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The Mystery of Capital
Hernado de Soto addresses the latter questions while making the case for his central thesis: that Western property law and administrative infrastructure is the reason for the ascendency of the Western economy.
The book is framed as an investigation of the 'Five Mysteries of Capital' during which the author enthusiastically demonstrates the shortcomings of common knowledge on the subjects of poverty, money, law, and history.
De Soto's mysteries are, in short:
- The Mystery of Missing Information. How much poverty, and conversely, how much property is there in poor countries, and how do we measure it? Huge numbers of people live and work off the books: they have no clear title to their land and possessions, they pay no taxes, they have no credit. We're not talking about subsistence farming here, but about buses and taxis, repair shops, and light industry. This 'Shadow Economy' is explored, and the 'Dark Capital' bound to undocumented resources is examined.
- The Mystery of Capital. What is Capital, where does it come from? De Soto views capital as not just a proxy for physical assets, but as a side effect of of property laws and infrastructure. His explanation of capital amplification derived from the standardization, globality, and liquidity that is given to property by standard protocols and infrastructure echoes common reflections on the internet phenomenon.
- The Mystery of Political Awareness. Why have so many governments failed so badly at economic reform? Simply because they do
not realize they are in the midst of their own Industrial Revolution, 200 years late. De Soto argues that the true extent of
the shadow economy was unknown until recently, and methods of dealing with it are in process. It is refreshing to read something
on this subject that acknowledges the hard work and sincerity of many of these governments, rather than rehashing accusations of
incompetence and corruption.
4. The Missing Lessons of U.S. History. How did the U.S develop an infrastructure that nurtures successful Capitalism? This section is an entertaining overview of the evolution of U.S. property law (believe it or not). What I found interesting was the way that 'law' would spontaneously arise in circumstances where the existing system was inadequate or non-existent. Also of interest were the examples of legislation chasing and converging (roughly) with reality over a century long period.
5. The Mystery of Legal Failure. What legislation is required to = enfranchise the people of the Third World? Again, the author makes an argument for law tracking reality. In the Roman legal tradition, laws are not created, they are 'discovered'; the best laws are those that fit existing practice. Well intentioned land reform measures fail because they do not reflect the actual situation. People do not want to be uprooted, they want title to what they believe is theirs.
De Soto tells a story about walking through rice paddies in Indonesia - = there were no survey markers or fences, but he knew whenever he crossed a property line - a different dog barked at him. He tells a group of ministers working on land reform to start at the bottom; listen to the dogs. and work up from there. His message is simple -- discover the law, then write it.
In each of these sections the author firms up his arguments with a = unique perspective based on solid research as much as theory. The final section of the book gives sober and well thought out step-by-step directions to lift people out of poverty and invisibility, again based on experience in field programs, rather than ideology.
This book is infused with a sort of passion that gives the arguments and figures an unexpected fascination. It is neither an anti-globaliztion rail nor a 'greed is good' apologia, but a well thought out investigation into a subject the author cares deeply about. For myself, I care little for economics, but I am familiar with engineering. De Soto approaches his topic like an engineer; he is interested not in promoting a theory, but in solving a problem.
I would recommend this book to two audiences: anyone interested in world poverty or economics, or those interested in the interaction and evolution of laws (ill-informed or not) and the Web. I would also recommend that we start barking.
You may find out more about the author at www.ild.org.pe.
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You need a free market, but free doesn't just mean free from governmental control. You need enforceable contracts, tolerably low levels of official corruption, and the right set of (usually unspoken) assumptions about how things work. The West has that; most other areas don't. Unfortunately, cultural changes take a long time.
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What a steaming, stinking, unsightly pile of inaccurate information.
America has the largest tax receipts of any country in the world.
That receipts are irrelevent. America has only moderate tax rates (although still too high). They're not even close to the highest in the world.
America spends more on its miltary than any other country in the world. What exactly does this contribute to free trade ?
You're joking, right? How about, for one, the free-flow of oil at market prices? Or do you forget that Saddam dude who tried to take over a large majority of the world's oil supply? If the US hadn't stepped up, you would have a king of the "United Kingdom of the Middle East" by now. Stable economies require a stable world. A strong military is critical to stable economies.
When forced to compete on a level playing field, US corporations fail dismally. E.g. the auto industry.
The car companies don't care about exporting their cars. I was reading an article a few years ago about how the American car companies only recently produced a car that could be changed to have the steering wheel on the right side. The problem is that Americans like big cars, and the rest of the world doesn't. So it's not all that profitable for American car companies to produce tiny euroboxes that all have to be exported, since there is no market here.
In any case, I believe the Ford Fiesta (?) is one of the best, if not the best, selling cars in Europe, so they can do it if they care.
But going beyond cars, the US dominates in almost every industry that matters, particularly the leading edge ones like software.
America leads the world in the destruction of the natural environment.
Cite some proof. American is one of the cleanest countries in the world. In fact, I remember a british engineer who I met about 10 year ago who came over for some temporary work. I asked him what struck him the most about the US, and remarked he couldn't believe how clean everything was. Just an anecdote, but telling.
If you want to see pollution, take a look around Europe some time.
--
Sometimes it's best to just let stupid people be stupid.
The final section = of the book gives sober and well thought out step-by-step directions to lift = people out of poverty and invisibility, again based on experience in field = programs, rather than ideology.
There are two main theories on how the developing world should move into the developed world. Currently, only 30 countries are considered "devloped," while the rest are divided among groups such as "developing," "not developing," and "less-developed."
MT prescribed that economic development requires the rejection of traditional behavior and orginizations, and acceptances of new behavior and orginizations that futher economic growth. The culture of a nation must change to the accepted western ideas of devlopment. A partial list of the requirements that Modernization theorists agree on include:
In a nutshell, a acceptance of western culture and western sytle economic and policital thought lays the foundation of economic development.
