Doesn't the state shoot itself in the foot if it allows the stuff? The state is part of it. Let's just be open about it. It's not that the state is on the other side and capital is there. Without the state, capitalism wouldn't exist.
Katarina, thank you so much for joining us on The Breakdown. How are you doing today? I'm really well, thank you for coming. Yes, thanks for hosting us in your lovely home.
I wanted to start fairly simple and just to give everyone an idea of, I think, a really interesting core argument in your book, The Code of Capital, which is about the way that law, I guess, constitutes capital. sort of capitalism as we understand it. So could you describe that argument to us and then we'll take it from there. Yeah, I'm basically making an analogy to software coding or the genetic codes. I'm saying it's the code of capital.
And that's not the codification like the French civil code or something like that, but it's the process by which lawyers can use existing Institutions of the legal systems like property rights or collateral law or company law and help their clients create wealth from these resources. That's the core argument. Basically you take a social resource, the legal system, and you convert it into private wealth.
Right, so without the law, something can't be an asset in the way that we truly understand it. Absolutely. So you can think about a piece of land as just a piece of dirt. You can graze your cattle, you can find some produce.
or you can collect some herbs or whatever you want. But if you want to monetize that piece of land, that's the point, right? If you want to turn it into something of pecuniary value that you can make money with, you need title.
And you need somebody who protects the title for you, right? And so it's a legal construct. Property rights is not a thing, but it's a legal construct.
And that's the very idea. And the same is true for other types of assets. But land always is, I think, conflated with property rights because we have naturalized that relationship so much.
When you think about... intellectual property rights. Like patents, I think it's obvious because you need a state act to have an intellectual property right, like a patent recognized and registered.
And so it's really the state that creates that right and only then can you use it for monetary gain. Right. And I think I'd like actually just to probe that a little bit as well, because one of the, I think, most important points of that is to kind of dissolve the kind of false boundary between sort of markets.
in the sense of being free markets as defining capitalism versus the state, which is sort of required to make them function. So could you talk a little bit about that sort of relationship between the state, the law, and the functioning of capitalism? So I think most economists would concede that you need property rights and contract enforcement for a market to work.
But they basically reduce this to, well, almost naturalized again, just attributes of the market. rather than an entire legal system that requires not only the allocation of property rights but also the legitimacy of property rights, that requires courts, that requires an adaptation of existing law to new types of assets, the whole package. So what I'm basically saying, you need a complex legal system for capitalism to arise.
And when you look at it historically, you can see that there's a strong correlation sort of happened in lockstep, the evolution of capitalism. capitalism and the evolution of the nation state with its national legal systems. And in effect, I'm basically saying private actors can create new types of capital assets with the help of the law.
You need sometimes the exposed vindication. So it's not that the law dictates what capital is. It doesn't sort of produce it itself, but it sanctions the kinds of assets that are being produced by private agents, particularly by lawyers on behalf of their clients. I want to talk about the idea of the corporation, because I think often when we're talking about sort of capitalism and climate change, things come to light.
You know, the sort of very famous fact now about, I think, 70% of emissions coming from about 100 corporations, things like that. We have a sort of generalized sense of the corporation as equal to companies in a general way. But could you talk about what makes the corporate form so specific and distinct? and how that sort of lends itself to the kind of scale of impact that a corporation has on the world. So the corporate form is one of the five modules, as I call it, of the Code of Capital, so property rights and the corporation trust, collateral law, contract law, bankruptcy law, but you don't really need much more, so that's also interesting.
But the corporation is key for a reason because it's a particular form, a particular legal form to organize a business. You can organize a business in all kinds of ways. You can have a simple partnership, you can... You can have a co-op, but you can also have a corporation.
The attributes or basically the characteristics of the corporate form evolved only over time. The earliest commercial trading corporations are actually public-private partnerships. It's the English East Indian Company and the Dutch East Indian Company. They were chartered by the Crown in England and by the General Estates in the Netherlands. They were funded mostly by private money because they wanted to do commerce in India, but they were also given cannons and the authority to govern over people, so it was both.
It was clearly both. But by trying out how this worked and how people could make money with a business organization, Some of the core features evolved and one of them is first of all that a corporation is a legal person. It's recognized in law almost as you and me.
It's a person. And that's really important because that person can own its own assets. These are not the shareholders'assets. The shareholders have a right to the corporation but not to the assets of the corporation. So the corporation can operate as an incubator.
