The Mystery of Capital
The Mystery of Capital

 
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It's become clear by now the fall of the Berlin Wall and the collapse of communism in most places around the globe hasn't ushered in an unequivocal flowering of capitalism in the developing and postcommunist world. Western thinkers have blamed this on everything from these countries' lack of sellable assets to their inherently non-entrepreneurial "mindset." In this book, the renowned Peruvian economist and adviser to presidents and prime ministers Hernando de Soto proposes and argues another reason: it's not that poor, postcommunist countries don't have the assets to make capitalism flourish. As de Soto points out by way of example, in Egypt, the wealth the poor have accumulated is worth 55 times as much as the sum of all direct foreign investment ever recorded there, including that spent on building the Suez Canal and the Aswan Dam.

No, the real problem is that such countries have yet to establish and normalize the invisible network of laws that turns assets from "dead" into "liquid" capital. In the West, standardized laws allow us to mortgage a house to raise money for a new venture, permit the worth of a company to be broken up into so many publicly tradable stocks, and make it possible to govern and appraise property with agreed-upon rules that hold across neighborhoods, towns, or regions. This invisible infrastructure of "asset management"--so taken for granted in the West, even though it has only fully existed in the United States for the past 100 years--is the missing ingredient to success with capitalism, insists de Soto. But even though that link is primarily a legal one, he argues that the process of making it a normalized component of a society is more a political--or attitude-changing--challenge than anything else.

With a fleet of researchers, de Soto has sought out detailed evidence from struggling economies around the world to back up his claims. The result is a fascinating and solidly supported look at the one component that's holding much of the world back from developing healthy free markets. --Timothy Murphy

"The hour of capitalism's greatest triumph," writes Hernando de Soto, "is, in the eyes of four-fifths of humanity, its hour of crisis." In The Mystery of Capital, the world-famous Peruvian economist takes up the question that, more than any other, is central to one of the most crucial problems the world faces today: Why do some countries succeed at capitalism while others fail? In strong opposition to the popular view that success is determined by cultural differences, de Soto finds that it actually has everything to do with the legal structure of property and property rights. Every developed nation in the world at one time went through the transformation from predominantly informal, extralegal ownership to a formal, unified legal property system. In the West we've forgotten that creating this system is also what allowed people everywhere to leverage property into wealth. This persuasive book will revolutionize our understanding of capital and point the way to a major transformation of the world economy.

Customer Reviews:

  • Enhanced real estate markets = prosperity?
    I enjoyed this book, particularly the legal history of property rights in the United States.

    DeSoto doesn't really explore the nature of capitalism, nor the terms one can use to gauge its success. His claims that a reorganization of 'property rights' statutes can free up cash for investments has some obvious truths, but the equally obvious dangers are never considered. For example, China and Taiwan seem to be excellent example of DeSoto's recipe producing the desired prosperity. Unfortunately, neither get much attention. Several critics have suggested the Chinese real estate boom is based on forcing impoverished farmers off their land and reorganizing ownership to better suit investor needs. The reality of poor losing their land in the process of bringing land into the 'general market' contradicts DeSoto's claim about the book helping 'the poor'. In the context of US politics, consider recent controversies regarding civic use of 'eminent domain' powers to take land from small property owners and deliver it to 'investors'. At a minimum, DeSoto needs to address such issues. ...more info
  • A Marxist take
    To what extent do private property rights--dividing up the earth among individuals, making everything a commodity which can be bought or sold--facilitate economic development? Are they absolutely required? Could a planned economy manage to guide development, perhaps with (nearly) as much speed, but a lot more consideration for humanity?

    This is an important question for Marxists as well as others. It's also a controversial one. Adherents of Trosky's theory of Permanent Revolution (Bolsheviks more generally, in fact), and of Che Guevara's theory of peasant-based rural guerrilla rebellion, insist that it is possible and desirable to make the transition directly from an underdeveloped, largely agrarian society to an advanced, industrial capitalist economy under the auspices of socialist planning. In terms of legal systems, they believe it is possible to bypass a system of private property and free enterprise, moving directly from feudalism (landlords and peasants) to socialism (collective ownership of the means of production, distribution and exchange) without capitalism (the private ownership and building up of small businesses into giant capitalists industries, aka the MoP).

    Classical Marxism--represented by Marx himself, most Marx scholars, and politically speaking, by (for instance) the Russian Mensheviks--holds instead that every society must pass through a long period of capitalist industrialization before it is ready for socialism. Private property rights must be granted and protected by the government, development must take place under the "guidance" of capitalists (they are really just seeking their own individual self-interest, but in the aggregate they guide things), productive capital must become ever more concentrated into fewer hands, until eventually the forces of modern production are too large and too concentrated to be held by any one person in a society that considers itself democratic, and control of them must be taken away from individuals and given to society as a whole.

    Like any honest Marxist, although I'm convinced of the need for a planned economy in any highly industrialized society, I'm torn on the question of third world development. On the one hand, the classical Marxist argument seems more compelling and more in tune with reality. On the other, there is a strong emotional impetus to accept the revisionists' theories about moving straight to socialism. Must all of humanity really pass through the ugly period that the West experienced while capitalism was developing here? Modern sweatshops, all over the world, are like Charles Dickens' London on a massive scale: child labor, starvation wages, dangerous conditions, 16-hour days. Is it really necessary to see all this suffering happen again? Surely it would be inexcusable to dogmatically hold to the classical Marxist view if there was indeed an alternate, more humane path to development.

    The Mystery of Capital takes the basically libertarian viewpoint that an extensive and rigidly enforced private property system is necessary for development to occur--roughly in line with the classical Marxist view about the capitalist development stage that must precede socialist planning. It makes the case rather well. Since 100+ reviewers have already summarized the book, I won't. Instead I'll suggest reading De Soto in conjunction with Law and the Rise of Capitalism by Michael Tigar, which documents the *actual* role that libertarian (bourgeois) property rights had in the *actual* development of capitalism in the West. It nicely rounds out De Soto's hypothetical argument about what is required for the *future* development of the third world.

    Even if the argument of De Soto/libertarians/classical Marxism is correct, no one should think that legally-enforced private property is all that is necessary for development today. For we live in a different age than the one in which classical Marxism was born. Today there is an unprecedented development gap between the industrialized and undeveloped world, something that wasn't faced by the early industrializers (Britain, Western Europe, and America). New and unique obstacles therefore face those who wish to industrialize in today's global economy.

    Even with extensive private property laws in place, no infant manufacturing industries are able to compete on the global free market with those of the advanced industrialized nations. Thus, pure free trade provides another stumbling block to development even if private property laws were extensive and thoroughly enforced. Sure, developing nations can freely compete and trade their agricultural products and raw materials, but if they do not protect their markets for *industrial* products, they won't ever develop their own industries. An Indonesian car is not going to be able to compete on the free market with Japanese and American ones. The industrially undeveloped countries must be protectionist about their manufacturing industries until they are sufficiently developed to compete against established global companies. To continue with the same example, protectionism would allow an Indonesian car maker to grow to the point where it was providing cars for the entire Indonesian domestic market. At this point, it would be robust enough to have at least a fighting chance should the Indonesian government open up the automobile market to free trade, allowing foreign companies to sell cars in Indonesia and the Indonesian company to sell cars in foreign countries. For a further development of this argument, check out books by Ha-Joon Chang (Kicking Away the Ladder) and Erik Reinert (How Rich Countries Got Rich...Why Poor Countries Stay Poor). Needless to say, this will require a political battle by common working people of the first world against the economic elites of their own countries. Overseas development can only help working people in the first world: as other countries develop, their wages rise, and Western capital stops going overseas to exploit super-cheap labor, so more jobs stay here in the West. However, Western economic elites--by which I mean to refer to that select group of people who are in a position to personally profit from lack of development overseas, the owners of the capital that is benefiting by exploiting cheap foreign labor--will continue to try and make free trade, which is an impediment to development, a condition of Western loans and aid. For them, development of industries in the undeveloped countries represents merely a loss of cheap labor and a bunch of new competitors.

    Finally, what about the revisionist Marxist view, that of Trotsky, Che Guevara and others? It is possible to empirically check up on that line of thinking: just examine the record of states which have attempted development under capitalist and socialist legal systems. Compare existing and formerly existing socialist states and their efforts at development against the efforts of *comparable* (you don't compare Cuba with the United States, obviously) nations who have followed the liberal capitalist model of development. Many books have been written on the Cuban case, putting it in comparative perspective against Latin American nations with similarly undeveloped economies who have followed the capitalist model, and looking at whether Cuba's policies can potentially serve as an alternative path to development. Hopefully these books also take into account the effect of the crippling American-led embargo, or else their conclusions will be flawed in favor of the libertarian/classical Marxist view. I personally haven't read any of these books on comparative development in Latin America, but I plan to do so soon. After all, the entire third world is just waiting on my answer about what it should do! :)...more info
  • Very Important Book
    I won't go into explaining everything about this book except to say that it is an attempt to explain why capitalism has failed in third world countries. Mr. Desoto makes a very insightful case. This is a very important book for the future of the world. If you have any interest in progress and stability in the future spend some time with this work....more info
  • Necessary for those interested in economics & development
    Hernando de Soto makes an excellent case for the continued relevance of capitalism to the third world, despite its poor track record over the last half century or so. He begins this book by stating firstly that there really isn't another option to capitalism, so the question is not whether or not a nation should adopt capitalism, but how to make it work. Perhaps this is true, but what is even more important than the truth of this assertion is whether his prescription for change will actually work.

