[MUSIC PLAYING] KATHARINA PISTOR: It's a
really kind introduction. And thanks all for coming. I know this is a busy
time of the term, and I appreciate
you taking the time. So this is what I'm
going to talk about. I know that we
have limited time. So what I want to do
is just expose you to the core concepts
of the book, and run you through
two case studies. I will allude to the
other case studies that I have in the book. And then I want to say a little
bit about global capitalism or how we code
capital for the globe. I want to say a few words
about the master coders, the lawyers who are
basically the who's-done-it. And I want to close with
some questions, perhaps fewer answers than
you would want to have on what we could do about it. So the famous Leninist question
[NON-ENGLISH] will come up at the end. So here is the core argument-- I'm of course asking
in the book, first of all, the question once
more, what is capital? And I basically use
a definition that has been used by
others, Piketty, et cetera, who are
saying that capital has the interesting quality of
being able to generate wealth. So it's an asset that has a
particular type of quality. People can generate
private wealth, and maybe also protect
past gains with capital. And so the question
for me, then, was what are the kind of
qualities that an asset has to have to generate wealth? And I'm basically saying
you need a set of priorities that law can bestow on an asset. And these qualities
or attributes are priority,
durability, universality, and convertibility. I'm basically saying you
need three out of four. And let me just say a
few words about this. So the first thing is
"priority" basically means that somebody has stronger
rights to an asset than everybody else. The easiest institution to
think about in that context is property rights. So you have property
rights, which basically means that you can decide
what to do with an asset, whether to destroy
it or transfer it, and to exclude others
from that asset. And the priority quality
comes out most clearly when you think about an
insolvency situation. Insolvency is
defined by the fact that the debtor has fewer assets
than claims against his assets. So it really, really matters
when you have a defaulting counterparty, whether you
have stronger rights or weaker rights, whether you
have priority or not. If you have an owner of an
asset, you can take it out. If you have a secured
claim, you can separately enforce against the asset
that has been secured. If you have unsecured
creditors, you will just have to deal
with the leftovers. You'd get a haircut,
as we say in jargon. So priority is critical. And legal institutions
create ranks, and prioritize some claims over others. The second aspect that
you need as capital-- you need some durability. So if an asset can end up
easily on the auction block all the time, the ability to
accumulate wealth over time is limited. So durability basically
protects assets or asset pools from too many counterclaims. It's a particular
legal privilege, which is bestowed
particularly by institutions such as the trust or
the corporate law. And now I'll go into
those details in a second. The third attribute
its universality, namely that these priority
rights and the durability are enforced not only against
another party with whom you might have negotiated
these interests, but against the world. [LATIN],, as we like to say
in Latinese, as lawyers. So it has a universal
quality, because there is an authority
behind that, that will enforce these
attributes against the world, against anybody. Others will have to yield. And then last but
not least, especially for financial assets,
we need convertibility. You could also think about
convertibility giving financial assets durability. Convertibility is not just
that I can assign an asset to somebody else. It's not just about transfer. It's about a right-- ideally
a right or an option-- to flip one asset
into another one, to get a safer asset
for what I have, to have access to cash
in times of crisis is really what it boils down to. And that's also why I said
you can attain durability for financial assets
by having access, for example, to
central bank liquidity, or by getting a bailout, or
by having maybe a put option to a private party that
has a bigger balance sheet than yourself. So basically, you need priority,
durability, universality, but for financial
assets, I would say convertibility is the
mechanism by which you attain durability. So what fascinated me,
and why I wrote this book, is that I was engaged in
trying to understand the 2008 financial crisis, and trying to
understand the legal tools that had been used before that
to create these really, really fancy financial assets,
like derivatives and credit derivatives, the CDOs, and
the CDSs, and of course, securitization itself. And when you do an institutional
autopsy of these assets, you'll find these institutions. And they're old. They're much older than our
fancy financial institutions or assets today. So property law, collateral
law, trust law, corporate law, bankruptcy law, and
contract law are the tools from which the contemporary
financial markets have been made. And when you trace
them back in history, you'll find that many other
capital assets have been coded in these institutions. So it starts with property
rights and it starts with land, but the same kind of mechanisms
that we first used to flip land into a capital
asset have been used to flip other types of assets-- debt, or firms, or knowledge,
or perhaps even data-- we'll talk about this-- into capital assets as well. And that's then basically the
story I'm telling in the book, is how these different assets
have been coded in law. So the question I still have
to answer before we can go into the details is, why law? Why do we need law
for all of this? And what is the function that
law or a state and its laws play? And I'm basically adopting here
a Weberian notion of the state, if you want. Really what I'm
saying is what you need to convert a simple
asset into a capital asset is you need a credible
commitment of enforceability. You want to make sure that
you can enforce your rights at some future
date, in some place, and maybe even in some place
outside your own jurisdiction. That's what it's all about. So we need to have the
institutionalization of the centralized
means of coercion that private parties
can use to organize their private
affairs so that they can bank on enforceability. So at some level, at every
stage in the creation of capital and the creation of
financial markets, I would say in the creation
of markets in general, the state is deeply
involved, certainly when we talk about modern states. So when people think about
the state and the state law, I think most of them have
an idea of a vertical relationship, where you
have the state and the law, and the law dictates what
you can do or cannot do. Criminal law says you can't
do x, or regulation says you can't do other things,
otherwise you will be fined, sometimes also prescribing what
specifically people have to do. There's also the flip side
of this vertical dimension, is that countries that
use the rule of law, have a constitutional
system, actually empower individuals to use
the law against the state, to use the law in the
state against the state itself through civil
and political rights. You can protect your property
rights against the state. If you are expropriated,
you can get compensation. That's also just
to think about-- I think it's an enormous
institutional revolution to create basically the
centralization of the means of coercion on the one
hand, but then also allow individuals to avail themselves
of that against the state itself. These two dimensions I
largely ignore in the book. I'm mostly interested
in the third dimension. I'm interested in how
private parties can use the coercive power
of the state to organize their own private affairs. That's what the
book is all about, and the ability to create assets
that have priority rights that will be universally enforced,
not only against my contracting parties but against
anybody, whether or not they knew about the arrangement
or were party to the deal. That's what state
power basically does. So the stories I tell in
the book are basically dealing with four out
of the five assets I have at the blackboard here. I talk about land, firms,
debt, and know how. And I thought today I will
just talk about land and debt, and draw some
connections between them so we can see how these
institutions work. My latest project is data. Data, as some people
say, is the new oil. And certainly, it's an asset
of enormous monetary value. But it defies some of
the characteristics that the other assets have. And so it's an interesting new
project for me to think about. So I will just leave this aside. I just want to flag this. This is really cutting
edge, new stuff here. I can skip this slide, really. This is just to say
that the different-- maybe let me just
use two minutes about this different situation. So these assets I talked about--
land, debt, firms, know how-- can be coded as capital by
using the legal institution I mentioned before--
property collateral, trust, corporate bankruptcy,
contract law. Now most of you will have an
idea what property rights are. I just want to flag
that the concept of property rights for
lawyers is somewhat different than for economists. For lawyers, we're
thinking about property as an absolute
right that is backed by a state that actually creates
this rank order, hierarchy. It's not so much
the residual right, the left over after
