A Guide to the ‘Legal Fictions’ That Create Wealth, Inequality and Economic Crises

The Ezra Klein Show

“Capitalism, it turns out, is more than just the exchange of goods in a market economy,” Katharina Pistor writes. “It is a market economy in which some assets are placed on legal steroids.”

Pistor is a professor of comparative law at Columbia Law School, the director of the Center on Global Legal Transformation at Columbia University and the author of “The Code of Capital: How the Law Creates Wealth and Inequality.” In the book, Pistor argues that economic value isn’t just captured by markets; it is created by the legal system. An asset like a piece of land or a machine has some intrinsic value. But it is only when you graft legal attributes onto those assets — backed by the coercive power of the state — that they are transformed into wealth-generating capital.

Pistor’s theory has sweeping implications for some of the most fundamental economic questions of our time: How is wealth actually created? Why does our current economic system produce such huge inequalities? What causes financial crises? In Pistor’s telling, you can’t begin to answer such questions without understanding the legal foundation that our economy is built on.

This is a conversation that delves into the deepest layer of our economic system — one that shapes all of our lives even as it remains largely invisible. We discuss the four legal attributes that transform an ordinary asset into a wealth-generating device, how the law creates corporations and financial instruments out of thin air, the “feudal calculus” that underpins our modern economy, why focusing solely on wealth redistribution will never be sufficient to solve economic inequality, how private lawyers — operating outside democratic institutions — end up shaping the rules of our economic system, the “law and finance paradox” that explains why financial crises happen, how legal manipulation has eroded the “social contract” of capitalism, whether the law can work as a tool to help fight climate change and more.

Mentioned:

“A Legal Theory of Finance” by Katharina Pistor

Book Recommendations:

Capital in the Twenty-First Century by Thomas Piketty

Crashed by Adam Tooze

Ages of American Capitalism by Jonathan Levy

This episode is guest-hosted by Rogé Karma, the senior editor for “The Ezra Klein Show.” Rogé has been with the show since July 2019, when it was based at Vox. He works closely with Ezra on everything related to the show, from editing to interview prep to guest selection. At Vox, he also wrote and conducted interviews on topics ranging from policing and racial justice to democracy reform and the coronavirus.

Thoughts? Guest suggestions? Email us at [e-mail].

You can find transcripts (posted midday) and more episodes of “The Ezra Klein Show” at nytimes.com/ezra-klein-podcast, and you can find Ezra on Twitter @ezraklein. Book recommendations from all our guests are listed at https://www.nytimes.com/article/ezra-klein-show-book-recs.

“The Ezra Klein Show” is produced by Emefa Agawu, Annie Galvin, Jeff Geld, Kristin Lin and Rogé Karma. Fact-checking by Michelle Harris and Mary Marge Locker. Original music by Isaac Jones. Mixing by Jeff Geld and Sonia Herrero. Audience strategy by Shannon Busta. The executive producer of New York Times Opinion Audio is Annie-Rose Strasser.