    As other reviewers have mentioned, the main focus on the book is property rights, and de Soto comes back to this point throughout. He argues that it is not that the people in the third world don't have money, it's just that they do not possess the formal rights over their property, which is necessary for them to convert it from 'dead' to 'live' capital.
    This made a lot of sense to me when reading it, because in many third-world nations the legal systems in many cases are too complex for ordinary people or else the law isn't able to enforce simple contracts that are taken for granted in the first world.

    What was missing for me however was the HOW? He mentioned WHY property rights are important, but how do you put this into practice, how do you transform the system of property rights in these nations? I was also disappointed at the way he handled possible problems with property rights such as, the need to educate people on their rights. In the back of my mind was always the thought that if property, especially land, had legal title, rather than being 'communally' owned, as it is in many third world nations, it would make it possible for foreigners to buy out uninformed landowners who would then not have anything else to turn to.

    But one shouldn't expect a book of this length to deal with all possible scenarios. As an earlier reviewer said, de Soto has missionary zeal, and it is infectious, but he should temper that zeal with some consideration for those who are suspicious of capitalism, otherwise it comes across to them as "another ploy by the imperialists to steal our land".
    ...more info
  • Insightful
    I thought this was a fantistic book. The author compares the sorry state of property rights in the third world today with identical problems in earlier periods of US history.

    Rich countries are frequently blamed for the problems in poor countries but this book shows why that blame is misplaced. This book also shows why billions of dollars in foreign aid have not and can not eliminate third world poverty....more info
  • A view only possible from outside the capitalist system
    This is a MUST read in my opinion. DeSoto has done us a great service. By standing outside the Western Capitalist System, he truely provides us all with a view we ourselves could not possibly grasp except as he has described it. We do not normally see this view because we have simply grown up in a free market capitalist society and accepted too much for granted. If we all could see ourselves from this perspective, we would all gain a special sense of our responsibility to the rest of the world. By understanding these cultural differences with other societies, we would be more effective as ambassadors of American values including free markets, individual rights and etc....more info
  • One-Trick Pony
    While the author does raise several points, by the 3rd chapter it feels like de ja vu. Yes, you are really into property rights and yes there's a lot of extralegal activities in developing economies, but do you have anything new to say?! By the fourth chapter, you start wondering how he's going to say what he's already said in a slightly different manner. Don't waste your money, read the comments here and you've basically read the book....more info
  • Reason for optimism
    This is a very good book. The idea that property rights are necessary for economic growth is not especially new territory, but there were three things the book brought to the table that I was not aware of, or was very impressed with.

    1. The nature and degree of extralegal activity in third world countries. There were several fascinating examples of what goes on in the informal sector. I found it very encouraging that there is so much untapped resource available and more than ready. It is also a powerful argument against the idea of culture being the limiting factor to growth.

    2. The idea that a set of property rights will need to incorporate the preexisting "social contract" property rights of the informal sector in order to include most or all of the nation. This was backed up with a lengthy example of the formation of property rights in the US. This explains why it has been so difficult for countries to implement a property system that is usable for the poor.

    3. A comprehensive plan to implement a usable set of property rights for a third world country. Most political economy books focus on finding problems and are not nearly as forthcoming with solutions, let alone one that is as detailed and real-world based as this one.

    Overall the book left me with a reason for optimism about the possibility of third-world countries being helped along in their desire to improve their economic condition. My only complaint is that it tended to be a bit repetitive, but it was a small price to pay for a potentially world changing idea.
    ...more info
  • A wake-up call for economists
    Since the Keynesian revolution the economics profession has been busy writing up mathematical models of incentives that show how IMF and World Bank loans, free trade deals, "fiscal policy" or "game theory" can be used by governments to generate economic growth. Hernando de Soto's Mystery of Capital is a slap in the face for every economist that has ever had a high-paid position in the countless agencies built to promote growth. It turns out that the classical economists (and their Austrian school heirs) have been right all along, that the source of economic growth is individual businessmen. And what can these individuals do when it takes a year of full-time work and years of savings paid out in bribes to get a legitimate business license? Nothing. The only people that can do business in these countries are the already-wealthy and well-connected.

    For all the talk about international free trade, contemporary economists have never really paid attention to internal free trade, free trade between individuals. There is no mystery of capital. The men who built the West knew it well. The real mystery is how a class of government-protected elite academics could have forgotten the basic lessons of economics. It took a non-academic, De Soto, to remind them. It remains to be seen if they will admit their failures....more info
  • The Power of Property Rights
    The mystery referred to in the title of this clever, but not particularly useful, book is what citizens of Western liberal democracies have taken for granted for many years: namely, the ability, thanks to highly developed systems of property law, to convert assets to capital. The fact that capital has the potential to produce "surplus value" is commonplace in the West but still a mystery to much of the develping world, and it is, according to Hernando DeSoto, the main reason they are still mired in poverty.

    DeSoto and his research team from the Institute for Liberty and Democracy in Lima, Peru have done some case studies of the legal barriers to economic growth in Egypt, Haiti, Mexico and the Phillipines. What they have discovered is that the poor in these countries are actually in possession of assets to which they do not have legal title. In Haiti 97% of the rural poor live in housing that "no one" owns, amounting to about $5 billion worth of "dead capital." In Egypt 92% of the urban dwellers do not have title to their property, worth about $240 billion. In the Phillipines about 50% of the urban dwellers and about 66% of the rural people live in extralegal housing, worth about $133 billion. Peru's extralegal real estate is valued at about $74 billion. Worldwide the value of dead capital is about $93 trillion.

    Imagine $9.3 trillion converted into working capital for the poor. This is the insight that makes DeSoto's work so compelling. This is about 100 times the amount donated by wealtlhy countries to the developing world since the fall of Communism. Desoto writes: "What the poor lack is easy access to property mechanisms that could legally fix the economic potential of their assests so that they could be used to produce, secure, and guarantee greater value in an expanded market." Converting informal or extralegal property systems into formal, legal systems is what lifted the West out of poverty in the 19th and 20th centuries; it can do the same for the developing countries today.

    Now also imagine the legal challenges in this great conversion of assets to capital. All these parcels of land that are being illegally occupied are, presumably, owned by someone or will be claimed to be owned by someone if legal title is not clear. Land reform in Europe and America took centuries of give and take to arrive at today's systems of property law. The developing countries undergoing land reform should not expect "surplus value" anytime soon.

    Property rights are just one of the key ingredients of a robust market ecconomy. There are other rights that are crucial to capitalism: such as, the right of contract, intellectual property rights, right to form corporations, and so on. In other words, rule of law is necessary for the efficient functioning of capitalism. If Desoto had expanded his analytical framework to include this bundle of rights - not just property rights - he would have done much better....more info
  • Thoughts that come on doves' feet guide the world...
    Other reviewers have commented on De Soto's originality in relation to prevailing economic tradition. They have also praised his style - very clear prose, interspersed by passages of honest elegance. Yet, for me, at least, what stands out most about De Soto is his interest in discovery, in reawakening a long forgotten question.

    Who asks oneself seriously what capital is today? Is one even generally capable of understanding the question of what capital is? I doubt it - the first reaction is ridicule. Of course one knows what capital is, for one lives in a capitalistic society. One can hardly take such a question seriously.

    Yet, this provocative question moves this book. De Soto has carried out first-hand research among the boiling global centres of 'marginal' economic activity. He has not looked for the 'right' theoretical answer to the question of capital, rather, he has tried to discover a way to pose, and answer, the question meaningfully. Meaningfully for whom? To those who have forgotten - those in the West - and to those who wish to learn in the developing world and the former communist nations. What is capital?

    Other reviewers have criticised De Soto for redundancy, repetition. These criticisms are off the mark. De Soto has discovered the conceptual solution to the question of the potential of capital: a legitimate system of representation of property. Yet, he can not simply elaborate it in a few words, for one does not still understand the question he is answering. Because it is disturbing and fleeting, it is very difficult to grasp. Thus it requires constant reformulation. Shakespeare used parallel structure, De Soto uses masterful analogies (I particularly like his profound observation on something so seemingly apparent as barking dogs).

    De Soto also tries to situate his thought within diverse traditions of Western thought, combining Continental philosophy with American analytics (it is rare to see someone who is capable of synthesizing Derrida with Wittgenstein, to say nothing of Searle!). He seems to be trying to say the same thing in many different ways - yet it is very difficult to understand what that thing (capital) is. De Soto helps the reader by offering many different pathways to the thing (capital) itself.

    I feel that De Soto might have engaged more deeply with Plato's thoughts on representation and his analysis of the cave parable is somewhat superficial. A more in-depth engagement might provide the basis for a rethinking of some of the precepts behind private property and capital, which De Soto simply accepts as given. This is a personal quibble only, however, as such speculation would reduce the clarity of the book, and thereby reduce its tremendous practical value for concrete action, obviously the author's main intent.

