1. The cornerstone right: property

In a Law of Political Economy perspective, property is the cornerstone right, the one around which the separation/reconnection of economics and politics is structured. To understand this, one must move away from the common sense understanding of property as a right over things.

Property is one of the most sophisticated inventions made within Western legal systems. This, however, is vastly ignored. ^{Footnote 16} Economists treat it as a right over things, and usually confuse property and possession. In day-to-day life, one can certainly treat property as a right over things and avoid the pedantry of correcting this widespread mistake. ^{Footnote 17} But making the mistake of thinking that rights exist over things and not against others in connection with things prevents the development of a proper understanding of property rights and of their role in today’s society. ^{Footnote 18} Property is primarily a legal concept, a right legal persons have against other legal persons in connection with the object of property, things in particular. ^{Footnote 19} Lawyers, especially in the common law tradition, do see property as a right of the owner against the world at large. The right to property is generally understood as being a ‘bundle of rights’. ^{Footnote 20} But both perceptions miss the key constitutional dimension of property. The ‘bundle of rights’ theory fundamentally misrepresents how property operates in our power system. With property, what is finite at any point in time is not the set of prerogatives, the ‘bundles of rights’. What is finite is the set of limitations to the right to property, to the autonomy it entails. The autonomy of the property owner is the rule; the limitations of this autonomy via contracts or laws or other norms created via the political system limiting the uses of property are the exceptions. Property is a default rule. It is a right as a matter of principle with ‘bundles of limits’, bundles of exceptions evolving when the law evolves, depending on the demands made on the political system, and on its eventual reaction to adopt norms limiting the potentially abusive uses of property. ^{Footnote 21}

Modern property is embedded in the overall system of governance of society. ^{Footnote 22} It is part of the constitutional mode of allocation of prerogatives. It does not predate society; it is one of its most sophisticated produces. And modern property is the product of a specific society: a liberal constitutional society which has gone through what Rafe Blaufarb has appropriately called ‘The Great Demarcation’. It is the demarcation via which a radical distinction between private property and public power, introduced by the French 1789 revolution, has led to a series of dichotomies that constitute the modern political economy: the opposition between the political and the social, state and society, sovereignty and property, public and private, and so on. ^{Footnote 23} But in this society, political institutions must be operative to ensure the reconnection of economic and political processes. Otherwise, the political economy is incomplete and cannot operate properly.

Since property is the cornerstone in the institutionalisation of modern society, the starting point of a Law of Political Economy analysis adapted to a global setting must be the concept of property. Property must be stripped from its material object. Of course, there are objects of property. But the right to property is a right against others in connection with the object of property, not a right over the object itself, which is not a subject of rights and cannot have duties. The confusion between the two has certainly been very helpful to window dress the power of owners in the Power System behind the appearance of the ownership of things. ^{Footnote 24} But it has also led to an unofficial restructuring of the Power System into a pluralistic legal order composed of official (States) and unofficial (firms, in particular) legal orders.

2. Property as part of the power system

Property, understood as a constitutionally protected right of decision-making as a matter of principle, means that the operation of property is part of the foundations of our constitutional system of government. It is part of a decision- and rule-making system, but this is not officially acknowledged, and property is treated as fully belonging to the private side of the Power System. The owner has power, but this power is treated as if it were a subjective right, a right which can be exercised without considering the consequences onto others. Owners have this power towards others thanks to law. But they do not perform a prerogative the use of which can be controlled. They do not fulfill the duties of an office. They are autonomous and do not have to explain how they make use of their prerogatives. The privatisation of property is a final constitutional decentralisation of the power of decision-making (as a matter of principle) towards the use of objects of property. It makes it possible to develop economic activities without interference.

To understand the role of property and its embeddedness in the governance rules of society, one must draw the consequences from the fact that, in a modern constitutional system of government protecting property rights, there are two sets of interacting rules. One of the purposes of the Constitution is to define the operation of the branches of public government, usually via democratic institutions. This is the most traditional way of understanding what a ‘Constitution’ is. But the Constitution also aims at protecting individual persons and minorities against governmental abuses. There is therefore a set of constitutional rules defining fundamental rights, rights of autonomy designed for individual persons. These rights – freedom of thought, of movement, of religion, of association, property rights and so on – are to some extent out of the reach of the institutions created via the operation of the separate set of constitutional rules defining the mode of operation of the officially political institutions of a constitutional system of government. ^{Footnote 25}

Under this constitutional arrangement, fundamental rights are placed out of the reach of the political institutions. Individual persons benefit from a combination of freedoms and rights of autonomy allowing them to pursue their individual purposes and, in the sphere of economic exchanges, to use their property rights as they see fit. This may lead to issues the electorate wants to see addressed via the adoption of new laws; and part of the democratic process of government is designed to provide procedures to address these issues. This is how the reconnection is done in a Law of Political Economy perspective. Private autonomy is the rule, but public heteronomy may be required when its combined outcome is unsatisfactory for a majority of the population. This process has been particularly made use of since the State has evolved, especially after the great depression of the early thirties of the twentieth century, from a ‘night watchman’ State to a ‘regulatory’ and ‘welfare’ State, internalising negative externalities (limiting the use of property) and redistributing income (appropriating property for redistribution). But there are limits – which are changing via evolutions in the interpretation of constitutional norms – to what the democratic process can do. Unrestrained democracy could lead to absolute public governmental power. The purpose of the fundamental rights protected by the Constitution is to create limits to absolutism. Their existence necessarily limits democracy. ^{Footnote 26}