The assets that are owned by the corporation can just grow over time. And then over time also the corporation was given an indebted... indefinite lifespan.
So when we go back to 1700 when the East Indian companies were established, they had a lifespan first of only 10 or 20 years and had to be rechartered. And that was common actually until the early 19th century. New York State had its first corporate law in 1811 and said, this is for 20 years. You're a corporation for 20 years and come back and talk to us. And then it didn't take that long during the course of the 19th century for all these restrictions to fall.
fall away, now a corporation has an indefinite lifespan. It is a legal person. It grants its investors and officers limited liability.
That means that for any obligations that the corporation has, could be creating damages for others, pollution, other damages toward victims or contractual liabilities, only the corporation is responsible. So if worst case scenario comes along, you just put the company into insolvency. and you walk away as a shareholder with the money that you have made before, right?
So it's a vehicle to insulate the investors, the shareholders behind the corporation, from the responsibilities of the activities that the corporation undertakes. But I think it's important to see that the corporation is not one thing that was born with all its attributes at one point in time. These developed over time. They're flexible, malleable. Some countries did some things earlier, others later.
We have a pretty standardized form today. But even today there is a lot of debate about what should be sticky, when can we maybe make exemptions from certain types of attributes. So there's lots to be done still, I think.
And do you think that in the context of climate and ecological crisis, that something like limited liability is a legitimate principle to operate by? Or do you take issue with it for any of the kind of implications that it has? I mean, I think it's remarkable that we still just hold on to this principle of limited liability.
for investors when investors knowingly invest in brown assets, that is, assets that pollute, right? So if we go and just think oil is scarce right now because of warfare and other things, we can make a lot of money by just putting more CO2 into the atmosphere knowing that it's polluting and knowing, as you said earlier, that many of the industrialized companies that we know are the major polluters. I'm not sure why we give them limited liability.
And I should add to that there have been interesting law cases recently. one of them by the Supreme Court in the UK about Shell Corporation, where they haven't quite held the investors behind the parent company liable, but they basically said that the mothership, Shell parent company, is liable for damages produced by its Nigerian subsidiary. They basically polluted the waters of some fishermen.
And what was so interesting about this case was that the Supreme Court said it's basically the duty of care. beautiful common law principles that basically says you have to take care that agents that operate on your behalf do the right thing too and if they create damages to others we will attribute them to you. It's a principle that we have a little forgotten in the corporate context because once a subsidiary has been created the courts have very often created treated it as a separate legal entity and said the parent can't be responsible for it and it's very complicated to pierce through that corporate veil and say we want to hold the parent liable. And in this case, they didn't even talk about piercing. They just said this is duty of care.
And so we're using old principles that have been around for centuries, older than the corporation itself, and saying, you know, you have to take responsibility for your actions as a parent company. So it's a good step in the right direction, I think. Yeah, definitely.
I want to touch on something that you mentioned there, which is, I guess, the complexity of the structure of a lot of contemporary corporations, so some of them having dozens, if not more, sort of subsidiary entities, but also the way that that allows companies to sort of pick and choose where they want to be located, even if that has nothing to do with where their operations are. So could you talk a bit about how, I guess, how that sort of came to be? and how that's, I guess, exercised by corporations today, often, I guess, for bad. Yeah, I mean, one can tell different stories here.
So let me just go to the principles. The first thing is a corporation is a creature of the law, right? It's also not naturally born. The idea to say that some organization that we invent, it's a kind of a fiction that this has legal personality and can be treated in many ways like a natural person, is a legal construct.
And therefore... the first instinct would be well then the legal system that bestows this organization with these rights and privileges has to say whether you know it is a corporation right which basically means you are a corporation in your home jurisdiction but when you do business in your neighboring country you may not no longer be a corporation which can have major ramifications because it could mean for example that all the shareholders behind the corporation are now liable because when we strip away the privileges just because they move across the border then it no longer has these privileges And so there has been a time, and until very recently, some jurisdictions, including Germany, my home country, said, if you do most of your business and have your headquarters in Germany, you have to be incorporated as a German corporation. And the European Court of Justice said this is a violation of the principle of the free movement of capital in persons. And so Germany cannot deny legal personality and the corporate attributes to a corporation from the Netherlands or other EU member states.
