Customer Reviews

The Mystery of Capital

5 star:		(89)
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2 star:		(9)
1 star:		(5)

 

 

Attempts to explain why the 3rd world (and the 2nd world, now that communism has largely collapsed) is different from the developed world tend to fall between two poles. At one end are those who seek an Archimedean point--a single underlying cause which, once grasped, will allow us to quickly move developing countries up the socio-economic ladder. Such explanations have the virtue of being useful to people who actually work in 'development', because they convince us that we know how to produce fundamental change. But they run the risk of oversimplifying and, if taken as a guide to policy, of raising expectations only to see them dashed by the complexities and historical quirkiness of the real world.

At the other pole are holistic, multifaceted explanations, taking into account history, culture, economics, religion--the whole nine yards. Such accounts may be more intellectually satisfying, but often lead to frustration by convincing us that the problems are too complicated, too resistant to quick fixes, for practical solutions.

The Mystery of Capital falls for the most part in the first camp. It's author, Hernando de Soto, is one of the 3rd World's most dedicated and intelligent reformers. He wants desperately to do something to help the poor, and has been heroically influential--and successful--in arguing against the failed statist solutions long in vogue in Latin America. Now he wants to move beyond criticism to a positive agenda for change. De Soto's impeccably pro-capitalist credentials make his initial criticism especially convincing: actual capitalism in most of the world is restricted to a small elite, while most remain on the outside looking in.

The question is whether de Soto's solution is equally convincing. He does not believe poverty is due to the evil intentions of capitalists or capitalist countries (though he acknowledges that powerful interests in developing countries do not want to make the system more inclusive--a subject which could use more discussion). Nor is it because of culture or any inherent faults in the poor, or in poor countries. No, the real problem lies in a kind of intellectual or historical blindness, which has kept everyone from seeing what the real source of wealth is: real property, or more exactly well-defined and socially accepted property rights. Once a society has this, it has the secret of capital, since these assets can then be used to generate loans, credit, insurance, liabilities and the whole apparatus of capitalism.

It is hard to argue, looking at the real experience of the undeveloped or maldeveloped world, that the lack of property rights is not a huge impediment to economic growth. De Soto and his team have done tremendous work in documenting exactly how this holds back and frustrates the poor and disenfranchised.

But it is equally hard to believe that this is the key or only reason. More accurately, it seems--from de Soto's own account of what is required--that having property rights is a sort of 'meta-cause'. It depends on such a host of other developments in the economy, in society, in the political system (where access historically often depended on property, limited to a few), in the legal system, in the informal norms and mores, that it is hardly practical to point to it as 'the solution' to 3rd world poverty. For this reason, it seems unlikely that simply pointing out that developed countries have complex systems of property rights, though useful, will be enough to allow for the development of similar systems in the developing world.

If de Soto is right, why is China developing so fast, without anything like the formal, all-encompassing property system he thinks is essential? Why did European economic development begin to outpace the rest of the world centuries before the property systems which, he points out, in most Western countries were only arrived at within the last 100 years?

As a recipe for action, The Mystery of Capital is excellent in pointing to a dimension of development that has been neglected, and for its path-breaking research on the ground, discovering what it takes to bring the newly urbanized poor into the modern economy. But as a satisfying account of what ultimately causes poverty and why some countries are rich and others are not, it falls short. For this, one should go to books like David Landes' The Wealth and Poverty of Nations, or Jared Diamond's Guns, Germs and Steel.

The Mystery of Capital, by Hernando DeSoto, could be among the most important books on economics of any century. DeSoto notes that more than a decade after the fall of Marxism, the expected capitalist revolution has not occurred. Capitalism has been successful only in the developed nations and has made little progress in the third world or in the former communist states.

He and his team are convinced that the problem is the lack of well defined property rights. He notes that the poor in under-developed countries have assets, but that their real property is often owned informally, and thus cannot be used to generate capital. As a result, the crucial role of real property is simply absent in under-developed countries.

He proposes the obvious solution --- formalization of informal property rights and notes that acquisition of property through informal means (squatting) has a storied history in the United States and other developed nations. DeSoto understands that formalization will be politically difficult, but points out that both rich and poor will benefit economically. One might call it "trickle up economics."

Finally, formal property rights are under attack in developed nations, through overly intrusive land use and environmental regulations. It is well to reflect upon the potential for slipping toward a system that allows virtual squatters to seize or nullify property rights through regulation, threatening a principal source of national income.

