Law and the future of capitalism with Katharina Pistor

What if the key to transforming capitalism lies in the law? In this episode, we speak with Katharina Pistor, Professor of Comparative Law at Columbia University, member of the Club of Rome and author of The Law of Capitalism and How to Transform It, about the legal foundations that underpin our economic system, and how they might be reimagined. 

Katharina argues that capitalism is not a free market but a "market economy on legal steroids," shaped and sustained by legal structures that govern everything from corporations and property rights to data ownership and financial markets. She explores how tools such as limited liability, asset partitioning and private contract law have enabled the concentration of wealth - and how those same tools could be repurposed to drive systemic change. 

From the enclosure of the commons to the rise of the data oligarchs and the Alaska Permanent Fund, this is a wide-ranging conversation about the unwritten rules of our economy and the potential for transformation. 

 

Transcript

Till: Welcome, Katharina. Great to have you on the show. 

Katharina: Thank you so much for having me. 

Till: We have often on this podcast talked about our polycrisis, overlapping different crises, eroding social capital, polarisation, of course, our ecological crisis. And in all of the debates, we often talk about economics, politics, but rarely about law. 

You now write in your new book that seeking change through law does not make transformative change easier, but arguably it makes it more likely. Why is that the case? Why should we talk more about law when we talk about change and transformation? 

Katharina: So I think before we think about change and transformation, we have to do a thorough diagnostic of the system. And my diagnostic of the system, now people might disagree, but my diagnostic of the system is that capitalism is a system that is effectively a legal system, a legal regime. Capital is coded in law, as I have argued in my previous book from 2019, "The Code of Capital," and in the new book, "The Law of Capitalism and How to Transform It," I'm basically extending the analysis to the system as such. 

And I'm arguing that the system is a legal regime. It is based on law. It is maintained by law. It's entrenched in law. And because of this, we have to seek change through law rather than from outside of the legal system. 

Till: What I was wondering when, when, when reading the book and, and, and listening to you, is law kind of then the foundation as you see it of then, the capitalist system? Or is it following logics of capitalism and kind of aligning with those logics to an extent? So is it preceding or following? 

Katharina: Yes. Well, that's a really interesting question. So I think from a Marxist perspective, you would say it follows, because it's all about the material conditions that create the conditions for law to evolve in a particular way. Also, Evgeny Pashukanis, one of the leading socialist legal theorists of the early 20th century, he argued that law takes a particular form in capitalism. 

He might even go as far as saying law is always necessarily capitalist. That I think would go a little too far. So in my mind, it's very difficult to do the chicken and egg analysis here because we have a long trajectory of legal institutions. Private law, the law of contracts and property,   even business organisations, you can trace back all the way to Roman times. 

Prior to the rise of the nation state, people used legal arrangements, and so the question is then what is really law? And I think law, in my mind, is when you start formalising the norms and institutions that govern social and economic relations. So once you formalise them, you abstract them, and then once you also add the capacity of a state or authority to back these contracts and property rights through enforcement mechanism, then you have something like a legal system. 

That's what I would call a legal system. And I think for capital and capitalism, that was really critical because capitalism is not just about having economic transaction within your small little community, it's about scale. And scaling requires more complex, more abstract, more formal systems of ordering, of social ordering, and you may not want to call this law what I would call that law. 

So in that sense,  the rise of the nation state, the scalability of socioeconomic relations, and their enforceability by mobilising the consolidated means of coercion is absolutely critical for capitalism. So if you push me, I would say that comes first, but in fact, of course, it comes in relation with. 

It is sort of, it's a correlation that it has to happen at the same time, but it doesn't... It's a sine qua non. Without this, it will not happen. 

Till: And what I found interesting in that context when you spoke aboutthis way of law and the expansion of economic activity in general in capitalism happened through it. You spoke about steroids of law enabled  the economic system to do, right? Yeah, maybe you want to refer to that. 

Katharina: Yes. So many people think that the markets are free and the markets kind of do what they do by whatever market means. So it's, you know, the price mechanism, it's demand and supply. You have those with this curve. Yeah, but you have to think about, okay, what creates demand and supply and through what means do people actually meet and then exchange goods and, and payment, and they rarely do this on the spot these days. 