So, I think that's a very important point. And so that principle that jurisdictions can say, you are a corporation, if you want to do business in my territory as a corporation, and you have your headquarters here, you have to be a German corporation. You can have a branch operation or something, but not the main ship. Once we have allowed this, it has given corporations much more leeway to pick and choose the jurisdictions where they wish to be incorporated, as opposed to where they want to do business. So the famous example here in the United States.
States is the small little agricultural state of Delaware. That's what it was still in the late 19th century, captured most corporations. Why?
Because of course the first corporations were in New York and New Jersey and Massachusetts, but there were labor unions and political upheavals and there was a lot of contestation about what the contents of a corporate law would be. Delaware had nothing. I mean, it just had an agricultural state.
And they figured out if they wrote an interesting corporate law that was nice to shareholders and managers. that could capture the corporations that they have to pay a fee to register in Delaware. And that actually helps them also fund their state budget. And so the Delaware Code was born, borrowed, of course, heavily from New Jersey, but then basically became the leading corporate law in this country, which means that corporations are incorporated in Delaware. Hardly any do business in Delaware.
They do business in New York and California and Illinois and move around and basically roam the nation and roam the globe with that. jurisdiction in hand because other states were denied the right to say, you're not a California corporation, we won't recognize you. They had to recognize them under the Constitution which says we won't have one national market, the Commerce Clause, so you can't deny the legal attributes. And then this has been projected to the globe. So most countries today would recognize a corporation that was incorporated under foreign jurisdiction as long as that corporation complies.
with those requirements, we will recognize you as a corporation here. That includes even, let's say, all the tax havens. The Panama's and Cayman Islands, the Jersey's, all those tax havens. That is, we all know that most of the corporations that are being incorporated in these jurisdictions don't have employees. They have the same board as every other corporation in the same jurisdiction because it's all fake.
The only reason that they're there is sort of to transfer funds through them so that they can avoid taxes. And yet, let's say countries like the US or Germany, most of them in principle recognize them as corporations and therefore recognize the formal distinction between the subsidiary and the mothership or any other subsidiaries. Not all do, but that's the principle.
Interesting. Yeah, I think in the book you use the word sort of footloose to describe capital in that way. And you touched there, I think, on an interesting question about sort of the legal The system that these companies do choose being recognized by other states. So how does that function practically at the international level? If there were some kind of conflict between a corporation and some other entity, even a state.
What does that look like in terms of who gets to actually decide the rules by which capitalism functions at the global level? That's a really good question. I think it's a question that is not asked often enough. And people don't know about these rules. So there's a set of rules that is called conflict of law rules.
international private law, we call it in the civil law jurisdictions. And these rules govern the law that is applicable when potentially more than one legal system is in play. It's mostly written for courts, that body of law, but it's of course used by lawyers in anticipation of a potential dispute to make sure that a transaction on intermediary is in the right jurisdiction.
And so in principle, every country can decide how to... to govern this potential conflict between one or more legal systems. So let's say we have a corporation from the UK that does business in the US, and somebody questions whether this is actually a corporation or whether you might have a claim directly against the shareholders.
In that case, a local court here would say, which law is applicable? Do we apply English corporate law? Do we apply American corporate law or Delaware corporate law?
And the general... rule is the domestic court that looks at a case will decide the conflict of law rules. But most countries have now basically allowed a lot of flexibility in giving the power to the private parties. So under the rubric of private autonomy, actors can decide where they wish to incorporate.
They can of course decide by which legal regime their contracts shall be governed. Indirectly, they can even choose the jurisdiction for property rights, which used to be the fundamental territorial nation state thing to do. All assets are now most rules said, that are within our territory, will be governed by our national law. But then you have lots of assets that don't have a location. So you have all these financial assets, where do you locate them?
So you invent new rules, and new rules then of course can be gained such that you have actually a choice. Because where you incorporate the entity that issues the assets is a matter of choice. Who is the party to the contract and by what law do we govern the contract between the account holder and the account manager?
is a matter of choice. And so we can actually choose property rights too. And so this basically then from the perspective of a sophisticated lawyer and his client or her client, we can actually look at the globe and say, it's like a menu in a restaurant. You can pick and choose the different items that you would like to have.
You pick and choose the different rules by which you wish to be governed. Must be nice. But of course, brought to the very extreme, I always like to save all of. of us picked and choose the law by which we wish to be governed, we wouldn't have a community anymore.
