Mystery of capitalism

In the book ‘the mystery of capitalism: Why Capitalism Triumphs in the West and Fails Everywhere Else” Hernando De Soto, the Peruvian economist presents a detailed study of several countries and their failure to benefit from capitalism. It is important to mention here that while most economists understand that land is as important a factor of production as liquid capital still many have failed to understand the significance of property and property rights when it comes to the success of a particular economic system. The core purpose of writing this book is to answer the question that the author has posed in the very first chapter:
“But if people in countries making the transition to capitalism are not pitiful beggars, are not helplessly trapped in obsolete ways, and are not the uncritical prisoners of dysfunctional cultures, what is it that prevents capitalism from delivering to them the same wealth it has delivered to the West? Why does capitalism thrive only in the West, as if enclosed in a bell jar?”
While we are aware of the fact that land itself is important, we rarely ever delve deeper into this subject to find out how property and its legal rights can play a vital role in the success or failure of an economic system. This is where Hernando De Soto stepped in and has offered a detailed study of property and its legal title in various poor countries with reference to capitalism in those areas. The main purpose of this book is to illustrate the reasons why capitalism has failed in poor countries and why only the developed countries in the West have been able to benefit from this system but the book carefully ignores the reasons which other economists have mentioned often and only focuses on property and its role in the economic system. The author maintains that failure of this system in poor countries is a cause of concern not only for the developing countries but also for the West.

