Review - The Mystery of Capital, by Hernando De Soto

De Soto studies the failure of capitalism in developing nations.

Hernando De Soto's "The Mystery of Capital" is a political and economic expose on the triumph of capitalism in the West and its failure abroad. He has some good points, some poor points, and some absurd points - but all with a hope and rationalism that tries to see developing nations as untapped fountains of resoures and riches. In one way, this view gives you hope that capitalism can succeed anywhere as a ubiquitous force fabled to overtake the planet. In another, more realistic way - this view fails to consider other ways of life and that perhaps differences in culture (not directly attributable to the economic state) will also affect capitalism's success.

Main Thesis / Main Idea:
Capitalism has failed in poor countries throughout the world only because it’s being used incorrectly, not because of problems inherent to the system.

Main Thesis from Author:
The major stumbling block that keeps the rest of the world from benefiting from capitalism is its inability to produce capital.

Ideas Addressed:
--Why does capitalism often fail in developing countries?
--Why does capitalism work so well in North America and Europe?

Gives you hope for developing nations.
It’s a short book because of how simply and clearly De Soto writes. Very to-the-point.
Explains the concept of capital in a straight-forward manner.
An excellent theory of why capitalism thrives in the West.

The premise is something of an oversimplification.
Glosses over the contributions of Western capitalism to developing nations’ economic problems.

Why don’t property laws exist outside of the West?

De Soto argues against a mix of truth, fiction and fictitious straw men - framing an argument and then attacking the frame.

"Capitalism stands alone as the only feasible way rationally to organize a modern economy. At this moment in history, no responsible nation has a choice. As a result, with varying degrees of enthusiasm, Third World and former communist nations have balanced their budgets, cut subsidies, welcomed foreign investment and dropped their tariff barriers." (p. 1)

The first sentence is his argument, the second is part of his frame, and the third is half-true. It's true that developing nations have adopted many capitalist policies in their respective economies, but to say that it's due to an abject failure of other economic systems is misleading. It pretends that American imperialism isn't systematically targetting countries without a capitalist policy. It also pretends that globalized free-trade hasn't been designed to snuff out competing ideologies.

De Soto begins by detailing the failure of capitalism in developing nations, because after all - they don't have huge companies akin to the successful powerhouses we have in the Western business world.

The main argument De Soto presents is:

"The major stumbling block that keeps the rest of the world from benefiting from capitalism is its inability to produce capital." (p. 5)

The point is that since the assets of other countries are poorly documented, they cannot easily be transferred to capital. As such, trade is restricted to smaller circles and those who know each other, which limits the economy and expansion. This means they cannot get real collateral for credit - if they don't have easily-identifiable assets, like a house or a car. This failure to be eligible for credit is what stops people from, let's say, starting businesses and making strong investments. De Soto's sub-argument is that Without small businesses, you can't see which industries really thrive and who will become as successful as the McDonald's's and Wal-Mart's of American society.

It is this hidden life that capital has that De Soto wants to investigate. Because you own a car, or at the very least the rights to it are in your name, you are able to sell it off to someone in exchange for something else. In developing countries, De Soto suggests that if you "own" a car, there is really no registration system in place to detail that you truly do own it. You drive it, you have paid money for it, perhaps indebted to someone you personally know - but isn't registered with the government as yours. If it were, you could sell that to someone anywhere in the country or world -- and then they could be said to own it.

"When Gordon Wood wrote that, ‘something momentous’ happened in US economic history, it was that Americans and Europeans established widespread formal property law and invented the conversion process in that law that allowed them to create capital." (p. 11)

Having laws that protect people from others, setting in-place identifiable papers for assets and documenting everything every step of the way has enabled us to get an accountability and representational system that makes capitalism work.

More Mysteries

De Soto theorizes about the mysteries that keep capitalism from being successful in developing nations:

1. Missing Information
--The poor in other countries have no documentation of whatever assets they do have, so there will be no way to generate capital from it.

2. Capital Itself
--Marx said that you needed to go beyond physics to touch ‘the hen that lays the golden eggs’; Adam Smith felt you had to create ‘a sort of wagon-way through the air’ to reach that same hen. But no one has told us where the hen hides.
--What is Capital, how is it produced, and how is it related to money?

