 Things can be coded as capital, it's the right legal coding. So the question that we now have to ask is really who has done it. We've talked about how capital is coded in law, how different legal institutions or the modules of the code of capital like property rights and collateral law, have been grafted onto different types of assets, onto objects, ideas and promises to future payment and we have to now find out who is doing that job. And I'm basically arguing the private attorneys are the masters of the code. You might be puzzled by that because the real law makers, of course, are legislatures or in common law systems in the UK or in the United States and other common law jurisdictions. Judges also have explicit power to make the law. But most transactions that people enter into are never tested in the court of law. They happen outside. And so if you use your bargaining power and you push a little bit what you would like to accomplish and you make the argument that in principle this should be still consistent with what courts or legislatures have told us in the past, then you can actually push the law itself as long as the other party buys into that and complies. And if it doesn't comply, then we can go to court and test these principles. But in many cases courts might actually go along. So if most people think that law is really made by the state, there is, of course, truth to that because ultimately the state has to back law so that it can be enforced. We talked about the centralized means of coercion. That's really what modern states are all about. But who has access to the means of coercion and what kind of coding strategies might be used without ever going to court or without ever asking the legislature to back these laws. So where do they come from? An independent legal profession emerged only in the modern times in the 16th and 17th century in England and later on on the continent as well. In England you found attorneys who would advise private clients rather than a ruler or a feudal lord or sit on the bench as a judge. So this is a different type of lawyer, right? You're not a judge, you're not hired by the state, but you advise private clients. That kind of independent legal profession emerged in the 16th, 17th centuries with several thousand of people calling themselves lawyers and advising private clients. Very often these attorneys were recruited from the landlord class, if you want, because these were people who were literate, they had an education, the second-born sons couldn't get the property from their fathers and so they would go into the medical profession, the legal profession and others accounting later on as well. So that's where mostly we recruit lawyers from that has changed over time, but I think in the early days it's fair to say they also come from the upper classes and it might not be so surprising that they have a cognitive bias at the very least. An independent privately profession earns fees. It earns fees by charging their clients and whoever can pay better fees might also have a better lawyer who will invest more time or has more lawyers sitting on the same case and giving that person better advice. Lawyers are value creators. They're not just ensuring that their clients are compliant with the law when they take certain actions. Some have argued that lawyers are transaction cost engineers so that in principle private parties might enter into transactions themselves and just do all the business with themselves and without having the lawyers on their side. They might be able to do this, but I think many of the transactions that they enter into really need legal advice and lawyers actually offer a little bit more than just the engineering. They're pushing the limits. They're suggesting new materials if you want. They're recombining existing materials to create new value. Lawyers don't like to hear this. Most lawyers do believe that they are in the packaging industry if you want. The client has an idea. They're packaged in the law such that it doesn't violate any principles of the law, but in truth I think they're doing much more. One metaphor, one picture you can think of is think of the existing rules and regulations that might constrain what we can do that say, no, you can't go further than this or this is prohibited. Think of them as the scaffolding, like a scaffolding around a building. And what really good lawyers do, they find new gaps in the scaffolding and use the modules of the code of capital, the property rights, the contract law, secure transaction law, the trust law, the corporate law to push new assets, new ideas through the gaps of the scaffolding. It's important not to conflict with the scaffolding because then the transaction might be void and then you can't enforce it in a court of law and you lose the benefit of having the law. But it's also important to fit through the gap because then you avoid the costs of legal constraints but you're still using legal institutions, the module of the code of capital to back your transaction. So this might sound a little schizophrenic and it is, but we have basically a duality of law where we have constraints and then we have enabling legal institutions and we can use the latter to get around the former and lawyers know how to do that. If you just step back a little bit, we have encountered many of these issues in the past. We have looked at property rights, how they have changed over time, how firms were coded into corporations and even before legislators enacted statutes for a corporation, lawyers had figured out how to mimic many features of the corporate form. In the end the legislation put a standardized form on the shelves so that lawyers and clients could easily use it but many of the developments that gave us something like a publicly traded corporations were already anticipated in the transactional work that lawyers did. Even if the lawyers had not formed a fully legal profession, were not fully organized, might not even have mandatory legal training, there were very often intermediaries in figuring out how to make sure that their client had a better right and could enforce it against others, not just with the guns but also