    De Soto has written a masterpiece around a a simple kernal of truth. It seems so obvious in hindsight! Yet, it is the very stillness of those words in which it is expressed which will bring on a storm....more info

  • International economics

    This is a great book by Mr. DeSoto on the real reasons as to why it is taking so much pain and time for Third World countries to develop their economies and markets. He is not arrogant or ignorant in his critique and does not blame people or governments blindly like some of his fellow American writers do. Highly recommended to anyone who is interested in international economics or finance....more info
  • Explains what it takes to make free market really work everywhere
    This book dispels may ill-conceived notions people in developed world have about people in the rest of the world. Explains how the inability to put a value on assets in various parts of the world is a major cause for stymied growth. And the reason for this inability to quantify assets stems from the extralegal ways in which the assets are obtained.

    Emphasizes the importance of institution building (over long periods of time) for the capitalism to really work. Explains why institution building is not always easy. Explains how, to set things right, extemely unpopular measures have to be taken (which upsets the some people who are afrid to lose their influence) which in many cases leads to unrest resulting in rollback of reforms.

    Explains how to bring extralegal sections of the society into the fold in order to ensure long term success. Mentions the transformation of US over centuries into what it is today (largely governed by the rule of law)....more info
  • The BIG solution
    Robert Lucas once stated that its hard to think of anything else, once one starts to think about how poor nations can grow rich. de Sotos thinking is the best Ive come across. Most explanations of why so many people all over the world are poor are based upon some moral condemnation. de Sotos is based upon logic and empirics.

    He documents that between 50 and 90 per cent of the population in a lot of the developing countries are living in extra legality. A lot of the people on the outside of the legal system are poor, but most of them are not. In reality, they own homes and businesses. However, their ownership cannot be capitalized because it is virtually impossible to register it properly, so creditor would accept their property as collateral. And without credit, development and expansion of business is extremely difficult. The documentation of the dimensions of the extralegal sector is one of the books main qualities.

    As some reviewers have pointed out, de Soto is in very little doubt that he has an extremely good case, maybe to little doubt. The book is written almost as a recipe for nations with underdeveloped property registration systems. In the recipe however, de Soto is very nuanced, and pays a lot of attention to most of the important aspects. Especially is he stressing that there is no property vacuum, even without no laws. A transition to a legal system would have to take the extralegal system into great consideration.

    To what extent the importance of private property is generally acknowledged in the West, is illuminated by the fact that the Haag convention of war of 1899. "International law (..) treats the property rights of individuals as more sacred than the sovereign rights of states, providing that even if governments lose lands, property owners in those same territories shall not lose theirs (p. 166)".

    What I find lacking is a more thorough discussion of the interests in the developing countries that prevent the establishment of rules and property registration. I got a feeling that de Soto thinks the main reason is that the politicians and lawyers just dont know how their nations could grow rich. As an economic explanation, this is clearly to easy, and more related to the classic explanations of how countries are poor (exploitation by the evil West), and not in line with the clear logic carrying most of the book.
    ...more info
  • It's still happening in Asia
    I , an taiwanesee real estate agent, read the chinese version. Comparing with the book "the ecnomic analyze of argricultual developement in Taiwan" writtent by our former President Li, Deng-Hwe, Taiwan developed so quickly in 50 years due to the same process that happened in western hundreds years ago. Now, it is happening at every coner in Mailand China. Millons of acres of land are sold to foreigner's manufactories and the government is spending those money to develope infarstructure. People in shaing-hai could amazingly finish any real estate transacton within 20 days. Vietnam also trigger that system 3 years ago. Where's the next one ? I think oppotunities are full of Asia, I just keep searching it....more info
  • A Mystery, Revealed
    Like Economics in One Lesson, by Hazlitt, The Mystery of Capital is one of those books that opens your eyes with one single lesson: the importance of strong private property ownership rights and its consequences. De Soto argues, not theoretically, but with proven experience that this is the key to unleashing the potential of capital and its benefits. Suffice it to say that De Soto's advice got rid of the guerrilla in Peru by giving their farmers title to their property and therefore desincentivating them from the growth of drug crops. He also has been hired as a consultant to Egypt, the fastest growing economy in the Middle East, since the reforms proposed have been implemented.

    This is a must read to all those wishing, wanting, willing to do away with poverty and to protect property, and it does not have to apply to the third world only: the US and Europe could use a good dose of deregulation and less State intervention in property rights in order to combat poverty, inequality and all the evils modern politicians like to talk about but do little to solve. Were I president of a nation one day I would immediately hire De Soto and his team. Can all evils be resolved with property rights? No, but by aligning the incentives correctly most economies would benifit greatly and much corruption would dissappear, eliminating a lot of poverty with it. This book should be a required reading on any economics university program, and De Soto's researched should be further expanded and discussed....more info
  • One idea book
    A one idea book by Peruvian economist Hernando de Soto: that capitalism will flourish in the Third World (where clearly it has not, give de Soto one mark for honesty) if the poor there, who live in many cases in land that is not legally theirs, would be given a title to the land. Once given a title, they would have collateral to enter the legal market. The idea is interesting; certainly, anybody who has been in a bustling third world market has seen it as a haven for capitalism, not socialism. But the notion that this would be a cure-all for third world poverty is preposterous. Worse, de Soto gives figures of wealth held by the poor (but not under legal title) that seems frankly dubious. Like most one idea books, the author ends up overselling its idea (which is not bad in itself)....more info
  • The elephant in the capitalist room
    Let me see if I have got this right? The only way to organize the economy is the capitalist way? That way we all gain? OK the bosses of Nike, McDonalds, and Wal-Mart will gain a bit more than us ordinary folk, but our little boats will rise with the flowing tide?

    Sounds good: who would want to be the party pooper?!

    Well someone's got to be, and for the simple reason that we don't live on a planet the size of Jupiter.

    The oil's finite: we know that but can't be bothered to act on it. Even the supply of water is turning out to be finite: the south east of England is on a collision course between an expanding population and a diminishing supply of water. OK, they could ship it in from the rest of the UK where there's no problem, but for reasons that don't quite add up that's not possible. It's not the corporate solution, if you will forgive the pun.

    Has it occurred to anyone, I wonder, if it's capitalist-driven growth which is at the heart of the upcoming problems? Yes, I know Marx and Stalin don't offer any fixes, but at some point along the way the problem is going to have to be faced: growth is going to wind-down whether we like it or not.

    ...more info
  • The book that could change the world for the better
    As I write this, there are already 99 reviews, so I will keep this 100th review brief.

    De Soto's argument is that the problem of poverty in the third world is primarily caused by the inability of the people to make use of the capital they already posses, because the government won't allow them legal title to it. So while they occupy the land, build houses and markets, all of their activitity is technically illegal. So while I, in the U.S., can get a loan to start a business, using my house as collateral, no bank will give them such a loan because they don't have legal title to their property and so cannot use it as collateral.

    He debunks the arguments that capitalism only works if you have a western ideology. Humans are the same under the skin, regardless of ethnicity or cultural upbringing, and people all over the world have the same goal--to improve their own condition. That desire, and the access to some amount of capital, however small (think of the success of the Grameen Bank's micro-loans), is what leads people out of poverty. Government cannot kill the desire, but it can prevent access to the capital--which is what nearly all 3rd world governments have done remarkabley well....more info
  • Explaining the differences between and poor
    Hernando de Soto's "The Mystery of Capital" is a breakthrough piece of scholarship that provides a plausible explanation for the differences between rich and poor societies. According to de Soto, it's a well-defined system of property laws that allows individuals to unlock their accumulated value. In general, de Soto shows that permanently downtrodden societies:

    a) Make it very difficult to buy, sell and value property rights.

    b) Create all sorts of byzantine barriers to anyone who wants to start a business.

    The key to de Soto's work is the empirical evidence he and his team accumulate. The book is rich with examples from de Soto's native Peru and other countries like Egpyt. In fact, de Soto is working with Gamal Mubarak (son of the President) in Egypt to implement many of these ideas. Bill Clinton is also a big supporter of de Soto's.

    Some of the reading here is dry and stilted, but it's worth wading through those passages to grab the gist of de Soto's thesis. This is an important publication that you'll see menationed time and time again over the next decade. ...more info
  • Clear, Precise, Cogent and Important Thoughts
    Although De Soto is trumpeted in the halls of the Chicago School as a person directly in line with his ideological primogeniteurs, it is clear that De Soto is not an ideologue.

    His main thesis is that property rights are one of the fundamental underpinnings of western capitalism. Property rights allow the smooth functioning of capital accumulation without the diversion of too many supernumerary laws and institutions, and form the base impedements that allow capital markets, lending institutions and wealth creation mechanisms to function smoothly. If property rights are not highly developed then the "friction" this creates in the movement of capital impedes growth. As a concrete example, people in Africa and much of Latin America and Asia live in hovels that do represent accumulations of capital, but because these hovels, many owned by squatters cannot be leveraged to create capital or cannot be lent against. They in effect at dead capital because their ownership is in limbo. Advanced societies have smooth functioning property laws and markets that allow the process of wealth creation.