you have contracted out all the other specific
commitment to an asset, but it's sort of
at the beginning, basically, there is property. And that basically
means ranking. The next institution,
collateral law, is basically a subset
of property rights. If you get a particular
interest in a thing or in a particular right,
that is at your disposal when you want to enforce. So think about a homeowner
that wants to get a loan. The mortgage is a collateral
or a secured interest, and a bank can
take the house away from a debtor that fails
to perform on the loan. And so you have a
security interest, which is kind of a small,
little, property right-- not full property right,
but if the debtor defaults, you can actually
seize the asset, and get a title from the
court to enforce against it. Trust is an institution
that is perhaps least understood
of the ones that I have here in the PowerPoint. So trust, I think, is one of
the most ingenious institutions for coding capital. It comes out of the
English common law. And it's a contractual device
to create property rights or to alter property rights,
which is why the civil law systems don't really like
it, because they have a much stricter [INAUDIBLE] [PHONE RINGING] I'm sorry. I thought that I'd done-- don't disturb-- so the civil
law creates a much stricter separation between
contract and property. Just to give you an idea
of what the trust does, think of an land owner
in feudal England, where you had
primogeniture rules that required the father to leave
all his assets to the firstborn son. No wills, no basically
private decision where you want to
give your assets. You have to give it
to your firstborn son. But you do have a
second born son, or maybe a daughter to whom
you want to leave some assets. So what do you do? You have to get around the
restrictions of the inheritance law. And what you do is basically--
let's assume I'm the father. I basically say, I'm going
to transfer formal title to a certain piece of land that
I own to my younger cousin, who hopefully will survive me. So transfer formal title. This cousin now
becomes the trustee, but he only has formal title. He doesn't get the economic
benefits of the land. The economic
benefits of the land shall accrue to my
daughter upon my death. That's the deed I
draw up, and we'll put it into the drawer
of my country solicitor. And once I die, somebody
will discover the deed, and say, actually,
this land doesn't belong to the firstborn son,
but it belongs to the daughter. This arrangement has the
other beautiful effect that if I am still
working on the land, I've transferred formal
title but nothing else happens in the world. Nobody can see that. It's just in the documents. My personal creditors
come and want to enforce against
my assets, I can say, you can't take this land
because I no longer own it. My cousin owns it. If the personal creditors
of the cousin come and say, I want to enforce against your
assets because you didn't pay, he can say, I have
formal title to this, but I don't benefit
from the economic stuff, so you can't enforce
against that. And when the personal
creditors of my daughter come and want to enforce
against her, she can say, I don't have it yet. So this is the
perfect incubator. You just have
created a legal shell that protects these assets from
multiple groups of creditors, and thereby can grow over time. Things have become legally a
little bit more complicated over time, but the trust is the
core institution today, still, to have these family
offices to protect private wealth from taxes
and private creditors. It's also very important in
securitization structures. And I'll come back
to that as well. Did this go out? It did go out. Doesn't matter. Let me just talk through it. It's back, OK. Let's just ignore it. I'll just talk you through this. Maybe if it comes back up
before we get to the debt. But for the land, I can
just talk you through it. So when you go back to the
16th century, I can use, actually, this slide. When you look at
the slide, you can see that until well into
the 19th century in England, rural land,
agricultural land, was one of the most-- was the most
important source of wealth. And of course, it starts here. It starts at around 1700. You can go a little earlier. In the 16th century
already, most of the land that had been
commonly owned or used by the commoners
and the landlords according to certain use
practices, was enclosed. And the landlords won a
battle, both a physical battle in the field and a legal
battle in the courts, to get priority
rights to this land, to have their rights recognized
as being able to say, actually, we want to close the land
against the commoners when we want. We want to build new
hedges and new fences, so we can use the
land to herd sheep or to grow cash
crops for the cities, and exclude the
commoners from that. This was a battle
that wasn't resolved by a single piece
of legislation, but by hundreds and
hundreds of court cases that were battled
out one by one, where basically, the
landlords at some point said the commoners could
not use the land anymore. They built a new fence. The commoners broke down the
fence, broke down the hedges. They ended up in court. The court cases
went back and forth, but all told, by the end of the
16th century, about two-thirds of arable land in England
had been enclosed by courts, basically recognizing
the landlords as having priority rights, and
being able to exclude others. Now, the landlords, once
they had enclosed the land, of course also realized that
they could not mortgage it, so they could get funds
to do commercial ventures in London and other cities. But they also then had
to learn that once they didn't pay their loans, the
creditors could come and seize the land. So they went to the
lawyers to get help. And the lawyers
advised them that they could protect their family
wealth from creditors by basically creating a trust. They called it an entail,
but it works exactly like I told you the
trust worked before. They basically said the
family member-- the son, the eldest son that now manages
the family business or family estate-- is not the true owner. He just holds as a
trustee, basically as a life tenant, the land on
behalf of future generations. So the creditors can't take
the land away from him, because it's not
really his land. It's the family's land,
including unborn generations, which means that even secured
creditors can seize only 50% of the land, and can never
get the family mansion. So again, you protect your
assets from too many creditors. And they've been able to
do this over the course of the 18th century. The system lasted until 1881. This is why this
slide is so beautiful. This is from Piketty's
book, from 2014. And he has this chapter on
the metamorphoses of capital, and says the stuff that
is the source of wealth has changed over time. And he gives sort of
standard explanations of supply and demand
and technological shift. And what I'm saying
basically here-- something really important
happened here in England. And this was basically
after the system blew up. it's, of course, inefficient,
as you can imagine. In 1870, you had a major
depression in agriculture because the landlords would
not get another credit anymore from their creditors
to roll over old debt. Because at some point they
just stopped doing that. And they stopped doing this
when English agriculture became really uncompetitive
vis-a-vis North America. They had repealed the Corn Laws. So this all blew
up in the 1870s. In 1881, two
important reforms were introduced in England that
had been waiting for decades. The Land Settlement Act
and the Land Conveyance Act basically said, from
now on, we treat the life tenant, the firstborn
son, as a true owner. We treat land like chattel,
and we will enforce. And as a result
over 20% of land was reallocated within a
relatively short period of time in England. It was one of the most
[? encompassive ?] land reallocations in England. That happened exactly there. That's when land,
in my language, gets stripped of durability. You still have priority rights. You still have land. But you no longer
have the benefit of the entail or of a
trust type of protection, so the land can easily end
up on the auction block, and then will be redistributed. And if you have
these kind of rules, then the ability to
accumulate enormous amounts of wealth over long
stretches of time is just much more
limited, because there are economic cycles. There is competition. And things will be
re-allocated eventually. So the story of
what is interesting when you look at the
US, a similar picture, also from Piketty, the story's
a little bit different. And this is, I think,
just interesting for political economy reasons. In North America, England
introduced the reforms that they introduced in
England only in 1881, 150 years earlier. So it's not that they
didn't know what to do or how the institutions
would work. It's really a story of
the political economy. So in 1732, they introduce the
so-called Debt Recovery Act in colonial North
America, which basically said the same thing-- we will
treat the tenants or holders of the estates as owners. And we will evict you if
you don't pay your debt. And of course, in that case,
the English were the creditors and wanted to have
access to family estates. They busted a lot of
those southern estates, and actually, one of
the effects of that was that you had the first
slave auctions, because slaves had been taken as collateral,
and were put on the auction block along with the houses. So the story here is that land
was not always propertized in that fashion. Land can have all kinds