You can't have a democracy. You can't have a polity. You can't have a collective anymore.
Everybody's picking and choosing the laws. And of course, you have to have a lot of resources to be able to do this to begin with. But I think it's a fundamental challenge also to our ideas of self-governance as a collective.
And so funny, because it's obviously justified on the basis that the corporation is this person, and yet it has many more rights than the average person. Yes. Yes, and of course, yes, and we're also then invoking like individual freedoms, and yet the corporation is usually a business organization with a bureaucracy and like a budget behind it that rivals nation states.
But they've been able to attribute this ideology of freedom and markets, and we also know that in the transnational space, most of trans-border investments and trade flows are intra-firm. They're not between, but within firms that have their subsidiaries elsewhere. So...
This entire ideology of the market is a little hollow. And beyond that, I think we touched on it there briefly, but treaties and bilateral treaties, thousands of them, a big way that these questions are often resolved from the outset, I suppose. You just pre-agree how the interactions will work. But something that I think I was very shocked by when I learned about it a few years ago is the actual systems of arbitration that are built into many treaties. Basically the fact that through them a corporation can sue a government for enacting policy within its own borders.
So could you talk a bit about that system in the context of climate and environmental damage? This is basically yet another layer in our complex legal system. So I started basically by talking only about domestic law, domestic corporate law, domestic property rights, for example.
And most countries have provisions in their constitutions and other laws that protect individual property rights holders, individuals and corporations, from expropriation. And then we have basically ratcheted this up and brought this into the international. legal framework.
Now we have of course conventions that protect property rights of individuals that have also been extended to corporations but what has been new and was invented really in the NAFTA Treaty of 1994 is that you institutionalize a dispute settlement mechanism in international law. International law being in principle the law that governs the relations between states. They're both subjects of international law so in the international rule Public law, rearm, they're only states, there's nobody else. Indian with human rights, but in principle they're states.
Now the states decide amongst themselves that they should give a right to a foreign corporation to sue the host state, outside the host state's territory, for expropriation or unfair and inequitable treatment. And that has, of course, empowered cooperation to take to court and sue governments, not only that. you know, really expropriate because the expropriation clause is actually not that often invoked.
We know pretty well what expropriation is, but unfair and inequitable treatment is a bit vague. And that's of course very nice when the more vague it is, the more you can interpret it and try to make a case out of this. But you can still get expropriation-like damages. So with this framework, and as you suggested, these are thousands of bilateral investment treaties.
Why? Well, they were trying to do a multilateral investment treaty in the late 1990s. And a coalition of NGOs and developing countries blocked it. And so the global north, the US, Germany, the more powerful countries in the global north said, well, if you don't like the multilateral, we do the same bilaterally. And that's why they basically had now a bilateral investment treaty with every country, which is why we have close to 3,000.
They've declined a little bit because some countries have canceled them, but they're out there. And these treaties basically say we protect. The property rights of foreign investors in our territory allow the foreign investors to go out and sue us in an arbitration tribunal.
And there are different regimes how these arbitral tribunals are governed, but in principle you have each party selects an arbiter and then they select the third one and they preside over these things. Most of the arbiters are actually recruited from commercial arbitration. So they don't have this idea that most judges... still have of kind of a publicness of agents of the rule of law under a constitutional regime. So they were very quick in saying, you know, even a violation of constitutional law is not basically an irrelevant factor in the arbitration because it's an international treaty and there is an international convention that says international law has actual priority over than domestic constitutions.
But when that treaty was written, we didn't have these bilateral investment treaties yet. And we had not given private parties yet the power to sue states on that level. So if you put this together with what I said before, I think you have corporations, if they're sophisticated enough, and many are, they can not only pick and choose their jurisdiction where they want to do and have their corporate law, they can also pick and choose the jurisdiction where they have their bilateral investment treaties.
And they were even able to do this ex post facto. So they have a dispute with a subsidiary and they know the legal regime is not so great. So then they create another subsidy or in another jurisdiction and move the entire dispute into its hands and then use the protection they get from that treaty. So that has, you know, one of my colleagues has said, Julian Arato, he has made the comment, this makes corporations really lawmakers in their own right.