    All of this is simple and De Soto does chronicle, as well as he can the underlying condition of dead capital formation, historical development of property rights and solid policies for implementing more legal property controls in the third world.

    De Soto is also profoundly motivated to move backward societies forward and feels the poverty profoundly. In this sense he is very much a thinking man's economist and not an ideologue.

    The one thing I would state is that the concepts De Soto is propounding are simple in nature and scope. As such I think that De Soto does repeat himself from time to time. Also the historical developments of property rights in the US is a good example of how a country with essentially third-world property rights, emerged to relatively advanced property rights. But I do think that his historical scholarship suffers a little as an Economist outside of his area of interest.
    The writing style, though good, is not so exciting at times and would do better with a bit more details on specific human examples. But that should not detract from its scholarship. ...more info
  • Packed With Knowledge!
    Hernando de Soto's ideas cannot and should not be ignored. This book will open many eyes to the nature of capital. The author suggests a radically simple yet enormously challenging way of bringing the world's impoverished billions onto the track of capitalism and development: give them legal property rights to what they "own." The author's intriguing case is that a lack of property rights - not a lack of entrepreneurial zeal or competence - stymies development in the former East Bloc and Third World countries. This seemed to be a shockingly original notion when the author first propounded it in his bestseller The Other Patch, and it still does. If the book has a flaw, we warn, it is that the author's undisguised missionary ardor sometimes makes one wonder whether he is merely a zealot. Even if he were one, the book would merit reading....more info
  • Wow! These are things you never think about
    This is beautiful book. And there are so many good things to be said about them, I've had to abbreviate much of my review in the interest of readability.

    First, the good points:

    1. First hand experience with the subject of which he is speaking. This author went through a lot of pain to actually go through some of the processes that he described the local people in different countries that he was describing so as to associate some numbers with the facts. So, he would count out 728 steps in the a particular registration procedure. Or 289 days from start to finish for another.

    2. His coverage of the American experience with squatters was brilliant. Most people don't understand that it took a long time for America to "get it right" in terms of assigning property rights and creating the stable country that we have today-- and this is not unreasonable since the type of information that deSoto was gathering had to be found at a lot of different places. (How often do people write about the hisotry of squatters with respect to legal issues?) The stability of American assets and the strong property rights go a long way in explaining why American assets are coveted in such a way as to create the huge trade deficit that the country experiences.

    3. His understanding of which people involved in the game of assigning property rights were apporpriate for which steps. So, for example, people who made a living as intellectuals only dealing with isolated facts on a page were totally inappropriate to the task-- no matter that they develop the most discussion about said people. Those who deal with "nuts and bolts" on a regular basis are best for such things.

    4. Discussion of how legal institutions must accommodate extralegal persons-- especially if they form a majority of the country in question.

    5. Detailing of the commonality of informal arrangements in places where the government can't be relied on to enforce contracts. It doesn't seem to depend on country or culture or anything of the like. And this author strongly eschews cultural explanations of why people fail to produce wealth-- which is currently en vogue.

    6. His discussion of how the symbolic representation of things has changed the value of them to large numbers of people (numbers, paper money, etc) is brilliant and just enough.

    7. He's drawn from many sources and his bibliography is extensive and wonderful.

    The negative points:

    1. DeSoto really bludgeons the reader with the fact that private property has the potential to become venture capital. We understood it the first 5,000 times you made the point.

    2. His idea of "surplus value" is not clearly distinguished from that of Marx (to whom he refers several times throughout the text). Marx was so thoroughly wrong about so many things, it would do well for him to make separations between his ideas and those of Marx in the text.

    3. Some of his metaphors were stretched too far. If potential energy goes to kinetic energy, that is one thing. I don't know that it's the same thing as some physical object being seen as capital and becoming earning potential as a result.

    4. The book was about 220 pages, but could have said the same thing in 150. Big minus, but the book was so strong otherwise it outweighed all of these things....more info
  • Property Rights are key to ending poverty
    This book reveals what needs to be done to bring the third world out of poverty. The everyday American does not have a clue about what made America's economy the best in the world. Property rights are the key to advance any civilization out of poverty. Just look at china and how with their economy has exploded with the limited property rights they have granted....more info
  • A "should read" book for a different perspective on 3rd world poverty.
    The first 20 or so pages are actually the hardest hitting.

    DeSoto's team has compiled, by going thru them, a list of the administrative steps that someone wanting to legally register a small business would have to go through in a half dozen developing countries. Haiti, as an example, has about 150 steps, jumping from ministry to ministry, and visiting many several times, before you can be legally registered. Unbelievable stuff!

    His point? Nobody bothers, and nobody bothers to register land or building ownership either. This results in ample scope for graft by corrupt officials. But, mostly, this makes business relationships outside your immediate circle very difficult: how can you sell or insure something which you can't prove you own? How can you buy land without formal land ownership information? How can you get a bank loan without collateral? So the vast majority of citizens are forced to eke out a living, with none of the opportunities for entrepreneurship which we take for granted in our societies. According to DeSoto, those people are just as capable, and certainly have more reasons to be motivated, as many of us. They just have no opportunity, due to systemic legal failures.

    Only the rich can afford the time to play by all these well-meaning rules, or the money to bribe themselves out of them. The poor just end up in extra-legal shantytowns. See Zimbabwe's recent little ghetto cleanups for one possible result.

    There is also a comparison of these issues with the slow establishment of formal property rights in America, in the 17th thru 19th century. The point being that these problems are not new and are not impossible to solve either. In fact, the book is almost worth reading just for its look at that particular facet of European and American history....more info
  • De Soto forgets about risk management and market liquidity
    De Soto, observing that "the single most important source of funds for new businesses in the United States is a mortgage on the entrepreneur's house", concludes that by providing real estate property titles to poor people, they will have access to the same type of funds from banks.

    He forgets two important facts:

    1) Banks take into consideration the credit worthiness of the entrepreneur asking for the loan. A poor person in a shanty town with a business idea of starting a fruit stand will not be considered credit worthy by any commercial bank.

    2) Banks take into consideration the real estate market liquidity when making a property-backed loan. If the real estate market is not liquid, the bank cannot liquidate the property in case of a loan default. I'm willing to bet that the real estate market in a shanty town is less than hot.

    We should always bear in mind that economics is hard....more info
  • Several important points, but de Soto oversells and is mind-numbingly repetitive
    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)....more info
  • a BIG idea for social change
    Every now and then, a book comes along that opens our minds to an idea that can change the world, and in so doing changes us and reminds us why we read and search for that next great book with that next big idea. I have a very short list of contemporary books like this, and "Mystery of Capital" is one of them....more info
  • One of the single best books on Economics I've read
    Many of the other reviewers have given excellent in depth summaries of DeSoto's book, and I will not regurgitate what others have already done a good job of saying. I will just say this: if you want to know why 3rd world countries are 3rd world countries, and what Gov'ts around the world can do to create prosperity for their people, read this book. Nations are poor because of ill-guarded private property rights. It's that simple. They aren't poor because of lack of socialism (quite the opposite), they aren't poor because of lack of resources, it's because "It's the property rights, stupid!"

    Books like this can give hope to the pessimist, that it is possible to end serious poverty in the world. Relative poverty will always exist, but the civilization-destabilizing poverty that exists in the Arab world, in Latin America, *can* be cured if Gov'ts would just put in place a system that allows capital (ie entreprenuers) to grow from the natural resources within the country. Replace Socialism w/ Rule of Law. I hope every member of the Iraqi CPA has read this book and heeded its lessons......more info

  • A Comment regarding the book as well as many of the other reviews
    I have read a great many of the reviews and it amazes, amuses, and frustrates me that so many of them criticize the book for not being about that which the book never pretends to be!

    It seems that so many wish to attempt to posit their prodigious knowledge at the expense of the book. And I am sure that some appreciate that, although I suspect more are concerned with the intended scope of the book, rather then the personal concerns and baggage of the reviewers.

    More evidently have not read the complete title and erroneously have interpreted it as a complete treatise on all things "capital"!

    Others cite the premise of the book that many societies have not yet developed the legal infrastructure to provide for legal ownership and property rights related to the historical 'squatters rights', citing that the problem is that countries are under-developed! Such circuitous insight is, at best, well amusing!

    And regarding the fact that he responds to Marx's premise, it is not surprising at all when you consider the context of the political reality in de Soto's South America, in particular, with the activity of the Maoist Shining Path.

    What would indeed be refreshing are more reviews that address what the book attempts to address, within the stated scope of the book's premise, rather then a review of the emotional baggage of the reviewers who review the text based upon that which they wish it addressed!

    The book focuses on a valid and fundamental point that has not previously been adequately addressed! And it presents the basic tenant with many examples from many perspectives. And excellent and deceptively simple book, after reading the premise assumes a quality of a point that is suddenly quite obvious, but which has heretofore not been adequately realized nor addressed!