of different arrangements, but it started in England
in the 16th century, and other countries
followed suit later on. Creating individual property
rights and land took time. It took several centuries. Only in 1881 did England
introduce a registration system for land, and it made it
mandatory only in 1925. So really late-- just
keep this in mind. So priority rights are
important, but equally important-- that's
so often forgotten, especially in the
development debates with [? Desoto ?] and others,
who say, just title the land. Give people title. Then they can lift
themselves out of poverty. Durability is really
key, and durability does a lot of the work. And durability is
basically a legal subsidy. It's basically
saying, we allow you, the state allows you to
protect your property from too many creditors. And if you can avail
yourselves of these protections without even having
to ask anybody, because you have a good lawyer
who knows how to do that, then you can basically make
use of that particular subsidy. Let me jump to this. And I'm just going to do
this again, so we can see. Let me jump to this. So I'm now going to shift
from land to debt, which is of course always related. And of course I'm starting here
with these little buildings in the corner here. This is houses again, ownership,
land ownership, and houses. And these are
homeowners in California who wanted to have
loans, and had to grant the creditor a
mortgage to get the loans. And so we're talking
about the securitization of mortgages in the US in the
run-up to the 2008 crisis. And on top of that, I'll
also show you basically how collateralized debt
obligation basically works. And what I want to show you
is that the same institutions that we talked about
for land earlier, just pure agricultural land, work
here, and how they work here. So you start with these
homeowners who want to buy land or they're being told actually
they can buy houses really cheaply. And you have a
mortgage originator, which is New Century. And New Century
basically only originates mortgages-- gives the
loan, gets the mortgage, piles it all up,
and then sells it wholesale to one of the
big banks, in this case, to Citigroup. We're starting in California. Land law is local. It's state law. It's California land law. But we're selling the stuff,
the loans backed by mortgages, to a New York-based
major entity, Citi, which has a specific affiliate,
one of its subsidiaries, which buys the stuff,
thousands of mortgages, puts them together. And what do they do with us? They throw this into a trust,
the trust under English law. Why? Because | want to make sure that
the assets, the cash flows that come from the loans which
are backed by the houses, are separate,
distinct from any risk associated with Citi
or its affiliates. You want to make them
bankruptcy remote. And to do this, you
have to basically say, this is a true sale. by basically
throwing these assets into a different legal
shell, this trust, we're really transferring
them into this thing. And now the investors--
these are the beneficiaries in the trust [INAUDIBLE],,
these are all the daughters, the investors who are buying
interest in the trust-- they only have to worry
about the cash flow from the assets in the trust. They don't have to worry
about whether Citigroup or its affiliates will go bust. So again, you
insulate these assets. They can incubate without
any other credit risk, and the investors only have
to think about the quality of the assets in the pool. There's been always a
trustee, like my younger cousin has to be there. This would be basically
somebody from JP Morgan Chase who just is the trustee
for the Citigroup stuff. And then Citigroup will be
the trustee for the same stuff that JP Morgan
Chase does, as well. What I wanted to look
at here is a little bit more the different
investors that you have. So securitization of mortgages
in the United States started in the early 1970s,
after in 1968, the Federal Housing
Act was changed and the government-sponsored
entities-- Fannie Mae, in
particular, Freddie Mac wasn't around yet, but
Ginnie Mae as well-- were authorized to
securitize mortgages, not to originate
mortgages, but to buy them on the secondary market and
securitize them in order to lower the cost of credit,
because you diversify the risk associated
with mortgages, and thereby make
homeownership affordable. Background-- burning cities in
the United States, many people trying to get houses
couldn't afford them, et cetera, et cetera. So the choice made in 1968
in this country was to say, we resolve the housing problem
by making credit cheap. And the way to do
this is to securitize. When Ginnie Mae and Fannie
Mae did the securitization, they did a very
simple securitization. You throw stuff into a trust,
and the beneficiaries all buy an interest
in the trust that has the same cross-section,
just a little bit more, a little less, bigger
slice of the pie, smaller slice of the pie. When the private sector joined
the securitization game, they discovered that
they could actually interest many more
different types of investors if they cut and slice the
pie in a different way. And so they
introduced tranching. The French word
tranche is "to cut." And what they did is they
created cash flow rights that were stronger than others. So this is priority now
done with contract law. Everybody who buys an
interest in this trust now knows some have
a senior interest. They will always the first
cash flow that comes in. They will always be the
last one to face any losses. Then there are juniors, who
are exactly the opposite. They will always be the
last to get cash flow, always be the first
ones to bite the losses. And then you have different
levels of mezzanine tranches. So you know some people really
want to have safe assets, so Fannie Mae now
buys the stuff, rather doing the
securitization itself. It buys the senior. It wants to be safe. China Investment Corporation,
the Chinese sovereign wealth fund, buys senior. Bayerische Landesbank, the
German state-owned bank, buys senior. So does [INAUDIBLE]
in this example. It might be different
in some other examples. The junior tranche went,
in this particular case, to Citi itself. This happened actually,
unfortunately, too often, because they thought
they could do a nice private placement later
on or benefit from the returns. And of course, they got
stuck with the junior when the whole thing blew up. The real problem for keeping the
securitization machine running were the lower
mezzanine tranches, because you had to place all
the tranches to basically close a securitization,
move to the next. And they did-- when you
talk to the lawyers, they sometimes did 40
structures like that in a week in the heydays of
securitization. This was a mass market. You had to produce mortgages. You had to put them
through the system. And you had to place everything. But you couldn't really
place the lower mezzanines, because they were too risky
for the safe investors, and they were not risky enough
for those searching for higher yield at the lower end-- [PHONE TONE] Sorry about that. I'm going to close this down. And so what they had to do
is the industry basically had to produce its own buyers. And that's when I come to
the CDO on the right here. So when you can't place
the lower mezzanine, you basically set up
a corporate shell, in this case in
the Cayman Islands. So that gives you additional tax
benefit, because Cayman Islands is a tax haven. What I didn't show you here
is that actually the CDO had a twin in Delaware,
the same name, just a Delaware corporation. And they co-issued the interest
that investors would buy, because some investors,
such as insurance companies, can only invest a certain
proportion of their portfolio in foreign assets and
Cayman is foreign. But if they co-issue it
with a Delaware company, all of a sudden it was domestic. It's another legal trick
the lawyers came up with so that they could attract
investors who otherwise would have been constrained. So you set up the shell company. The shell company raises
funds from investors by saying we will now buy
a gazillion different lower mezzanine tranches from
different securitization structures. Since we diversify, the
probability that all of them will tank at the same
time is sufficiently low that all of a sudden
we can rate them in such a way that we
can get senior triple-A, maybe not triple-A,
but at least AA-rated senior tranches, and then
upper mezzanine tranches, lower mezzanine tranches,
junior tranches. And the investors buy the stuff. You take the money. And then you buy the assets. You throw them, in this case,
behind a corporate shell. And then you might
get stuck, of course, again with the lower
mezzanine tranches. And if you do, you just have
to go through this again. You just set up another entity. And then we call
this a CDO squared. And if you have to do it
again, then you do a CDO cubed. That's basically what in
the end blew up our system. So these are just
two illustrations of how this works. I think what you can
see, it's property law, it's contract law, it's
collateral law, it's trust law, it's corporate law. There is a story
for bankruptcy law that was buried, because it's
going to get too complicated, but I invite you
to ask me later on. But bankruptcy law is
implicitly in here as well. Let me perhaps say a couple of
words about the other topics I wanted to talk about. One is globalization. We clearly live in a
world of global capital. Nobody doubts that. The story that I tell
you at first glance conflicts with the notion of