They do this through a very complex financial system. So I'm basically saying capitalism is not just a market economy. It's a market economy on legal steroids. Even an ideal market economy needs contract law and property law. I think most economists would concede this today as well. I think capitalism goes much further. 

Just think about corporations. So corporations are legal creatures. They don't exist outside the law. They have to be created. They can't be created without some authorisation that actually you create a legal person, the assets of which are distinct from the owners of that legal person. That's a legal fiction, but it's a legal fiction that is absolutely central for a capitalist system. 

And you can't contract for this. You might, may be able to contract for limited liability. You can't contract for this asset partitioning because you can't easily enforce it. So there are certain features of the law that were created over time, and of course, were pushed for because theywere proven to be helpful, that enable the accumulation of capital over time. 

So corporations are critical because you can create basically separate pools of assets that can incubate over time and create wealth. The fact that shareholders are dominating,   corporations, the fact that we are,  you know, sort of making debt deductible from corporations, the fact that we allow all kinds of assets to be used nowadays as collateral, including financial assets that are themselves created in the law. 

So we basically have created an entire machine. The fact that we have a complex banking and money system where we have a central bank at the top that sort of governs liquidity, makes sure that people have enough liquidity, which means cash on hand if things go bad, when things are creaking. And if we didn't have this, we would have just many more crashes. 

So there's a whole apparatus which I think can be disentangled and dissected when we have a bit of an understanding of what the legal structures are that underpin it. So we can go beyond the illusion that this is a free market. It's a market economy on legal steroids, and capitalism would not be able to do the kind of accumulation that it does and allocate the resources that it does in the way it does without these legal steroids. 

Till: I think it's a very important point because it also takes away this pseudo objectivity of market transactions and kind of our system as we have set it up, right? It shows again that all of that are in a way also a construct, social contracts or constructs or at least enabled by humans, and shaped by humans, and there is no objectivity in market transactions per se. 

It depends on the institutions that are involved by that, and you argue then that those institutions very much depend on law. 

Katharina: Correct. I mean, like, you know, institutions, as Douglas North said, come in two forms, informal and formal, and the formal ones are the law. And I think for a scaled system at national and global scale, you can't rely exclusively on informal institutions. They still play a role. There's trust involved, and people know each other, and they know some, you know, traders better than others or trust some institutions more than others. 

But I think you can't have a multi-trillion global financial system without formal institutions, so it has to be the law. 

Till: And what those steroids led to is, of course, something the Club of Rome deals with since decades, the question of growth, right? We have seen massive, massive growth, of course, in financial activities in a way, this whole debate around financialisation. But it's of course never only kind of the mechanisms of, of economic systems are not reduced to, to financial systems in a way. 

It's, it comes with a massive offloading onto nature and kind of expanding what we now call planetary boundaries, as well as, of course, people, right? It comes with a breaking of certain social capital as well. And I was then wondering, because the steroids thing is, is something we actually don't want in that way. 

We don't want growth on steroids. We don't want massive expansion. We, in a way, want to reduce the impact we currently have on our planet. I was wondering what's, what's the role of law in there? Can law in our systems be designed without those steroids or even steroids in the other direction to help a transformation, or how do you see that? 

Katharina: Yes. So I think here it's again important that we think about how we would address this. So I think with environmental legislation in the '70s and onwards, we've tried to use, once again, public law to regulate private activities, and the private sector typically finds ways to mitigate the costs that are imposed on it. 

Till: And so for me, therefore, the question is also can we use the instruments of private law? Can we reduce the legal steroids, as you put it, that they're using to organise the system? And there are a couple of things that immediately come to mind. One is the allocation of responsibility, right? 

Katharina: That's what the law does. Who's responsible for what? Who has to internalise the cost of what kind of actions? So with corporations and giving the investors who buy shares in the corporation limited liability, we have created a license to externalise. Because the investors are not responsible for the damage that the corporations create, full stop. 

And that made sense in the 19th century when we had capital scarcity and we needed to get lots of savers to put their money into corporations as well. It makes no sense when you think about that brown assets that are issued by companies that are in the natural resource sectors or that are major polluters are,   giving you high monetary returns and the investors don't have to care about the polluting effects. 

