Legal Creep
Or why we think there is no alternative to economic expansion
A better sub-title for this essay with two book reviews might be “can we escape our self-deception that economic expansion is necessary?” Whether economic expansion is labeled capitalist or socialist, we insist that we must “grow.” Escaping this mindset stretches our psyches to their breaking points. For some who personally “feel” an environment at great risk, trauma is a real psychological phenomenon.
The system is too successful. Neither we nor the planet can tolerate its excesses much longer, but “Big Other” has a tight grip on us. Our present way of life depends on it. Intellectually we see that the system cannot continue as is, but fear leaving it to navigate a more fearful future — or we’re too busy navigating the complexities of the present to think about the future. Change is personal. It’s more than concern for child miners in the Congo, or Alaskan villages forced to move. Real systems change digs much deeper than boosting environmental philanthropy on the side.
And change has to be by both the wealthy and the poor — especially the high-consuming wealthy. All of us in advanced economies are daily lured to consume more and more by a system buttressed by legal, cultural, and political biases. “Big Other” keeps us in involuntary servitude to our own material consumption and convenience. (I owe, I owe; it’s off to work I go.” And “Our beneficiaries depend on us earning at least 5% on our investments.”)
What has to change? Almost everything, beginning with our mindsets.
What traps must we escape? Some are economic expansion myths, held as if they were religions. Others are laws, regulations, customs, and state coercive power that favor commerce, especially big business. First we must realize that these traps keep us on a road to ever receding mirages of economic growth. What would we have if we ever got there?
Protesters seek to destroy these traps, or at least to loosen them. Doers strive to displace them with local self-help circular economies. Those with an introspective bent strive for insight, concocting their own version of “Deep Ecology.” And human conflict is inevitable; environmental justice isn’t easily separable from social justice. All of us must think our way out of these traps to develop a “mindset of hope” other than a return to the status quo. One way is Compression Thinking.
Books from two different viewpoints deepen our understanding of these traps.
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Strangers in Their Own Land, by Arlie Russell Hochschild
This book’s theme is that Louisiana conservatives are unknowing sacrificial lambs to the gods of industrial development and economic expansion. Using ethnographic studies, a dab of history, and a few statistics, Arlie Hochschild develops her case. She’s professor emerita of Sociology at UC-Berkeley. To learn first-hand how real people live and think, she spent years visiting the area of Louisiana known as Cancer Alley; easy read; lots of stories; one of the better out of a spate of similar books.
Hochschild’s book attracts “liberals” who can’t understand why people act in opposition to what liberals consider to be their own interests; The Great Paradox Hochschild calls it. A typical living paradox is Peggy Frankland, leader of protests against a polluted bayou. But Peggy and nearly all her friends oppose strong government and the EPA. A company, PPG, not a government, spilled toxins into the river feeding the bayou. A PPG employee openly admitted to following orders to personally discharge toxins, but afterward when the government issued seafood bans, local fishermen blamed the government for cutting off their income, not PPG for causing the spills. “PPG is making the world a better place.”
This is only one of many similar stories. Hochschild wondered what pattern of beliefs set up The Great Paradox. Why do people feel like strangers in their own land, alienated from the life they once knew? Nicely presented, the pattern is no surprise to those living among anti-government conservatives, but it seemed revelatory to Hochschild. Some of its key points are:
- All we need government for are laws, jails, courts, bonding – and a military. Private enterprise can handle everything else better. (Surely insurance companies can police workplace safety and environmental compliance better than a government agency.)
- Almost any problem can be resolved by markets and competition.
- Institutions that pay us money (companies) are good. Governments that take our money (taxes) are bad. Governments are sinkholes for money.
- Anyone on the public payroll has a cushy job. Non-government jobs are “real work.”
- Others receiving money from government programs are on welfare. If I get money or favors from the government, it’s because I worked hard for it.
- Private industry paves our way to “The American Dream.” Almost anything can be overlooked in pursuit of this dream.
