If you have thought seriously about inequality or capitalism then the thesis of The code of capital by Katharina Pistor is not going to be too shocking. Still, it’s one of the best articulated explanations for wealth and inequality I’ve seen.

Fundamentally, capital is made from two ingredients: an asset, and the legal code. I use the term “asset” broadly to denote any object, claim, skill, or idea, regardless of its form. In their unadulterated appearance, these simple assets are just that: a piece of dirt, a building, a promise to receive payment at a future date, an idea for a new drug, or a string of digital code. With the right legal coding, any of these assets can be turned into capital and thereby increase its propensity to create wealth for its holder(s)

This gives you the crux of the argument. That how assets are turned into capital, and so generate wealth and confer certain rights, is contrived. This may seem like a simplistic and obvious point, but we often take for granted what protections are afforded to certain assets, why some stakeholders are held over others, or the myriad frameworks and legal fictions we use to interact with them.

Who decides this, and why, helps explain persistent and widening inequality in many societies.

The idea that people aren’t all equal before the law isn’t a novel concept. Nor is the notion that the already wealthy and powerful have greater ability to influence this. But Pistor makes a more subtle point.

She focuses on how private agents, through private law, have taken over this process. Lawyers, not legislators, conform assets to the law, and select and fashion the law to suit.

Law is the cloth from which capital is cut; it gives holders of capital assets the right to exclusive use and to the future returns on their assets; it allows capital to rule not by force, but by law. The cloth is woven of private law, of contracts, property rights, trust, corporate, and bankruptcy law, the modules of the code of capital. Capital owes its vibrancy and frequent transmutations (from land, to firms, to debt, to ideas, etc.) to the fact that private and not state actors code capital in law.

In that sense the issue is less about access to legislators and more about access to smart and creative lawyers. Especially interesting is how Pistor frames this as an implicit subsidy to those able to play the game.

Subsidies and other “entitlements” are typically viewed with great suspicion, because they are regarded as distortive of markets and lead to inefficiencies, even corruption. Yet, the legal protections capital enjoys are arguably the mother of all subsidies. Without the code’s modules and the possibility to fashion them to one’s liking, neither capital nor capitalism would exist.

What Pistor reveals is a deeper problem than is acknowledged by calls for higher taxes, different tax treatment, greater transfers, or pretty much anything else intended to decrease inequality. This is a structural issue, an invisible force behind much of our lives. It’s about who gets to set the rules behind closed doors.

Realizing the centrality and power of law for coding capital has important implications for understanding the political economy of capitalism. It shifts attention from class identity and class struggle to the question of who has access to and control over the legal code and its masters: the landed elites; the long-distance traders and merchant banks; the shareholders of corporations that own production facilities or simply hold assets behind a corporate veil; the banks who grant loans, issue credit cards, and student loans; and the non-bank financial intermediaries that issue complex financial assets, including asset-backed securities and derivatives…

…The law is a powerful tool for social ordering and, if used wisely, has the potential to serve a broad range of social objectives; yet… the law has been placed firmly in the service of capital.

As always my emphasis