This post kicks off a series on Katharina Pistor’s The Law of Capitalism and How to Transform It. Look forward to responses from Ninta Tzouvala, Ioannis Kampourakis, Kate Jackson, and Yochai Benkler.
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David Grewal first formulated the basic insight that animates this book: Capitalism is a “juridical,” or legal, regime. This starting point does not deny that capitalism is also economic, social, cultural, and ideological, but recognizes that capitalism is deeply imbricated with state law.
Capitalism co-evolved with the modern nation state, which consolidated the means of coercion while leaving ample room for non-state parties to order their relations through law and in the shadow of state enforcement. For the legal theorist of the early Soviet Union Evgeny Pashukanis, this division between state coercion and private ordering was reflected in a core characteristic of capitalist law: the “anti-thesis” between private and public law, between individual autonomy and collective self-governance.
Building on Pashukanis, I identify three features of capitalist law that foster the use of private law to avoid public law constraints: Private legal empowerment, decentralized access to the centralized means of coercion, and legal arbitrage. Let me say a brief word about each.
Law empowers not just state actors, such as courts, the police, or regulators, but also non-state actors who can avail themselves of legal authority. Private parties can write binding contracts, claim and enforce property rights over a changing roster of assets, and incorporate organizations with legal personhood almost on a par with humans. By insisting on formal equality and ignoring differences in resources and power, the law legitimizes hierarchy without accountability in the private realm to an extent that it would not permit in the public realm, at least not in constitutional democracies.
Resources also matter for the second core feature of capitalist law: the decentralized access to the state’s means of coercion, or litigation. Well-resourced private actors litigate not just for the outcome in a specific case, as Mark Galanter noted decades ago, but to shift the rules of the game in their favor. They relitigate until they obtain the desired change in law; in the alternative, they settle a case when it threatens to upend their long-standing business practices. Substantive as well as procedural law restrict access to the courts by stipulating which claims are justiciable, who has standing in a court of law, where a case must be brought, and how it is litigated.
The third feature, legal arbitrage, allows private actors to pursue their interests under the guise of legality even as they violate the purpose of a law. The practice of legal arbitrage is most effective when law is stripped of its normative contents and becomes but a black-letter tool for maximizing wealth and power. The inherent incompleteness of the law enables attorneys to design transactions or create new assets and intermediaries that exploit every loophole in existing case or statutory law.
These three features of capitalist law, the book suggests, help explain why attempts to regulate capitalism’s excesses with the help of public law have rarely worked in the long term. Changes in public law might rebalance the playing field in the short term, but given the ability of resource-rich capitalists to wield litigation and arbitrage, it is only a matter of time until the ‘master coders’—private transactional lawyers and elite law firms—to design new end-runs around public regulation for their best paying clients.
It is tempting to conclude that these dynamics not only characterize the past but will invariably repeat themselves in the future; that is, that there is no exit from the law of capitalism. Yet, history never ends, and as the evolution of capitalist law itself suggests, the world changes constantly, if often incrementally, in ways that can ultimately prove transformative. Historical examples include the separation of public and private law; the birth of the business corporation; the spread of wage labor. The goal is not to reverse this history, but to take a page out of the capitalist script and identify possible game changers in the law that point to a very different normative order.
Capitalism is “undogmatic” about its alliance with different political regimes, Sven Beckert notes in his recent book Capitalism: A Global Regime. Democracies, by contrast, should be more dogmatic about the actors and purposes they empower. And yet, when new constitutional orders came about in the 18th and 19th centuries, they left intact the private legal order they inherited from feudalism; and by enshrining the protection of private property rights and contracts, they created one of the most powerful defenses of that hierarchical order, and its descendants, against economic democracy. As a result, political democracy has been hamstrung as well.
It may be intuitive to reform this system top down, by seeking political power to change the law and impose new regulations. However, given the “anti-thesis” of public and private law, these reforms would have a short half-life, as the three features of private law would allow powerful private actors to scale them back once more.
Instead, private law should be at the forefront of transforming capitalism. But this requires at least two things: First, viable alternatives to the capitalist legal order must be derived from existing law. Second, private law must be placed on a normative foundation that is compatible with democratic self-ordering. In fact, efforts in this direction are already happening even if below the radar of news outlets or big court cases. The law governing limited liability companies is being used to configure cooperatives, which would be unviable under existing statutory law. Trust law is being used to create rights of nature in private law, which is faster and arguably more effective than hoping for constitutional change. Standard corporate law has been broadened to enable benefit corporations or steward ownership through a mix of transactional innovation and reforms of statutory law. And in a series of cases decided by the UK Supreme Court, fiduciary duties have been used to attribute liability for harm not to the subsidiary but the parent shareholder.
Of course, these changes are relatively small, they are happening mostly at the margins of a system that continues to serve primarily the interests of capital, and there remains a danger that they will fizzle out before their transformative potential is realized. Overcoming this bottleneck requires more than smart litigation and institutional design; it requires a broad-based normative commitment to place the well-being of people at the center of the law and the economy. In short, we need a theory of social justice that has sufficient buy-in, including by supporters of the current system, to be willing to try alternatives.
In the book, I use the capabilities approach developed by Amartya Sen and Martha Nussbaum as an example for such a theory – but it is not the only possible choice. Its appeal is that it combines an affinity with the rights-based individualism that characterizes existing law with a built-in obligation to ensure that others have the right to live the lives they have reason to value. Neither the state nor private actors should be allowed to deprive people of this right, much less justify this as legal. In short, the capabilities approach has a built-in trojan horse because its logical conclusion is to deny the vindication and enforcement of claims that violate it. In addition, it empowers claims against those seeking to enforce their right. As a result, it would alter two of the three features of capitalist law: the legal empowerment of private actors largely without accountability and their ability to use litigation to invoke the state’s means of coercion to impose their will on others.
The attraction of this bottom-up approach is that it can proceed without major legal change at the outset. Its long-term success, however, will require supportive institutions and, more importantly, a continuous commitment to the normative principles of a just economic order.
