy corporations 
and individuals, and a forceful demonstration that “the power to 
determine the contents of law lies ultimately with the people as the 
sovereign.” That is the ultimate purpose of her technical 
recommendations, which have no chance of realization without a dramatic 
assertion of popular will. The proper responsibility of a reformed and 
self-critical legal profession, reorganized around a new model both for 
funding law schools and determining professional compensation, would be 
to support this assertion of popular sovereignty. The result, Pistor 
hopes, will be nothing less than a “true transformation, not an 
elimination, of rights and of law.”

Pistor’s proposals are surely worthy of applause. But one is left 
wondering whether her emphasis on the clash between capital and the 
people, with the legal profession as the crucial mediator, does justice 
to the third party in her story: the administrative state. Again and 
again, the state is invoked in Pistor’s analysis as the ultimate 
enforcer of the law. As she says, “Without power, law is at best 
fleeting and at worst ineffective.” But as crucial as the state is to 
Pistor’s account, it remains a shadowy and abstract presence, as if to 
reflect a sad reality: the administrative state, particularly in the US, 
has withered away in the face of decades of political and fiscal 
assault, and through the insidious work of the “private coders of 
capital,” their clients, and their cheerleaders in the mainstream legal 

If a rebalancing of public interest and private right is essential, if 
what we need is a reassertion of political sovereignty, then one of its 
central prerequisites is a reconstruction of state capacity. This, too, 
is a project in which the law and lawyers have a crucial part to play.

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