3. Missing History
--Many countries are becoming more industrialized and this (largely ignored) aspect of typically “poorer” nations will add to their coming capital.
--The failures and tribulations of countries struggling to generate capital now are the troubles experienced by Europe and the US from the past.
--The answers to how capital can be more easily generated and regulated on a federal scale are present in US history books.

4. Why Property Laws Don’t Exist Outside the West
--Citizens require the institutional framework to produce wealth.
--Most citizens in other countries outside the West cannot use the law to convert their savings into capital.

From here on out, De Soto addresses these mysteries (which vary in their level of mysteriousness) and attempts to frame them from a capitalist's perspective.

"Imagine a country where nobody can identify who owns what, addresses cannot easily be verified, people cannot be made to pay their debts, resources cannot conveniently be turned into money, ownership cannot be divided into shares, descriptions of assets are not standardized and cannot be easily compared, and the rules that govern property vary from neighbourhood to neighbourhood or even from street to street. You have just put yourself into the life of a developing country or former communist nation." (p. 145)

De Soto argues that commodities that you gain which can be traded for, or create labour in your favour in the future, are capital But there needs to be some kind of mechanism to change these items into work and make them capital.

Apparently, it is incredibly difficult to gain legal property rights in other countries. In countries like Egypt, Peru, Haiti, and others, it reportedly (reported by De Soto) takes dozens of different steps involving usually over 2 dozen public and private agencies. He claims that simply to lease land in Haiti requires 5 years of various steps -- and purchase land, it would take 12. Even then, you would be hard-pressed to say that you actually “own” it.

All of this untraced capital that is not represented would be worth a lot of money if it were actually represented. And when De Soto suggests there would be a lot of money if assets there were accounted for, he actually means a ridiculous sum of money.

In effect, commodities or assets that you can use to transform into labour or trade with are considered capital - however they are no good for expansion by themselves. For that, you need representation and a fictional entity of the product in question. The product in question needs to have an identity separate from yourself, in that it belongs to you, belongs to someone else, is currently un-owned, etcetera.

So when someone sells a house, it has to go through various representational procedures until the house itself, “owned” by someone, gains a “capital life” of its own. Such questions begin to arise, concerning the privateness of the property:
- Does the seller have the right to transfer ownership of it?
- Will the new owner be accepted by those who enforce property rights?
- What are the effective means to exclude other claimants?

In developing and formerly-communist nations, these questions are harder to answer – making capitalism itself harder to work.

As to how capitalism is so successful here and not there: De Soto sequences the formal property systems of the West whcih produce the critical effects that allow their citizens to generate capital:

1. There must be a title - formal, legal representation that is separate from the asset itself.
--For example, a house can change hands but does not change.
--What changes is the legal property status, and this is entirely conceptual.
--Specifically, it represents the non-visible qualities that have potential for producing value.

2. The assets of Western nations have been integrated into one formal representation system.
--This greatly aided the “fixed” nature of capital that gives it a solid background on which to be represented conceptually.
--The integration happened in the comprehensive system we now have of all the loose and isolated data about property.
--Because knowledge about assets has been gathered and systematized, we have something to relate to (the background data-book of facts) when gauging its energy-potential.

"What people in those countries [developing and formerly communist ones] can do with their property is limited to the imagination of the owners and their acquaintances. In Western countries, where property information is standardized and universally available, what owners can do with their assets benefits from the collective imagination of a larger network of people." (p. 51)

So with this organization, assets became easier to categorize and recognize for their potential. This eases the potential of them to change hands and accomplish more.

3. Making people accountable
--Creating accountability and punishment for dishonourable economic activity helps capitalism grow.
--A person has a record that’s kept within the system, and this record helps get them credit for gaining new assets.

4. Transactions are protected.

"Yet only the Western nations and small enclaves of wealthy people in developing and former communist nations have the capacity to represent assets and potential, and, therefore, the ability to produce and use capital efficiently. Capitalism is viewed outside the West with increasing hostility, as an apartheid regime most cannot enter. There is a growing sense, even among some elites, that if they have to depend solely and for ever on the kindness of outside capital, they will never be productive players in the global capitalist game.

Ten years ago few would have compared the former Soviet bloc nations to Latin America. But today they look astonishingly similar: strong underground economies, glaring inequality, pervasive mafias, political instability, capital flight and flagrant disregard for the law." (p. 221-222)