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The Legal Construction of Value


Roy Kreitner is Professor at the Buchmann Faculty of Law at Tel Aviv University.

NB: This post is part of the “Piercing the Monetary Veil” symposium. Other contributions can be found here.

Legal realists and their heirs made it into a truism: law is constantly entangled in value judgment. The statement is typically aimed at undermining one sense of the claim that law and legal judgment are or even could be neutral, value-free. But that is no the full extent of the realist point.

Beyond the issue of neutrality lies the question of how law constitutes value in the first place. It is not just that legal decisionmaking necessitates underlying values, it is that legal decisions shape the process of attributing, assigning, or creating value. Of course, there are multiple modes of valuation, and some are (thankfully) quite distant from the law (think friendship). But modern market societies overwhelmingly value resources, goods, services, and benefits of almost every stripe through money, and money is made of law. This may seem a simple point, but exploring its implications should disorient—and perhaps reorient—how we think about the relationship between law, values, and markets.

The price system is often mythologized as a fully decentralized and spontaneous creature. But some myths, even analytically productive myths, obscure as much as they reveal. Prices don’t just happen, they are in large part engineered. Markets have to be made, infrastructure supplied, a unit of account determined and managed, rules established as to what counts as property and what kinds of property are alienable, saleable, and taxable and where, when, and under which conditions it can be can exchanged. Market creation and market maintenance are not the products of spontaneous genesis, but rather of institutional design, legislative action, and judicial decision. Even more importantly, they do not set an immutable baseline leaving disorganized parties to play a game of price with eternally fixed rules. Instead, collective, organizational decisions play a central role in manufacturing and moving prices.

Examples could be multiplied ad nauseam. Government employment and procurement effectively benchmark prices for some of the most important goods and services in the economy. It is hard to imagine pricing pharmaceuticals without patent law; impossible to make sense of real estate prices without local zoning ordinances; incoherent to consider the price of medical care without insurance law.

Katharina Pistor’s forthcoming book, The Code of Capital, paints a general picture of these processes, in which asset holders employ lawyers to change the legal nature of their holdings, granting them the attributes of priority, durability, convertibility, and universality. These attributes make the assets easier to accumulate and to trade, or in current economic parlance, make them safe, or more like money. The mechanism has a long lineage, but increasing importance in a world where abstract financial assets are the dominant form of wealth, because for such assets it is clear that there is no fallback without the law. If you buy a cow as an investment and the legal system falls apart, you can still drink the milk and make cheese. But if your legally backed power to enforce a contract or to collect a debt falls apart, you have nothing. So, more abstract property needs better legal protection.

Law’s role in valuation goes deeper than that. Legal engineering is not limited to manipulation of assets in terms of the measure of value, but rather underlies the making of the measure itself. The basic core of this analytical point is that money is a sovereign creation, driven by the ability to tax. As detailed in Christine Desan’s Making Money, it is the process of money-creation that actually constitutes the price system. Two important mechanisms are at work.

First, the sovereign’s money is built on the idea of tax anticipation: its primary value is that of being the resource that will pay off debt to the center. As a sovereign stakeholder injects money tokens into circulation, it marks the value of initial contributions; as it taxes those tokens in, it marks the effort required to pay off the debt it imposes. The rate at which the stakeholder demands the return of its tokens directly affects the value that the tokens themselves hold. As long as the center is credibly taxing, the tokens’ value cannot fall below the effort required to acquire enough to pay that basic debt to the polity.

Second, the tokens also acquire a value for their very liquidity, that is, the fact that they are the most reliably tradeable resource. Because everyone (or virtually everyone) has a need for the tokens, virtually everyone is willing to accept them in trade. As they emerge as the ultimate liquid asset, the tokens take on a premium associated with that tradability – a cash or liquidity premium.

The upshot of the analytical picture is striking. Prices and the markets they enable are not discovered by traders; they are engineered by the center. Creating a unit of account takes work, and maintaining it requires administrative and political energy. Extending this insight to a world with developed central banking reveals that myriad decisions – some legislative and dramatic, others administrative and seemingly mundane – are constantly involved in shaping the measure of value itself, and from there onto the price system writ large.

In sum, law is crucial for delineating the attributes of assets, and thus determines their value while simultaneously being central to designing and governing the workings of the measure of value itself, money. The design decisions on both these planes will have enormous (and often at least partially predictable) effects on both the level of production and on the distribution of costs, risks, and benefits.

I  type of effect that seems most striking for those of us concerned with distribution is that the closer we get to decisions regarding the measure of value itself, the wider the ripple effects on distribution we are likely to see.

A major devaluation of the currency – especially in the context of ostensibly fixed currency values, is an obvious case. During the Great Depression the United States changed the official value of gold that anchored the currency from $20.67 to $35 (while at the same time outlawing transactions in gold). The results were clearly appreciated, indeed intended: a spurring of spending and production, a boost for debtors and a major loss for creditors.

Other examples are subtler but no less important. Consider the determination of eligible collateral at the central bank: assets that qualify are easier to trade, and in essence have an edge over assets that are not. For the early part of the twentieth century in the US, and up until recently in Europe, the question of whether government debt should enjoy such a status was a live issue – the fact that we take it for granted that government debt underpins the money system is a testament to big decisions that often escape public attention. The examples could (and should) be multiplied: who should have access to the central bank’s discount window? should there be accounts for individuals (not just for banks) at the central bank? should the central bank pay interest on reserves, and if so, should it discriminate among types of banks in doing so? should the central bank run direct lending facilities to fund projects that commercial banks bypass? should decisions about whether to tax or borrow be determined by their distributive impact?

Appreciating these effects sheds a different light on some proposals for dealing with inequality. Many of those proposals focus on taxing wealth at the end of some chain of market activity. Others focus on trying to change a particular market dynamic at the end of a pricing chain, for instance programs to cap executive pay. But if the widest rippling effects for distribution exist close to the core of the valuation system, then these proposals look like a treatment of a single symptom, rather than a search for root causes of the disease. To the extent that the speculative point advanced here holds, those of us concerned with inequality should be focusing a great deal of attention on the basics of valuation, which means looking hard at the way law makes money.