The key point regarding property rights in a constitutional perspective is that they provide the legal basis for private governments in connection with the use of the objects of property. ^{Footnote 27} The introduction of modern property was an instrument to ensure individual autonomy. More appropriately, it was granting autonomy to owners to make use of their properties as they saw fit, without the constraints of a wealth of rules inherited from feudal and corporatist society. The heteronomy of property rule was still there for non-owners, but they had the theoretical possibility of becoming owners and thence access to more autonomy. Whatever the practical merits of this construction, it has been grossly invalidated by the advent of the corporate economy. Gigantic corporate organisations now concentrate so much property, so many rights of autonomy into potentially eternal ‘private’ world governments, that the whole liberal construction is in total disconnect with the realities of the existing World Power System.

The unitary view of the Constitution proposed, looking at the operation of the rights of autonomy, of the institutions of democracy and of constitutionalism together, is contrary to the traditional one, as expressed for example by Alf Ross. It is classical, he wrote, to consider that the Constitution ‘deals with matters such as Parliament, the King, the ministers and the court but not, eg, … economic organizations, or private individuals … because only the former are regarded as “Organs of the State”’. ^{Footnote 28} This is a very restrictive view of the Constitution which neglects the key importance of the affirmation of fundamental rights. For some strange reason, it only deals with part of the constitutional provisions (those dealing with officially political institutions), as if the other ones were not part of the whole constitutional construction.

Even the avant-garde identification of what is today described as ‘societal constitutionalism’ treats Constitutions as being merely State centred ‘political constitutions’. And these ‘political constitutions’ are presented as being ‘limited to the political system’. ^{Footnote 29} This is accurate if one understands property rights as being part of the political rights guaranteed by the ‘political’ constitution. But this is not the position of the proponents of societal constitutionalism who consider that there is ‘a multiplicity of societal constitutions, which are neither wholly public nor private [and] emerge in the various spheres, into which contemporary society is differentiated: economy, science, technology, media, medicine, instructions, transports etc’. ^{Footnote 30} These ‘societal constitutions’ are treated as radically autonomous from ‘political constitutions’.

In my own analysis, this is also a restrictive view of the Constitution and of a constitutional system of government. ^{Footnote 31} If fundamental rights provided for in the Constitution or in amendments to the Constitution or in other texts having constitutional ranking are effectively enforced, ie, are effective restraints on the autonomy of the legislative, executive, and judicial branches of the State, these rights are part of the constitutional system of government. They are part of a complex Power System comprising State institutions (organs of the State) and non-State ones (private persons) which do exist as such because of constitutional provisions. Since the French revolution of 1789 and the first written modern European Constitution – the French Constitution of 1791 – Constitutions typically contain a declaration of fundamental rights, on the one hand, and a description of the separation of State powers, on the other. There is first the definition of certain fundamental rights and principles guaranteed to individuals against the State and, second, the description of the political system commanding the operation of the State, which can be that of a monarchy, an aristocracy or a democracy or anything else. ^{Footnote 32} But these provisions and the institutions thus created operate as a whole. And studying the whole is what the study of the Law of Political Economy is all about.

Private property being a decentralisation of the decision-making power towards an object of property to its owner as a matter of principle, one must determine how the restrictions to the use of property, as a matter of exception, are defined and implemented. In a constitutional Power System, they are defined by the political organs of the State. They are then implemented by the administrative organs of the State, using the public property at the disposal of the various State’s officials. This is how the prerogatives of sovereignty are being apportioned in liberal constitutional States. ^{Footnote 33}

Modern property rights lead to a very strange structure of the legal system. As a right of autonomy, property leads to an ability of rulemaking in connection with the use of the object of property. Users of the object of property must abide by the rules set by the owner. They are legally enforceable and are law proper. But because they derive from a right of autonomy, these rules are not subject to review. They are binding and final for the users of property, with no possibility to challenge the use made of these subjective rights by the owner. ^{Footnote 34} Because enforced constitutional rules protect property rights and property rights enable rulemaking, the rules created by owners are part of the constitutional legal system while escaping legal review, unless of course they are in breach of otherwise applicable rules applying as a matter of exception. Property enables the creation of autonomous legal orders, which are made possible by property as a constitutional prerogative, ensuring the rule-making autonomy of the property rights controller. These legal orders made possible by property exist as such. Legal pluralism is built-in any constitutional system protecting property in the modern sense. But, thanks to the modern notion of property, these legal orders are understood as belonging to the private side of social organisation and are not integrated within official ‘public’ legal orders.

With globalisation, the ability to make decisions about the most significant property rights – productive property in particular – is now concentrated into very large organisations, into very large enterprises, often called ‘multinationals’, ‘transnational companies’ and so on. These organisations generate ‘private’ global legal orders which are built on modern property. In addition, they have a high degree of control over their whole ‘value chain’ (more appropriately understood as a ‘value extraction’ chain). This concentration of property rights into large private global enterprises has fundamentally changed the operation of the Power System. It is because strong property rights are the other side of the coin of individual liberalism. The couple they create was emphasised by Portalis, the main drafter of the French Code civil, when he introduced it to the French Conseil d’État. In his construction, ‘all laws either relate to persons or to property, and to property for the utility of persons’. ^{Footnote 35} But the ‘persons’ then contemplated were individuals, not the subsequently developed large-scale business organisations which have fundamentally exhausted the ability of State institutions to play their reconnecting role in a Global Political Economy.