with the help of the law. On the continent, both in what we now call Germany or France, the rulers, the king of Prussia or the monarchs in France were much more careful in allowing a private legal profession to develop. They had their tabs on it. In the early 18th century the Prussian king really purged the legal profession in Prussia and halved them because the sense was that they just do a lot of stuff that the king cannot control and that tells you something. It tells you something that lawyers can be actually quite powerful that they can do things against the interests of the state but also perhaps against the interests of democracies that are self-governing states in modern times. In the United States we saw a little bit of a wild west of lawyering for most of the 19th century still and of course earlier as well where people came from Europe and some of them had legal training that they brought with them. Some just learned on the job and they were out there in places where you didn't really have a state yet, not really administration and still writing deeds to be able to give people some rights or have some way of solving conflicts that might arise between them in a peaceful manner. Law school training in the United States became standard only in the late 19th century when basically the big law firm said we would like to have some pre-training by our lawyers and Harvard offered legal training. Many other schools popped up and started training lawyers. Nowadays we have hundreds of law schools in the United States, thousands of lawyers. The profession has increased tremendously and the competition amongst lawyers has also increased tremendously. We saw a lot of that already since World War II or after World War II. Before that we had big WASP type of firms, big blue chip firms that would advise the major corporations, the major banks in this country. But they also wouldn't admit everybody to become a partner in the law firms. Women weren't admitted, Jewish people weren't admitted, people of color weren't admitted to be partners. They might be associates but they wouldn't be promoted to partnership. So many of those who had been excluded from the club of the big law firms started building their own law firms and also would challenge the informal rules by which the big firms operated. So the big firms would not do a hostile takeover, basically buy up another company without the approval of the board or without even having talked to the board because this was just not done. And they would also have conflict of interest if they did this. But if you have a new firm that is not bound by this and you're trying to build a new client base, you might be much more aggressive. And so it was these new firms that also brought another level of aggressive lawyering to the table. In the United States they had the additional advantage that in the United States we have a federal legal system but most of the modules of the Code of Capital that I've been talking about, property rights, contract law but also tort law, corporate law, are all state law. That means you can pick and choose amongst different states and code your transaction or code your corporation in the laws of a particular state, say Delaware. But the corporation can also do business in California or in Illinois or anywhere else in the country because the courts have said that under the Constitution we have an integrated economy under the commerce clause people and entities should be able to do business elsewhere and another state cannot deny the legal status of a corporation. What this basically means is that lawyers figured out in the United States already for some time how to pick and choose amongst different legal systems to advance the interest of their clients. And they did then later transpose this knowledge, these techniques that they had developed to the globe after entry barriers to the legal profession entry barriers to trade and commerce and financial flows had been eliminated. The formal law makers of course are courts and legislatures and very often when transactions are challenged ultimately the court will say you're right or you're wrong. This is what you can do, this is how far you can go and no further, that happens. But as I mentioned before many of the transactions are never challenged and legislatures are even in the picture much less frequently because for a legislator to take action and reform a law or change something something big must have happened. Typically in the world of finance for example we see new financial regulations come after a crash. That's when you get the wake up call as a legislator you've got to do something and then they do a lot. Sometimes it's just window dressing but at least they want to create the appearance that they have now done a lot. But in most cases they basically are on the sidelines once they have enacted the law. Once you have the law on the books basically the task of adapting the law over time to changing circumstances to the needs of different clients to different interests really is handed over de facto to the lawyers. And the smarter they are the more agile they are the better their fees are the more they might be able to do. It's also worth recalling that the lawyers are not just outside the formal powers of law. They do talk to law makers. They also do talk to regulators or they do talk to tax authorities. If they have a new strategy for helping a client to get around taxes not to evade them but to avoid them which is a significant difference in tax enforcement. So if you evade you might be punished but if you just avoid that's okay. And the Supreme Court and other courts in this country have said actually nobody has an obligation in this country to pay all the taxes. If they find a legal way to get around it that's fine. And so lawyers have a niche here to provide services that allow you to get around them. They also talk to regulators if they have a new idea of creating a new instrument that might not be regulated as tightly as the regulators had said earlier they will call up the regulators and say listen if I do this will you take enforcement actions against us because the policing of much of the regulatory