a global capitalist system, because I'm saying
capital is coded in law, and the legal institutions
that I discussed are all institutions
of domestic law. There is no equivalent for
this stuff at the global level. We have a UN Sales Convention,
but that's just minor. We don't have a global state. We don't have global law. So how can a global
capitalist system exist? And the answer I give in
the book to this question is, in theory, we could have a
global capitalist system that is sustained by a single
domestic legal system, as long as all other states
recognize and enforce the legal institutions that
are created under that system. So they say, we
accept what you do. We accept everything--
the trust, the property law, all the
devices that you use in [INAUDIBLE] and
then you can do it. And I'm basically saying to you
in fact, we have two, not one but two legal systems that
sustain global capitalism. And these are the laws of
England and of the State of New York. And for corporate law you can
throw in Delaware, if you wish. Most of the globally
traded financial assets are coded in one of
these two legal systems. So it's much more
parochial and also much more hegemonic
or hierarchical, the global system,
than is often depicted. And then of course,
the other question I have to ask, sort
of who's done it? Of course, these are the two
global financial centers, London and New York. And then I wanted
to show you this. When you think about who
are the global law firms, the 100 top global
law firms are all located in London and
New York, and they all have Anglo-Saxon names. They're either indigenous
American or English firms, or they have merged with
continental European or Japanese firms. So in countries like
Germany or France, most of the work in MNA
and capital market law is done by global law firms,
and not by local law firms any longer. So I'm basically saying
the masters of the code-- they don't really
like to hear it. The lawyers want to say they're
just agents of their clients. They're agents. They're not masters. I'm saying you're
masters of the code. You know how to code. You can substitute assets. You can substitute clients, but
the coding is what you master, and that's the key thing. And this, then, leaves me
with the final question here. This is this one,
we, the people. How should we think about this? We have created a
system, and this is a longer process
of legal evolution, legal institutional change,
whereby we have basically given those who are resourceful
enough to do so the ability to pick and choose
from legal systems, different legal
systems, the ones that best suit their clients' needs
to advance capital's interest. What they're ultimately doing
is they're invoking state power, because that's what you need. But we have created a system
that makes it actually very easy for private parties to
avail themselves of state power to do their things. But in a way, that
benefits, of course, mostly their own private
wealth interest rather than the common good or
the public interest, however you want to call it. And that is intention
with our quest for democratic self-government. So the more we allow easy
opt-outs or even also easy opt-ins, to some extent,
because New York and England, I think most of the
people in these countries are not aware about the extent
to which they are fashioning legal institutions that are
globally used to code capital. So the more we allow that,
the greater the tension is between a collective
sense of governance and the-- not unilateral, but sort
of the invocation of state powers by those who
have the greatest sophistication and the best
lawyers at their side to do so. So that's, I think, the
dilemma that I suggest we are confronting today. And I have some suggestions
at the end of the book how to address this. But maybe let me stop here and
just listen to some comments. NICK: Katharina, thank
you so very much. [APPLAUSE] We'll move now to
our discussion. But because it's a very
busy time of the semester, and I know quite
a few people will have to leave the
room before 1:00, this is the first of two
good opportunities to leave. Because we do want to
have a good discussion. And if you have to leave
within the next 15 minutes, this is the best time. You will get another chance to
leave after our discussion is done, but it's good to choose
one of those two times, just because these chairs
make a lot of noise. And we're going to be trying to
figure out all of the insights that Professor Pistor
has just given us. So now it is a good time, or
stick around for the next-- AUDIENCE: Or to come in. NICK: [INAUDIBLE] And we can
switch a few seats around. That's absolutely right. Let me very quickly introduce
our very accomplished discussion professor, Seth
Rockman from Brown's History Department. Professor Rockman
is an authority on the social history of
capitalism in the United States. He was educated at Columbia
University as well as UC-Davis, and is the author of numerous
publications, one of which, his 2009 book, Wage Labor,
Slavery, and Revival in early Baltimore,
received numerous prizes from the historical profession. And without further
elaboration, I want to turn the
floor over to him. So thank you very much. The floor is yours. SETH ROCKMAN: All right. Thank you, Nick, and thank you-- [INAUDIBLE] AUDIENCE: We have
phones [INAUDIBLE] SETH ROCKMAN: Seriously,
it's worse than the students. It's remarkable. Thank you, Nick. Thank you Professor Pistor, for
sharing your deeply historical work with us. I want to offer you
a particularly warm welcome to Rhode Island, a place
known for its concerted efforts to break the code
of capital by making it possible for
debtors, in fact, to convert all of their
liabilities into state money at a moment in time
about 230-some years ago. I'm referring to
the summer of 1786, when the struggling
state made an effort to address the brutal
shortage of currency by emitting a substantial sum
of unbacked paper money, that is to say, money that could
not be immediately redeemed for specie, and requiring all
participants in market exchange to value that paper as equal
to silver, and in fact, making them obliged
to accept it. That is, as making
it legal tender for all transactions
that would take place in the state of Rhode Island. Moreover, the law made it
possible for Rhode Island debtors to use that
money to settle debts with out-of-state creditors. If you could not get that
Connecticut merchant to take this money directly
out of your hand, you could deposit it at a
state court in Rhode Island, and that would, for all
intents and purposes, mark you as having
discharged that debt. This legislation also
included a force act, that meant that there were
penalties that would befall any merchant, any
private party that refused to accept this money
in a private transaction, and also instituted
special courts and non-jury trials
for the enforcement of this issuance of money. This was, of course, one of
the most infamous, if you will, moves by any state
government in the decade after the American Revolution. And the law was not
particularly long lasting. It was struck down in a state
Supreme Court case, Trevett versus Weeden, which
is usually cited as a precedent in the
history of judicial review. But the law was struck
down not because there was any problem with the
issuance of unbacked paper money, but rather because
the lack of jury trials was deemed a
violation of rights. But the law, of course, had
a much longer life, at least in the imagination of the
nation's creditor classes, alarmed and outraged
that a state could legislate and enforce
the value of paper currency. The amount of vitriol levied
against the state of Rhode Island was really massive. The Massachusetts State Supreme
Court Justice, Francis Dana, declared that
Rhode Island should be obliterated as a state,
or annihilated as a state. A Connecticut lawyer
called the state's laws, "The most
extraordinary laws that ever disgraced the annals
of democratical tyranny." And he was not using the term
"democratical" in a good way. He was using it as
a bad word to refer to what 18th century
commentators would have known as "mobocracy." There's certainly reason to
believe that the Rhode Island legislation loomed in the
imagination of the men who met in Philadelphia
in the summer of 1787. And at least here, we like to
believe that Article 1, Section 10 of the Constitution-- prohibiting states
from issuing coin money or from coining money, from
emitting bills of credit, making anything
but gold and silver coin a tender in the payment
of debts, and of course, in issuing no laws and carrying
the obligation of contracts-- was written with our
particular state in mind. But it's also, of
course, worth mentioning that the ill
feelings were mutual, at least to the extent
that Rhode Island refused to ratify the
Constitution until well into 1790, and then
only in response to the chorus of threats of
the now fully operational national government. I use this Rhode Island
example as an entry point into my wholehearted
agreement with the premise of the code of capital,
and my pleasure with a book that I think readers in my
community of scholars, those traveling under the banner
of the history of capitalism, will find incredibly
convincing and to which they will be fully sympathetic. I want to say a little bit about
where that conversation is, and how it intersects
with Professor Pistor's Code of Capital, but then
come to some of the questions that I think emerge from
this Rhode Island example, and that meet up with
your concluding comments about basically what are
