The notion that economic growth is generated by secure private property rights is true on various levels but leaves many questions unanswered. Which property rights? (Land occupied by immigrants or Native Americans? Landlords’ enclosure rights or village commons? House owners’ rights or eminent domain rules that override them? The owners of a pharmaceutical patent or the dying who need their pills?) The Coase theorem, suggesting that any initial allocation of clear property rights can be efficient, is useful not because it is always right but because it elegantly forces us to analyze with greater clarity the cases where it is wrong. Katharina Pistor's challenging new book takes us further along the path of understanding how law is used in capitalist systems, giving a refreshingly new take on much recent law and economics literature and drawing illuminatingly and in granular detail on both historical cases and current concerns.
A Columbia professor of comparative law who has absorbed the relevant economics, Pistor is a veteran of debates on common versus civil law and the difficulties of adopting foreign law in eastern Europe and elsewhere. Here, she makes a broader pitch for the notion that law and lawyers are central to the historical evolution of capital. In successive chapters, she carefully analyzes the evolution of land and trust law; corporation law and legal personhood (from the East India Company to Lehman Brothers); debt and its securitization; patents, trade secrets, and the ownership of knowledge; the growing dominance of English law and New York law in international contracts and arbitration; and whether blockchain technology can succeed in its ambition to wither the state. A common thread through this cornucopia is the use of lawyers to “code” the ownership rules that evolved and are still evolving. Lawyers innovated rules of priority (ranking competing claims to assets), durability (extending ownership in time), universality (extending claims in space), and convertibility (to legal tender preserving value). They were not neutral servants of a national demos that laid down statutory rules of the game in these areas and enjoyed equal access to them, but independent creators of interpretations, elaborations, and limitations, recombining modules to serve new private purposes, overcoming local rules by globalizing, jurisdiction shopping, and tax shifting, and preferring resolution by attorney's opinions and private arbitrators to public courts. Numerous small changes had huge effects as they were adopted more widely, while specialist attorneys and private arbitrators essentially acted as handmaidens to the wealthy. Pistor's picture is not the classical Marxist's of a centralized state serving the bourgeoisie in the class struggle, nor the regulatory capture beloved of public choice theorists, but rather a decentralized, fragmented, and accretive process whose long-run outcome, sometimes only dimly perceived by innovators, was clearly greater inequality. Her sympathies lie firmly in the tradition of Thorstein Veblen, Arthur Pigou, Karl Polanyi, and Joseph Stiglitz.
Her recipe for curbing the damaging impact of the methods of coding capital that we have inherited is neither revolution nor radical marketization. Rather, she advocates, “do as you have been done by,” suggesting that those who deprecate present troubles should determinedly learn from the persistent professional incrementalism that has created them and replicate its slow but sure success in reverse. She would, among other things, make jurisdiction shopping more difficult; reaffirm rational Pigovian policymaking rules to correct the external costs of rapacity; recognize that populist reactions to inequality, however currently attractive to some electorates, are a delusion; and shift the financing and incentives of legal education to reflect a nobler vision of the rule of law.
A book of this ambitious scope can readily be forgiven first-edition mistakes in unfamiliar territory. Pistor suggests that the option of limited liability by simple registration was outlawed in the United Kingdom between 1857 and 1862 (p. 61). On the contrary, it was then finally extended to all financial services, and those years saw an unprecedented increase in incorporation. Nearer to the present day, she arguably underestimates the damaging Supreme Court–reinforced role of U.S. lobbyists in exacerbating inequality by restricting new business entry and correspondingly underestimates the potential role of congressional action in devising countermeasures. She provides inadequate guidance on how her thesis fits with the great compression of the twentieth century when inequality declined. These are minor quibbles about a book I hugely enjoyed. Business historians and policy analysts alike will find much in this thoughtful, challenging, and original work to stimulate critical reflection on their own areas of interest.