3. The corporate constitutional revolution

Of equal importance with property is the notion of ‘artificial legal person’, a distinctively Occidental legal invention which has fundamental consequences for the structuring of modern society and its shaping. The genealogy of the concept of corporation is very long and beyond the scope of this article. Suffice to indicate here that the concept of autonomous legal person has been instrumental to legally structure the modern State as a legal person existing irrespective of the passing of those performing the duties of the various offices conducted on its behalf. Similarly, without the modern business corporation, today’s global business organisations could never have been effectively structured as stable, long-term organisations. As Nicholas Murray Butler, an American philosopher who once was president of Columbia University, insisted:

Without the business corporation, massive concentrations of capital in the long run would have been impossible. The scale of the industrial revolution would have been seriously reduced. But the coin has its other side. The concentration abilities of corporations have unleashed formidable challengers to the liberal political economy. As written by Justice Louis Brandeis, we are facing a ‘Frankenstein monster which States have created by their corporation laws’. ^{Footnote 37}

The reason for this is that corporate law, through the ability it offers to concentrate property rights over the long-term and through the flexibility it gives to set up groups of corporations (one corporation being able to own the shares issued by another one and controlling its decisions, and so on in virtually endless chains), plays a central role in the structuring of large global firms. They gain access to legal life through corporations. Corporate law plays a key role in the current structuring of the World Power System and plays an important role in the world political economy. But the power thus concentrated is mostly out of control at the world level. It fully benefits from its structuring via private law tools with no political duties attached.

The deep-rooted source of the radical evolution of the State Power System lies in the development of the business corporation as a normal mode of structuring business enterprises. The progressive introduction of this legal device into the States’ legal systems, which mostly took place during the second half of the nineteenth century, has fundamentally changed the operation of the Power System. The change took place after the liberal constitutional revolutions and, for a set of complex reasons, ^{Footnote 38} corporations were granted most of the constitutional rights enjoyed by individuals, including the right to own property.

Corporations are very efficient legal devices to concentrate capital: they enjoy legal personality, a potentially infinite life, and serve as a shield between the assets and liabilities of the corporation and those of the shareholders. ^{Footnote 39} Shareholders have no liability in connection with the corporation’s affairs ^{Footnote 40} ; and corporations are not impacted by events (death, bankruptcy, divorce, etc.) affecting the shareholders. These events only impact the allocation of the property rights over the shares issued by the corporation, but they do not affect the assets and operations of the corporation’s business. On top of that, corporations can own the shares issued by other corporations and can be used to create groups of corporations, each subsidiary corporation enjoying the ‘assets partitioning’ effect and the benefits of eternal life. ^{Footnote 41}

When corporations concentrate property rights, however, it means they concentrate rights of decision-making as a matter of principle towards the property rights they own. It means they concentrate within artificial legal persons rights which were created to serve as devices providing autonomy to individual owners, to physical persons yearning to express their autonomy, their personality, and live their individually chosen life. But the liberal constitutional equilibrium was never contemplated with business corporations and their potentially eternal concentrating abilities in mind. The surge of corporations to legally structure businesses has led to the corporate constitutional revolution made more visible by the globalisation of the World Power System. Thanks to their foundation in property, even the largest corporate powers are still not treated as being ‘public’; but at the same time, they are hardly ‘private’. ^{Footnote 42} They belong to a different category. Because of the property rights they concentrate under their management structures, corporations can issue commands, regulate the activities of those making use of their assets, adjudicate disputes, impose rules of behaviour, delegate the use of resources, train individuals to abide by their rules, discipline and punish. And they do this, inter alia, over 80 per cent of the legal structuring of world trade which is intra-firm trade. ^{Footnote 43}

In the area of corporate law, the misunderstanding about the meaning of property rights has been dramatically damaging. It has led to the development of above ground economic theories which have been hurting the economy, the political systems and the natural environment provided by our planet. ^{Footnote 44} Here again, the use of the day-to-day understanding of property as rights over things has led to much misunderstanding and analytical errors. In everyday meaning, shareholders are routinely considered to be the owners of firms (or corporations, the public and most economists making the confusion). This error is widespread, and it affects even the specialised press and scholarly reviews. In reality, shareholders only own shares issued by corporations. ^{Footnote 45} They do not own firms or corporations, neither of these being the object of a property right. And they do not own their assets nor execute any contract with the employees, suppliers, or clients. But the widespread ‘everyday meaning’ that shareholders own corporations/firms has led economists to develop their above ground so-called ‘agency theory’, ie, the twisting of the management of most large firms in the interests of shareholders only to lead managers to create ‘shareholder value’. Since shareholders own corporations/firms – the theory goes – managers are their ‘agents’ and must manage in their ‘principal’s’ interest. Then this interest is declared to be the ‘maximization of profits’ (or of ‘shareholder value’). Legally speaking, this is a myth. ^{Footnote 46} But this has and is still generating massive negative externalities, including global climate change. ^{Footnote 47} Based on mistakes – or worse – this theory leads to a defective operation of the political economy.