Once you have so much choice over the legal system, which should be the rules by which we are all governed in a kind of equal manner. if you can pick and choose them in that fashion and arbitrate arbitrage around the legal system then you become a lawmaker in your own right. And why, maybe this is a really obvious question, but how did that kind of a system come into being if it's something that states have to have agreed to and have designed? Because it seems a little bit like shooting yourself in the foot, opening yourself up to a fossil fuel company suing you for having a climate policy.
Well, I think the countries in the global north were taken a little bit by surprise because they thought they were only making the world safe for their corporations. And didn't quite foresee that others might come and go after them as well. I mean, that's like the typical arrogance, right? You're trying sort of to impose your legal regimes, your principles to the rest of the world. We've done this through colonialism in one way.
We're doing it through bilateral investment treaties today. And I think many countries have realized then, once they have been objects and targets of these suits, later on that it's infringing their democratic powers and trying to get out of them. Thank you.
But they typically run for 10 years. You can't easily get out of them. And they grant for many of the rights that have been created under them. So it's a bit complicated, but some kind of rethinking is happening.
Right. Because in the UK, I think February, March maybe, they announced that they would withdraw from one of these treaties, the Energy Charter Treaty. Several countries have done that.
Right. So could you talk a bit about that and your understanding, I guess, of basically what that treaty has done, how it's been used? It would be great to know. And secondly, why you think that withdrawal is happening in this moment? Why now and at such a scale?
So the Energy Charter Treaty is actually a multilateral treaty, so many countries are parties to it, and the idea is that oil and gas and other natural resource companies are protected under that treaty. These of course have always been the primary targets of expropriation if expropriation happened. I should add to that we haven't seen like waves and waves and waves of expropriation always through history. They happened after the Iranian revolution, they happened at certain political moments, but it's not that foreign investors are constantly under threat. But putting that aside, the energy charter tree was basically protecting this natural resource sector, which is of course critical for the industrialized world, and created also this dispute settlement mechanism.
And as a result, things happened like the Netherlands says we want to get out of coal. And the German company LWE sues the Netherlands for infringement of its investment because it thought when it invested in the Netherlands it could always be in call in the Netherlands. And so if you change your expectations, that's now an unfair and inequitable treatment.
Which of course is crazy because I mean like most constitutions and constitutional courts in most countries would agree that countries can regulate. and change their laws with some transition periods, right? But you're not stuck with the law that you have necessarily. And that's what some of the investors have been trying to argue and many of the arbiters have given them, which of course is also private arbitrations, also business.
We have to recognize them, right? They also would like to have more suits. rather than they're not civil servants like judges are. So, no, but I think there have been a number of cases where countries, in Europe in particular, who wanted to do a transition, a climate transition, were sued by companies from neighboring countries or, you know, who had just a different jurisdiction.
Sometimes it might have been their own countries that just were suing from a neighboring country. And so realize that they couldn't do this if they stuck to the Energy Charter Treaty. And, of course, they don't want to pay... expropriation because that makes it almost unaffordable to do the climate transition for states. And so their solution has been to terminate the Energy Charter Treaty.
Spain started, France has done it, Germany, the UK has now done it. So a number of countries have given notice or have already gone out of the treaty. Again, some transition periods, et cetera. But I think it's a very strong signal that they're saying, you know, we don't want to be, we bind our hands by a couple of companies.
It's interesting, and this is a very surface level read, so correct me if I'm wrong, but it feels like the, because the Energy Charter Treaty has over 150 signatories, is that right? But the countries that are now either announcing their intent to leave or kicking up a fuss about it all seem to be relatively wealthy, powerful, influential countries in the global north, and not many of the countries that have probably received some of the sort of. harshest outcomes from that treaty and do you think, you know, what is your understanding of the reason that that might be and is that, you know, of concern is it possibly going to set up a kind of, not that this doesn't already exist, but a system in which, you know, there's very different treatment of different countries at, you know, the international level. Yeah, I mean that, you know, I'm afraid to say that is the case anyhow.
Yeah, exactly. As I was saying it. Well, but I think...
you know, I think for many developing countries emerging ...the emerging markets signing these bilateral investment treaties was mostly a photo op. And I think many didn't realize what they were getting themselves into, because we've signed so many international treaties, and they all do, and most of them have arbitration clauses, but between... States. They're rarely, if ever, invoked. We negotiate these things then or let it pass.