    But in keeping with the spirit of the myriad other reviewers, I guess I should find fault with the book for not delving into the early formative period of Mickey Mantle's life, as I am sure many would appreciate this! But alas, such is not within the author's intended scope of the text!...more info
  • Well articulated and researched book on property rights
    Desoto explores the history of property rights in the developed world and the state in developing world nations. He argues for the essential nature of well-defined property rights to transform the trillions of $ of "dead capital" (property which is owned through the unofficial "extra-legal" market) into leveragable capital which we take for granted in the developed world. One of the most interesting sections is when he describes the extended time (75+ years) it took in USA for property rights to become reasonably established. He argues that we expect developing nations to implement our current system in a very short period of time which isn't the process the USA (and all other developed nation systems) went through! It is inherently a political process and politics takes time for new systems to soak into the fabric of the society and displace the entrenched status quo which has many beneficiaries. This is a must read for anyone who is seriously interested in breaking the cycle of poverty in developing nations....more info
  • DeSoto points to property rights as key to capitalist development
    In The Mystery of Capital, Hernando De Soto, President of Peruvian think tank "Institute for Liberty and Democracy," seeks to explain (as stated in his ambitious subtitle) "why capitalism triumphs in the West and fails everywhere else." His answer is that Western countries have developed flexible legal systems that recognize emerging property interests, especially in land.

    De Soto notes that the United States from the start faced the issue of illegal squatters. George Washington experienced squatting on his land in Virginia. He called squatters "banditti." The United States was dragged into recognizing squatting and "homesteading" rights, not as a matter of liberal enlightenment, but rather as the result of social upheaval often mixed with bloodshed. The expansion of the Western frontier, and particularly the California Gold Rush, exposed tensions over uses of federally owned land that still continue. What was so propitious to capitalist development in the United States, De Soto asserts, is that the traditional view of property rights caved in and masses of people became independent property owners.

    In contrast, De Soto points to many Third World countries, including Peru, where the masses have developed much potential property, both in the countryside and in squatters' cities, but no solid legal foundation to back up their claims. Without uniformly recognized property rights, they cannot borrow against (mortgage) their property to make other investments. Their capital is not fungible or tradable. It doesn't enter into the spiral of accelerating benefits that De Soto attributes to a fully integrated capitalist system. De Soto and his researchers have labored admirably to detail the hundreds of steps it typically takes in such pre-capitalist legal systems to develop a clear title to land.

    De Soto's thesis: those countries that develop a flexible system to recognize property rights develop capitalistically; those that fail to develop such a system don't. However, De Soto fails to explain adequately why it is that some countries are able to cross this legal threshold and others haven't. He makes many generalizations about the West "and Japan." What allowed Japan to become an exceptionally developed society? Are countries such as Singapore and Taiwan on the same (sustainable) path?

    De Soto's book is potentially valuable to emerging markets investors. We are now seeing many Latin American countries, after an era of reform, reverting to anti-capitalist sentiment and statist policies. Consider Venezuela and Bolivia, for example. The implication of De Soto's these is that the State can make many good reforms, but if it fails to recognize property rights in the disenfranchised masses, economic development will fall short, and the political constituency to support it may also fail. De Soto's thus book provides an echo in economic theory of English Prime Minister's Margaret Thatcher's famous doctrine of an "ownership society." The implication for investors is to go where the masses are developing clear property rights.

    Andrew Szabo
    (Greenwich Financial Management)
    ...more info
  • Great, refreshing, unique!
    How do you make capitalism work? Make all your citizens capitalists!

    De Soto argues that the reason why capitalism isnt working in many parts of the developing world is because of an immature system of property rights... In a nutshell, he asserts, the costs of obtaining property are so high (thanks to government over-regulation in most cases...lots of paper work and trips to the capital and fees) that the poor are unable to own property. Unable to obtain property they can't do things like get a loan put on the value of that property so they can develop a business or expand a business.

    The book gets back to the roots of capitalism...property. If the poor don't have access to property they can't dig themselves out of poverty and when they can't do that your economy stagnates and falters. Instead their business will remain extralegal and thus benefit far fewer people (and do little in the way of building wealth).

    This book illuminates one of the many areas of capitalism that needs to be addressed before it can truly work to eliminate poverty (creating more egalitarian property right laws is only part of the puzzle but a very important piece).

    This book is a great read, though the middle part is mostly repeating the central theme over and over. Any fan of capitalism, markets, or fighting poverty should have this book on their shelf....more info
  • very disappointing
    Coming from both developing and communist country myself, I expected to read some serious analysis and convincing explanation for the question de Soto asks in the title. The reading turned out to be very disappointing. The most apparent error de Soto made in my opinion is: large extralegality, lack of property system are all results of underdevelopment, not the cause. Second, as other reviewers have pointed out, it's very annoying to read the same idea repeated again and again throughout the chapters. ...more info
  • Brilliant!
    A deeply interesting read. This book completely changed my outlook on global economics and politics. After reading this book, one will certainly see the world quite differently....more info
  • A Pragmatic approach to the socio-economic issues
    Outside the Western borders; capitalism is in crisis not because international globalization is failing but because developing nations have been unable to channel capitalism in their countries. Most people in these nations view capitalism with skepticism. To them it is a private apartheid system that benefits only the West and the elites of the developing countries. The fact that more people throughout the world wear Nike shoes; flash Casio watches; drive Ford cars and dine at Mc Donalds; is not an indicator of capitalism.

    The Issue:
    Latin Americans do not have to be reminded. On at least four occasions since their independence from Spain in the 1820's, they have tried to become part of global capitalism and failed. They restructured their debts; stabilized their economies by controlling inflation; liberalized trade; privatized government assets; undertook debt equity swaps and overhauled their tax systems. At the consumer level they imported all sorts of American and European goods. But their lack of success is in their misplaced directive. Fact lifeblood of capitalism is placed in nothing but Capital.

    The Resolution:
    Desoto has taken a very pragmatic approach to the problem; by taking both a historical approach as to how the West traveled the path of Capitalism and undertaking a detailed research in the extent of dead capital stagnant in the developing world. He professes that just like the west in the early days; in the developing world there was a migration of people to cities during the industrialization. This migration created squatter colonies; and around them developed supporting economy. Bureaucracy and painful property registration system (taking 14-17 years); prevents registration of property. In essence creating dead capital; in such a system nobody can identify who owns what; addresses cannot be verified; people cannot get credit or debits; resources (land assets) cannot be converted into money or securities, description of assets are not standardized and cannot be easily compared; and rules of property law changes from neighborhood to neighborhood. By streamlining the registration of dead property lying outside the legal system eliminates all the issues above; and benefits the people by making credit/debit easily accessible to them, by taking loans with property as a security.

    Facts:
    Desoto from his years of research of underground economies taken from a very varied group of countries (Haiti, Egypt, Philippines, Peru) has found some very startling facts about dead capital.
    In Egypt the Dead capital is 241,2 Billion, which is 55X foreign direct investment (FDI) up to 1996, 30X market value of Cairo Stock Exchange; 13X accumulated foreign reserves; 6X total savings in commercial banks in Egypt.
    In Philippines the Dead capital is 132,9 Billion ; which is 14X total FDI; 7X total savings in commercial banks; 4X market value of Philippines Stock Exchange.
    In Peru the Dead capital is 74,2 Billion; which is 14X FDI up to 1995; 11X capital of the largest public enterprises in Peru; 8X total savings in commercial banks in Peru....more info

  • Important work
    This book is a very important work in the area of the economics of property rights. De Soto emphasizes the importance of property rights for the development of developing countries. ...more info
  • First Rate Analysis of Poverty and Development
    The Mystery of Capital tackles one of the largest issues in development and comparative economics: non-convergence. Why is it that living standards do not converge? Is it because some nations have better technology? Is it because some nations simply have more capital? De Soto focuses on institutions rather than existing technology or capital. The reason why some nations succeed in developing a modern capital structure using modern technology is because their institutions protect the property rights of those who try to save and accumulate wealth.

    The discussion of American history is detailed enough to make a strong case, yet focused enough to make it easy reading. De Soto does a good job of relating American experience to modern development issues. This is what economics should be about: using valid and sensible theoretical propositions to explain real historical events. Consequently, I have found this book useful in my classes on Comparative Economic Systems, and Law and Economics. The Mystery of Capital certainly does not read like a textbook, but it should be used as one anyway.

    The main limitation of this book is that it tends to make observations about politics, rather than explaining it. In other words, De Soto does not get very far into Public Choice issues. This is a minor limitation, as no book can cover every angle. Read The Mystery of Capital and learn!...more info
  • Good Book, though not what I expected
    Being a student of Economics (one looking into doing a dissertation on Capital Theory in a few years, actually), I thought this book looked like a great book in the field. So, I bought it.

    When I started reading it, I was a bit shaken. Mostly because it wasn't the book I expected. I expected a book on capital theory (the theory of capital goods, I was hoping). Instead, I got a book about the importance of legal property rights being derived from the existing social norms among the poor in Third World and post-communist countries. So, from a technical standpoint, I question if "capital" is really the term De Soto should have used for the mystery he was uncovering.

    But, after the initial shock, De Soto's point really caught on. The lack of legally enforceable property rights make it so that all the savings the poor of the Third World have can't be converted into "live capital". Personally, I think a better way of saying it would be "The lack of legally enforceable property rights prevent the Third World's poor from being able to join the global markets due to the resulting lack of unenforceable contracts." In addition, laws should be based on pre-existent social contracts. Good points, and I agree with De Soto: pouring money into the developing world just won't cut it as far as economic development is concerned. Until strong legal property rights exist, any investment is more or less waste. (With the exception of charity to the very poor, which isn't with the goal of economic development, anyway.)

