His book The Code of Capital (Capitán Swing) has been chosen by the Financial Times as one of the best works of 2019. German Katharina Pistor, multi-awarded academic from Columbia University (USA), was in Barcelona this week to participate in the inaugural lecture of the Fundació Josep Irla course.
Are the law firms in charge of the world?
Property law, contract law, corporation law, bankruptcy law, trusts were created to allow private parties to organize their lives with other private parties. Some of these figures are feudal, but democratic states have embraced them: that is the stuff capital is made of. The power resides in each transaction of the lawyers, in each financial product they create for their clients or for intermediaries. And the law is designed to be relatively flexible. By using this material strategically, the firm creates wealth for its clients.
And is this way of proceeding at the base of the current inequality?
Inequality follows from this system. Because with proper legal coding you can turn an idea, a piece of land, a promise to pay into a wealth-producing asset. The problem is that the wealth that we have accumulated today is unthinkable without using the law and having the guarantee that the State will protect you even if you have used it in ways that the State had no idea when it was first created. . And of course, if you already have a lot of resources that you may have inherited, you have a better chance of finding the right lawyer to help you monetize it.
Are you referring to tax havens?
We have the case of the Cayman Islands or Switzerland. But the other states, like Spain or Germany, are also responsible. Because their law recognizes as legal persons the corporations that are registered in those countries, which everyone knows are fictitious. It is no longer worth blaming these tax havens, we should blame ourselves because we are allowing formulas that blind us.
In his book he argues that even democracy is in danger...
We have given ourselves very elastic rules by which we can choose a different legal system depending on what suits us. I can create a corporation in Luxembourg and continue doing business in another country, being able to choose the law I want to abide by. At the same time, we claim to be a democracy and say that we are governed by law! This reading is one of the deepest causes of populism. We repeat to ourselves: "There is this game, more and more extreme, but nothing happens". Then Brussels is always blamed for whatever. We have lost control over the financial system.
The markets have brought down Liz Truss. Is it excessive?
The markets are extorting us all the time. Every time they start to falter, the central banks step in and support them. Look at Britain right now: they didn't like the tax plan and they killed it. People cannot be blamed for not understanding these mechanisms, but the feeling is that we do not control our collective destiny as democracies. The market does not function democratically. Corporations exercise dominion over others, and the legal system allows them to do so. We have created a system for the market, under the ideology that this was freedom.
But we need the market to raise capital.
Our democracy has become dependent on growth. We have been taught that it is the only purpose and we elected a government with that idea. We are no longer talking about Social Security or any other topic, when climate change is pushing us to the limit. Capitalism is inherently a system that exploits the law and expands spending. It works on legal steroids, with the centrality of credit and debt financing much of what we do.
But the law also protects innovation and progress...
Intellectual property rights are a wonderful example because they only exist in law. In the case of land, it can be debated if it is something you can sit on and build your house on. But today's most valuable assets come from an immaterial world, a luxury in the hands of powerful, well-trained lawyers and their clients that depends on the ideology and will of the Patent Office. Certain assets should never have exclusive rights.
You claim that Anglo-Saxon common law is open to abuse.
The common law system has a couple of structural features. One is, of course, case law, rather than codified law. The law evolves through the litigation process, and in court those who sit on the bench are often former lawyers. And there is no clear line between contract and ownership. The common law allows you to change ownership relationships through hidden contractual mechanisms.
Does capitalism always need law?
We cannot expect the legislature to always act, it is too slow and cumbersome. In practice we adapt the law to the circumstances. We leave this task in the hands of the lawyers with subsequent review by the judges. We have taken these mechanisms to an extreme because expected or future returns are treated almost like property. The competitive capitalist logic has pushed institutions to be used for a particular type of expansion of wealth creation.
For example?
We can go back to the issue of derivatives before the great financial crisis of 2008, exempt from bankruptcy rules. We still have the idea that we are all equal before the law. But when the many small exceptions are combined, then the lawyers bear some of the blame. They have become service providers when we used to have the idea that lawyers serve the rule of law, right?
Capital moves, law does not.
But in fact most financial assets traded on a global scale are governed by English or American law. The two global financial centers are London and New York, and the biggest law firms are there.
What do you propose to improve?
It could, for example, restrict the possibility of choosing the most convenient legal models and avoid private arbitrations. Or decide that, at least for tax purposes, states stop accepting shell companies as businesses.
The minimum global corporate tax of 15% goes in the right direction.
Most of our law still thinks in physical terms, which means that for financial or digital assets we don't really have good legal mechanisms that ensure control. It was France, outside the OECD, that said: “I am going to implement the minimum tax anyway” with the big technology companies in mind. Well, if France does it, and if the EU does things like that, it can take a lead and create a snowball effect. So instead of multinational negotiations that take years and years, it is better to mobilize the national legal system.