Legally speaking, the whole construction is nonsense. Shareholders own shares, corporate officers, and directors are agents of the corporation, and they generally must manage the firm structured using the corporation (or a group of corporations) in the corporate interest. Surely, the ‘corporate interest’ includes the shareholders’ interest. But there are other interests which are affected as well by firm management which need to be considered to manage in the ‘corporate interest’. The consequences of the confusion generated by economists having developed their theory based on the everyday meaning of property are dramatic. ^{Footnote 48} While corporate power should be treated as any other form of power, with a duty to consider the various interests affected by the firm’s operations, ^{Footnote 49} corporate prerogatives are treated as a property with no other purpose than the satisfaction of the ‘owner’. And this satisfaction is deemed to be ensured when profits are maximised. Maximising profits in a less than perfect world, however, means maximising negative externalities, abusing human rights, concentrating wealth and depriving States from their fiscal means of action. Our species may not survive this ‘mandate’ built on a mistake induced by the ‘scientific’ use of words in their ‘everyday meaning’.

To precisely understand the position of firms in the World Power System, it is necessary to avoid the widespread confusion in the literature on economic organisations between the concept of ‘corporation’ and the concept of ‘firm’. The two words are often used interchangeably, ‘company’ or ‘enterprise’ being also sometimes used as synonyms. The corporation is a legal person; the firm (the business) is not. The corporation owns property rights over assets and is party to contracts; the firm does not and is not. As written by Lynn Stout, ‘the careless but unfortunately common habit of treating them as synonyms confuses and misleads.’ ^{Footnote 50} And the fact is that the consequences of this linguistic and conceptual confusion are extraordinary. They are a major hindrance for an understanding of the modern Power System and of the institutional structure of economic activity generally. This may also explain why the economic theory of the firm has not made much progress over the last thirty years or so. Economists, disregarding the legal structure of the firm (and law generally), are unable to agree on what a firm is. ^{Footnote 51} Ignoring the legal structure of the firm leads them to confuse the notions of ‘firm’ and of ‘corporation’ and to develop their analyses using concepts which are not suited to the economic system and real-life firms as they effectively exist. ^{Footnote 52} In this respect, economics is inherently limited by its abandonment of the Law of Political Economy perspective.

The firm as an economic organisation can be quite simple or extraordinarily complex, with worldwide operations for so-called ‘multinationals’. But the legal instruments used to structure them are basically the same: property rights, contracts, and legal persons. Corporations are only one of the types of legal persons used to legally structure firms. Multinational firms are organisations having a corporate structure which is splintered into numerous States legal systems in which the rights, duties, and liabilities of each subsidiary corporation – numbering sometimes in the hundreds or thousands – are all different. This offers a world of opportunities for the structuring of multinational firms and the allocation of rights, duties, and liabilities among the various corporations used, precisely because firms have no legal unity, and each subsidiary corporation is a separate legal person able to contract with the other subsidiaries of the group. The outside world, including States, contracting parties or third parties can only interact, insist on law abidance, contracts fulfilment and damages correction with one or part of the legal persons (corporations) used to structure the firm. They cannot do it with ‘the firm’ as such which has no legal existence and has no duties. This is one of the key issues of our time, to which economists, political scientists, and lawyers must adapt.

Via the introduction and the development of corporate law, capitalism as we know it appeared. Two separate but interrelated property systems came to life: the property over productive assets owned by corporations and the property over the financial assets (shares in particular) issued by corporations and which can be owned by other corporations or other legal persons.

The unfounded notion that shareholders own corporations allows them to contribute very little and take quite a lot. ^{Footnote 53} They contribute very little because most shareholders are only active on the secondary market for shares, where their ‘contribution’ (the price paid to get their shares) only goes to selling shareholders and not towards productive investments. Adolf Berle, one of the best corporate lawyers of his time, already wrote in 1967:

Businesses (composed of real assets, real people, etc.) are managed by corporations or, more precisely, by agents of the corporations in the name and on behalf of corporations. These officers are the ones directing the use of the property rights owned by corporations. Shareholders can do this only with regards to what they own: the shares. They can sell them, loan them, give them. Thanks to their ownership of the shares, shareholders can vote in shareholders assembly meetings. But they do not manage the corporation’s assets. Shares are not direct rights over the business or the assets of the corporation. There is, on the one hand, the so-called ‘real’ economy where the property rights over productive assets are administered, and, on the other, the financial system. The two are somewhat related, but not in a direct way. ^{Footnote 55} It is impossible to understand capitalism without understanding the dual type of property rights in existence in connection with the operation of a corporate economy. Rights over productive assets are structured within firms via the corporations owning them. Rights over shares can be exchanged, sold, given, inherited without any impact on the structuring of firms via corporations. In this way, vast and relatively stable organisations have been created thanks to corporations which can concentrate considerable rights of decision-making as a matter of principle over productive assets. This has inherently affected the Power System, which was not designed to cope with the surge of these autonomous corporate powers having concentrated the prerogatives of decision-making granted by property. They were originally only designed to protect individual persons against the State and have turned against individual persons and States in their confrontation with firms.