    But, after giving me 6 good chapters of evidence as to how Third World and post-communist governments are failing to provide good property systems, De Soto decided that his final chapter should be a short essay on how great Karl Marx's analysis of certain capitalist phenomena are, and how tempting his philosophy will be to the Third World if it doesn't shape up soon. Thanks, De Soto. But, perhaps you should reread Marx a bit more critically. Fortunately, this chapter did explain why De Soto felt it necessary to continuous use the phrase "produce surplus value" instead of "make a profit" or "increase standards of living". Either way, much of the last chapter felt like useless conjecture about how Marx would feel about the state of the modern world. So, it's not a 5 star book.

    If you're looking for a decent book on a very specific issue in development economics, this book provides good evidence for the necessity of relevant property law to economic development. If you're looking for a book that's actually about capital, then look somewhere else....more info
  • Capitalism Triumphs in "Market" and Fails EveryWhere Else
    Most reader comments on the "political" and "Policy" side of the book. They applause by embracing the idea of less government intervention, better legal protection, better property right and so on. But I will comment the Economic side of the book. The most important point in this book is that there is a lot of "dead capital" in under developing countries. My wonder to this point is that which mechanism generate so huge amount of "dead capital". From the content of De Soto book, it is sure that all these "dead capital" comes from "black/underground Market" or "Illegal Free Market". The "Illegal Free Market" generate 9.3 trillion dollar. Actually I think De Soto is still highly under estimate the value since De Soto does not include all the human capital estimation. I think De Soto agree Free Market is the real source of economic growth.
    Also in De Soto analysis, capital is the fuel for economy growth while the Keynesian believe that both individual and government spending the fuel for economy growth. De Soto book does not directly compare this 2 different ways to go. But De Soto clearly show that Foreign loan or aid does no help since it only simulate spending only. From my understanding, De Soto recommends to use Market to replace the government to release the "dead capital". Government is only require to provide minimum effect to ensure that the contract is fulfilled. ...more info
  • Big, original, important ideas explained well
    Desoto and his team deserve a lot of credit for this book and the research underpinning it. Desoto asked the question of why capitalism, a system that works so well in parts of the world, fails miserably in other parts of the world. Rather than sitting in an office somewhere and coming up with a theory, he and his team headed into the third world and literally attempt to buy homes and start businesses; their findings are enlightening.

    The premise of the book is that basic property rights, and the set of laws that guarantee them, are prerequisites to effective capitalism. In the parts of the world that do not have these rights and laws, capitalism cannot take root. Desoto finds that the ability to take material holdings (like a house) and leverage them (through someting like a mortgage) into capital is absolutely critical. In many parts of the world, however, it can take between two and ten years to get legal title to a home. Even then, your rights to continued legal ownership of the property are far less than perfect. The effects of this legal quagmire on capitalism are crippling.

    One of the most interesting points that Desoto makes is that the West, in its efforts to spread capitalism, never recognizes the need for property rights as an underpinning of its own economic system. He argues that we take our system of property rights so for granted that we can't even recognize them as essential to capitalism.

    The book would be five stars except for a tendency of Desoto to get a bit preachy and the fact that he actually seems to blame capitalism for not having its own mechanism to create the property rights upon which it depends. It's a little like blaming the rain for not coming with the concrete that would make it into a pool in my backyard - it just isn't the rain's responsibility.

    That said, there are amazing ideas in this book that hold real power to improve the lot of billios of people if they can be recognized and effectively implemented. Highly recommended....more info
  • A Huge Step to Achievable Results
    I'll keep it simple. The book does a great job of illustrating the fundamental components of culture and law which allow citizens in the first world to succeed under capitalism. Americans, and indeed many first world citizens, too easily assume simple concepts like property rights and contract law are universal. In that ignorance, they blame lots of things, never realizing that the answer is so omnipresent in the west that they take it for granted.

    An economics background can also help you appreciate the role that classic market concepts like (im)perfect information and transaction costs play into the examples he cites. A loan shark must charge 30% to 50% interest because he doesn't have a credit score on which to rate you. He may be taking advantage of you, but he certainly can't give you prime+5 if you've got high odds of defaulting or running out on your debt. In another of the book's examples, you're not gonna start a legal, tax paying company if it takes you 2 years to file the papers.

    An excellent book for just about anyone, but especially those concerned with the issues of the 3rd world. Once you see the importance of the lessons abroad, where the lack of certain, specific conditions cause economic failure, we can even extend the lessons to hone the systems here at home....more info
  • Unjust Laws that Handicap Growth and Perpetuate Poverty
    We find ourselves living in a day where there seems to be an ever increasing concerning for justice for the oppressed. Also we are increasingly being called to remember the poor and to fight on their behalf. While many are more and more compelled by the moral responsibility to the suffering among them, one finds that the response to those suffering have a number of different expressions. Within navigating the diversity of these expressions, it does not take long for one to move to some of the macro-structures that either seem to be apart of the solution or the problem for alleviating suffering and poverty. Globalization, capitalism, the free market are deified by some and demonized by others who have shared concerns for the "have nots" of our day. While understanding these macro issues is a complex endeavor, one thing that is not complicated to understand is that it is necessary for those of different perspectives to listen openly and honestly to one another as truth often seems to be found within conversation rather than monologue. One of these voices that needs to be heard is Hernando De Soto. He is one who has grown up in the third world country of Peru which enables him to bring a unique perspective to this ever important conversation.

    De Soto's work attempts to address the question of why Capitalism is triumphing within the west yet failing throughout the rest of the world. For De Soto "capitalism alone stands as the only feasible way to rationally organize a modern economy (1)," so therefore understanding its non-western failures becomes increasingly important for him as there are no other viable alternatives. In pursuing this concern, De Soto began his research in his home country of Peru, one of those countries that was experiencing the failure of capitalism. What De Soto uncovered within that study (it is available in his former book The Other Side) is what the title of this book attempts to unpack..."the mystery of capital." As his team did research they began to discover an enormously large extralegal network of economic exchange where the vast majority of Peru's citizens were operating outside of the "legal" sector of society. As this extralegal sector was more fully understood, De Soto's team realized this group of people had enormous capital developing potential, but their inability to participate in the legal sector of society handicapped their ability to develop any substantial amount wealth. At its core, De Soto's team discovered there was not an appropriate legal framework to help these people expand their assets. The reason for this is because the vast majority of what they possessed is what is referred to as "dead capital." That is capital that does not have the potential to develop. It deals with houses that are built on land the "homeowner" does not own, which undermines their ability to establish loans and other endeavors necessary for a greater capacity to create wealth.

    It was not as though this enormous sector of society was failing to "do business," for more economic activity was taking place within this sector than outside of it. It was just the context from which it "did business" which meant it would never allow for much flourishing. It is as though there is an economic ceiling to all extra-legal activity as their capacity to go big simply does not exist. To put some numbers to this, De Soto's team calculated that the total value of real estate held but not legally owned by the poor of the Third World and former communist nations was at least $9.3 trillion (which they argue are very conservative numbers). To put context to $9.3 trillion, this is about twice as much as total circulating U.S. money supply. It is nearly as much as all the companies listed on the main stock exchanges of the world's twenty most developed countries. It is more than twenty times the total direct foreign investment into all Third World and former communist countries in the ten years after 1989, forty-six times as much as all the World Bank loans of the past three decades, and ninety-three times as much as all development assistance from all advanced countries to the Third World in the same period. Given this, the problem is not as much about not having as not being able to legally have and legally produce.

    To make this more practical, let's say you are a business owner. The length of time it takes in some of these developing countries for you to actually become "legal" is profoundly time consuming. It can often take months and months and perhaps even years. Not to mention the amount of money needed up front to go legal. So operating legally is simply a luxury many do not have and you chose not to become legal. It helps that the majority of society is already doing this and now you find yourself doing business from the "illegal sector." Now, as a business owner, contracts do not mean much or perhaps anything because there are few ways of enforcing them so you need to develop relationships of trust to maintain your business. The reason for this is because if someone you are in business with fails to follow through with the terms you agreed to, the loss you might incur could be devastating. It doesn't take much imagination to see how violence and large groups of organized crime can easily become extremely powerful in this type of world. Therefore you only do business with those you trust which is a profoundly smaller number than what operations under the legal sector of society would allow where an enforcement of contracts exist, thus allow exchanges to take place with people you do not know. Given this, the extra-legal sector necessarily limits expansion, for you are dealing with exchanges that could be thought of as "nickel and dimes" rather than anything of substance. Not to mention that in some countries since the land is not legally yours, the business buildings that you developed can easily be taken by the government for the land you built your building on is probably theirs. Knowing this it helps you to keep a small building lest it eventually find itself in the hands of the government. This type of practice destroys the incentive of the people of your country to actually build into the value of your country as you have no protection that what you "own" will actually be in your possession tomorrow. Now the list could go on regarding issues that handicap your capacity to develop wealth but this illustration at least highlights how destructive it is to you and society as a whole to operate illegally.