Only in really bad situations do we go maybe to an international court. But of course, with these commercial arbitration mechanisms, all of a sudden the corporation... corporations had basically a lever to go against these states. And of course the lawyers were really excited because they could bring cases against states.
So I think the repercussions of this new mechanism, of this investor-state dispute settlement mechanism had to be felt first. It took a while for us to realize this. Some of the weaker countries of the Global South have tried to get out of some of the bilateral investment treaties and the framework for the dispute settlement, the exit treaty. Haiti, Ecuador has done so, some have had also really bad experience.
So it's not only the countries in the global north, I think it's actually a very positive signal that the countries of the global north are following suit and are realizing that a system that they helped basically birth, that they're trying to roll this back in the name of their own sovereignty and their own democratic self-governance. And do you think it signals, I guess, a more fundamental, this is a big question, but a more fundamental shift in the nature of capitalism as we understand it? Obviously this all came out of the height of the globalization era of the 90s. And it's interesting to me that it was under Trump that we dropped the investor-state dispute settlement system from the renegotiation of NAFTA. And does that tell us something about the changing nature of capitalism?
Yeah, I mean, what we certainly are seeing is the backlash. And the backlash tends to be, you know, can sometimes be also more violent or more, you know, but I think there's certainly a backlash against the regime where many people and I think you know that's where I'm just I understand many of the followers of Trump or similar political figures they just know that they're living in a country that people say is still democratic but they have no control over their future. And there are certain things that symbol that lack of agency even as a democratic collective body. So we've just given this up. You vote for them, you vote for them.
for this party, you vote for this party, nothing happens. Nothing happens. And then you find you're looking for explanations and some explanations might be oversimplistic, but they're given to you. And one of them might be just international trade.
You know, all the jobs go somewhere else. And they have, right? So they have gone somewhere else. Or we can't do this because otherwise we will be sued by these investors.
And you hear this several times. And you see how corporations come to your communities and they, you know, strip the assets and leave after it didn't work. And you have these different... fund companies sitting there.
So I think people have this gut reaction against a system that they can't control. I'm not sure most of these people who have that gut reaction would say we don't like capitalism. They might just sort of focus on certain types of issues.
I would say that these are outgrowths, logical outgrowths of our capitalist regime. So I'm not surprised that, you know, I think I see Trump as a symbol for this kind of backlash, gut reaction against capitalism. against a system we can no longer control.
And some of the stories about there's no alternative, like Merkel or Obama says, you know, have hope. But you know, that's all fake. It's so fake, right?
Somebody finally doing something, saying let's just get rid of these regimes. You know, I think it's understandable. You can certainly explain that kind of reaction.
I think we also should roll back some of these regimes. And sometimes you need somebody who's doing this as loudly as Mr. Trump tends to do things to. to get started on these conversations.
Do you see that as a kind of potentially irreconcilable tension between, I guess, the demands and the needs of capital and... The ability to sort of exercise complete sovereignty over your state, your region, for example. It feels like they're often in tension, but is that something you think could be sort of reconciled with changes to the law, for example?
Well, I think we have tried to reconcile it after World War II. So I think many people in the late 40s and early 50s realized that the World War just didn't come from nothing, that there were lots of economic crises beforehand, and that also the political polarization of the... Early 20th century had something to do with a pace of industrialization and an upheaval for people that one had to think about and control, right?
Which is why we created a system for capital controls in Bretton Woods afterwards, which is why many countries decided to have a bigger welfare state and something like a social market economy, not a free market economy like the Germans tried to do it, etc. Britain had lots of companies socialized. It's like post-war, it's still kind of this strong state.
And then I think, you know, people usually point then to Thatcher and Reagan, so that's when it stopped, but you can actually see already in the 50s, late 50s, 60s, how the system unravels that we put in place after World War II, right? So private actors are using the private law mechanisms that I describe in my book, the Code of Capital, to get around the regulatory constraints that we created. So the New Deal in capital markets control, you regulate the banks, you regulate capital flows.
Now you create swaps, you know, and you sort of set up sort of a new entity that is, you know, doesn't really look like a bank, does banking, but maybe is not recognized as a bank by the regulations, so can do the banking stuff without the regulatory cost. And so slowly, but surely, you erode the regulatory structures that are being put in place. I'm actually working on a new book where that's sort of one of the puzzles that I pose myself is how is it that a legal system that is coded in law is so resistant to legal governance, right?