There was a very interesting debate on the role of business corporations in the concentration of property rights and on their impact on the role of the State at the so-called ‘Lippmann Colloquium’ held in Paris in August 1938. Among the numerous liberal intellectuals who participated, one finds Raymond Aron, Friedrich Hayek, Robert Marjolin, Ludwig von Mises, Michael Polanyi, Wilhelm Röpke, Louis Rougier, Jacques Rueff, Alexander Rüstow, and Alfred Schütz. The colloquium led to the creation, a few years later, of the Mont-Pélerin Society, which still exists today and played a key role in the extension of what is understood today as ‘neoliberalism’. At the 1938 colloquium, and during the first years of the Society’s activity, two strands of neo-liberalism expressed themselves. One of them was the ordo-liberalism of Röpke and Rüstow; the other was advocated by von Mises and (to a lesser extent) Hayek. ^{Footnote 56} As is well known, the second strand eliminated the first, ‘neo-liberalism’ meaning today only the second strand of thought. ^{Footnote 57} What is interesting for our purposes is that the ordo-liberals, whose legacy is unfortunately vastly ignored or misunderstood, had a clear understanding of the role of law in the effective operation of a liberal society. For someone like Louis Rougier, only the ‘liberal mystic’ misses the importance of

Or for Wilhelm Röpke, it was utopian to present a competitive market economy as a ‘natural order’ whilst it is ‘the artificial and fragile produce’ of a particular civilisation. ^{Footnote 59} For Walter Eucken, the central problem of economic thought was that it had lost all connection with social and political reality.

Aware of the role of law in the effective operation of the economic system, Wilhelm Röpke clearly saw the difference between liberalism and capitalism. For him, ‘capitalism is nothing else than this soiled, adulterated form which liberalism has taken in the economic history of the last hundred years.’ ^{Footnote 60} In this move from liberalism to capitalism, business corporations have played a major role. But for today’s ‘neo-liberals’ – the heirs of the second strand of thought expressed at the Lippmann Colloquium – there is no issue in treating them like individuals or nexuses of contracts, and this topic was quickly dismissed in the debates. ^{Footnote 61}

In this tradition, the US Supreme Court has recently shown that it is ready to twist the arm of corporate law to further extend the theory that corporations benefit from the constitutional rights designed for individuals. It granted additional constitutional rights to corporations on the rationale that they are associations of people from whom rights can be derived. ^{Footnote 62} The US Supreme Courts dealt with them as is they were partnerships. Via corporate law, however, corporations are granted extraordinary features like a legal personality separate from the one of shareholders, eternal life, no liability for their shareholders, asset partitioning among their assets and those of the shareholders, etc. Corporations can’t be equated to partnerships or individuals in any way. But when it comes to tame their powers – or rather, not tame their powers – they are treated like any mortal individual physical human being in need of protection from potentially oppressive State power. Of course, the immediate effect of such a stance is to protect the potentially oppressive power exercised via corporations. ^{Footnote 63}

Addressing the effects of the concentration of property rights within (groups of) corporations is certainly not an easy task. But the centrality of the issue created by the concentration of property rights devised for the individual only within corporate vehicles should not be underestimated. There was an interesting debate between Friedrich von Hayek and Robert Bork which took place in San Jose, California, in November 1978. ^{Footnote 64} Hayek tried to elaborate on it but was unfortunately silenced by Bork:

The corporate rights issue had already been raised at the Lippmann Colloquium by the ordo liberals. They were quickly silenced. And although the fact that corporations are the largest property rights owners on our planet and play a key role in the structuring of the world economy, they are still understood as being merely ‘nexuses of contracts’ by economists and ‘associations of people’ by (Supreme) Courts. And on top of that, these ‘nexuses’ are understood as having no specificities differentiating them from other contracts or the ‘market’. ^{Footnote 65}

In this perspective, this means that Google, Amazon, Toyota, Shell, Total, etc. not only do not exist as such; in addition, they fade away in ‘the market’. This has led to gigantic concentrations of property rights in the realm of pure private law, in the absolute ignorance of the constitutional dimension involved and the requirements of a properly operating political economy. ^{Footnote 66} The rights of decision-making as a matter of principle towards the property rights controlled via corporate structures are treated as purely private rights while, with the globalisation of the economy, corporate structures can now avoid a large number of the regulatory rules they want to escape. ^{Footnote 67} Interests which could find a way towards their protection via State laws are now left to fend for themselves, just like employees during the nineteenth century capitalism prior to the invention of labour law via the democratic reconnection between the economy and the political process.

The fact is that if one does not develop a legally grounded analysis of the firm which requires a legally grounded analysis of property rights and of their reconfiguration via corporate structures, it is impossible to understand the effective operation of modern capitalism and of the World Power System. Modern capitalism relies on the existence of artificial legal persons to own, directly or indirectly, real assets, enabling the development of organisations existing in the long-term, and leaving to mortal individuals only derivative rights via the securities issued by these artificial legal persons. These derivative rights, and in particular shares of stock, are traded, generate income, can be inherited and have value as separate assets connected to, but at the same time isolated from, the activities of business firms. To stabilise large business firms and the coordinated operation of their assets, transactions among individuals in (remote) connection with these assets must take place in a wholly autonomous sphere: the market for shares.

As we can see from these developments, globalisation is not a globalisation of ‘markets’. It is the globalisation of a complex Power System within which planned enterprises play a key role in the operation of productive assets – and markets play a lesser one. A key market in the present World Power System is the market for State norms which allows global enterprises to tinker with costs and prices. But it makes it extremely challenging to reconnect economic issues to political processes.