law comes through the regulators themselves that parties that challenge somebody in court. And then the regulator might take a look at this and say actually for this specific transaction I think you should be fine which basically means it's very unlikely that we will enforce. It's not binding on the regulator but they might they're very unlikely to enforce an action if they gave somebody a so-called no action letter. This is where a lot of informal lawmaking takes place. If I'm now got a no action letter from a regulator for this client comes along I said you know I have a new great quoting strategy and by the way I got a no action letter for this case which I can't really transpose but I think we're reasonably sure that nobody will come and do something against us if we now push the limits again. So this is how lawmaking occurs in practice through transactions in the private offices of law firms behind closed doors there's no public that can oversee this most contracts are private. We do not have access to them. We do have access to some contracts because financial assets that are publicly traded have to be registered with the securities and exchange commission in this country and with similar capital market regulators in other countries but also this was a relatively recent development. Before the 1930s in the United States people could just issue financial assets and tell people all kinds of nice stories what promises they would have and then run with the money and might be gone before anybody figured out that there was nothing gotten from this particular financial asset that it had been a fraud. So to avoid that regulation was created and at the very least if you want to issue securities financial assets to the public you have to register them with the SEC and you have to disclose certain information to the parties that will buy them to your investors and if you misrepresent you might be liable for fraud effectively but we needed the structure to contain the private coding of capital that had gone overboard because people were making so much money that they also pushed the limits of truth what they would tell investors. The lawyers are in a service sector but in a service sector of a special client. They advise clients how to create wealth by coding capital but at the same time they also have certain obligations to society because they are after all taking the law which is a social resource to code assets or do transactions or sometimes also defend a client in a criminal case. Most legal systems have some ethical codes for their lawyers which basically say your client is really important and you have confidentiality rights and privileges that we give you but at the same time you also have to be aware of the fact that what you're dealing with, what you're servicing about is the legal system and if you bring a lot of frivolous lawsuits or you abuse the legal system in a certain way we might sanction you for that. It doesn't happen all that often. You also have to remember that the courts who would have to take actions of that nature are also lawyers and in the common law jurisdictions in particular they're also recruited from the bar but it does happen and it can happen and so there is this idea of lawyers being in the service not only of their clients but also of the legal system. But just take a look at some of the figures the US alone today has a service industry in law that is estimated to be worth about $350 billion. Revenous increased in 2021 over the previous years by 14% and we were still in COVID but there were also a lot of conflicts and actually a lot of transactions were done. The top firms have about $7.5 million in equity per partner and entry level associates who graduate from a law school and just go in the law school law firm market they earn something around $200,000 per year a little less in Europe they're still catching up but that's basically the enterprise that you get and on top of that law firms have started to pay bonuses to associates and partners who had done particularly well in the last year it's almost like an investment banking business where the more money you bring in the more money that you get and some lawyers even have claimed that they would like to be paid like investment bankers not by hourly rates but basically by the money that they make and that turns of course the whole idea of a legal profession that is also in the service of the law and thus the people in a democracy it turns it a little bit on its head now I should also say of course that there are many lawyers who are devoted to other things to public interest causes to human rights the civil rights lawyers of the 60s and 70s they also coded law in a certain way they used existing institution and transposed them to different applications and many lawyers are still doing that but the highest paid lawyers the elite law firms there are in the business of coding a capital since the 1990s the legal profession has globalized and that came on the heels of actually also nationalizing the legal profession so if you go back to the 1970s in the United States most firms were still relatively small most firms were operating locally or at the state level and then increasingly there became national law firms some rose to the top and basically created the model for what it would mean to have larger law firms with lots of lawyers in the same building who would specialize in different areas of the law and you could harness the knowledge of all of them and then advise really big clients on doing innovative stuff so first you have the nationalization of the legal profession in the United States on a bigger level and you see similar developments typically 10 years or so later in Europe again the legal professions are governed mostly at the state level so you had to think about how to get around this or how to deal with that to create nationally operative law firms but once you had created them they were also really well placed in some global law firms very often they opened offices in some jurisdictions some countries that had just opened up let's say Russia after the change in 1991 you would see western law firms come in and start advising