Katherine Pistor's Da Vinci 'Code of Capital'.

Katherine Pistor, has written a book called 'The Code of Capital' about which her publisher states- ' Capital is the defining feature of modern economies, yet most people have no idea where it actually comes from. 

Capital means stuff you use to generate Income. The hunter gatherer has a throwing stick and a couple of flints to make fire. That's Capital. So are tanks and air craft carriers used in the Nation's defense as well as Police Stations and Casinos and Brothels.


What is it, exactly, that transforms mere wealth into an asset that automatically creates more wealth?

Economic activity turns wealth into more wealth. Suppose you own shares in Apple. You have to claim the dividend on your shares and put them in your Bank Account. That is economic activity. You may prefer to pay a broker to do it for you. Then she is doing most of the work. Still, you stirred yourself enough to put her in charge. 

 The Code of Capital explains how capital is created behind closed doors in the offices of private attorneys, and why this little-known fact is one of the biggest reasons for the widening wealth gap between the holders of capital and everybody else.

Attorneys may try to grab wealth for themselves or their clients to which they are not entitled. Sometimes, these attorneys get knifed or beaten to death. Sometimes they get beaten in court by other attorneys. Sometimes the police arrest these attorneys and their crooked clients and put them in jail. However, there have been occasions when attorneys have succeeded in redistributing wealth. But so have black-mailers and extortionists and muggers. 

I can hire a couple of tough guys to beat other people and take their stuff. The problem is that those tough guys may beat me and steal my stuff. Alternatively, other people may kill my tough guys and fuck me over. If people pay taxes, they may be able to get a police force to kill or incarcerate those who try to 'redistribute wealth' using fraud or violence. However, wealthy people can always protect their own wealth and, at the margin, use their goons to grab other people's wealth absent any Law or Police Force. 

In this revealing book, Katharina Pistor argues that the law selectively “codes” certain assets, endowing them with the capacity to protect and produce private wealth.

Guns and knives and heroin and cocaine are assets. Criminal gangs use selective 'codes'. This endows them with the capacity to protect and produce private wealth. The law is impotent, unless there is a mechanism over which it presides which kills or locks up the gangsters and takes away their ill-gotten gains. However, this mechanism, if let loose on the producers of merit goods, will also destroy Society's wealth and impoverish everybody. 

 With the right legal coding, any object, claim, or idea can be turned into capital—and lawyers are the keepers of the code. 

There may also be a 'Da Vinci Code' but unless some albino guy is going around killing people, it has no effect whatsoever. Enforcement matters even if there is no Code and no Law. The 'Black Economy' by definition is outside the Law. It may have better contract enforcement than the 'White Economy'. Some years ago, a Judge in India hired a goon to get rid of a tenant of his who wasn't paying rent. The Judge could have gone through the legal system but the thing would have dragged on for decades. The public sympathized with the Judge for doing what everyone else was doing. 

Pistor describes how they pick and choose among different legal systems and legal devices for the ones that best serve their clients’ needs, and how techniques that were first perfected centuries ago to code landholdings as capital are being used today to code stocks, bonds, ideas, and even expectations—assets that exist only in law.

All this is bullshit. Landowners existed before there was any Law or Lawyers. So did Mercantile Capital. Guilds enforced 'intellectual property' by beating and killing transgressors. The legal system was a comparatively late development and initially featured 'trial by combat'. 

There are many assets that don't exist in Law but which are safe and highly productive. Being beautiful and smart and well connected does not, according to the Law, entitle you to a higher return on your labor or capital. By contrast, being a disabled woman from a minority may, according to the Law, entitle you to equal returns. Yet, invariably, the extra-legal, or even illegal, asset yields a safer and higher return than the one 'encoded' by the Law. No doubt, from time to time, there may be one or two instances where enforcement of purely ornamental, virtue signalling, laws do occur. But then some poor people do get to win the lottery or get to become celebrities after appearing on a Reality Show.

A powerful new way of thinking about one of the most pernicious problems of our time, The Code of Capital explores the different ways that debt, complex financial products, and other assets are coded to give financial advantage to their holders. 

Nobody would lend or invest money if they weren't promised 'financial advantage'. The existence of the Law can mislead people into investing with a Bernie Madoff. All that matters is Enforcement. But, illegal enforcement is generally better than going through the courts. Why? Because shysters are disintermediated. 

This provocative book paints a troubling portrait of the pervasive global nature of the code, the people who shape it, and the governments that enforce it.

This nonsensical book doesn't get that where free entry and exist obtains, rights are allodial. The attempt to render them otherwise generally fails. There is 'jurisdiction shopping'. People 'vote with their feet'. Rents are purely a function of elasticities of demand or supply. The Law, at best, serves an Aumann signalling function.

Pistor wrote a paper a few years back outlining the main props of her imbecilic thesis.

This paper develops the contours of a legal theory of finance (LTF) for contemporary financial systems, i.e. systems that mobilize capital today for future returns. The history of money and credit dates back millennia (Hodgson 2013), but the configuration of global financial capitalism is of more recent vintage.