One dramatic consequence of the economists’ general lack of sophistication in their understanding of property rights is that they neglect the necessity of having a complete constitutional system of government for the institution of property to operate properly. Without the ability of a ‘State’ to adopt exceptions to the rule of autonomy provided by property, the numerous and conflicting interests present in society cannot be properly adjudicated by the sole operation of the so-called ‘market’. The reconnection between economic processes and political ones cannot occur. There is no global State and having one is not an appealing or realistic option. Are we then condemned to live in a disconnected World Political Economy?

4. Constitutionalisation in a pluralistic global political economy

Today’s political economy is global. It has been built via the interaction of markets, States (sometimes within States-created international organisations, such as the European Union) and privately created organisations we call enterprises (or firms). In this process, firms – which do not have legal existence as such – have made use of key domestic legal institutions like ‘contract’, ‘property’ and ‘corporation’ to build themselves locally, nationally, and then globally. ^{Footnote 68} In the globalisation process, multinational firms have played a transformative role in our political economy. They have led to the self-institutionalisation of a new Power System in which they play an integral part. But the limited understanding of their legal structure and of its political consequences is affecting our ability to understand them as organisations existing beyond the public/private divide. The private legal institutions on which they have been built were not initially designed to be taken in isolation from the overall constitutional construction to which they originally belonged. And a lack of proper understanding of the inner structure and political role played by business firms has led to a dramatically imbalanced Power System.

As we have seen, the legal structure of constitutional systems of governments protecting property rights is inherently pluralistic. The almost universal denial of the pluralistic legal structure of society is important to understand because legal pluralism does not derive from globalisation. Globalisation only makes it more visible. ^{Footnote 69} Legal pluralism has always been there, even in modern, supposedly positivist and monist State law. Historically, the ancien régime macro-legal orders of pre-modern States were officially pluralistic legal orders. ^{Footnote 70} Society was understood as a body made of bodies. Each body was officially producing its own law. ^{Footnote 71} With the modern dissolution of most intermediary groupings, official legal pluralism has left the stage to be replaced by a monistic legal order officially based on the one hand, on the rights of autonomy of individual persons free from the restraints of the old corporate institutions of society and, on the other hand, the organs of the sovereign State as the sole official producers of legal rules over the whole State’s territory and population.

But irrespective of the stance taken by legal positivists that law proper is State law and that there are no intermediate legal orders anymore there is still legal pluralism. ^{Footnote 72} It is unofficial because it is hidden behind the concept of property right usually understood as a right over a thing. As we know now, property is a right of decision- and rule-making as a matter of principle to which third party users of property must abide. The ‘private’ legal orders may not be ‘intermediary’ in the sense that they have no official existence and do not officially mediate between individual persons and the State. They are not intermediary also in the sense that they are not territorial and may very well operate in the infra- or supra-State level. And private legal orders do not benefit from a delegation of power or a positive recognition of their rule-making power. In this respect, it is inappropriate to consider that the reason why ‘corporations’ (firms) exist is that they disperse collective power from government to civil society, as the sociologist David Sciuli does. ^{Footnote 73} It is the opposite which occurred: collective power was dispersed from government to individuals (not ‘civil society’), via property rights and liberties. Their concentration into the ownership of large corporate organisations led to a new form of concentration of power, with a great degree of autonomy from State governmental powers, and not at all to a dispersion of (private) power. ^{Footnote 74}

The legal orders built using property rights are not part of the official system of allocation of power in society. But the autonomy they have in this legal system is higher than in officially pluralistic legal orders because they derive their autonomy from property, a right as a matter of principle, a constitutional right, and not a delegation of authority which could be taken back. ^{Footnote 75} This is the real ‘constitutional moment’ of what is being called ‘modernity’. ^{Footnote 76}

The global legal pluralism induced by the worldwide spreading of a corporate economy is here to stay. Acknowledging its existence does not imply the acceptance of an undemocratic shift of authority and power to private actors. ^{Footnote 77} On the contrary, this legal pluralism needs to be made visible to identify how it is possible to reconnect economic and political processes within these ‘private’ legal orders via law. ^{Footnote 78} Confronted with the existing imbalance in the World Power System between the ever-freer prerogatives of organisations concentrating property rights and the limited ability to impact on this ‘private’ side of the Power System, ^{Footnote 79} various strategies have been imagined. A global State being excluded, the contenders are few.

A first effort is the development of so-called ‘corporate social responsibility’ (CSR) under international law. ^{Footnote 80} Historically, there were several attempts to develop binding international law designed to limit the autonomy of globalised corporate structures mobilising property rights worldwide. The prevailing spirit of market fundamentalism, however, led to the failure of these efforts. The CSR movement, led by John G. Ruggie, then developed a strategy of engaging transnational enterprises as such into voluntary and self-regulatory programs. They comprise the Global Compact and the Guiding Principles on Business and Human Rights, sponsored by the United Nations. ^{Footnote 81} A major issue identified with these efforts, as clearly expressed by Claire Cutler, is that the prerogatives of corporations, and in particular their property rights, are protected through hard, formal, constitutional, enforceable rights while their duties are framed under soft and (mostly) unenforceable legal forms. ^{Footnote 82} But experience has shown that these instruments do have positive effects, first movers leading the way for more reluctant firms. And Courts now tend to refer to them as sources of effective obligations. ^{Footnote 83} Also, they created a dynamic leading to new demands and they may end up having been instrumental for the development of new forms of the ‘State of law’, as applied to business firms.

