Ever since reading Capital in the Twenty-First Century, I've been on an endless quest to Learn More about the topics it raised. This has led me down the path of more Piketty books, but as there are a finite number of these, I'm increasingly branching into Piketty-adjacent writing. The latest stop on my journey has been The Code of Capital, which examines the same fundamental questions of the nature and behavior of capital and wealth, but from the perspective of a lawyer rather than that of an economist or political scientist. This results in a fascinating and really compelling argument that supplements and explains the more purely economic and social aspects I've been focusing on.
It isn't too surprising that the author Katharina Pistor brings a new perspective to this. She's a law professor, and it's natural that she would think that the legal system is a crucial aspect of capitalism. While reading this book I mused about how a farmer or a miner would probably argue that natural resources are the only true form of capital, how an architect or building tradesman would argue that human improvements are the only true way to grow capital, or how a software developer like me might claim that ingenuity is the primary component of capital expansion.
Katharina Pistor seems equally inspired by two things: digging into the root causes of the 2008 financial crash, and digging into a phenomenon that Piketty raises in Cit21C. In his grand tour of the last 2000 years of wealth, and in particular the last 250 or so since the French Revolution, he examines the forms that wealth has taken over time. There has been a drastic shift during the last 100 years: prior to that, most wealth was held in the form of land, particularly rural farmland. Over time, there has been a strong increase in the total value of urban real estate. In modern times, though, the vast majority of our planet's total wealth (as valued by the market) is held in financial instruments, especially stocks and bonds.
What's remarkable to Piketty is how consistent wealth has been: whether you're valuing a patch of dirt that has existed for billions of years and will exist for billions more, or valuing a handful of bits in a computer register that we've agreed to pretend is worth something, the way that capital accrues wealth to its owner hasn't changed, nor the patterns in how it is accumulated and passed down to heirs.
Pistor, though, is curious about how those new forms of wealth were created: it seems like a really big deal! Her thesis is that only the law (that is, the civil legal system) can create new systems of capital. Lawyers function much like priests. They take an unadorned asset, like a loaf of bread; they endow it with legal encodings that are recognized by the state, much like a prayer; and the asset is then transformed into capital, like bread into the Host.
Pistor is writing to a general audience, and I really appreciated the time she spends going through fundamental questions. One that she spends time on is a question that I feel embarrassed to ask: what is capital? I needn't feel embarrassed, because it turns out that there's a great deal of debate on the topic, and she gives a good survey about how various factions would describe it. In her view, though, capital is simply an asset that provides guaranteed income for its owner. Examples could include a house that you rent out, or money in a bank savings account, or a patent that pays you royalties.
Not every thing that exists in the world can generate income, of course. People won't pay you for merely owning a musical instrument, or for inventing a new dance move, in the same way they would pay you for owning an acre of farmland or for inventing a gadget. Why do some things get the special status of capital?
In the author's explanation, capital doesn't depend on what kind of asset it is: traditionally only physical assets were considered capital, but today most capital value is intangible. Rather, an asset becomes capital once it is "coded" with certain properties. These include:
Priority. There needs to be a way to determine who has the rights to declare themselves owner of the asset. Something that is held in common, like fresh air or the historical record, can't be owned by any individual and is thus worthless as capital. If there are multiple claims to a specific asset, then there needs to be a way to determine whose claims are the strongest. If a landlord owns a house, and the bank has a mortgage over that house, and a tenant occupies the house, then whose interests will be protected?
Durability. The asset and its ownership needs to continue existence for a long time. Something that is only temporarily "owned" isn't capital, nor something that will rotate its ownership.
Universality. The owner's, er, ownership, needs to be recognized broadly. It isn't enough if you and I agree that our parody songs are worth billions: the whole country, and other countries, need to agree that parody songs are valuable and that we are the sole owners of them.
Finally, Convertability. A capital asset needs to be able to be sold for something of actual value: in particular, government-backed currency.
So, how does new capital (in particular, new categories of capital) get created? By high-priced private lawyers. They use the legal code to designate assets with the above properties, using existing tools from areas such as contract law, property law, trust law and bankruptcy law. Two parties might enter into a contract with one another in which they agree to recognize certain claims and obligations, and code the asset in such a way that they can exchange it with others not party to the original contract. These contracts will likely invoke existing statutory law to protect and defend the new aspects of ownership, taking law that was originally created for one type of asset and claiming it applies to a new one.