Because it's not that we haven't tried. We usually try by means of public regulation, like regulating of banks and capital markets and maybe the environment, but then we allow the private actors to use the private law to get around it and we enforce that too. So we're living in a schizophrenic world. The same state power that on the one hand says you can't do this, on the other hand endorses all the legal arbitrage strategies that get around the constraints we put in place. And so if we continue to do this, then I think the tension will increase and I don't think we can reconcile it.
And so my argument is actually it's not enough just to do the public regulations. We have to think about reconciling our normative premises for how we govern ourselves in public and private law. Can't just say that let them do everything and we will back it ever but we would backstop it anyhow and then sort of patch up some you know some It would just put some tapes over the worst in a cracks in the system once in a while after a crisis It just won't fix it. So would you say then that? attempts to kind of address the climate crisis by Setting targets and trying to sort of regulate emissions at a national level or something like that a very classic approach is sort of fundamentally hemmed in by what you've just spoken about there, this kind of inability to actually sort of exercise that regulation if at the end of the day we allow as this entirely private legal system to kind of proliferate and actually define things.
Yeah, I think it's limited, the effect is limited. I mean I think there was a time where you know public regulators were a bit more powerful but it's always it's temporarily that it works and it also requires the coordination with others because you know what do you do you just you set up your operations in a different jurisdiction you do the same thing. If you don't allow it here, then the argument goes now with this competition, we don't want to lose our company, so we have to lower regulation too, we have to lower taxes, etc. etc. So I think there are inherent limitations, and then you see in the political realm also the argument, well then let's do it the market way. Then we create green labels and green assets, or we do carbon offsets, right?
Basically we're trying to harness the powers of the market mechanisms, but... You know, I think when you look at them and sort of the evidence that we have now in terms of, you know, how much of that is actually true, what they tell us with carbon offsets, for example, we know the green labels is mostly fraud. I think that's hard to refute.
We've lost 15, 20 years in trying to get the labels right, and the airlines are still polluting at the same level and telling us we should all feel good about it. And I think we're doing something similar with carbon offsets, right? This is, you know, what you said before. Doesn't the...
the state shoot itself in the foot if it allows the stuff, the state is part of it. Let's just be open about it. It's not that state is on the other side and capital is there.
Without the state, capitalism wouldn't exist and the coding of capital wouldn't be allowed to that extent or it wouldn't be feasible. It wouldn't be feasible to that extent. And so I think At every step along the way, the bilateral investment treaties, the protection of property, the recognition of corporations, at every step along the way the status is there. And then with COP28 they allow the CEOs from the big oil companies to join the table.
they're always in it. So do you think that there needs to be quite significant changes then to legal systems as a sort of precursor to actually being able to have effect on the climate crisis? And if so, what might some of those changes look like, if you had to pick the top three?
Well, that's of course a really, really hard question because obviously if we wait for the legal system to change, nothing will happen, ever. Because legal systems are sticky, they've been around for quite some time. I mean, not forever, they're not that old, but they're 200 years old and they have grown rather complex and the more complex they are, the more difficult they are to change.
So I'm not advocating for let's change the legal system first. But I'm But what I am saying is that we certainly have to try to put some stops on the excesses of the ways in which the legal system is actually used to legalize and legitimize certain types of actions that are clearly harmful. That also requires political action.
And at the same time, I think we can also harness existing laws for different purposes. So I think advocates of capitalism and capital holders, capitalists, have always repurposed legal rules for their own benefit. benefits. And so you can also repurpose legal rules for your benefit.
As I mentioned, the duty of care, you know, for holding shell parent company liable for pollution done by the subsidiary is a wonderful example. We can't really do this on a case-by-case basis only. That sounds also crazy because it took the fishermen from Nigeria like 13 years to get that ruling, you know. We don't have that much time left. But when you look at historical processes of transformation, including transformation of legal systems.
that are part of the social system, we're always transforming. We're always in those processes. And I think there are ways in which we could accelerate these processes by being more focused and strategic about the kinds of things that we have to change.
So if you ask me which things should we change, I mean, certainly we have to get out of these investment treaties things. So that's a no-brainer. I think I would encourage more courts to think twice about granting limited liability, just like this.