What does 'configuration of global financial capitalism' mean? I don't know. Nobody does. Even Soros or Buffet can't tell us what the price of such and such currency or bond will be tomorrow. The real interest rate remains unknown till after the fact. Yet, real interest rates and real exchange rates and real per unit labour cost and so forth are the parameters global financial markets look at. But they don't fully specify the system. Because of Knightian Uncertainty, the thing is impossible. The configuration space is radically unknowable. Is this cretin saying that there is any Legal system in the world which asserts that there can be a justiciable vinculum juris specified upon the configuration space of the entire Global Financial system? Did nobody tell Pistor about force majeur or Acts of God?

It is this system that is the concern of this paper and the theory it develops. LTF asserts that finance is legally constructed; it does not stand outside the law.

So, LTF asserts a lie. Finance stands outside the law. The law may bid for 'contract enforcement' services, in return for a fee, and Finance may or may not take up the offer.  However, there is a portion of Finance- stuff related to Government debt instruments and shares issued by Public Corporations- where the Law has an originating role. In other words, the Law has financialized itself to survive or thrive. But this means the Law is under the discipline of Financial Markets, not the converse.

In the short run, a tyrant or demagogue may think that passing laws can force Finance to pay for the Government. In the medium to long term, the Government either has to change tack or goes bankrupt. The Law has no magical power over Nature. Economics is a game against Nature. Chrematistics is grounded, not in Nomos, but Phusis, because different socio-economic regimes have to compete with each other on an Uncertain fitness landscape. The Akrebia of the Law is out of place in the Economia of the Agora.

Financial assets are contracts the value of which depends in large part on the  contemporary global financial system, including its inherent instability, its organization into an apex and a periphery, the differential application of law in its different parts and last but not least the locus of discretionary power.

Nonsense! Financial assets are contracts whose value depends only on their own market. If put options are 'in the money', then call options are 'out of the money'. The 'global financial system' is irrelevant. 'Apex' and 'periphery' are irrelevant. The Law is irrelevant- unless it tries to fuck things up, but even then the effect will only short run because the market will move to another jurisdiction.

As such LTF can serve as the foundation for a political economy of finance.

No it can't. Only some cretinous shite can be founded upon stupid lies.

Within this framework there is ample room for analyzing the behavior of actors using rational choice models, but also a more socially embedded approach in socioeconomics (see infra under 5). LTF’s critical contribution is to emphasize that the legal structure of finance is of first order importance for explaining and predicting the behavior of market participants as well as market-wide outcomes.

The legal structure of finance changes slowly. Thus, though expectations re changes in that structure can have some effect, by the time they occur they have been discounted and evaded.

Uncertainty, Liquidity and the Instability of Finance Before explaining the elements of LTF in greater detail I turn to the two premises on which it rests – uncertainty and liquidity volatility – and their implications for the nature of finance, namely its inherent instability. Frank Knight argued long ago that any attempt to capture dynamic rather than static phenomena must grapple with the problem of fundamental uncertainty; that is, with risk that cannot be quantitatively measured (Knight 1921). This is the case whenever circumstances are unique and deviate from “invariable and universally known laws” (ibid at III.VII.3). Such circumstances cannot be reduced to variables that lend themselves to probability calculations, and the distribution of possible outcomes is unknown (ibid at III.VIII.2). These cases call for judgment, not calculus. Keynes developed a similar concept in his Treatise on Probability, also published in 1921 (Keynes 1921(2010)). Building on this insight, he later emphasized that the process of accumulating wealth is necessarily a long-term project that is beset by our inability to  know the future. Writing in 1937, he elaborated: The sense in which I am using the term [uncertainty] is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealthowners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know. (Keynes 1937, 214) It follows that we cannot fully predict the future and that, therefore, any investment strategy devised today will have to be adjusted should the future deviate from assumptions made today.

This is ignorance simply- but it is not uncommon. A regret minimizing strategy fully incorporates Knightian uncertainty. This means that only tactics change, the strategy remains 'Hannan consistent' in some respect.

This does not have to but frequently goes hand in hand with a financial crisis, in particular when substantial readjustments have to be made throughout the economy. The frequency of financial crises in the history of financial markets corroborates these predictions (Kindelberger 2005). Reinhart and Rogoff offer eight hundred years of evidence that financial crises occur much more frequently than people are willing to believe (Reinhart and Rogoff 2009). In fact, there is little disagreement even among proponents of the efficient capital market hypothesis (ECMH) that at least some aspects of finance are beset by inherent instability. Specifically, entities that engage in maturity transformation, i.e. banks, are widely held to be vulnerable to crises (Allen and Gale 2001; Levine 1998). They finance long-term commitments with short-term funds that can be withdrawn on demand. Whenever too many depositors seek to withdraw their money these entities face extinction with potential repercussions for other entities and the system. The vulnerability of financial markets to such bank runs has found a regulatory response in the form of deposit insurance. Private intermediaries that engage in similar bank-like activities, such as hedge funds, have instead unilaterally imposed at times redemption restrictions to ensure their survival in times of liquidity shortage. Where there is disagreement is whether instability extends beyond intermediaries to financial markets, or whether financial markets can instead solve the instability problem by diversifying risk. Financial innovation has made possible the splitting of credit, default and interest rate risk; prior to the global crisis it was widely believed that this kind of risk diversification had ushered in a period of “great moderation”, where instability was contained. There are, however, good reasons to believe that the root causes of instability are the same for banks and markets. Both offer mechanisms for investing capital today in the hope and expectation of positive future returns, and both have to confront the conundrum that knowledge about the future is imperfect and liquidity is not a free good. Under these conditions, splitting risk cannot offer full protection against future events or a reversal of liquidity abundance.