The limits of these instruments as tool under international law may be precisely at the origin of a more fundamental restructuring of the legal system towards a renewed understating of the importance of constitutional law when dealing with instances of institutionalised power. Today, numerous authors look beyond CSR and are working on the concept of ‘constitutionalization’. ^{Footnote 84} In connection with large corporate enterprises, thinking in a constitutional perspective is rather old. In the very last words of The Modern Corporation and Private Property, Adolf Berle and Gardiner Means were very clear:

But no one realised that the constitutional system of government – this specific institutionalisation of State power in the Power System – had to be thought about in connection with the surge of the large corporate firm starting from the concept of property as part of the decision-making process of society from the smallest micro-powers (individuals) up to macro-powers (States). Berle and Means hinted at it when they wrote in the preface of their book that it was ‘intended primarily to break ground on the relation which the corporation bears to property.’ ^{Footnote 86} But they did not properly analyse the complexity of the evolution of the concept of property in a corporate political economy with the appearance of rights over securities (by shareholders) in addition to the rights over the underlying productive assets (by corporations). ^{Footnote 87}

Also, the pluralistic nature of the constitutional order was perceived a long time ago. But what did not appear clearly is that the medium of the redistribution of sovereignty is to be found in the concentration of property rights into large organisations which end up creating significant counter-powers to State powers. This is because there was no understanding that what is concentrated – property – amounts to a concentration of rights of decision- and rule-making towards objects of property, and over those making use of them, as a matter of principle.

There are recent developments in case law which show that courts are sometimes ready to face the harsh reality ahead of us and play their role in reallocating duties in line with this reallocation of power. Although they are of course not mentioning a process of ‘constitutionalization’, they do submit private world governments to higher norms of conduct, thus reconnecting via judicial law economic and political issues. They are part and parcel in the much-needed global constitutionalisation process.

In a recent case involving Shell, a Dutch court treated this global enterprise as a world private government with a duty to act against climate change. ^{Footnote 88} The specific issue at stake was to determine whether Royal Dutch Shell PLC (‘RDS’) has the obligation to reduce CO2 emissions of the Shell group’s entire energy portfolio through the corporate policy of the Shell group (para 4.1.1 of Judgment). In a 26 May 2021 Decision, the Hague District Court ordered RDS to reduce the CO2 emissions of the Shell Group’s activities by 45 per cent at the end of 2030 relative to 2019 through the Shell group’s corporate policy (4.1.4).

Section 2.2.1 of the Judgement indicates that ‘RDS is a public limited company, a legal person under private law, established under the laws of England and Wales. Its head office is established in The Hague.’ This, of course, is rather innocuous. It is merely the identification of the party to these private law proceedings. But via this specific private law corporation, it is a much larger organisation – Shell as a firm, as a global private government – which is impacted by the Decision. The Court notes that RDS is the top holding of the Shell Group. The Shell group is composed of 1,100 companies operating in 160 countries on which RDS has ‘a policy-setting influence’ (4.4.18) due, of course, to its direct or indirect ownership of the shares issued by these corporations. Consequently, under the Decision, RDS has an obligation of result with regards to the CO2 emissions of these entities (4.4.23), wherever they are located in the world. But RDS power goes beyond and extends over its business relations, including end-users. For these, the Court imposed ‘a significant best-efforts obligation’ on RDS (4.4.24). The Court effectively embraced the whole of Shell’s sphere of influence to set the boundary limits of RDS obligations and their standard of compliance (obligation of result for the controlled entities; significant best effort for those uncontrolled but within the sphere of influence). The private law court decision involving RDS in The Netherlands only in effect has a world-wide impact.

In its defense, RDS position was that the energy transition requires a concerted effort of society as a whole and that the solution should not be provided by a court, but by ‘the legislator and politics’ (4.1.2). RDS took the view that States have to, and are able to, balance different social interests, which it argues is not true for businesses. (4.4.12). For RDS, ‘states determine the playing field and the rules for private parties’ (4.4.51). ‘The energy transition must be achieved by society as a whole, not by just one private party’ (4.4.51). ‘Imposing a reduction obligation on [RDS] will lead to unfair competition and a disruption of the level playing field on the oil and gas market’ (4.4.53).

RDS position was clearly in line with the de facto pro-business imbalanced operation of today’s global political economy. RDS was in effect trying to make use of these defects to its advantage. In a divided States System, there is no effective ‘legislator and politics’… Suggesting that the energy transition should be addressed at this level by ‘society as a whole’ is in fact making sure that there will be no effective energy transition… Especially since, as the Court noted, RDS current policies ‘amount to rather intangible, undefined and non-binding plans for the long term (2050)’.

In such a context, it is clearly hard for a court to step in. But the Hague District Court did not bend. Via a very detailed and carefully worded decision, it decided on the case, considering that it was not going ‘beyond the lawmaking function of the court’ (4.1.3).

For the Court,

With regards to the source of RDS obligation, the Court notes that although the legal instruments of international law are not binding on enterprises, the duty to respect human rights is a global standard of expected conduct for all business enterprises wherever they operate. The serious and irreversible consequences of dangerous climate change in The Netherlands pose a threat to the human rights of its inhabitants (4.4.10). For the Court, tackling dangerous climate change needs immediate action (4.4.28) because the remaining carbon budget is limited and, at unchanged emission levels, it will be depleted within 12 years (4.4.28). The Court also notes that the total CO2 emissions of the Shell Group exceed those of many States (4.4.5). For the Court therefore, ‘much is to be expected of RDS’ (4.4.16).