Wendell Cox

In the past five years I've read a shade under a thousand books, and this is easily the most important of them. In it, Peruvian economist de Soto sets out to do nothing less than explain why capitalism has worked in the West and been more or less a total disaster in the Third World and former Communist states. This has long been a pivotal question for anyone interested in the world beyond their own back yard, and there have been plenty of attempts to explain it before (often in terms of history, geography, culture, race, etc.). However, de Soto's is the most compelling and logically argued answer I've come across. But it's not just me. I don't generally quote other reviews, but my general reaction echoes the most respected policy journals, newspapers, and magazines, who tend to repeat the same words in their reviews:"revolutionary", "provocative", "extraordinary", "convincing", "stunning", "powerful", "thoughtful". Perhaps my favorite line comes from the Toronto Globe and Mail: "De Soto demolishes the entire edifice of postwar development economics, and replaces it with the answers bright young people everywhere have been demanding." Of course readers (especially those on the left) will have to swallow a few basic premises from the very beginning, such as "Capitalism stands alone as the only feasible way to rationally organize a modern economy" and "As all plausible alternatives to capitalism have now evaporated, we are finally in a position to study capital dispassionately and carefully." And most importantly, "Capital is the force that raises the productivity of labor and creates the wealth of nations.... it is the one thing that the poor countries of the world cannot seem to produce for themselves no matter how eagerly their people engage in all the other activities that characterize a capitalist economy." No matter how badly some of us may want to hold on to cherished ideals of collectivist economies, the reality is that at present these are only viable on a micro scale. For the moment, capitalism has won, and the only question is how to make it work to improve the lives of the bulk of the world. De Soto writes: "I do not view capitalism as a credo. Much more important to me are freedom, compassion for the poor, respect for the social contract, and equal opportunity. But for the moment, to achieve those goals, capitalism is the only game in town. It is the only system we know that provides us with the tools required to create massive surplus value."

According to De Soto, the problem outside the West is that while the poor have plenty of assets (land, homes, businesses), these assets lie overwhelmingly in the extralegal, informal realm. De Soto's on the ground research reveals that this is the result of an accelerated process of urbanization and population growth, coupled with the inability of legal systems to adapt to the reality of how people live. What has happened is that throughout the Third World, the costs of making assets legal (obtaining proper title to a house, registering a business, etc.), are so prohibitive both in terms of time and money, that the assets end up being what de Soto calls"dead capital." In the West, a web of financial and legal networks enable people to use their assets to create further wealth, through such tools as mortgages, publicly traded stocks, and the like. Outside the West, most people live and work outside the kind of invisible asset management infrastructure that we take for granted, and thus are unable to use their assets for the "representational purposes" we are able to. Thus the full set of capitalist tools are not available to them and it becomes incredibly hard to realize any kind of upward mobility.

One of the key sections of the book is "The Missing Lessons of U.S. History", in which de Soto demonstrates how the US faced the exact same challenge several hundred years ago. The difference is that the legal system was flexible enough over a century and a half to realign itself with the reality being created on the ground by an energetic citizenry. However, it occurred over the long-term and long ago, and has thus been forgotten by history. What de Soto says needs to be understood is that the less developed nations of today are trying to accomplish the same thing over a much shorter time and with much greater populations, and without a clear understanding of how the West managed to do it. The ultimate challenge is raising the social awareness and political backing necessary to implement major legal change in the face of resistance from an entrenched bureaucracy and elites who benefit from the status quo. This is a daunting and provocative challenge-but not impossible.

Of course, all of the above is greatly simplified, so anyone interested in the state of the world should read it for themselves. De Soto's writing is remarkably clear (especially for an economist), and no background in economics or law is needed to follow his argument. There is a little repetition here and there, but always in the service of making sure the reader doesn't miss the big picture. In the end, whether you agree with his thesis or not, I guarantee it'll challenge your preconceived notions about global capitalism.

The Mystery of Capital is recommended, among others, by no less than Milton Friedman, Ronald Coase, Margaret Thatcher, and William F. Buckley Jr. That's not why you should read the book. De Soto examines a necessary and misunderstood topic: why are poor countries poor? His arguments and insights make the book a necessary read for the economist, or other educated person.

The main point of The Mystery of Capital is that the seemingly intractable and hopeless situations in Third World countries is due in large part to one common problem: the issue of property rights. Macroeconomic policies make piecemeal improvements (or may improve nothing at all). Money is not the source of the wealth in a nation. Capital is the source of the wealth of nations! Facilitating the proper legal environment is an integral part of the creation and growth of capital, something First World nations had to develop, and something de Soto argues that Third World nations can develop.

The book gets a bit dry in the latter half, but is definitely worth the read. De Soto covers legal ramifications and reforms that will help build a bridge for "dead capital" to be converted to "live capital". The Mystery of Capital will be a surprise for some, because of de Soto's synopses here and there about what life is like for those who live in Third World countries, and the enormous amount of (untapped) wealth the people of Third World Nations possess.