- If they work hard, anyone can achieve the American Dream. Hard work earns you bragging points. If I do not achieve the American Dream, it is because the government lets others cut ahead of me in line (blacks, Latinos, immigrants, women). Equality = reverse favoritism.
- I work hard. Everybody should. We can endure temporary hardship. We hate slackers, not corporate executives who earned their money.
Another factor in The Great Paradox is religion. Many Cajuns believe that end times are near and that the Lord will provide, so concern about environmental pollution is unnecessary. Before anything becomes unbearable, those who endure will be in heaven. These religious beliefs are not a white-only thing; many blacks and “people of color” share them.
Personally, almost everyone Hochschild met was warm and open. They swap recipes. They volunteer for charity work to take care of those they deem truly needy. They like to fish and hunt – where they can. And they fear confiscation of firearms. (Louisiana has lax gun enforcement and a high gun death rate.)
The Great Paradox is not confined to the South, but Hochschild concluded that it incubated there from the legacy of poor white culture during slavery and reconstruction times. White sharecroppers might have been as dirt poor as blacks, but not so far down in social standing as to be without hope. They respected whites with landed wealth as symbols of superior ability who had “made it.” Fast forward and they could easily substitute 21st century industrial managers for plantation owners as having truly made it.
Strangers in Their Own Land suggests that Louisianans’ neoliberal beliefs evolved to explain to them why the lifestyle for which they nostalgically pine is going away. These beliefs set them up both to be slowly squeezed by environmental degradation, and to be subjugated by forces engineering the Code of Capital propping up the status quo. The elites want to preserve their status too. Addicted to the American Dream of unending expansion, neither the “oppressed” nor their “oppressors” can fathom a way of life without it.
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The Code of Capital, by Katherina Pistor
Dogma is that business should prefer minimal government. Not true says Katherina Pistor. Big business and big wealth need strong government enforcement of the Code of Capital to grow business and sustain wealth. They prefer that this Code of Capital strengthen slowly and be enforced quietly so that we are increasingly mired in legal obfuscation. Hence, legal creep.
Pistor has an impressive title: Edwin B. Parker Professor of Comparative Law at Columbia Law School and Director of the Law School’s Center on Global Legal Transformation. She’s familiar with the processes she describes. Many former students are creative corporate lawyers in the top 100 corporate law firms in the world, the chief perpetrators of global legal creep. Too tough a read to be a best seller; hard to track; lots of acronyms, but fascinating legal insight.
Capitalism uses and trades assets. An asset may be land, a physical thing, a process, a computer program, a symbol, or a composition. None have monetary value unless they are coded as having value by law, protected by patent, copyright, trademark, and other legalisms. An asset legally has monetary value if the law and the markets say it does.
Nearly all creative lawyers are corporate. The table below is a high-level overview of the palette from which they creatively blend new legal rulings on behalf of well-paying corporate clients. Since 1990, global legal firms skilled in this craft have expanded 3-4 times, a major factor in the rapid growth of globalization.
Palette of Variables to Mix to Create Legal Creep
Legal creep has grown from a little grease promoting commerce to a slather covering the daily life of much of humanity. Software has become legal property. Consumer contracts routinely include arbitration clauses mandating that you will arbitrate disputes on corporate terms, which hampers the organization of class action lawsuits. Derivatives traded in global markets are vested with strong “rights” to make trading them viable. Companies with patents try to pass off little modifications to their “designs” as novelties deserving a new patent (a standard strategy for pharmaceuticals). Finally, Pistor describes efforts to vest blockchain contracts with legal standing to make them convertible to cash if somebody wants out. Pushing these and other boundaries leads to questions like the extent to which legal protection for contracts between humans should extend to exchanges between their computer programs.
History of Commercial Law
Before diving into 21st century legal creep, Pistor serves up some history on how capitalism evolved its legal wrappings. For example, Roman legal codes that defined private property are still cited occasionally. However, today’s complexity derives mostly from English common law and New York state law. Nearly all global legal logic and precedents favoring corporations incubated in those jurisdictions, which were the cradles of capitalism. Lawyers well-schooled in these precedents have a palette from which to mix old precedents into new ones favoring corporate clients.