the consequences of this for democratic self-governance? And what does the
future look like? Or is, in fact, the game over? So within this emerging subfield
of the history of capitalism, there's overwhelming agreement
to do exactly what Professor Pistor has done in this book-- to describe capital
capaciously, to recognize that the
terrain of conflict is as much over the
means of payment as the means of
production, to recognize that the processes
of commodification and financialization
that move more and more, make more of the world bendable,
and make more of the world available as a kind of hedge-- that these processes
require work. And they must be studied
not as the outcome of inexorable market
forces, but have to be understood as
the outcomes of power and the operations of power
that allow for some things to be moved into the market-- that transition of
land, for instance, from being protected under
entail into operating under fee simple transactions-- but also to move certain
things out of the market, through legal codes or legal
fictions like the trust, but also through the
regulatory operation of states through such things
as slave emancipation. And I think it's important
here to recognize that for most of the history
that leads us to this moment, human beings are property,
which is something that the book acknowledges. But to think about the
emancipation of, for instance, the most important asset
class in the 19th century United States not as the
result of simply efficiencies that the market provided, but
as a massive mode of state operation, in which
ultimately, it is law and the violence
of the Union Army that brings about this outcome. Likewise, in this
sort of conversation between the history
of capitalism and the Code of
Capital, there's clearly a shared set of
commitments to what many people in the
discipline of economics might identify as the new
institutional economics, a focus on the formal
and informal rules that organize and
structure exchange. But here, I think
Professor Pistor does something very
interesting that is exactly what a historian of
capitalism would do departing, from the economist,
which is to say that these rules in
particular are not meant in the anodyne way of
simply reducing transaction costs, but actually are
fundamental to the operations of power. And they are a mode
of ruling, rather than simply a means of
creating new efficiencies to smooth transactions. Additionally, within the field
of the history of capitalism, there's a lot of attention
to lawyers as, in fact, being the crucial class of
actors, those who the historian Charles Sellers in the context
of the 19th century United States refers to as "the
shock troops of capitalism," a group that in particular
made its own form of expertise, that is to say
knowledge of the law, a prerequisite for lawmaking
itself, as they came to dominate state legislatures. Lawyers became the most
prevalent occupation of state legislators
in the United States in the 1820s, 1830s, and
1840s, basically making lawyers and lawmaking redundant
in the legislative branch, not to mention, of course
in the judicial branch. But of course, within
my field, there's an abiding commitment to the
work of someone like Morton Horowitz, focusing
on the ways in which the story of
capitalism is largely run through the developmental
bias of the law, through an instrumental
jurisprudence that's fundamentally using
the law as a technology to promote
developmental economics, and to move an increasing
amount of the law out of the realm of
democratic adjudication, into the realm of
unelected courts, and particularly in
the courts itself, moving certain kinds
of disputes out of the realm of juried spaces
into spaces of equity courts or chancellery courts that
empower judges and judges alone to decide what's
actually going on. In this sense, too, thinking
about the ways in which, as the Code of
Capital refers to, when things are
encoded in the law. And when capital is
encoded in the law, it allows for bad behavior
because it's legal. And the consent recourse
to, "But it's legal," as a way for
allowing inequalities to emerge and to sort
of self-perpetuate is, of course, very much
a part of this thinking that somewhere in
the 19th century, we moved from a
judicial system that is invested in notions
of community fairness and creates space
for communities to decide this, what is often
referred to as an equitable conception of law, into one that
is much more interested in sort of a Will Theory of contract,
in which if two people, two parties, agree to it,
it's all good if they have, in fact, agreed to it. Most of all, what
we all agreed to is the idea that there is
no capitalism in practice outside of the state. There is no capitalism outside
of the regulatory regimes that the states establish,
the contract enforcement mechanisms that it
creates, its capacity to declare legal tender, and
not to mention, of course, the operations of
and indispensability of its military capacity
to dispossess lands, to police shipping lanes,
and to open markets in distant parts of the world. In some ways, then, the
state and the market are the co-terminus spaces. This may not be true in
theory, and I know many people dismiss this in theory. But in practice, in history,
we don't have many examples other than this being true. I was once accused of being
so much of a historian, that I kept saying things
that were contextually true, but economically implausible. And I'm willing to have that
inscribed on my tombstone, if it comes down to it. But the questions that I want to
lead to from this conversation is about what happens
when you collapse the boundary of the
political and economic, and thinking about if, in
fact, the state and capital are entwined with
one another, is it possible to think about one is
the dog and one is the tail, and to try to figure
out who's wagging who? And that's not necessarily
obvious here, in the way that I read this book. And this is one
of the things I'd like to hear you speak
a little bit more about. Are we talking about a process
of administrative capture, by which a cohort of actors
we call "capitalists" have taken over the
means of producing law, and in fact the administrative
components of the state to create regimes
that privilege them over the majority of people? Alternatively, though, there
is a body of scholarship that certainly is
historical, that's thinking about the ways in
which the state, in fact, makes itself. The state is, in fact, produced
through its organization of the economy,
and that if we want to think about not simply
capital mobilized in the state, but rather the state
mobilizing capital as a way to create
its sovereignty, to set the boundaries
on its territory, to create the allegiance
of its people. And certainly this comes through
the work of a legal scholar like Christine Desan, thinking
about basically the engineering and architecture of monetary
regimes as the fundamental way by which the modern nation-state
creates its sovereignty. To create its money and
have its money matter is the way in which
states become real, particularly as you move
into societies that are not going to be held together
by a shared religion or even held
together by adherence to some set of
hereditary monarchs, but rather in which
the market will be the fundamental
determinant of who belongs. So thinking about the ways in
which the state and capital are bound to one another, and
thinking about if, in fact, we want to say that these are
the same entities with shared goals, or if this
is, in fact, kind of a mutual sort of beneficial
relationship, in which each group is getting
something out of the other? But I want to think
about whether it's important to think about
the way that states have an investment in capital
and the code of capital, just as much as the
capitalists have an investment in the state
as the fundamental mechanism that they have for making the
world safe for investment. But the second thing, and this
is perhaps the more important thing, where this
culminates, is what are we going to do about this? And what are the
possibilities for making law in a democratic society? Obviously, in the legal regime
that we're living in today, we recognize that, in fact, the
law is made in multiple places. And in particular,
we have spaces where presumably the people
are empowered to make law. And these are
called legislatures. And we have a realm of
unelected officials, in most places, where the law--
it's determined whether or not it's valid. And that is the judicial branch. And we know over time
that certain things come to be understood in
the purview of one, and certain things
come to be understood in the purview of others. And this has not
been consistent. We know in the
early 19th century, for instance, that an increasing
amount of decision making around private property and land
and about developmental rights, say using a river to power
a mill versus using a river to irrigate a field-- that this moves out of the
realm of the legislatures into the realms of
judicial lawmaking. And this is quite important. Alternatively, we know that
in the realm of labor law, things in the
United States, that had been organized around
feudal conceptions, and decided almost exclusively
by judges in private places, become by the 20th century
the realm of legislatures. And this is, of course,
Karen Orren's argument in Belated Feudalism, a
book now 30-some years old, but which continues
to have hold, I think, in the American
political development tradition, and that
recognizes that there is no unidirectional
relationship between things always under the code