De Soto is a decent economist, in part because he draws from so many disciplines and sources. He also did a prodigious amount of observation and collection of data (hardly an ivory tower academic). If you have an interest in developmental economics, law and economics, entrepreneurship, History of Thought, Economic History (especially that of the U.S.), or political science, among other areas, The Mystery of Capital is especially for you. I recommend the book to any social scientist - the book is so well done and relevant that you may find yourself developing an interest in any of the above!

econ

I spent 5 years in Cambodia doing development/legal reform work and never could figure out why it was so often frustrating and kept running into dead ends. I only wish I had had this book at the beginning of my time there. It reveals what needs to be done to bring the third world out of poverty. Full of simple but powerful ideas. I only hope the development bureaucracy will adopt it. Sound property laws enable land and other assets currently not marketable, saleable or mortgageable to be used as collateral for enterprises (as in the West), and there is more of such property out there in the world than all the Western aid since the beginning of time to all other countries! The author has done his homework on the ground and has compelling and important ideas. An interesting read even if you are not involved in this area.

Why Capitalism failed everywhere but succeeded in the West? This is a question that haunts many politicians and economists in 3rd world countries and in the West as well. Eventually the mystery became a quarrel between the two worlds, having the third claiming that Capitalism is just a hoax for the West to tap into their trifling fortunes, and the first claiming that 3rd world countries are failing to implement Capitalism efficiently.

The author of this book, Hernando De Soto, is siding with the second team in this dispute. And for that purpose he extends a very strong argument, which is that 3rd world countries failed to utilize the most basic element of Capitalism. And that would be Capital itself!

De Soto defines what he calls "Dead Capital" as property and real estate that is not fungible and can serve only in its most basic usage. Capital goes dead when the government fails to establish a real estate system that is accessible to the common public and is appropriate to the people and their property. What De Soto found after years of research and study is that in most developing and ex-communist countries the real estate systems are troublesome, drastically complicated, and out of touch with the real world. These systems nurtured a burgeoning extralegal style of living, where capital and businesses are not adherent to the legal systems of those countries. Instead, they work based on laws and regulations the people developed themselves among their social circles.

De Soto extends many shocking statistical information proving that 3rd world countries posses vast amounts of dead capital in their extralegal sectors. The author describes this capital as dead because property in extralegal sectors cannot serve as collateral for loans, are not fungible, and their transactions are not protected by the law. De Soto believes that the poor people living in extralegal sectors of 3rd world countries are the real entrepreneurs of their countries. They are very innovative in creating jobs and forming their own systems of protecting assets and their transactions. The author says that the biggest mistake of their governments is that they are trying to enforce the legal system on them when they should adopt their systems instead.

But how come the West never encountered this problem, you wonder. Wrong, the author tells you. The West did go through this and had to sort out many extralegal property and real estate into the legal system. But the West didn't enforce the law on extralegal property, instead they adopted the various extralegal systems and integrated them into the law. The author extends a thorough research in the U.S. history to explain in detail what created the problem of extralegal property and how the Americans overcame it.

One thing you'll notice if you read the book to that point is that the book is too long for its topic. And even though it's little less than 300 pages, but by page 150 I felt that the author had said everything he wanted to say. I believe that once an author begins to say "like I said in chapter x" numerous times he should stop immediately.

However this is a valuable book indeed and I learned a lot of lessons from it. De Soto is a man who will not make a claim without being able to back it with intensive and thorough research and study. His arguments are sound and make a great deal of sense.

If you're interested in the economies of 3rd world and ex-communist countries then I recommend buying this book. This book might fail to appeal you otherwise.

The Mystery of Capital attempts to "reopen the exploration of the source of capital and thus explain how to correct the economic failures of poor countries." I believe the author makes an interesting argument within the book concerning the failure of capitalism to catch on in developing and post-communist countries. His argument deals with institutions we here in the West take for granted-property rights and other legal institutions. The connection between these legal institutions and economic growth is clear-and de Sota is clear on this point as well.

He states that an individual living outside the West faces an impenetrable wall of rules that bar them from legally established social and economic activities-such as deleterious bureaucracies that retard growth by wielding red-tape. De Sota sent teams to Peru, the Philippines, Egypt, and Haiti and they experienced firsthand how it takes several years to obtain legal verification of assets-years compared to days here in the West. Under these burdens, individuals create new laws-extralegal laws. These social contracts have created a vibrant but undercapitalized sector. This sector is known in economic layman's terms as the underground or informal economy. The author estimates that over half on the inhabitants in developing countries engage in this sector-using Dead Capital. The value of the assets in the informal markets are huge-surpassing the assets of rich countries sometimes. De Sota has brought attention to the core of the problem-he then states that the solution can be found at the heart of the countries.