So I've written an op-ed a couple of years ago where I said we just have to take away limited liability from major polluters. That can be done through a legislative act, unlikely, but some courts, including the UK Supreme Court, have developed new doctrines where they attribute, at least to the parent company, damages done by a subsidiary and by inference, I think you could go a step further and attribute the damages also to the investors behind the, the, the parent company. That has to happen. They have to bear the cost of what they are creating for their financial returns. They have to bear these costs so that you drive down the financial returns. 

Without this, I don't think we can make much headway. 

Till: How radical is the suggestion of reducing the limited liability of certain companies? Because it sounds a little bit technical, right? Reducing limited liability, and we know that it was maybe useful in a certain period of time to make sure enough capital goes into certain activities, and we know that might not be useful today anymore. 

But is basically reducing the limited liability, does it equal changing ownership structures in a way... 

Katharina: I mean, like, even if you look at property theory in economics, people like Harold Demsetz and others would say an owner has the control over the residual returns, but the owner also will internalise the cost of using the asset. They're basically accusing state ownership or the commons of a system where nobody internalises the cost of using the asset. 

When we now create limited liability, we actually are destroying the logic of property rights theory in accordance with economic theory. And so it’s like a theoretical proposition, I think it's totally consistent with ownership saying an owner invests and knows what, you know, has expectations about the returns of the investments, but also knows that there are costs, and if the company is being held liable for causing certain damages to others, then the owners will also have to bear these costs. 

In any other organisational form, like in partnerships, that is undisputable, and we have created limited liability as an artifact of a particular form of cooperation that was capital intensive. But I don't think we have to maintainthat, and I think you would have real owners at that point. 

You would have shareholders who really have to think about the cost that the corporation imposes on others before they invest. 

Till: And, and could one still go one step further? You have also written a lot about the enclosure, right? A starting point of kind of public land, dealt with by norms or public norms in private law into private ownership.  We have worked in the Club of Rome initiative called Earth for All on a concept called universal basic dividend,  where it was argued that basically the global commons in a way belong to all of us, right? 

And there should be dividends coming out of activities such as fossil fuel or even data or kind of activities that are related to the commons. So we see that in parts. There is something called the Alaska Permanent Fund, where kind of money is distributed across a population. You might argue that in Norway there are similar approaches. 

Is that something that could follow out of the changing  law debate here as well? 

Katharina: I think so. I think there is, however, a potential cost of this because we all might become used to the dividends from oil revenue, for example. And that argument has been made also in the US context for our pension system. So if you have your pensions in private stock markets, you want to have the markets go up and you're not really interested in how this happens. 

You just want to have a decent pension. So I think in the Alaska Permanent Fund, this was a really good solution to a very corrupt regime that existed until the 1970s to make sure that the people in Alaska had control over the dividends. They could see whether something came back into their accounts, because they were participating in this. 

So that was important for that particular reason. But I think there's also danger, especially where people's income in general stagnates, that they become hooked on income that is being produced by certain types of assets which create the kind of externalities that we have to get rid of, right? So it would have to be very diversified, if at all, and I think when you know, as a general first, as a first step to say, "Why does the wealth from pollution accrue to a handful of investors and they become super rich and then also dominate the political system?" 

That's worse. So I think in that sense, it's a step in the right direction. 

Till: Yeah. And I mean, you see variations of that, not exactly this, but you see, for example, that in Europe, the debate about internalising externalities, particularly through carbon taxes is more advanced. It's much harder in the US. And you have some countries, Austria, partly Switzerland, who then kind of share that, that money again amongst the population. 

But the question is if it has to be stuck with those externalities we don't want in the natural world, or if one could include even factors such as data, right? And kind of use it as a way of dealing with our digital world as well. 

Katharina: That I find an easier proposition and one that I would really support as well, is that I think we, as some forms of collectives and the organisation of which and the size of which would have to be determined, we should have control over how our data is being used. This is again, and it's an artificial decision, which is again deeply rooted in the law, to say that the data producers, you and I, do not have ownership of our, over our data. 

So the European directive says personal data is basically you determine with consent or not, but the consent is kind of meaningless. In the US, you have lots of cases where the courts explicitly say because to you and me, our data have no economic value. We can't sell them at a price, just the little data that we produce all the time. 