of capital moving from available to the
people to decide on, into the realm of this
very limited and arguably, the least democratic branch
of American governance. So we know also from history
that at different times, different places,
state legislatures have passed lien
laws to prioritize certain creditors over others. And these have been enforceable,
that people have, in fact, attempted to create new kinds
of financial regulation again, and again, and again. And sometimes, these
are upheld by courts, and sometimes, they're not. But I think it opens up
a set of questions for us about where we want
the law to be made and about what are the prospects
in the future for using the sort of democratic
resources that are part of the American
constitutional structure to, in fact, make laws
that serve the many as opposed to those that
reinforce the power of the few. And so is there a
hope, for instance, that the state
legislatures, just as they were the crucial sites
of making the code of capital in the United States
in the 19th century, could be, in fact,
the crucial sites for unmaking the code
of capital in the 21st. And that's a question
that I leave to you, and that I hope we can all
think about a little bit more in the future. But thank you. NICK: Seth, thank you very much
for a terrific set of comments. I think now is another
good time to leave for anybody who has to. And we should, I think, turn
it over to you, Katharina. If you'd like to [INAUDIBLE]
opening it up for Q&A. KATHARINA PISTOR: So first of
all, thank you very, very much. This is terrific. And I sometimes say I'm
a closeted historian, but I'm not a real historian. So I've always studied
some history on the side, but I never got my full degree. But I love to engage with
that, and so I really appreciate your very
comprehensive treatment of these issues. So I think the fundamental
dilemma that you have pointed to is sort of what is
actually the relationship between the coders of
capital, of the law, and then state power,
and how are they meshed. And I think you're
probably right in sort of discerning something
that I don't really stand fully behind, that there seems to
be an argument or a threat in the book that
says it's gotten worse and worse and worse. It's a little bit
unidirectional. And I think that I
take that critique. I don't think that's
actually entirely true. I think there are different
ways in which these things are configured, which makes
sort of the answer to the question at
the end, what shall we do about this,
really complicated. Because law is made
in multiple places. It's always been made
in multiple places. And it shifts, and shifts for
different types of things. And one of the issues
that I find really disconcerting, especially in
our world of global finance, is that we're not even
going to the courts anymore. So we don't want to have
legislature, regulation-- well, we need regulation,
sometimes, to get clarity. But we're trying to
get away from that. We don't want to
have courts anymore, because the worst thing
that you could have, if you create a
global capital system on the basis of
English contract law, and you get a precedent by
English court, the whole thing blows up. So even though the
common law courts were so important to create
the system in the first place, they're the last
ones that you wanted to call on right now, at
least from the point of view of the coders, to get in. So we're basically
building a system that is increasingly attenuated
to the source of its power, because law firms are writing
legal opinions to say, you can do this. And we are
interpreting decisions that are now 10, 15 years
old, because we're not getting any new ones. We really don't want
any new ones, either. So this is a funny,
funny relationship. But this doesn't mean that we
don't have other entry points. And of course, at some level,
if you take this argument to its conclusion,
it's hopeless anyway. Because the state wants to have
capitalists and will enable it, and capitalists want to have
the state to enable themselves. So it's all circular. But I think the beauty
of a democratic system is that we can try to harness
state power in a different way. It's not the one thing. It's not a single
actor, the state. So I'd just like to think
of it as a more fluid set of a particular
institutionalization of coercive powers. And this is basically the law. And it can be used
in different ways. Your Rhode Island
example suggests that. And I think more
could be done today. I don't talk so much about the
Federalist system in the United States at the end, but
I do say at the end that globally speaking,
individual states, sovereign states,
should basically think about their
legal sovereignty, and take it back in
their hands, and use it. And that means basically rolling
back sort of the outsourcing that they had made so easy
through conflict of law rules, with the choice of law
or private arbitration that the courts will
nonetheless enforce, and through more
imaginative law making. That, of course, always
gets the counter-argument-- through regulatory competition,
this will erode again. But I think there is more that
individual states could do. And so in that
sense, I would say, yes, I think individual states
in the US could do something. They can't do everything. There is still the
Commerce Clause. There is still the
enforcement of you have to open your
territories to everyone. But I think they
could probably do more than they're currently doing. I think that's the
space, at least, that I see sovereign states or
states within United States, where pushback can happen. But let's open it, maybe,
to Q&A more generally. NICK: Terrific. Let's then open
the floor to Q&A. And if people could
identify themselves when asking questions. Should we take two at
a time, do you think? KATHARINA PISTOR: Or
three, yeah, that's fine. NICK: Yes, Jay. AUDIENCE: Practicing
attorney, one of those firms that's on your list. Just wanted to add a
footnote, but also to leave it as kind of a question-- law is generally
reactive, I think. You pointed out that
frequently there's a problem, and it takes one country
300 years to deal with it, and in another place, they
can deal with it much more promptly. China-- those firms all have
teeny, little offices in China. There are huge offices in
Hong Kong and in Singapore. And the reason for it is the
one that you were indicating, which is they have not
reached a point in China where they're comfortable
with, shall we call it the "horizontal
contractual dealmaking." That is historically going
to become very relevant, because it is becoming such
a huge economy that it's going to be able to move a
lot of weight in the world. It's not clear
that they're going to play according to this rule. So all of this
discussion has been premised on what are
we going to do about it in our democratic society? It may be that there's a
different mode of governance, which is going to
be powerful enough. And it's going to have
the [? votes ?] to enforce its will. That's going to take
a very different view. And that may alter a lot
of what we're seeing. Flip side, I love the title
and the cover of your book, because there's was
the nod to coding in artificial intelligence. We have the private
sector in this country wanting to create its own money,
which I loved your phrase. I'm going to get
it wrong, but it strikes me as economically
plausible, but contextually ridiculous. It's hard to conceive of
governments in this country giving up their power over money
if money makes them real to Mr. Zuckerberg or anybody else. But you have these
two forces coming, which was meant to
be the observations. And then to ask the question,
which is, how are we, the people as reactive-- because that's what we are. We react to things. We're not ahead of this. How do we deal with it as
those big forces roll in on us from our inside
domestic forces-- Mr. Zuckerberg, and Google,
and all those people-- and the outside? NICK: Great. Take one more. Terrific. Well, now we've got a lot
of people on the list, so we'll have to keep our
questions fairly short. But I think you're next. AUDIENCE: Yeah. I have a question from
another angle, so to say. There was a debate in the
'90s, since 1990, 1989, you can say, about
global constitutionalism and global law. And then it was
also a little later, the debate became ever
more publications. And later, there was a debate on
private international law, not international law, but private
transnational, post-national law based on the self-organizing
power of legal system was not mostly from
German lawyers, but from some of the lawyers
like [INAUDIBLE] and at school. And so now, the problem
of all these things was the question of enforcement. And I find it very
interesting, as you said, well, there's no global law,
but there is domestic law. Yeah, and there is still
domestic law that is global, and that is the law of
the State of New York and the law of England, which
also was observed at that time, but not in the
center of the debate. This is, so to say, the center. That I find very interesting,
because the people. So once this [? kind of ?] law,
this sort of [? kind of ?] law becomes global, and enforceable,
but on the state basis, it is finally totally decoupled
from democratic legislatures. And this total decoupling,
in the state already it was an imbalance,
which one can nicely see throughout the 19th century. But now it is totally decoupled. The question is, that's
also the question why is the European
Union is as it is, to [? enter ?] democratic
monster so to say. But what to do? What can we do to get the