And then at the same time, on the positive side, I would encourage many actors to think about how to use the law to create their own structures, whether these are new forms of companies, new ways for financing these companies, basically to start building an alternative infrastructure. That, of course, is a very small scale in comparison now, but can grow over time. And I think by experimenting and normalizing alternatives, we're also creating a path forward. And do you see the seeds of some of those alternatives?
anywhere in particular? Are there examples where some of these alternative forms of enterprise, for example, are being scaled up or is that still relatively far away from where we are now? I mean, most of them are much smaller than the big corporations and not surprisingly, most of them make less money than the big.
corporations, but they're also not coded just for capital. They're trying to pursue different purposes, right? So I think I see basically two models currently being pushed. One is a new attempt again to think about cooperative forms of organizing firms. firms.
There's always the financing question dooms large and for them I think we really would need a different financial ecology. People are talking also about mutual, again, we've had them all before, different forms of financing vehicles, public banks, etc. On the other side you have sometimes companies like Patagonia, as discussed here in the United States, a lot of apparel company for going hiking outdoors.
They have tried different forms of financing. forms of alternative business and most recently have decided to set up a very interesting structure whereby basically you have the corporation as such, the one corporation. It's voting stock.
It's only 2% of all shares, but the voting stock is firmly vested within a perpetual purpose trust. So the trust is an old English kind of vehicle. It's like the corporation that shall exist forever. And so you have the purpose trust.
And it dictates what can happen with the company. And of course you have a board of the Purpose Trust where the old owners still sit. And then you have a co-op that owns all the non-voting shares but gets all the revenue. And they have a charter that says you have to spend the stuff on environmentally good causes. So now we basically have a corporation that operates for the purpose of creating profits for environmental causes rather than shareholders.
But I would say, so this is an interesting form. And I think many other Companies that have grown big and where maybe owners are now departing or sort of to retiring you could imagine setting something up like that but in order to create the first of all the the revenue flows to set this up you know you are kind of a capitalist company and then you change your structure, as many of the foundation companies in Germany, Denmark, etc. have done as well. But it's not a bad model to think about, because we have many grown-up companies that could do something like that. And that's the easier path than trying to do a co-op startup without money, you know?
So I just have one more question. And I wanted to ask about the experience of the pandemic in which we saw quite a devastating outcome in terms of the production of vaccines and the limitation of how vaccines were distributed around the world based on intellectual property law and the idea of a patent. And it made me think a little bit about how that applies to some of the technologies that we need for...
the transition to a sustainable economy at a global level, it's a global challenge. And how, as a legal scholar, do you think about patents, the justification for them versus whether in this kind of an emergency context? maybe they actually can't be justified. Yeah.
I mean, we do even have in the law sometimes waivers of the patents or ways in which we can force patent holders to share what they have. But let me just step back for a moment, because what patents do is that they create a monopoly right for the patent holder for a period of time, not forever, but for a period of time, to be the only one who can basically benefit from the economic value of that patent and prevent others from using it or require... a fee if they hand over a license or something like that.
So it's clearly a legal construct and when and for what purposes a legal system grants a patent is in principle a question that the legal system has to decide, except of course we have an international treaty, the TRIPS treaty that binds countries to offer this kind of protection to patent holders. The justification traditionally has always been people won't innovate unless we reward them. But of course the innovators are human. humans.
People always innovate, they're always creative in arts and in science, they've always done that. The point again, just with the land, you can use the land for grazing cattle. You can't use the land to make money unless you have the title. The patents, all the intellectual property rights are for pecuniary gains, for making money. That's why they're so capitalist, right?
So I think we have to understand this because, and the second point I'd like to make is that in many areas, particularly farmer, but to some extent it's also true in technology. Much of the basic research is publicly funded. Because the basic research is too risky and too uncertain for private parties to put too much money into it. Once you see the chance of it being valuable in terms of monetary terms, they want the patent. And then they want to have the exclusive revenue flows.
And I think we have to ask ourselves very much so whether this is justified for, let's say, technologies that are indispensable for making the climate transition. have mandatory licenses. We did this sometimes also in pharma. We can have waivers of patents. We can reduce the lifespan of a patent.
And we could also encourage firms to do like what they do in generic drugs with generic technology and not enforce the patent holders. And I think that would be legitimate given the problems that we face. I think we'll leave it there.
But thank you so much for joining us on The Breakdown. Thank you for having me.