The Mystery of Capital

Reader Mike N. contributed this review of The Mystery Of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Hernando de Soto, for those unfamiliar, is an interesting character in his own right.

The Mystery of Capital author Hernado de Soto pages 276 publisher Basic Books rating 8.5 reviewer Mike N ISBN 0465016146 summary A take on the abstraction of 'Capital' We read about the new economy, cyber-squatting, e-cash, intellectual property, and the Wild West on the internet. How can we intelligently consider these concepts if we are unclear about what the old economy, or cash, or physical property (let alone the real Wild West) is?

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:

1. 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.

2. 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.

3. 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.

If anyone believes the answer to any these questions is either simple or boring, they are mistaken. De Soto addresses topics such as the nature of cash, the importance of responsibility, and the impregnability of badly designed bureaucracies in the course of his arguments. An especially harrowing read is his description of research detailing the steps required to get title to property in Haiti, the Philippines, and several other countries. Ith can take decades (decades!) and hundreds of transactions with dozens of bureaucracies to get clear title to land that a family may have lived on for generations.

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.

You can purchase The Mystery of Capitalism from bn.com. Slashdot welcomes readers' book reviews. To see your own review here, carefully read the book review guidelines, then visit the submission page.

Comments

Capitalism is necessary, but not sufficient

[YIAAL]

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.

Re:Rather a USA-Centric world view, no ?

[Reality Master 101]

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.

--

Theories of development

[skwang]

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."

• developed countries = first-world = industrialized nations
• developing countries = third-world

1. Modernization theory (MT)

   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:

   • Education of the population
   • Acceptance of science, technology, and the scientific method
   • increased secularization/decreases religious tradition
   • urbanization
   • division of labor
   • rule of law
   • merit based system of rewards (as opposed to a system where people of a class or birthrite are rewarded)
   • social mobility
   • diversity
   • innovation and change

   In a nutshell, a acceptance of western culture and western sytle economic and policital thought lays the foundation of economic development.

2. Dependency theory (DT)

   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.