Nothing offers 'full protection' against future events. There are no riskless assets. No doubt, there was and is some bad economics at work in the discourse of the market. But the remedy for this bad economics is not bad jurisprudence. It is mechanism design to reduce principal agent hazard. We are speaking of 'incomplete contracts' here. Pistor, cretin that she is, pretends otherwise. The result is bad Law and worse Economics.

The concept of liquidity as used in this paper is the ability to sell any asset for other assets or cash at will.

Without realizing a loss. You can sell your Rolex for a 100 dollars to the guy at the 7/11. But, since its value is much greater, we don't say your Rolex is liquid.

Selling or buying assets is intertwined with balancing one’s assets and liabilities and as such necessarily links funding liquidity and market liquidity.

Nonsense! Only arbitrageurs are doing this balancing. Everyone else in the market is either a net lender or net borrower. How stupid is this cretin?

This definition differs from others used in the literature. Brunnermeir and Pedersen (2009), for example, define market illiquidity as the “difference between the transaction price and the fundamental value” and funding illiquidity as “speculators’ scarcity (or shadow costs) of capital”  fundamental value as compared to its value or volatility relative to other assets and to conceptually differentiate speculators from other investors.

Arbitrageurs, not speculators. A speculator may have zero liabilities.

Yet, as the US Supreme Court has put it, while “scholastics of medieval times professed a means to make such a valuation of a commodity’s ‘worth’”, this may not be a meaningful exercise for today’s courts nor arguably modern day academics in economics or law .

So, the US Supreme Court is ignorant and babbles about 'scholastics of medieval times'. But the Bench is of no greater account to Wall Street than it is to NASA.

In fact, it is not what market actors do: they are more concerned with relative, not absolute value (Frydman and Goldberg 2011). Lastly, in a market-based credit system that is largely reliant on “Ponzifinance”, as Minsky has defined financing strategies that rely ex ante on refinancing in the future (Minsky 1986 at 226), the distinction between speculators and other market participants becomes less tenable.

This is because Pistor is a cretin. She does not get that her argument refers to arbitrageurs, not speculators. No doubt, you can have periods of collective irrationality but that is the consequence of bad mechanism design. The broker is wrongly incentivized and misleads the gullible man in the street who wants to get rich quick. But the brokers themselves get infected and end up jumping off skyscrapers- at least in movies.

Adjusting existing investment strategies to new facts entails selling some assets and/or buying new ones.

No. The Hannan Consistent strategy involves simply updating weightings in a multiplicative weight update algorithm. The strategy remains the same. It is regret minimizing. The tactics change- i.e. there is portfolio adjustment on the basis of a m.w.u.a which incorporates new information.

Yet, not all assets may find takers, or only at a substantial loss, and not all sellers will obtain refinancing, which they must when confronting shortfalls in cash or other sellable assets to meet their own liabilities.

So, there is a shakeout. Nothing wrong in that. It happens in every field. Some lawyers keep losing cases coz they are as stupid as shite and so they become academics or take to dealing drugs.

In the worst case scenario a fire sale of assets may occur which can trigger an economy wide downward price readjustment and potentially mass insolvencies. The likelihood of such an extreme scenario depends on how many investors will have to seek refinancing at the same time; the number will be higher the more investors have built their strategies on the ability to refinance on demand. In short, for a crisis to occur uncertainty must meet liquidity shortage.  

 Mass stupidity leads to misery for the masses. Mechanism design is about preventing that. Consider Hitler's Germany. The German masses believed something very stupid. This caused a lot of them to get killed or raped or ethnically cleansed from what had been German territory. Why did the Germans- and other Europeans- fuck up so badly? Bad mechanism design. Within Germany, General Blomberg should not have got the Army to take an oath of loyalty to Hitler. The Judiciary should have asserted its independence. The French should have, as De Gaulle warned, developed an offensive doctrine etc, etc. Mechanism design is about incentives and checks and balances. Pistor isn't interested in it. She just wants to talk paranoid shite about 'Codes of Capitalism'. This is neither Law nor Economics but Stupidity simply. But there is a Globalised market for stupidity and good luck to her if she makes some money of it. Still, she'd better keep a weather eye open for albino assassins coz like I read about how Opus Dei controls the Rothschilds who control the British Monarchy who control the Lizard People from Planet X. Wake up sheeple! Its bleeding obvious that the Illuminati have been anally infiltrated by Elizabeth Warren! Time to put on the tin-foil hats!