The Court also states that enterprises have an individual responsibility (4.4.13). This duty exists independently of States’ abilities and/or willingness to fulfill their own obligations. This is not an optional responsibility; it applies everywhere and is not passive (4.4.15). It is undisputed that RDS is not the only party responsible for tackling dangerous climate change, but this does not absolve RDS from its individual partial responsibility (4.4.37). Clearly, the right reduction pathway cannot be determined for everyone – all States and companies – all over the world. But RDS is given its own leeway to develop its particular reduction pathway (4.4.39).

In my view, what the court did is in effect (partly) constitutionalising Shell’s ‘private’ government. The managerial setup of RDS as a global firm is subjected to higher nonnegotiable human rights (‘There is no room for weighting interests’), taking on the character of constitutional principles. ^{Footnote 89} The Court did so, and could only do so, towards the issue at stake in the specific case at hand, which is a limit to court induced adaptations of the Law of Political Economy perspective. But as a large world government in connection with the operations it controls, Shell is declared to be under a duty to respect human rights. All its operations are now subject to this imperative and the human right to life must be respected no matter what. Dangerous climate change is a threat to human rights and no excuse, pecuniary or otherwise, can reduce the obligation to respect this human right.

This is clearly a way forward to reconnect economic and political issues in a Global Political Economy. ‘Private’ world governments must respect human rights and the profit motive is no excuse. They are government proper, and the classical public/private divide does not apply to them. They are not public, but they are not private either. RDS, of course, appealed the decision which, however, is immediately enforceable.

This case is in line with the reasoning followed in an earlier one, in France.Footnote ⁹⁰ Further to a Statute of March 27, 2017, very large French enterprises have a ‘vigilance duty’. They have an obligation to prevent social, environmental, and governance risks related to their operations, wherever they are in the world. To do this, they must put in place a ‘vigilance plan’ including risk assessment and prevention procedures in their relations with their subsidiaries, subcontractors, and suppliers.

Total SE, the French holding company of the Total group (1,191 companies active in 130 countries), published its vigilance plan on 15 March 2018. A disparate set of French municipalities and regions and private law associations considered the plan presented as being insufficient and decided to take legal action against Total SE to improve it. Total SE challenged the jurisdiction of the court. By an Order issued on 11 February 2021, the Nanterre Court declared itself competent to review the challenge.Footnote ⁹¹

What is relevant for us here is the judge’s reasoning on the meaning of the new provisions adopted under French law and what they concretely impose on large companies. The Court combined in its reasoning the vigilance duty with the amendment made to Article 1833 of the French Civil Code by the so-called PACTE Statute of 22 May 2019. Since that date, any French company must ‘be managed in its corporate interest, taking into consideration the social and environmental impacts of its activity.’ Some wondered whether these provisions could have any real-life impact or whether they were just wishful thinking. According to the Nanterre judge, given the combined effect of these two texts,

Based on this reasoning, the Judgement further states that:

As in the RDS case, one can see the process of constitutionalising global firms taking shape. With the combined effect of the vigilance duty and the promotion of social and environmental concerns in the Civil Code, Total’s world government must now integrate in its decision-making processes the preservation of human rights and of the natural environment, ‘elements [which were] previously conceived as exogenous’. Standing to challenge Total’s decisions is to be widely accepted and its decisions must go well beyond mere risk management. What was ‘exogenous’ in compliance with the tenets of ‘agency theory’ must now be integrated in corporate decisions. Alongside efficiency considerations, the preservation of fundamental rights and of nature is now endogenous to corporate governance.

These bold RDS and Total decisions show the way. But they need to be relayed by legislative instruments extending these judicial constitutionalising efforts beyond these two global firms. This would also provide a level playing field.

The adoption of a draft Directive on Corporate Sustainability Due DiligenceFootnote ⁹² is currently being contemplated by the European Union. It is designed to provide for mandatory corporate due diligence regarding human rights and the environmental impact of business activities for large business firms and the associated corporate governance rules. It was originally contemplated that the directors’ duty of care in the direction of corporate affairs would be extended to require them to (a) set up and oversee the due diligence actions and (b) adapt the corporate strategy to take into account the adverse impacts and adopted due diligence measures. This has been deleted in the most recent draft proposed by the Council. The explanation given is that this was ‘potentially undermining directors’ duty to act in the best interest of the company’.Footnote ⁹³ Implicitly, for the Council, adapting the corporate strategy to address adverse human rights and environmental impacts could go against ‘the best interest of the company’. For the Council, contrary to the findings in the RDS and Total decisions, there is room for weighting interests even when human rights and the preservation of a livable planet are at stake; and the shareholders come first. This is an unconscionable evolution for legal instruments which were designed to impact large business firms’ decisions and subject them to higher norms over the whole of their value chains (now limited to their ‘chain of activities’ in the Council's proposal).Footnote ⁹⁴ It would be a shame for the EU to miss a chance to effectively reconnect economic and political processes in the context of a globalised economy. This missed opportunity to move further towards the constitutionalisation of business firms could have very dramatic consequences at a time when new systemic rules are urgently required to structurally reconfigure the world governance system. Global firms are nearest to global issues in their day-to-day management of the property rights they control, and their policies need to be reconnected to the global political issues raised by the deficient existing rules of ‘corporate’ governance. In a globalised economy, this is the lesson to be drawn from the Law of Political Economy approach.