Therefore, we can't have property rights, and only those have property rights that basically have scaled the data collection already and put them on a device. There was already a legislation passed in 1986 in the US that the tech industry, industry lobbied for it,  which basically said if you then try to get these data away from them, this is hacking and it's basically theft, and thereby you create a new property right. 

So I, so I think the reorganisation of control over our data is absolutely fundamental, and that would include both control who can use the data for what type of purposes, and then the returns that are being produced with the data should be shared as well. And one can think of lots of different legal solutions to do this, public trust and also corporations and shareholdership and, you know, affiliations. 

Till: And I mean there are ways that, that we know we can organise both control rights and return rights in a way that would allow us to participate in the digital economy and not leave it to a handful of super rich. 

Super rich are sometimes called oligarchs in a way because you do see that the accumulation of wealth at the top is, is, is mind-boggling.   and,   you say there are different legal ways of dealing with that. Do those legal forms already exist or do they have to be created? 

Katharina: No, they exist. Interesting and good, good point. 

They exist, and I mean the data oligarchs are using them. These are corporations. They're using ownership structures and voting structures so that Mark Zuckerberg has over 50% of voting control over Meta. They are arbitraging with the legal tools that exist to give them absolute control rights, and they control both, everything that's being said. 

They also get a huge return from these companies. And I think on top of that with data, because they can control how we behave, certainly on the internet, if not beyond, they also have massive social control. So this is, this is a form of authoritarianism, I think that is kind of creepy because it's not as visible, but is massive, and I think we have to think about this. 

You know, what I'm arguing also in my new book is, there are lots of tools in the toolbox of the law that could be used in different ways. And of course, it's a question of the political economy and the relative power structures. What I'm trying to say to tell many people who don't really know what to do, and they always run to Congress or they might run to court, is that you also have tools in your own hands right now. 

Digital coding is happening by technologists, and there are many technologists out there who have different ideas of how to code relations. Similarly in the law, there are different ways in which you can organise businesses. There are lots of different companies. Think about Patagonia, which has completely reorganised itself using something as old and arcane as a trust structure to make sure that the mission of Patagonia will be withheld and, and, and protected in the future. 

So there's lots of stuff to play with. You just have to know about it and then have to find some lawyers who are not charging $3,000 an hour to help you set them up. 

Till:  Yeah. And what about this is that it kind of starts with this whole inequality debate at a different level, right? Because we often talk about redistribution and in a way it's- I support many of the suggestions there, right? And you now have also in, in New York, you have the debates about taxing the rich by the new mayor. 

But it is of course a present debate also within the Club of Rome. But to a certain extent, redistribution might already be too late, and we should think more about the pre-distribution. 

Katharina: Yeah. That, you know, it goes back to what we said at the beginning. It's about the diagnostics of the system, and I'm basically saying you're using a public resource, because our legal system is a public resource, and you could add the money system, which is also a public resource, to create enormous amounts of private wealth and,   plus all the negative,   effects that h- this has on inequality, on political systems, et cetera. 

So this social resource is available to us. We just have to know how to use it and also to imbue it maybe with different normative foundations so we can use it in a way that is conducive to more, to the rest and not just the few on the top. 

Till: Yeah. We did talk a little bit about the different kind of stages of capitalism and the varieties of capitalism from an economic perspective, I find it sometimes hard to describe what's going on at the moment even because you find certain things that are happening,    that 10 years ago in the US, let's say, the attacks on the independence of the central bank, right? 

Like 10 years ago, there were green progressive forces arguing against the independence in that way and including some issues such as, as green transformation,   as part of the mandate or things like that. Now it comes kind of from the right side and from the side many of us probably wouldn't want. 

Same with like tariffs. It's not the typical toolbox of free market policymaking in a way But you have people like Ha-Joon Chang who argued that this was basically also a way of protection of emerging markets to, to climb up the ladder  in a capitalist society. So it's confusing.  And what we try to do in the Club of Rome podcast often is also to make sense of complexity of the world. 

So can you help us to define what is the stage of capitalism we look at at the moment. How is our economic system and paradigm changing currently? 