people back [INAUDIBLE]?? NICK: OK, so that's a
big stretch of territory from China to the EU. And then we don't want to lose
sight of democratic openings at lower levels of aggregation. I leave it to you. KATHARINA PISTOR: Thank you. So China and the
digital currencies-- these are really, really,
really important issues. And I think we agree that
just the threat of this shouldn't move us away from
the critique of our own system. But I think these are
fundamental challenges. And I exactly agree with you. China has never embraced the
horizontal dimension of law. That's something that
they're still uneasy about. Having said that, we do see an
emerging shadow banking system in China as well. We just have too many
[? LLMs ?] that come our way, and they get trained,
and they also practice here long enough
that they can bring some of these elements into China. But the state is really
trying to retain control. And that particular
form of state control of how we organize our lives
is not necessarily the one that we wanted to have. So I think there's got to
be a normative debate here. And I want to have
this normative debate. I mean, one of the
reasons for writing the book was to say how
much flexibility should we have and give people? Because that's also--
it creates vibrancy. It creates a certain
degree of self-authorship, but of course more for
some than for others. The real threat for
me is the digital. And I think China
just has already learned how to master the
digital control in a way. So it's not the free
space that it once was, WeChat, but I think the
government is basically controlling the digital space,
including the digital currency space. And the combination makes
me really, really uneasy. But I was also very uneasy. I'm still very uneasy about
Libra and similar things. When the Libra came out, I
wrote a big op-ed about this. Because I just felt that
that's just taking it too far. You're basically tackling
monetary sovereignty. But this is coming. And states will not
want to give it away. But it's not clear what
states, individual states, can really do about it. If they have a
Swiss association, and they buy US assets
to back their reserves, there's nothing really the
government can do about it in the United States. What they can do is they
can tell MasterCard and Visa that they can't participate. And they can say you can't
issue in the United States. That they can probably
do, or re-regulate it as a security or something. But other than that,
by exploiting, again, the multi-jurisdictions in
the global sphere, the ability of any individual government
to really control the beast is rather limited. And so we would need more
coordination of governments. And of course coordination
between governments in this moment, in
this political moment, is more difficult than ever. So that's a true dilemma. So what do we, as the people,
have to do about this? I think we do still
have-- the only path that I can see is really
we have to mobilize our lawmakers, legislators at
the local or the federal level to take things back
into their own hands, to create a viable
alternative to Libra. And to think about
new ways of harnessing this technology for things
that are socially desirable. But it's, of course,
an uphill struggle. I realize as much. But you have to
have some hope here. Global constitutional-- I
followed sort of the debates about global governance and
global constitutionalism. Since I come from
the private law side and I teach corporate
and finance, I've always been a little
bit amused about how much weight was given to
that, but while totally ignoring the extent-- AUDIENCE: [INAUDIBLE] KATHARINA PISTOR: He has
written a little bit about that. Yeah, I know. He has. And I think I want to
just link your argument about the decoupling
from the state, which I have some of that flavor
in my book, too, [INAUDIBLE],, actually. Most of the states
have, of course, agreed to that decoupling
for some reasons. And some of them just
do this to promote their own companies that are
foreign investors elsewhere. Think about where the bilateral
investment treaties originated, when the multilateral
agreement broke down, so we just give bilateral
investment treaties. But there are states
on the other side that sign up to this,
too, in the hope that they can attract
capital to their shores. So the conflict of law rules,
private international law, and some of the
bilateral investment treaties that make this
possible and give investors additional protection in
the law always require states to participate in that. They're always complicit. So in that sense, it's always
a symbiotic relationship. You really can't
get away from that. So you have to shift the
debate within states. I'm not saying they
couldn't do differently. They could. They could. And I think some of
this is just ideology. But there's no silver
bullet where you could say, now we have to step
back and [? fine, ?] because these are debates that
we have to have continuously. On the EU, we can have-- I mean I'm just not going
to say too much about this. I think the EU is sort
of somewhat undemocratic, and I still think it's more
democratic than the private ordering that we've got. So it's the one entity that
can actually give pushback on-- [INTERPOSING VOICES] KATHARINA PISTOR: Yeah, exactly. NICK: Great. So now we've got [INAUDIBLE]
I think Chase, you were first. Why don't you identify yourself,
and ask your question, then I have [INAUDIBLE] over here. AUDIENCE: Sure. I'm Chase Foster. I'm a postdoctoral fellow
at the Watson Institute. So my question is related
to these previous questions, which is where do you see the
most meaningful variation? And the book is Really nice, in
the sense that it points to a lot of
commonalities across systems and the convergence. But along which
dimensions [INAUDIBLE] today do we see the most
meaningful differences with real impacts,
potentially, on inequality? So you mentioned maybe civil
and common law distinctions about contract law and
the trust law, perhaps on intellectual property
rights in the EU and US, perhaps in other dimensions. Where do you think we
see real differences? KATHARINA PISTOR:
Well, I think it would have been easier to
answer this question like four decades ago. And nowadays, many more things
have not fully converged. I'm not sure if you
believe in convergence, but they have been transposed
and mixed in such a way that it's harder
to identify that. And the EU introduces basically
the incorporation theory for corporations,
and basically does something that the US had done
already in the 19th century, but introduces it into its own
regime only in the late 1990s. But once it has done that,
people can pick and choose the law for their
corporation, and therefore, can also pick and
choose other law. So it becomes more flexible. So the shift towards like
private autonomy, free choice, has been very strong. China is sort of the
one big, big player that is basically saying you
can't really do this entirely. Although they also
have their own, of course, interesting
partnership with important private actors. One of my colleagues at Columbia
in Italian, who just joined us, basically said there's
still a difference between the civil law and
the common law system, to some extent, about how
we police the boundary. So the way he puts it was
a very legalistic fashion-- the boundary of the
numerus clausus. And the numerus
clausus basically says there are certain
types of interest that the state decides it
will protect as property, and basically give
this universality to. And others it just won't. So it can do this. It's not illegal to do things. But you just can't bank
on the state enforcing your claims against the world. And the civil law
system has always insisted the state defines
what these interests are. And you can't just
simply blur the lines. And the trust is, of course,
the most important institution that shows how you
can blur the line. And I think sort of by and
large, civil law systems are still more
likely to do that. But since they have opened
their borders for common law institutions to come in
through choice of law, you can't really say it's
fundamentally different. Because if they can't
do this in German law, they can just bring the English
law in and do the same stuff. Because you can
de-territorialize these institutions through
the conflict of law rules. So this brings me also back
to what to do about this. Well, maybe we should
limit the options that people have to
choose different laws and bring them back in. Maybe you should just not be
able to go and shop for law. It's not a private commodity. It is a social good. And maybe we should
govern it as such. NICK: Great, Tony
[? Levitas ?] and then we have a question from here. We'll go back to grouping them. KATHARINA PISTOR: I
saw your hand's up. AUDIENCE: Thank you
for a fascinating talk and a really wonderful comment. And let me see if I can get
out my question simple enough to ask a second. There's an incredibly
paradoxical outcome, that global capital has
coders in specific ZIP codes in cities, in some
sense, who exist in a completely sub-sovereign
setting in one way. And I'm wondering, and
your argument almost is that this has been
coming out of these ZIP codes for a long
time, on the one hand. And then on the other hand, it
seems like a lot of the story could be about the particular
regime of horizontal law that has been around
for 30 years-- call it the neoliberal
regime, if you want-- and that the hierarchy of
laws that we're talking about, which you've been stressing
that the citizen to citizen law has moved up, whereas