Throughout the book, Pistor returns to a central irony of the creation of capital. Ultimately, capital completely depends on the coercive powers of the state. At the end of the day, only the state has the authority to arrest people or enforce massive fines, and only the state will defend certain rights against the interest of people abroad. And yet, the actual creation of capital takes place entirely in the private sphere, and seeks to avoid involvement with the state as much as possible. Particularly in common-law jurisdictions such as England and the State of New York, new law may be drawn up in private agreements, and never face the scrutiny of a court, at least not until some catastrophic event occurs. By that time, such law may have been de-facto followed for decades: it will likely be blessed by the courts, and if not, the "owners" will still have reaped decades of gains.
I think that Pistor and Piketty came to many of the same conclusions from their varying journeys, with Piketty's more recent thoughts in Capital & Ideology often lining up with the arguments in The Code of Capital. In particular, both of them emphasize that the state has enormous powers to regulate capital that are currently going entirely unused or actively abused. Piketty sees this through a democratic lens: we, the people, collectively get to decide what kind of a society we want to have, and that includes the role we want wealth to play in society. Pistor sees it at an even more fundamental level: regardless of whether we're in a democracy or not, at the end of the day the coded wealth of capital won't be worth anything unless the state's police force and courts are willing to defend that capital, and the state provides a stable currency that allows the capital to be converted and used: capital could not exist without the state. And yet, we've seen endlessly that the masters of capital want to enjoy the benefits of state protection while providing none of their gains, or as few as possible, to support the state. They'll use the apparatus of the state to invent new wealth, but also code it in such a way that it avoids taxation, such as placing it "overseas" (while enjoying the benefit at home), or deferring obligations indefinitely, or refusing to let transactions settle, or any other chicanery. Anyways, Piketty has an enduring fear that, if capitalism isn't reigned in and wealth continues to accumulate in fewer and fewer hands, the end state won't be an eternal oligarchy, but rather a violent revolution that destructively redistributes wealth from outside the system. Somewhat similarly, Pistor sees that brilliant legal minds are moving more and more wealth beyond the reach of the state; but if they succeed, the end result won't be unlimited capitalism, but rather the end of capitalism: the state will shrivel, and with it the underlying coercive power to enforce the legal code, and with that capitalism itself.
Both are also acutely aware of the ills of globalization and have provided a lot of detail on how the liberalization of capital flows have enabled a race to the bottom, as more and more money is supposedly placed in tax havens while actually being spent elsewhere. Piketty seems to focus more on the economic measurements and impacts of this trend, while Pistor focuses more on its mechanics: the combination of treaties and domestic laws and contractual arrangements that enabled the status quo, as well as how those changes were accomplished. She even attempts to answer why states would voluntarily cede their sovereignty in such a way. Like Piketty, the overall analysis feels very bleak, but she holds out hope for reform. Piketty's plan seems to be broadly populist; Pistor's is compatible with populism, but she also makes solid arguments for why this trend is so dangerous and why a country's political and even economic elite should work to gradually reverse it. Also like Piketty, she acknowledges that a broad multilateral approach would in the best case take a long time and in the worst case never complete, but that in the meantime there are very strong moves that nations can take on unilateral or bilateral bases, which could break the chain and restore guardrails to our entangled financial system.
The penultimate chapter covers the rise in crypto, and more specifically the "code as law" idea. She takes this very seriously, tracing the origin of the blockchain and how its promoters envision it working. Crypto offers a potential alternative to the legal system: rather than writing a contract in human language and relying on the courts to enforce it, you can write a contract in code and have it automatically executed: the contract IS the transaction. As she shows, though, this has only been demonstrated to work for instantaneous transactions, which are a tiny fraction of all contractual arrangements. And furthermore, the binary nature of code isn't a good match for the uncertainties of reality. Natural language can occasionally be vague and messy, but that is part of its power: when unexpected details develop, as they inevitably do, courts can interpret the intent of that language in coming to a decision. There's no such wriggle room in crypto, so transactions will either fail without termination, or they will need to be thrown to human mediation.
And furthermore, even if we did perfect a computer-based system for contracts and mediation, there's still the fundamental problem of how we determine who owns what in the first place. Our current system is labyrinthine; for example, there's no central registry of who owns every parcel of land, but rather, each locality maintains its own roster of ownership. And these claims can face dispute: does a parcel of land belong to the indigenous tribes who occupied it for centuries, or the settlers who took it from them? The crypto system can't judge the rightful ownership of the assets it oversees, only trace the movement of those assets since they were entered into the system.