    So what needs to happen or what can happen that will address this problem. De Soto and his team argue that what needs to happen is what happened here in the U.S. Laws were in existence and it increasingly became evident that some of these laws were actually hurting those they were intended to help. The laws had to change in order for our country to continue to develop. Thus eventually and within the context of a large struggle, these laws began to match and help the practices that were taking place rather than opposes and hinder them. Law began to be seen as something that was shaped by and in need of evolving to the interaction of human experience rather than as something human experience needed to shape itself to. Out of this struggle more and more people were able to move from the illegal sector with no legal ownership of their property to the legal sector of society with ownership of their property. This is the shift De Soto and his team argue needs to take place. Much of the developing world's inability to develop capital stems from their lack of property rights. Therefore De Soto and his team see this as an unavoidable next step for developing countries. They have already waited long enough and this has helped to perpetuate the poverty we hear so much about. Clearly the problems are more complicated than merely property rights but they argue they are never beyond these rights. If these societies can begin to create these rights for their citizens, a great deal of poverty will be reduced and wealth created.

    With this brief summary of De Soto's work, it seems clear that our discussions about HIV/AIDS, poverty, etc. need to look closely at some of the legal realities that either help or hinder people who are on the receiving end of aid. If the laws continue to handicap growth, the money we pour into these global issues will have little significance. If the legal sector can begin to help those it has been hurting for so long, then the next hundred years will see a reduction of poverty and creation of wealth like the world has never known. ...more info
  • Land rich, Law poor
    Hernando de Soto determines that all the prerequisites for development and even prosperity are already at work in the developing world, except one: the dynamic capacity of property.

    De Soto led a team which traveled to major 3rd-world cities in search of explanation for poverty even among those countries which had nominally pledged to make market reforms. He finds that the poor do own property - over $9 trillion dollars worth. What these economies lack are institutions, legal systems and trust in both, which together turn houses, crops and businesses into assets which can be used for a multitude of productive purposes. That is, they have buildings and fields, but they lack the "essential representations" of assets. Therefore, they can not issue shares, get loans, make easy and valid transactions - they can not put their assets to work as financial tools.

    In seeking lessons on how to change this, de Soto notes three things about the development of the American property system. The first is that the U.S. process was designed to address property protection, not capital formation. The second is that "a property system" was not devised, but that many systems developed independently, mostly in the 19th century. Third, no one really took much notice of the process then, and the subject has not really been studied today.

    As for policy recommendations, de Soto notes two things. First, property systems do exist already in the third world; people (and their dogs) know where the property lines begin and end, and there are mechanisms for social acknowledgment of it. Second, to change these assets from a metaphorical "lake for fishing" to a "lake with a dam, turbines and electricity generation," leadership is needed from the poor, the elites and the bureaucrats. De Soto is confident that this will happen, but only over a long time period.

    My students enjoyed this book, especially when coupled with video of interviews of de Soto from PBS's Commanding Heights series, available free online at pbs.org.

    ...more info
  • Accessible Economics
    An economist's book written so regular folks can finally understand how and why capitalism is a distinctly American animal. The Mystery of Capital provides a plain-language explanation of the foundation and founding of capitalism in the US and why its export to third-world and former communist nations have, thus far, been unsuccessful. Then it outlines logical methods necessary for making capitalism accessible in any country. Excellently researched, exceptionally well-written....more info
  • De Soto nails it!
    More than anyone he seems to make sense of the mystery of why capitalism fails in so many countries outside of North America, Western Europe and Japan. The archetypical explanations assert that culture or Western inspired monopolistic conspiracies are at the root of this mystery. They are not.

    De Soto astutely asks the question of whether culture in the form of the Protestant Work Ethic or the legal property system of the United States can explain the success of entrepreneurs such as Bill Gates. Patent law, enforceable contracts, property records, and fungible property representations are the mechanisms that enabled the meteoric success of men like Bill Gates. In explaining the link between these mechanisms and economic success, De Soto deftly elucidates a hypothesis woven from the economic theories of Adam Smith, Karl Marx, Ronald Coase, and Jean Baptiste Say. He concludes that Bill Gates would not have been successful without a property rights system based on a durable and integrated social contract. Things that today are considered cultural are the mainly the result of rationalizations of the relative cost or benefit of entering the legal system.

    De Soto is a committed capitalist and believes that others can learn much from the history of the United States in how it developed it property rights system. Property rights in the United States did not emerge overnight, but developed over decades incorporating extra-legal customs into law. With the current populist trend in South America being towards the left and socialism, this is a lesson that must be reconciled as the third world is pressed to move towards capitalism as fast as possible.
    ...more info
  • A narrow view that will help some for awhile and leave many out
    I agree with de Soto's main point, and he states it well and often, that each underdeveloped or economically poor nation needs a unified titling system and attendant legal structures in order for untitled (dead) assets to be available for capital use and the creation (or unlocking) of wealth. It seems his main thrust or raison d'tre is that this will empower the poor. I think this thrust is at least partly an illusion or an idealism that is more of a goal than an attainable reality. Efforts in Peru, he claims, have started this process, which I take at face value. In the book he also acknowledges difficulties in Peru's efforts, but does not elaborate on them, or propose measures to remedy them.

    There is a Wikipedia article on de Soto, which has a section critiquing his theory. I refer you to it, and I will not repeat the critiques here; these are my own thoughts formed before I read the wiki article on de Soto.

    Adoption of de Soto's system is no sure guarantee of positive change; there are too many social, legal, historical, and political variables to predict even less-than-universal success. It is not a panacea, leading to significant wealth for most individuals of the masses, or proletariat, if you will. It will have some positive effect, but "the poor you will always have," will remain true.

    Upon reflection, I agree that his work and theory are a necessary fundamental reform in developing and former communist nations. However, my conclusion is that this reform effort will lead either to better-than-marginal but not optimal improvement or will again fail. And inevitably it will lead to inequities not foreseen by de Soto. Unfortunately, I can only be a supporter or a critic (I am both at this point); I cannot offer any realistic, well-thought-out, practical alternatives of my own, or anyone else's for that matter.

    As for my personal critique of his ideas, first, there is no assurance or even strong probability that reform will lead to systems that have less net cost than their present-day extralegal customs, which is the unstated requirement of the "end user," the untitled landholder or squatter. De Soto describes a more efficient, more sophisticated, but still more costly bureaucracy, replete with more educated technocrats, managers, career civil servants, computer programmers, analysts and systems, to replace the traditional one, with its many steps to ownership. And the benefits to the poor may be short-lived, as I describe below. Faith in de Soto and his reasoning is a thin underpinning or foundation for the wide-ranging changes he proposes.

    Second, the extralegal informal systems will not go away; there will always be an extralegal shortcut to "ownership" costing less than the official route to ownership, even if "ownership" is temporary or transitory, merely occupancy. Right of occupancy, sustenance, survival, and procreation is what most of the world's poor want and cannot afford; that is they want enough "capital," more rightly cash, to pay rent and buy food. Right of occupancy, especially if temporary occupancy is sufficient, will always cost less than capital; there is less overhead.

    Maslow's hierarchy of needs comes to mind. Where is capital formation on the scale of a squatter's needs? Very distant from the needs for food, shelter, clothing, medical care, sanitation, transportation, education, and meaningful social interaction, that is, family. De Soto proposes to provide something most of the poor do not even know they want or need. See the discussion on education, below. I take his metaphorical point of the need to put on socks before shoes, but I don't have an answer.

    Third, in absolute terms of numbers of people, it will help many, but I found de Soto's thesis surprisingly narrow in scope in terms of what classes or demographic segments it will help. Its basic target was a healthy, motivated, fairly intelligent or perceptive individual with a desire to expand his or her individual or small-business entrepreneurial opportunities, whether urban or rural, subsisting in a more or less stable society. To be sure, de Soto's system, if implemented, will help many of these people. There are many people among the under-classes in the world who meet these criteria, but many of the dispossessed are not of this type.

    Some of these are the nomads of the world, historic and present day; their way of life will continue to disappear, along with their languages and cultures, because they do not want to embrace the capital culture. This demographic covers such historical and current groups as the Esquimoes (Inuit), Native American Indians, gypsies, yak herders on the Mongolian plain, and Australian aborigines. The UN designates at-risk physical places as World Heritage Sites. Does the UN designate disappearing cultures as World Heritage Cultures, raising our consciousness of them? De Soto offers nothing to them. They cannot be persuaded to join the capital culture on its terms, and decline to adapt the capital culture to theirs, so they will inevitably continue to be consumed or absorbed by the capital culture, losing their identity at least, if not their ability to exist.

    Another demographic group and a reality de Soto ignores is the vast population of "displaced persons," economic or political refugees. Does he really think Kenya will grant land titles to the occupants of the formal and informal refugee camps inside its borders? Not gonna happen. If this is the case for Kenya, the same outcome applies to any other host country of refugees. The fact is displaced people seldom if ever go home. Even if they could, many do not, since they were born in the host country and never knew the homeland their parents or ancestors lost. Nor are they assimilated into the host countries for hundreds of years. They are lost, disenfranchised and powerless. What does de Soto offer them?