on Russian law nobody had told them not to so they just did that and the law caught up with them only later that said can you actually advise as a foreign lawyer on Russian law in Russia not so clear and it was solved differently but you could see that lawyers became basically aggressive bounty hunters also of new jurisdictions in which they wanted to offer their services with the established jurisdictions like Germany or France they actually started merging with law firms on the ground again you have to create the preconditions for that to be possible because as long as lawyers were deemed to be really sort of the servants of local legal problems and the servants of local law there were some restrictions to that but this opened up as well and that paved the way for the well established national and increasingly global players to start buying up and merging with firms in Europe as well so you see this towards the end of the 1990s that you have mergers happening in a really major way many fell apart because the cultures of lawyering and the cultures of legal systems were so different that they didn't work but many also were sustained so that today we actually have a whole roster of global law firms which are defined by firms that have at least one office in a different jurisdiction very often multiple offices in multiple different jurisdictions they can harness their knowledge they can pool their knowledge they can advise on complex transnational transactions so as the clients globalized because we were removing entry barriers not only to trade but increasingly to capital as we allowed corporations to incorporate anywhere and yet do business in other countries as well we had basically created the conditions for globalization globalization wouldn't without a legal network that makes it possible to still have contacts that you can enforce and to know where the law comes from that you have to observe which regulation you might have to observe but also which laws can you use to get around the regulation so today even in major countries with their own long legal traditions such as France or Germany in core areas that are relevant for capital the market share of globalized law firms is between a half and two thirds and these areas would be merchant acquisitions which is basically when a corporation acquires another corporation or capital market law everything that is governed the questions of can you issue certain financial assets and what do you have to do what do you have to comply with etc let me just make here a little detour because lately we have been talking a lot about lawyers and what they really do whom they really serve so to start looking a little closer what these law firms the magic circle of firms in London for example is doing was the Russian invasion in Ukraine as you might recall many countries immediately started freezing the assets of the oligarchs oligarchs basically being people who were very close to the Russian president Vladimir Putin and had made a lot of money in Russia during the transition had bought all these fancy yachts and had a lot of real estate bought in London London actually was called the laundromat or the money that they had gained in all kinds of different ways legal or non legal but then legalized them through structures that the attorneys helped them to build to be able to acquire real estate in London or to invest or buy their consumption goods because of the sanctions that countries imposed not only on the oligarchs but on Russia as well many had to pull out of Moscow and many afterwards also said we have to now go through our client list because we are exposed to many of the oligarchs that are very close to Russia and maybe to Putin the government itself so Alan Overy made a public announcement that they would basically go through their client list very carefully now. Now they defended themselves however for having taken on these clients earlier by saying well every client deserves a lawyer that's of course a principle that we hear a lot and that's a fundamentally important principle when we talk about criminal law. If I'm prosecuted by the state the state has the chorus of powers that can put me into prison in some cases there's even capital punishment everyone deserves a lawyer right. In civil matters for transactions actually law firms decide which clients they take on and which with which clients they might have conflicts and they charge fees that automatically price out a lot of clients from the market to the get-go. So to defend their actions by serving the oligarchs by saying everybody deserves a lawyer is a little cheeky. The other problem with this argument is that these law firms are enormously aggressive in trying to silence anybody who was critiquing the oligarchs and in England the major tool the major weapon for this were libel suits. So people who were writing books about the oligarchs looking at the structures looking where the money came from whether it was dirty or not the connections to the Russian government they were sued by them in a court of law in London at the very least they were delaying the publication of their work and very often forced them to make even just minor changes to show that one and lawyers advised them to do so. So many of the magic circle firms had lawyers who were experts in English libel law and pushed these kind of cases. So we're basically getting through these scandals. Crisis very often reveal what is actually happening underneath and there might just be the tip of the iceberg. It might be the worst apple and there's nothing else underneath but nonetheless crisis give us a good entry point to take a look at what lawyers actually doing and we're having the top law firms in the UK also in the United States involved in many of these transactions. That comes I would say after a long period in which law firms have aggressively tried to create market share where they have ratcheted up the fees and they also have ratcheted up what the lawyers earn and now they have to keep up going keep up getting income so they can meet their expectations and that creates a dynamic of its own as it does in any aggressively competitive sector in the economy.