Prior to reading this chapter, I was thinking about crypto a lot while reading this book, but not so much about the cryptocurrency stuff Pistor addresses: rather about the NFT movement. This book was published in 2019, shortly before the NFT craze really took off, so it isn't addressed much here, but I think it's extremely applicable to Pistor's main thesis and NFTs make a phenomenal case study. We were all, in real time, witnessing the attempt of the creation of a new category of capital asset. The underlying asset is famously just a kilobyte or so of code, basically a signed URL, arguably "worth" an infinitesimal fraction of a penny. And yet, thanks to a big marketing push and the endorsement of celebrities, the founders hoped to establish that these assets were investments, worth thousands or millions of state-backed currency.
So, let's take a look at how the code of capital was applied to these assets!
Priority is arguably the main selling point. One of the virtues of the blockchain is that at any moment in time, anyone can verify the ownership of an asset through the public registry. In the case of NFTs, this is an incredibly strong and unbreakable priority system, even in the presence of fraud or theft. "All my apes, gone!" As endless internet commentators have noted, the law-less quality of NFTs means that there's no legal appeal to the state to reverse a movement of assets, which is arguably terrible, but does reinforce the stability of the Priority system for an NFT.
Durability. On the one hand, NFTs are infinitely durable: they only exist in the digital space and will never decay. And the blockchain registry will also endure, so ownership of the asset is permanent until transferred.
Universality. This seems to be the category where NFTs fail as capital assets. Within the NFT community, members can agree to treat one another's claims with respect; outside of that community, though, there is no recognition that the claim means anything. We've all laughed at people online who say that only the "owner" of an NFT has the "right" to display their ugly monkey image: it's a JPEG, and anyone can right-click and save the image. When someone's "property" is "misused", there is no recourse or enforcement available. They can't sue someone in the courts to make them stop using "their" image, or send a sheriff to reclaim "their" property.
Finally, Convertibility. There is a fairly robust system in place to exchange state-backed currency for NFTs and vice versa, so on the one hand, they are highly convertible. But they run into the same issue as crypto, in that the market is extremely volatile and a terrible store of value. As the market has crashed, they are less and less desirable assets.
So, overall, it seems to me like NFTs failed to be successful capital assets precisely because of what they were advertised as: assets that relied on computer code (blockchain) rather than on the legal code (copyright) for their value. You can see what an incredible amount of influence it takes to truly mint a new form of capital, and in particular, how to ensure that the state will use its courts and police to enforce the private interests of the holders of capital. Just take a moment and imagine what that world would have looked like: if your apes were stolen, the thief would be thrown in prison; if someone used a hexagon image as their Twitter profile pic, they would be forced to pay millions in damages. Well, that's the world we live in when it comes to derivative securities, or Mickey Mouse, or Scrabble. A century or two ago, those examples would have seemed as ludicrously unworthy of state protection as a Bored Ape does today.
But, who knows? One possible, if unlikely, future might exist where those "rights" do become embedded in law; the depressing surge in Crypto-friendly members of Congress may be a harbinger. That would follow the path Pistor predicts at the end of her chapter on Crypto, suggesting that in the end law will win out over code and crypto assets will be enveloped and absorbed by the current masters of capital. The alternative might involve NFTs or their descendants becoming entangled in other, protected assets, such that harm to them causes harm to others. That could result in them belatedly being coded with universality, even in the absence of statutory law, as existing holders of capital would feel compelled to recognize and uphold them. Either move would probably move NFTs firmly into the realm of a true capital asset.
So, yeah! This was a really wonderful, fascinating book, with a whole lot to chew on, including quite a few topics I didn't get into here. I really appreciated Pistor's approach through the book; as a total novice in legal matters, I was able to follow what she was talking about, and follow into what becomes some relatively complex structures. That complexity isn't an accident; one of her observations is that much of what high-priced lawyers do is deliberately obscure, hiding important information behind impenetrable jargon, more or less explicitly to remove these actions from the public democratic sphere and make them exclusively available to the wealthy elite. So it's really important to know exactly what is happening and why. Globalization wasn't just some sickness that struck the world overnight and we all have to live with now. It was the result of a series of calculated legal maneuvers in order to achieve a particular outcome. And we don't need to live with it now that we've seen its catastrophic consequences. Those same tools of law can undo it. That won't happen naturally, or easily: greed is an incredibly powerful motivator, and such actions would be fiercely opposed. But it's an important job to do, and one I hope I see completed in my lifetime.