    Take Palestine. Granting formal property rights for the land upon which they squat, or even statehood to those occupying Gaza, is not what they want. They want their land inside Israel back, which they were forced out of in 1949. Regardless of the legality or morality of that event, it is a fact on the ground some 59 years later. Their "barking dogs," which de Soto believes will determine ownership, are not even on the land they want to claim.

    Fourth, de Soto ignores some pertinent historic and present day facts. He does not mention the historic range wars fought in the United States, or their corollary in England (initiated by the Enclosure Act), when open range ranchers and herders clashed with those who would fence lands, preventing passage of herds. The "fencers" won, and became the property owners. The free-rangers lost, and had to settle down or disappear. If any of these cultures remain, they will continue to lose under de Soto's system. What does de Soto offer them? Or is it too late and these cultures are gone? Are the Bedouins all settled oil magnates now?

    He also ignores a big reality, China. Many of those who gleefully chimed "Communism is dead" when the Berlin wall fell still have their head in the sand ignoring the gargantuan communist machine chewing up capital, oil, and other physical commodities such as steel and cement. Seen the price of oil lately? Gold? Does China have anything to do with these price rises? You bet.

    There is plenty of extralegal mercantilism and even some extralegal capitalism going on as an undercurrent in China. Is capitalism, as practiced by the individual or corporate entrepreneur, officially sanctioned throughout China? No. And even though some formal capitalistic economic zones exist, e.g. Hong Kong, Shenzhen, Singapore, and the rest, they will continue to be tightly contained and controlled. China remains a collectivist society, politically and economically, but it is as "capitalist" as any other successful nation; it formally produces, buys, and sells seemingly unlimited quantities of the world's goods, and manages the creation, use and flow of a vast amount of capital without a state-sanctioned private-enterprise capital system. By the measuring stick of Western capitalism China is a successful capitalist system, and will continue to be successful, regardless of its deplorable records on individual human rights, the environment, industrial safety and democracy.

    How does de Soto figure this into the apparent world view he espouses that it can't be done any other way than the way he describes? It is being done successfully in another way. Does China, the country, lack capital? The book was published in 2000. Perhaps this was before China was recognized for what it is becoming, a behemoth economic engine.

    Fifth, De Soto's solution may work in a society that is more or less unified as a functional society, even a chaotic or heavily bureaucratic one. Intractable centuries-old land claims between disparate (non-functional, or if I may coin a phrase "bi-functional") societies occur over and over in history, and continue to happen today. We call these claims "wars." These claims come from different cultures whose only method of resolution is war and repeatedly claiming, losing and reclaiming lost territory. Europe just got tired after two world wars and gave up trying to fight with itself; the combatant claimants are silenced, dead, or dormant. But Europe is only a recently and tenuously unified or functional society with a very short history of internal peace, compared to its bloody history.

    Then, consider the present-day claims of Serbs, Bosnians, Macedonians, the new Kosovoians, the Turks and Kurds, the Basques and Spanish, the Irish "problem" and so on. India and Pakistan are constantly on the brink of nuclear war over disputed property. What does de Soto offer them?

    Sixth, another issue which de Soto practically ignores is literacy, numeracy, and education in general, in terms of its effect on a person's ability to use capital to create, manage, retain and increase wealth. Giving title to land to a person unsophisticated in the ways of ownership is inviting them to be preyed upon by the economically sophisticated classes. As the comedian Gallagher said, "It is a miracle a fool and his money ever got together in the first place." Even if the miracle of titling occurs, and in some places it will, many unsophisticated, newly-minted landowners will soon be disenfranchised of their new capital and find themselves on the fringe of society again, back in a familiar-looking extralegal sector. How would de Soto address this inevitable outcome?

    This is my main concern about de Soto's program and theory: He uses education to entice the poor into accepting his view, but does not propose how to equip them to function with the novum organum. No one in a capitalist society will prevent someone from making a bad deal once they have title and capital, as long as the deal is legal. I am concerned de Soto's reforms will be short-lived benefits to those he proposes to help. The bureaucracies and ruling wealthy classes, however, will live on and swell with renewed power.

    Seventh, de Soto downplays the tenacity of those holding power. He says they will see the inevitable benefits, and naively implies they will happily relinquish their power voluntarily to squatters, e.g. capital stored in vast land tracts, if they would just listen to him. When did this ever happen peacefully in history? It happened when one government bought the land holdings claimed by another government. Examples of peaceful land transactions were the Louisiana purchase and the Alaska purchase. In both cases the seller government (France or Russia) did not have title to the land sold, as any Native American Indian or Inuit will tell you. But individuals or governments do not lightly give up what they have worked decades, in the case of individuals, or centuries, in the case of countries, to hoard, explaining why most land reform and wealth redistribution events or movements are violent revolutions.

    Eighth, there is little mention of the effect of an explosion of capital will have on the environment, the earth we live upon, and its ability to keep us alive. It is not necessarily or inherently "better" or sustainable to increase capital growth exponentially, without some vision as to where it is taking us.

    In conclusion, with the gigantic possible exception of China, which may once again find itself occupying the position of preeminent civilization in the centuries to come, what de Soto proposes is, to paraphrase Churchill, a change to the system of capital formation which is the worst possible change in the world, except for all the other changes proposed, tried, and abandoned. That is to say, what have we got to lose by giving it a shot?

    I hope de Soto comes back with another tome addressing some of the issues I tried to raise. He is a brilliant man, and has a remarkable track record. I admire his intellect, his ideals, and his willingness, even insistence, to put his ideas to real-world tests.

    In the week of March 23, 2008, I will take this book to Haiti in order to leave it there, perhaps in the airport in Port au Prince....more info
  • Spot on!
    It's been a while since I read the book. As a citizen and resident of a third world country I can vouch that what de Soto says is the absolute truth. I have also had a business in the USA and the difference is just staggering. The longest procedure in the USA for setting up my business was getting the sales tax permit and that took about two hours. A similar procedure in my country can take months.

    I'm a bit amazed that some reviewers are commenting about the book being badly written. I don't have that recollection but then, it's been a while since I read it and I enjoyed it very, very much....more info
  • The Mystery of Capital
    "For better or worse, people outside the West are fleeing self-sufficient and isolated societies in an effort to raise their standards of living by becoming interdependent in much larger markets."

    In other words, rural-urban migration in developing countries reflects a choice to give up traditional attachments for a higher standard of living. Many migrants end up in informal communities (slums) scattered around old urban cores. The nature of these slums is fundamentally different from the nature of slums in the industrialized countries. In a slum in an industrialized country, existing structures have deteriorated due to poverty. In a slum in a developing country, the residents are building new structures and then improving them as they accumulate more durable construction materials. Eventually, the residents may gain access to water, sewer, and electric service, although this typically requires tearing down a portion of the new construction to provide rights of way for utilities.

    Within these informal communities, one finds tremendous entrepreneurial spirit and energy in the form of small factories, shops, street kiosks, and other small and micro enterprises. Through their efforts, the inhabitants of informal communities have accumulated land and improvements worth more than $9 trillion, according to Hernando de Soto's estimate. However, because they do not enjoy formal property rights, the value of their investment is impaired: they cannot enforce contracts in court, obtain mortgages, or protect their property against opportunists.

    All industrialized societies have made a transition from informal to formal property rights. In every case, de Soto maintains, formal laws had to be amended to bring them into congruence with the informal property rights that have arisen spontaneously through negotiation: what we might call common law or the social contract. For example, in the recent history of the United States, people could establish an informal claim to land by felling trees, building a home, or raising a crop. Eventually, these informal claims became so numerous that most property was held outside the formal legal system, making the law irrelevant to most citizens. To maintain the legitimacy of the law, the formal legal system had to be changed to recognize the facts that had been established "on the ground." In effect, the law had to catch up to reality.

    When this is accomplished in the developing countries, de Soto says, a huge source of capital will be mobilized and, more importantly, the poor will become more effectively enfranchised and engaged in the capitalist system.

    This book has considerable strengths: in particular, its basis in field work and practical experience, its documentation of conditions in informal communities in developing countries, and its conception of poor people as a resource rather than a problem. It has some weaknesses too. For example, de Soto ridicules cultural explanations for poverty but does not effectively confront them. In fact, there is a close relationship between culture (e.g., norms that encourage cooperation with others) and formal law, since trust reduces the need for formal enforcement mechanisms and opportunism increases it. Also, while de Soto has something important to say, he doesn't say it very succinctly. The nature of capital is not as mysterious as he supposes, and much space in the book is spent belaboring the obvious....more info
  • The Mystery of Capital -- It's Really No Mystery
    Life changing book, should be read by everyone. Very easy to comprehend and very easy to read in one or two settings. What is capitalism, what is a capitalist and what is capital? More importantly, why do some have the good fortune to be capitalists? And, why have so many missed the boat? DeSoto doesn't give the formula for alleviating world poverty. More importantly he provokes the reader to start looking for answers. The "Mystery of Capital" essentially becomes the source of knowledge capital in action. I've already started looking at the billions of humanity stuck at the bottom in a whole different way. Hopefully you will too after reading this book....more info

 

 
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