Why do English and New York legal precedents favor capitalism? Because there, legal disputes play out on the stage of competing private rights to property or other assets. If you have full rights to an asset, you can sell it, in whole or in part, or sell complex representations of value in it, in whole or in part. Strong claims to asset ownership vault markets into realms of incomprehensible complexity compared with simple barter and trade.
Privatization of assets is as old as history, but Pistor pegs the development of capitalism to the English enclosure laws that from 1500 through the 1800s steered the breakup and privatization of English commons land. Before 1500, most English commoners used land in common. Enclosure parceled out most of these common lands into private ownership by landlords, or the landed gentry; hence the House of Lords and the House of Commons today.
Legal innovation engineered this transition. By the 19th century its finagling was as arcane as you can get without computers. English country barristers ingeniously concocted variations of non-human entities to own property, mostly trusts to legally own estates. Landlord occupants became mere tenants on their own estates, but beneficiaries of the trusts. If landlords lost borrowed money in a venture, they kept their estate. Since they did not own it, a creditor could not legally foreclose on it. Many Lords did not comprehend the legal machinations bolstering their privileged status.
Tradeable assets, valuations exchanged in markets, took a long time to work up to today’s volumes and complexity. Without “private” land ownership, even if a government is the owner, a land market has no basis. All markets need tradeable assets and an exchange medium.
Early global trading mediums featured Bills of Exchange. The last endorser to sign one of these was obligated to pay the face amount in full, and each time they were traded they were signed. That’s how global merchants created money as needed to facilitate trade. Merchant banks bought Bills of Exchange at discount and acted as collection agencies, which circumvented usury prohibitions. However, this private money system was inherently unstable. Merchants gravitated toward a medium of exchange guaranteed by the Crown, the pound sterling.
Expansion of markets required multiplying private assets in English colonies, replicating the enclosure process in England. Colonists busted up indigenous peoples’ common lands into tradeable tracts. New York State law embodies the legal arguments for doing this. The primary legal justification for seizing Native American land was “discovery and improvement.” If nobody has legal title to it, those who discover land have the right to take it and improve it. (Native rights still don’t have priority.) All over the world, variations of this legal code still justify seizing and privatizing commons land. Survey it; create a deed for it: declare it of value: raise money against it; develop the land; sell the land; use the proceeds to repeat the process. In a nutshell, that’s the code for capitalism – and economic expansion. Just extend it to all kinds of assets besides land.
Securitizing Debt
Unless it erodes, land doesn’t go anywhere, and seldom sells quickly, so you can be land rich, but cash poor. Idea: Use the land as security to issue debt instruments that can be traded. Now you have cash. Some form of securitizing is how nearly all money “of value” originates, but in a modern economy the original source may be many transactions removed, so it’s hidden.
In the 1700s, Prussian nobles securitized money after the ravages of war threatened their wealth. All landowners pooled their land values; then pledged to repay about half that value in tradable debt certificates. In the jargon, they securitized their debt into money using their land. Dormant assets came alive, and Prussia rebuilt. Soon all Germany copied this idea in Landschaft cooperatives.
This was genius, but simple (B.C. — before computers complicated things). The United States began its journey to abstract, complex financing in 1968. Congress formed the government sponsored enterprise called Ginnie Mae to securitize mortgages bought from private banks, and establish a market for them on the rationale that diversifying risk in a big pool would reduce financing costs to home buyers.
Big private banks could not ignore a play this big. By the 1980s private banks were securitizing mortgages – “private label” securitization. But to stir a huge market trading derivative instruments from mortgage backed securities, they needed legal kickers. They got them.
The first kicker was legalized tax-exempt trusts to own mortgage pools, but not profit from them. However, mortgages in the pools could be sorted, sub-divided, and bundled into “tranches,” depending on risk (prime down to subprime) and whether payments were on interest or principal. Then other parties could profit or lose by trading these packages, often called derivatives. Financial quant jocks chewed up computing power devising squared and cubed variations of derivative “instruments,”and trading them at higher and higher speeds.