DT is a ideology that critisizes the MT approach. Two main tennents of Dependency theory: The development of third-world nations did not resemble the development of the west. The west's development for instance did not have external influences. The second tennent is that developed countries exploited the third-world in their own economic rise. Therefore any economic structure that may exist in a developing country is set up to enrich the industialized nations, not develop the third-world nation.
Dependency theorists see the western exploitation of third-world nations as the primary roadblock to economic sucess. By removing the foundations rooted in imperialism, third-world nations and develop the economic structure that moves them forward.
I have not placed any value judgements on these two theories. All I can say is that I agree with the statement that there are no easy answers to how to develop the third-world.
This shows up in many controversial areas.
For example, take the immigration from poor areas of the world to the richer areas of the world. The question here is how the culture of these immigrants is different from the country they are going to, and how important is this differance.
For example, if you have a town or village where the immigrants predominate, and have become a political force, what does the community look like? Does it look like and reflect the country that they are in, or where they came from? Typically, it looks like where they came from.
The problem is when this results in the same conditions that they left in the first place. Actually, it never gets that far, because of local ordinances, etc. but it does produce dramatic culture clashes. Southern California is an example of this. Xenophobia and prejudice are easy to develop under these conditions because in a democratic society, those moving in want things their way, similiar to what they are comfortable with, the way they knew it in their former homelands.
A less touchy example is when rich successful people buy a house in the country, after having lived in the cities all their lives. They get all freaked out by things like the smells of the local farms, and complain to the local town council, or whatever.
This becomes important when you are talking about things like how people deal with the basics of their lives, the economics, and how they create their own community.
Part of the problem is that many lack the lifetime of education in the culture of the country the aspire to, thinking that they must hold on to what they know already out of pride. They think in terms of either/or, or at least some political leaders do. The better would be knowing both.
This gets flipped on its head when we take this into another context completely. For example, the arena of the software market, open source vs proprietary software, etc.
As some may say, this is another can of worms entirely.
"It is a greater offense to steal men's labor, than their clothes"
If you follow the Austrian School of Economics (yes, there are competing schools of thought e.g. Chicago School of Rational Economists, etc), then you realise that capital is a heterogeneous structure of productive elements. People tend to confuse the accounting unit (monetary value) with the tangible/untangible asset (essentially a service generating a revenue stream). Why has the West succeeded as compared with the East? There are a lot of competing claims but I will offer a few generic observations:
... just becaus you are successful now doesn't mean you will always be right. Deeming couldn't convince the American manufacturing industry to take his ideas seriously and as a result the Japanese have now supassed the US in that sector. Given the huge population mass and desire of normal people to improve their lot, there's no reason why India couldn't overtake the US in software services or the Chinese in Engineering Knowledge. In short, the future is unpredictable but a rising tide raises all boats.
- alienation - or the separation (and resulting specialisation) of powers. The modern corporation essentially has 3 functional components - owners (shareholders), governance (directors) and operators (managers). Through legal mechanisms, the transfer of powers and associated trust allows more complex structures to be established. Due to historical baggage of feudal governance structures and patron-style relationships, the East has yet to develop a culture which separates the State from the individual biases. Even if you look at places like Singapore, it is essentially a city state driven by a family core (think Italty) and as a result some financiers are rather disparanging of the capital utilisation rate (compare growth in TFP against other states after discounting human and capital mobility). The alienation eliminates (at at least checks to a large extent) influences such as religion, tribalism, etc from economic factors. The downside is that the government is less powerful than many people think.
- agency costs - consequent to this is how do you ensure that the remote agents (managers/financial brokers) work for your aims (wealth creation) rather than pissing off to South America with your loaned capital. Again the rise of a professional management class as distrinct from a family owned firm with a tendency to treat OPM (other people's money) as personal disposable income allows larger scaling of enterprises. This has been aided by the significant reduction in the cost of internal communications due to technology and now you have firms which number employees in the hundreds of htousands (as compared with 100-1000's early last century). Scale matters and family firms don't have guarentee of talent.
- universal education and democratisation of capital - one of the biggest hinderances towards an efficient market is information asymmetry. What you don't know *WILL* hurt you when it comes to insider information, scams, and other forms of white collar crime. By giving the middle class the chance to pool funds into mutual investments, and the transparency to assess companies in their own right, a more accurate picture of the economy can be reflected in the prices that people are willing to lend at. If you take a look at the share-market in say China/HK, if you are not a professional market specialist, you might as well be gambling at your local casino as minority shareholders get screwed big-time.
- credit creation - the unbundling of the currency from any tangible asset such as the gold standard. This is a rather contentious fiscal "innovation" as it creates inflation (e.g. 70's) but the upside is that greater individual risks can be undertaken (with resulting higher returns). There are some serious side effects (financial crisis/flutuating financial securities) but the industry has developed more advanced liquidation techniques to reallocate capital as a result. As a result, the US financial markets have been more efficient at directing capital to product uses (c.f Japan industry boondoggles) despite its current lower (negative?) savings rate.
I'm sure any professional accountants and economists will harp on about a number of other factors such as anti-trust law (one advantage over Europe), intangible property rights (branding, etc) or derivatives to transfer/concentrate risks but IMHO the above are the main structural elements. This is not to say that all is milk and honey, governments, corporations and individuals have been known to screw up but at least the system has a chance to self-correct. However, it should be noted that people in other countries are not stupid and they can read the books on financial as well as any other capitalist. It also discounts certain elements such as social capital whcih is prized much more highly in the East due to higher population concentrations. The other potential problem I see is institutional arrogance
LL