other aspects of this have been displaced. So I don't know-- in that typology of
law, where would you put tax law, which, again,
affects all these players, and is the direct exertion
of the state on these forces? And are we really saying that
the Masters of the Universe are sitting in 15
jurisdictions, and writing a code for the world? And have been doing this for a
long time, my guess, is the-- those are the two. NICK: Great. Great question. Another question, yes. AUDIENCE: My name's
Tom [? Seguris. ?] I'm in the research faculty
in Computer Science, but spend a lot of time on
public finance issues, too. I guess my questions are
a little more mundane, having to do with how
these things manifest in my life and the way
that I perceive things. One of the stories that I've
noticed, but don't really understand the underpinnings
of, is how when I was little, a Swiss bank account was an
exotic and unusual thing. And now, you can call
up a bank and ask to speak to their offshore
banking department. And I wish that I had a pointer
to a detailed story of how that evolution happened. And so, because I don't
think there was a moment. I think it was an
evolution of understanding, and interpretation,
and things like that. And I just-- again, my question
is a little more mundane. I just wonder if you're aware
of compelling accounts of how these things sort of manifested. KATHARINA PISTOR: So thank you. So I think the localization
of the master coders has a long trajectory. And it has something to do-- I didn't talk about
this in my talk, but if you look at
the organization of the private legal profession,
that's very [? essentially ?] fundamental difference
historical, so historically between different legal systems. So England developed a very
robust legal profession already in-- started in the
13th, 14th century. And they served private clients. They don't just
work for the Crown, or for monarchs, or
for a court of law, but they work for
private clients. And Prussia has its
private legal profession in the 18th century,
and imposes rules that you have to have certain
education, certain status, to be able to present
a client in court. So they don't want to have
these freewheeling lawyers. The US is on the other extreme. It doesn't even
have rules for how you become a lawyer, really,
until the late 19th century. Nonetheless, people
describe the US as a deeply legal, lawyerly
type of legal society at the beginning of
the 18th century. Well, the state was
far, but you still needed to decide where the
boundaries were, and create property rights. And the private lawyers
did a lot of that. So I think when you
look at the organization of the private
legal profession, I think that's where,
also to me increasingly, the real difference lies
between the common law and the civil law, with some
doctrinal stuff put on top of that, but it's important. And that also enables the
use of the horizontal law. Because if you know
how to use that, and you build a powerful
practice, you also, of course, gain influence
and again over the state, how to shape the
law, such that you have the flexibilities to do so. This is, again, sort
of this interaction. Tax law is at first glance, of
course, this hierarchical top down. It's always the most
hierarchical top down. But tax law usury
rules, anti-usury rules, were actually the stuff
where the lawyers have honed their skills for centuries. They always tried
to get around this. So the predecessor
of the trust I talked about earlier
was the [? use, ?] which was invented
in the 12th century. And in 1485, I
don't remember which King in England it
was, but he enacted the statute of the [? use, ?]
where he was trying to outlaw the [? use, ?] because
it was used particularly to avoid taxes. And then the lawyers
reinvented the trust. So if you can, you
can get around taxes. And nowadays, of course, Cayman
Islands and all the other tax havens. So in that sense, it's a mix. The tax authorities
try to tax, but you use the horizontal
law which states enforce to get around it. So one argument I
make in the book is that I don't see
why we've only sort of blacklist countries like the
Cayman Islands as tax havens, why countries don't simply
say, we would simply disregard your corporate identity. We just disregard this
as a legal person, and tax the assets nonetheless,
because this is clearly just a shell to try
to get around taxes. They're hesitant to
do this, because they want to maintain the fiction
of a legal personality, and there are powerful
interests that want to do that. But that's where I
want to push back, say we just have to go back
to the normative principles under which you can avail
yourself of the state's powers by using these forms. So I can't give you a reference
on how this all happens, but I think this has a lot
to do with, especially in the post-World
War II area was of the history of how we opened
the world for free capital flow. After World War II in
the Bretton-Woods system, you had very restrictive
capital flows, and it was much, much more difficult to
find ways to have legal-- at least legal-- bank accounts elsewhere. And I think that was
broken down step by step. And you can just walk through
the motions of doing that. And so I think at
each of these steps, you can see how different
interest groups-- of course, they start very
often also, again, by arbitraging around
capital controls through foreign exchange swaps. It's not that hard
to get around this. And once you have that, and
you make a powerful case to one of the
legislatures, saying you know we do it anyhow, you
might as well legalize it, then you legalize
it in one country, and you push the same
thing to the next. I would have to think
about whether there's a really good historical
account of that, but I would locate it in this
period, post-World War II. NICK: Great. Can we take one more
question, if there is one? And then we'll let you have
a couple of slices of pizza. So [INAUDIBLE] yes,
one more question. AUDIENCE: Yeah, my
name is Tom Slade. I'm a retired
management consultant. I want to go to something you
and Jack had both come in on, and that is the reactive
nature of our coding. I once heard, a few
years ago, I heard a professor from a
French law school give a talk about how the
legislature is done there. And here in America,
we give the legislators a chance to make the law
and make as many mistakes as they want, and then
we litigated afterwards when disputes come up. And he was describing
a situation that sounded something like the
Congressional Budget Office, or something that
there had to be an evaluation of
the impact of a law before it could be
completely enacted, which seemed kind of logical to me. I don't know how
effective it's been. But are there other-- has that been effective? Are there other ways that we can
make the coding less reactive, I guess? KATHARINA PISTOR: Yeah. I mean, I think
that the coding-- so I use the word
"coding" basically for the process by which private
attorneys sort of combine these different legal tools
to create a new capital asset. So I'm thinking about software
coding or genetic coding. I think what you're
talking about is more like the codification, the
top-down legislation. So what is interesting about the
French case is that basically, with the French
Revolution, they decided, so we've had enough of this
close collusion of judges and the state. And so they ruled that
judges cannot make law. They can only interpret law. So they don't have
this power anymore. Only the parliament
can make law. They even denied judges judicial
review, because they said, it's the legislature
that makes it. And so until Sarkozy introduced
these reforms in 2007, they did not have a
constitutional review of legislation. And then they changed that. And so what they
did is basically, once a law was-- a
bill came through, they would basically do a
pre-enactment constitutional assessment. It's not really a
cost-benefit, like we do many of these laws in this country. What might be the negative
effects on commerce is the question that
people ask here. But that was basically the
constitutional of that. And I think the fact
that they ultimately introduced judicial review
tells you that it probably wasn't doing its job entirely. It's very difficult, to
be fair, to anticipate what a law will accomplish. Laws are incomplete, even more
incomplete than contracts are. The world changes. You want to write laws that
last forever, but the world around you changes. And so a complete reliance
on ex ante review just has to be bounded, so it's
not entirely effective. But what remains true
in France, nonetheless, is there's still this
ideal that you have a legislature that can fix it. So I talked about
my book in Europe. I was traveling last week. And in Europe, Belgium,
and also in Paris earlier, people still feel
that there's got to be a legislature
that can fix it all, and are perhaps also less
exposed to the extent to which private-- AUDIENCE: In theory, yes. KATHARINA PISTOR: In
theory, yes, but they also have to see what the
mobility and the malleability of the law that exists in
those countries today, as well. NICK: Terrific. Well, I think we've learned
a lot about just how important law is,
and how much it can change in highly
significant ways, without our necessarily
noticing, all from our speaker. And thanks also to
our [? discussant ?] for reminding us that
we do have to think about how we can exercise some
control over these changes that are happening with great,
really great consequence. So thank you
everybody for coming. Thanks especially to Katharina. [APPLAUSE]