He supplies the formula to fix the backwardness of the nascent capitalist nations. The first objective is to unify the many social contracts already existing in the extralegal sector into one, all encompassing social contract-by listening to the "barking dogs", or the people. Past attempts with this aim have failed because they have lacked the legitimacy and support from the current extralegal world. De Sota creates a bridge to fix this dilemma-a bridge that integrates old social property customs into a new all encompassing social contract. By working with their people, government leaders can forge a new regulatory framework. The second task is a task of a political nature because the plan outlined above requires the support of the poor, the elite, and the lawyers. The poor will gain the most because they will greatly increase their economic lifestyles with a more unified social property system that will enable them to use their assets as full functioning capital. The elite will harvest gains as well; they will benefit from an expanded market and growing capitalist economy. The lawyers must not use the current law, but instead fine-tune the law and change it to make it work for all.

De Sota's real world studies and solutions make sense in my mind. He identified a problem and supplied the solution. He may fall short though in his solution because a complex capitalist economy requires much more infrastructure than only property rights-of course I mean other forms of capital, such as human capital. By De Sota is on the right tract; a capitalist economy demands strict and discrete property laws that enable individuals to utilize their assets. His premise is right-under capitalism, the rich get richer, and the poor get poorer. In the third world, the poor don't have access to their assets, and they thus flounder in the extralegal sector.

De Soto fundamentally argues that the reason poor countries are poor is because they have bad property rights: it's incredibly difficult for poor people (specifically, recent urban migrants) to get legal title to their land. As a result, the poor make "extralegal" arrangements, squatting on and using land that neighbors (but not the government) recognize as theirs. But because they don't own the land, they can't get a mortgage on their house to start a business, electricity and water companies are less likely to reliably provide services, the government has difficulty taxing them because they don't have a legal address, and so on. And so on.

It's a very important point but de Soto oversells, arguing with exaggerated (and oft-repeated) ideological claims but weak empirical evidence that solving this problem will actually enrich the poor.

He occasionally shares insights from his interesting field work. For example, he has helped businesses in Peru to navigate the overwhelming bureaucracy and become legal, and he has found that most businesses would rather be legal and pay taxes than be illegal and pay bribes: a useful bit of empirical information, but those gems appear all too occasionally.

Before reading this entire book, I recommend going to the website of de Soto's foundation (the Institute for Liberty and Democracy at www.ild.org.pe) and reading the main point there (in one tenth the words).

The Mystery of Capital attempts to explain the reasons why a capitalist system has not favored all people in third world nations in the same degree. Although Hernando de Soto focuses primarily in urban areas, he explains that there are far too many, if not difficult, obstacles for most citizens of third world countries to truly benefit from a capitalistic system. He has research poor neighborhoods in third world nations, and has found plenty of dead capital that could be put to use for the benefit of all people in such nations, if only politicians and lawmakers realize the enormous potential. Apparently, the value of property and extralegal businesses are far greater than the aggregate value of decades of foreign direct investments into those third world countries researched. Such assets are considered dead capital because they have been obtained or developed extralegally. Buildings and businesses exist, but they were not properly registered with the corresponding authorities, and in most cases developed in Government-owned land. A seemingly vibrant extralegal economy goes unnoticed. Why? The level of bureaucracy is overbearing, and therefore it becomes expensive for most people to go through the necessary steps for property establishing a business.

Hernando de Soto does not give you a definite method as to how to unlock "hidden capital", but it does give guidelines for developing a meaningful way to turn such unregistered assets into capital; the basis of a capitalistic system. He also offers some history as to how this kind of predicament was tackled by lawmakers in developed nations such as the United States and England. By using history, Hernando de Soto attempts to fill in the gap between theory and reality.

The book is definately worth reading. It basically points out that a legal system that values private property rights is essential for entrepreneurs to use that value to create or expand businesses. He argues the point persusavily and give concrete example from origial research. If a person is unfamiliar with ideas, this would be a good primer for the subject.

The only drawback is that he take a tone that he has made an amzing discovery that no one else has ever figured out. This same thing has been proposed by (for example) Landes in the Wealth and Poverty of Nations and in the collection: Culture Matters, both recently. Looking further back into the past, however, F. Hayek discussed this issue in many books as far back as the 30's and it is not so far from ideas explored by Weber at the turn of the century.

I think it would have been a better book if he had pointed readers into ways of exploring the ideas instead of acting like he was the first to discover the concepts. He does present the concepts well and the book is definately worth reading.