Katharina: So I think in many ways, we've seen the movie before. If I think about Karl Polanyi and his analysis of "The Great Transformation," his point was that the process of capitalism, the process of industrialisation, the transformation of the entire institutional framework has subordinated the society to the market principle. 

And then society fought back, because they kind of didn't like to be subordinate to the market principles. The fallout was massive, and the results was communism and fascism in the 1920s. And I think, unfortunately, we have not heeded his advice after World War II to think about how we could make sure that we kind of maintain the upper hand by society. 

But we've allowed and enabled the market to completely control us to an extent I don't, I don't think that even happened in the 1920s or at the beginning of the 20th century. So globalisation of the financial system, the power of private financial industry, and now the data is basically a massive control of the private sector over society, and is trying to subordinate norms, values, institutions, behavior to the logic of a market, of a market system. 

And the worst, I think, is really on the internet. Our entire social interactions are being driven by how many clicks you get and how much-- what the return is and how many ads they can place. It has nothing to do with other types of form, of formal values. And so I'm not surprised that somebody like Trump, I don't... 

It doesn't matter what he believes. I don't think he believes anything. He just has an instinct. He has an intuition for what the people want. So his MAGA movement is kind of what we saw in the 1920s, both on the right and the left, a backlash against the subordination of the society to the market principle. 

They've had it. They have no control over the future of the system. They can vote whichever party they want to vote into office. The system will continue because the system has become relatively autonomous from the state as such. The state can't regulate it, but we still use law, the private law, to sustain it. 

And I think that's the reaction that, you know, the MAGA movement is built on and is basically using it. It has to sort of symbolically show that they're doing something for them, which is kind of the tariff game, which of course hits them too, which they may or may not understand. It's a different story, but you're making a big spectacle. 

"This is Liberation Day. We're now doing something for you." That's politics. It has nothing to do with economics. But I think the politics are a reaction of a system that has suppressed too many people for too long and has basically, even in democracies, and especially in democracies, the sense that we have lost control over our future is devastating. 

And I think that's why we see extremes, not only in this country, but also in, in countries of Europe. 

Till: Yeah, and I agree with you, the losing control, polarisation, insecurity in the future, economic insecurity - there are many contributors to this situation as we see it. And what would you say, then slowly coming to an end already, would be the role of, you know, organisations like Club of Rome, but also people and institutionswant to fight back? 

Katharina: So I think for me, the most important thing is to show that there are viable alternatives. We've been told for a long time by politicians that there is no alternative. If we want to have growth, then this is the system that we have.   I think there's also a case to be made that we maybe need less growth, but many people in many poor countries in the world are still trying to somehow get out of poverty, and so I think that we have to keep, keep in mind. 

But in my mind, there's a lot of creativity. There's possibility for creativity. There are lots of opportunities that you can take without necessarily having to fight it at the international la-law level with treaties or even at the national law with politics, because a lot of legal structures exist already which could be repurposed. 

That's what capitalism has always done, because it rarely has gone through legislative approval. In democratic systems, this would have been too complicated. They've basically used the law as is. Now, obviously, if we have a direct confrontation between powerful forces of, on the capitalist side and, and others, this will be difficult to win. 

But there are cases where cases have been won, and so I think just collecting these cases and showing that there are viable strategies and making them known to others and thinking of how in different systems, because there's no silver bullet. But in different systems, you can see different openings, different legal tools that might be available to push on a particular front. 

And I think for the climate, I think it would be, it would be climate finance, of course, also environmental regulation. But,   thinking creatively about how you could really use these tools and get people on your side, including people who might have made a lot of money in the capitalist mode but want to change their ways and want to help do something else. 

 I think the Club of Rome and other organisations that have a voice kind of in the political and policy debates. We shouldn't only talk to the politicians and policymakers in Brussels and elsewhere. We should also talk to lawyers and to private actors and think about how we can help them find a better path. 

Till: Thank you very much, Katharina. For everyone who would like to learn more about the law of capitalism and the power of law as well, I do recommend your latest book, "The Law of Capitalism and How to Transform It."  It has been fascinating speaking to you. Thank you for listening to the Club of Rome podcast and thank you Katharina for joining us today. 

Katharina: Thank you so much for having me. It was really fun to talk to you.