“In the business community of the West, there is a growing concern that the failure of most of the rest of the world to implement capitalism will eventually drive the rich economies into recession. As millions of investors have painfully learned from the evaporation of their emerging market funds, globalization is a two-way street: If the Third World and former communist nations cannot escape the influence of the West, neither can the West disentangle itself from them. Adverse reactions to capitalism have also been growing stronger within rich countries themselves.”
It is clear from his book that the most important reason why capitalism has failed to influence the poor countries is because of the difficulties involved in getting legal title to property that poor sections of the society hold. The western countries fail to understand that capitalism is not exactly about growth of Internet or globalization, it is essentially concerned with movement of capital. It is important to mention here that DE SOTO believes that property is not important only because it provides security and a place to dwell in, but its significance lies in he fact that it is an asset, the problem with poor countries is that while a large section of the society possesses this asset, many of them do not have legal rights to those pieces of land. As a result of which they cannot use this land for any other purpose except accommodation.
“Most of the poor already possess the assets they need to make a success of capitalism. But they hold these resources in defective forms. … They lack the process to represent their property and create capital. They have houses, but not titles. It is the representation of assets in legal property documents that gives them the power to create surplus value.”
We need to understand that property is a fixed asset and it can be used for several other purposes including collateral. But since the poor sections of the society do not have legal title to the piece of land they hold, they cannot use it as a source of capital, which is the reason why only western countries have, been able to benefit from capitalist system of economy. He is of the view that every person in small developing countries possess immense talent to mint money and engage in business activities successfully but the problem is that since they are not capable of becoming legal owners of the property that they otherwise own unofficially, their access to finances is also limited.
The author has also carefully studied the views and theories of various economists from Adam Smith to Karl Marx in order to make the readers understand why capital plays an essential role in capitalist system of economy and why property is the backbone of this system. The author has also focused on the failure of communism and then builds a strong case in connection with failure of capitalism in developing countries.
“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 waggon-way through the air” to reach that same hen. But no one has told us where the hen hides.”
There is a new concept of ‘dead capital’ presented in this book. Hernando De Soto is of the view that the assets which cannot be used in place of capital becomes dead capital as it has no other value than the one purpose for which it was originally owned. He presents the example of some poor cities including Cairo, Lima, Manila, Mexico City and Porto Prince and shows how these cities are suffering from abundant dead capital. For example in Cairo, the city possesses dead capital worth $ 241.4 billion, which is six times more than the total value of all saving deposits in Egyptian banks. The country itself is thus suffering from its dead assets because they cannot be used as capital and therefore the economic system has failed to reap benefits of capitalism.
This brings us to another important question. Why don’t people who unofficially own a piece of land try to gain legal rights to their property? It is a very important question because the answer to it also highlights the dismal performance of various economic and administrative units of developing countries. There are so many difficulties involved in legalizing a piece of property and usually the process takes so long that most poor people simply do not bother to get legal rights. For example in Egypt it takes some 31 agencies and 5-14 years to legally own a piece of land and close to 77 steps are involved in this process.
De Soto has taken a serious look at the situation that has consistently suppressed Third World countries. He argues that people in these countries are constantly being oppressed because they lack knowledge about legal rights to property and their governments fail to offer adequate help. Karl Marx first discussed the function of property or its role in the development of nations in detail and De Soto recognizes his contribution.
He argues that when property is legally recognized, it is only then that poor people can use it in the way that would be productive and lucrative. Without legal rights to a piece of property, its occupation comes to no production use. De Soto maintains that property rights do not only facilitate legal and productive use of land, they also offer host of other benefits such as creating a sense of responsibility, more commitment from citizens, more politically aware people etc.
The most important lesson of the book is the topic of extra-legality. This refers to the sector of illegal property that has created extra-judicial ways to gain and use property. It was removed from West in the 19th century but still plagues third world countries. De Soto writes:
“… The reason capitalism has triumphed in the West and sputtered in the rest
of the world is because most of the assets in Western nations have been
integrated into one formal representational system.” (p. 52)
explaining the way West got rid of extra-legality, De Soto further adds that, “This integration did not happen casually. Over decades in the nineteenth century, politicians, legislators, and judges pulled together the scattered facts and rules that govern property throughout cities, villages, buildings, and farms and integrated them into one system.
This “pulling together” of property representations, a revolutionary moment in the history of developed nations, deposited all the information and rules governing the accumulated wealth of their citizens into one knowledge base. Before that moment, information about assets was far less accessible. …For knowledge to be functional, advanced nations have to integrate into one comprehensive system all their loose and isolated data about property.
Developing and former communist nations have not done this….It was this “revolutionary” development in the 19th century that sparked the Industrial Revolution the economic progress that is the hallmark of Western society.” (p. 52)
De Soto informs his readers that in the West during the 19th century, the private property laws were introduced to tackle the problem of extra-legality. This led to a capitalist revolution in these parts of the world and led to enormous economic growth. We need to understand that De Soto has found a close connection between integration of systems and codified laws. He argues:
It may surprise the Western reader that most of the world’s nations have yet to integrate extralegal property agreements into one formal legal system. For Westerners, there supposedly is only one law — the official one. Yet the West’s reliance on integrated property systems is a phenomenon of at most the last two hundred years. In most Western countries, integrated property systems appeared only about one hundred years ago; Japan’s integration happened little more than fifty years ago.
As we shall see in detail later, diverse informal property arrangements were once the norm in every nation. Legal pluralism was the standard in continental Europe until Roman law was rediscovered in the fourteenth century and governments assembled all currents of law into one coordinated system. (p. 53)
But is it correct to say that in the absence of centrally controlled legal system, we cannot have an integrated property system? Well I guess that is wrong to assume because the two can exist independently of each other. This is because these two deal with completely different things. One deals with access of information and the other is concerned with protection of property. From where I am looking at the situation, I feel that these two could exist without each other.
But the way De Soto connects them makes sense too. He believes that without protection of property, we cannot have accurate information about ownership of property and vice versa. De Soto is of the view that common law is a problem in the third world countries because it was the same kind of law that caused property problems in the West too.
He claims that common law could not “provide guidance for how courts should handle cases involving people who had bought or inherited land of dubious title,” and that, “more importantly, the English common law of property was often ill suited to deal with the problems that confronted the colonists.” (p. 111) But this may not be entirely true. Customary law or common law has its own benefits. Its strength lies in its ability to raise solutions as problems arise. But De Soto sees it differently.
The book definitely has its share of merits. Its one of the best books written so far on the subject of third world oppression because of property. I don’t think anyone really understood the significance of having legal property before the publication of this book. The author has chosen a different route for seeking a solution to the third world development problems. This solution may or may not work depending on its implementation but it sure offers a new way to study the problem.
1)      The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Basic Books and London: Bantam Press/Random House, 2000)

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