After this process corrupted, triggering the financial collapse of 2008, the second kicker became essential. The “financial instrument” most condemned for the collapse was the CDO, Collateral Debt Obligation. If a bundler could not market a tranch, re-package it to smell better as a CDO held by yet another special purpose vehicle (SPV). But if mortgage holders cannot pay, cash flow feeding this complexity dries up, crashing the whole market. In 2008 foreclosure horror stories abounded. In a cascade of mortgage holders, none of whom are actually human, which institution has the right to foreclose on the poor non-payor’s home?
For trade in derivatives to continue, confidence in their residual value in bankruptcy had to be bucked up, and globally. Residual value had to hold anywhere in the world. Enter the well-lawyered International Swaps and Derivatives Association (ISDA). It altered the priorities of creditors in bankruptcy, or who gets paid first.
They hit a home run. If a mortgage derivative instrument’s value goes South due to underlying bankruptcies, the netting out of residual values pays the representatives of this trading system before almost any other creditors, and usually before any bankruptcy hearings are held. That is, derivatives traders get their money out of a bankruptcy before house painters. To make this global, rig trade agreements so that in case of mortgages securitized into derivatives, the bankruptcy laws of the derivatives’ home jurisdiction must apply. Otherwise this marvelous system would collapse.
You’ll be happy to know that post-collapse, 97% of mortgage-backed securities are not private label, but are bundled by Ginnie Mae, Fanny Mae, or Freddy Mac. Total trading in derivatives is about 20% below pre-collapse levels.
Coding Abstractions into Assets
If the law can make an asset out of it, you can sell it; raise money against it; maybe even create whole new markets. So make anything you can into an asset. For example, the Master Limited Partnership (MLP) became popular in the 1980s. It was created to securitize (boost) extraction industries. If you have time to waste, you can decipher this convoluted train of logic here.
The standard old codes for creating assets are patents, copyrights, and trademarks – intellectual property, or intangible property. Terms hardly used 50 years ago, IP is now the bedrock of companies with huge market caps, Google, Amazon, and their unicorn ilk. Controversies between open system and closed, copyright protected software have now raged for 20 years.
Pistor makes the point that IP would have no value without legal protection, enforced by governmental coercive powers. Enforcement being largely by legal intimidation, corporations with deep pockets and a deep legal bench have a big edge. Don’t think so? Thoughtlessly plant an image of a Disney character in even a limited audience medium and see what happens if a Disney lawyer sees it. Don’t mess with the Mouse.
Innovative creation of new assets to monetize is proceeding apace. One of the latest schemes is legal platforms by which, for example, an Instagram influencer can package and verify the buying potential of her followers and sell her brand as an IPO. In time, perhaps we can all reduce ourselves to a brand with potential income streams and securitize debt based on it. Pistor devotes a chapter to creative legalisms to enforce value in blockchain contracts. These contracts promise to exchange value without trusted financial intermediaries – cut out the transactional middle men. Never mind. She concludes that without pegging private money to a stable state sponsored currency, all will ultimately come to naught anyway.
Minting Debt
Pistor uses this phrase throughout her book. By it, she refers to the core of the capitalist system: declaring something to be an asset and raising money based on it. In concept, this is no different for intellectual property than it was when English barristers engineered the enclosure of the commons, or when American colonists confiscated and developed native common lands.
Economic development is held to be the route to the American Dream, but for too many people the American Dream is more of a nightmare, and for many reasons. Environmental degradation. Indebtedness. Chronic diseases. Limited control of their own lives. However, a version of the American Dream – more and better material goods and experiences – is the only glue that holds the one-percenters and the precariat masses together. Lose hope in that and the whole thing comes apart. Perhaps it is.
Given our apparently inexorable transition into Compression, the American Dream cannot be maintained. We need more than a new American Dream. We need a new Global Dream.