Thirty years of sophisticated attacks on runaway corporate power show that Elizabeth Warren would be a radical president

By Nathan Newman
January 30, 2020  

Capitalism dumps its financial dead in corporate bankruptcy courts–-and Elizabeth Warren knows where the bodies are buried.

Over thirty years ago, Warren made it her academic mission to understand the intricacies of how companies die, how the law decides who inherits the assets of the corpse and how that process drives rising inequality in the economy.

There is a trope that Warren was a late convert to progressivism – itself a bit debunked since she voted against Reagan in 1980. But dismissing her as a “technocratic” proponent of “good capitalism,” as Jacobin’s editors do, misses the deep radicalism of her legal and economic analysis.  If you really want to place the candidate on the political spectrum, you need to understand the critique of corporate bankruptcy she made over 30 years ago when she argued that government, not some objective “market,” decides who wins and who loses and detailed how the rules shape our broader economic system.

One key divide between liberalism and radicalism is whether politicians let the market produce inequality in the economy and then use taxation and public spending to clean up the mess afterwards–the paradigmatic liberal approach. This contrasts with the more radical approach of actively shaping the rules of the economy up front to prevent the wildly unequal distribution of wealth in the first place.

Warren’s writings and her stump speech advocacy for “big structural change” place her decidedly in the second camp. That is reflected in her policy proposals —from remaking the financial system to calling for putting workers on boards of directors to promoting the break-up of monopolies to reshaping housing markets to arguing for redistributing wealth itself through a tax on the net worths of the richest Americans rather than just raising taxes on high-earners’ incomes.

Over thirty years ago, Warren was arguing that economic redistribution should not be left to budget politics but that policymakers need to be “dealing with the distributive issues that bankruptcy policy implicates”—the issues that create lopsided distributions to begin with.

As early as 1987, Warren was trashing the economic models of law and economics with their “simple answers” where “economic analysis is utterly self-referential…within a confined, abstract scheme” with no empirical basis in reality.

Conservatives, she wrote, must assume a sufficiently imperfect market for businesses to fail, but a sufficiently perfect market for their “version of a ‘market based’ solution’ to be effective in dealing with those failures. I have difficulty envisioning that market.”

Warren’s diagnosis of the problem of inequality dates back thirty years in her writing and is remarkably similar to what she says on the campaign trail now: the solution is not just getting better technocrats running the system but reducing the power of financial interests and increasing the voice and organizing power of average workers and consumers to control what laws get written in the first place.

Why Bankruptcy Laws Matter

Your eyes may glaze over hearing the words “corporate bankruptcy” – and that’s the point. The media tell endless stories of the winners of capitalist competition – the Apples, the Googles, the Exxons – but most firms, especially smaller firms that are never listed on the stock market, don’t survive and the distribution of their assets in bankruptcy court matters. But that process is arcane and meant to be that way to the advantage of those who benefit from it.

​Donald Trump epitomizes this reality since several firms that he has owned have gone through bankruptcy, stiffing creditors and contractors, even as Trump himself leveraged the legal system to shield most of his own personal assets.  As Trump himself acknowledged when asked about his many bankruptcies, “I’ve taken advantage of the laws of this country.”

Documenting how wealthy operators like Trump take advantage of the bankruptcy laws to increase economic inequality and figuring out how to design the law to promote greater equity has been much of Warren’s life work.

Bankruptcy is actually at the center of our economy. as Warren wrote back in 1992, “The most difficult social problems get dumped into bankruptcy– mass torts, environmental disasters, the dashed expectations of retired employees.” The failures of capitalism have to be managed by bankruptcy court judges. That’s where, for example, kids in chemotherapy, union workers with empty pensions and bankers square off to divvy up the assets of a belly-up chemical company that poisoned the groundwater in multiple communities.

Economists and legal writers like to pretend that the economy is made up just of markets and contracts, but Warren dismisses this as a “fiction” which lasts until one party or the other no longer has the money to make good on those promises. At that point, bankruptcy courts navigate all the “normative issues of fairness ignored in contract law,” which Warren argues the business class pretends has no place in economic thinking.

Bankruptcy exists not to further markets but to correct the mistakes that led to bankruptcy happening in the first place – and brings active government concerns for distributional fairness into play. “It provides a forum for negotiating deals, and, ultimately, it allocates the value of a firm to all claimants, making difficult distributional decisions among competing parties.” Pension holders owed money long into the future get into the same court proceeding with the banks holding immediate debt–“both present and future claims at once,” as Warren highlights.

How Bankruptcy Law Shapes Markets and Economic Inequality

Every legal rule in bankruptcy, Warren argues, reverberates in the broader economy to shape market outcomes, sometimes to the good, more often to the advantage of the wealthy, but never in some “natural” way as conservative economic thinkers would have it.

Warren writes: “Any legal rule will cause some redistribution of wealth.”
This may be obvious to many progressives, but it challenges the core capitalist legal ideology that law can stand outside the market and be a neutral arbiter of contractual relationships.  Instead, Warren sees legal rules as inherently favoring one group over another at every economic point of negotiation: “A rule of ownership, a rule of liability, or a rule of priority will relatively advantage or disadvantage competing parties.”
Stakeholders with explicit debt-based contracts with a firm, so-called “secured creditors”, consistently get priority by bankruptcy judges because, as Warren argues, they helped write most of the rules: “The group that profits from priority is well-funded and active…Their representatives are present at every drafting committee meeting and debate on the subject.”

Consumer debtors “have a perpetual problem” in Warren’s words: “they do not have money and they do not organize.”  For more organized labor and civil rights groups “bankruptcy was never a top priority,” so, she argues, the monied interests with their singular focus and far deeper pockets dominate the process far more of the time- one reason Warren makes strengthening the organizing power of workers and consumers a priority to alter that dynamic in the setting of legal rules across the economy.

Bankruptcy as Backdoor Industrial Planning

Warren focuses relentlessly in her work on the role of firms not just as profit-maximizing machines for shareholders – the conservative ideal – but as institutions serving the broader economy, the perpetual focus of progressives who promote industrial planning.

Industrial planning by the government is usually talked about on the left only after firms have shut down in a community, but Warren focuses on why bankruptcy law brings the broader social values of industrial planning to bear before companies disappear, and argues that it must go further in this area.

One key goal in bankruptcy is keeping the firm going. Partly, this enhances the value of its assets to pay off its obligations, but it also serves broader political interests of those outside contract relationships in the market. As Warren wrote, “the revival of an otherwise failing business also serves the distributional interests of many who are not technically ‘creditors’ but who have an interest in a business’s continued existence.”Those interests include older employees who can’t be retrained for other jobs, customers losing key suppliers of goods and services, suppliers losing current customers, property owners suffering declining property values, and states or municipalities facing shrinking tax bases.”

While corporate law and general contract law studiously exclude those broader community stakeholders from legal consideration, federal bankruptcy statutes create a real role for those interests – and Warren makes clear that expanding the law’s focus on those broader community interests should be a priority.

Creditors may want to dismantle a firm so they can get paid quickly but bankruptcy court, Warren argues, is where government is mandated to step in to protect the social values the market ignores.

Warren’s Ideological Challenge to Market Economics

Warren’s focus on community interests beyond the narrow confines of the market reflects her deeper ideological challenge to traditional legal economics. Warren argues that markets ignores ”parties without legal rights” and that we need a legal system to “protect these parties [and] more than the goods that are traded by private contract.”

Thirty years ago, Warren was a very public combatant with conservative “law and economics” legal writers, quoting Duncan Kennedy of the quasi-Marxist Critical Legal Studies movement that “the insulation from value judgments that economic analysis offers is illusory.”

Warren openly mocked the idea that there was any “real” market that law was supposed to try to drive the economy towards.  Any attempt to discuss policy “in a perfect market is a Zenlike exercise, much like imagining one hand clasping,” so attempts to imagine a “perfect market” were “worth little.”

Warren’s was an empirical critique of how markets function, but it was also a values-based statement that recognizing just the interests of those with property rights in the market would fundamentally be unjust.  She rejected market-based bankruptcy schemes as one where those without direct contracts with a firm, including “tort victims, discrimination and harassment complainants, or antitrust plaintiffs, would be left out.” A market approach “is overtly distributional in a regressive sense” in moving wealth from those with weak or no property rights claims in the market to those with enough political power to shape the rules.

At the heart of Warren’s ideological vision is a clear demand that the market and property rights be subordinate to the human needs and democratic will of the community.

Warren as a Radical Leader

Even as the corporate Right has been determined to conquer the courts in order to shape the law to further corporate interests, the liberal movement has been remarkably unfocused on the role of law in promoting economic inequality through the rules of the market.
Liberals have tended to treat battles in the courts as the place where social issues like abortion and gay marriage play out, while reserving their energy fighting economic inequality for tax and budget battles.  Based on her corporate bankruptcy writings and current proposals, a Warren Presidency, probably even more than a Sanders Presidency, would refocus the liberal-left on how legal rules decide winners and losers in the economy before a widget is produced or a line of code is written.

All her skepticism of markets is reflected in Warren’s array of economic plans in her Presidential run which systematically subordinates every market and property rights claim to regulatory supervision. Most on point is her proposed “Accountable Capitalism Act,” which would take supervision of large corporations away from the states and put them under federal regulation- and require them to “consider the interests of all corporate stakeholders – including employees, customers, shareholders, and the communities in which the company operates”– exactly the broader stakeholder interests usually considered only once companies have failed and gone into bankruptcy court.

Warren may call herself a “capitalist to my bones” but it is a “capitalism” in opposition to the systematic valorization of property rights and market solutions that is currently embedded in our economic and legal system.
Warren has spent decades arguing markets are the legal creation of government rules- and argues for far-reaching changes in how that government should design those rules.  Whatever you call it, Warren’s analysis dating back thirty years, and the proposals she now promotes, reflect an ideology that would make her orders of magnitude more radical than any President in our history.

A lawyer, policy advocate and writer, Nathan Newman also teaches sociology and criminal justice at CUNY.