The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else

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Basic Books, 2000 - Business & Economics - 275 pages
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"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.
 

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Must Read for leaders who preach success

User Review  - Blandino Go, PhD - Borders

Hernando de Soto's experience in Peru provide a clear picture of a poor country that will thrive if the poor are allowed to take control of their lives. Success in poor countries revolves around one ... Read full review

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In Hernando De Soto's most influential work, The Mystery of Capital, he proclaims that integration of extralegal settlements is necessary for the economies of developing and former communist countries to prosper. He explains that the informal economy is caused by legal failure, and that assets held extralegally are what he calls "dead capital."
The book begins by explaining how capitalism only works if the majority of people possess capital. De Soto shows how the key manifestation of capital is land, which people can use to receive loans. By receiving loans on land owned, that land carries out two lives, one that is real, and one that is more economically useful and represented by titles and deeds.
This second life of assets is only possible with formal property, the absence of which, De Soto claims, renders the economic potential of the asset useless. It is here that he analyzes what he calls "extralegal settlements": informal economic activity that has become predominant in developing and former communist countries. In these extralegal settlements, people have constructed homes on land that they did not own, and have formed a cottage industry to support their well-being.
De Soto recognizes six benefits of owning formal, rather than informal, property. The first is fixing the economic potential of assets, which is done by allowing economic activity regarding the asset to be carried out using a representation (title) of the asset. Next is integrating a variety of social contracts that have already been agreed upon into a formal system, which is essentially codification of law. The third effect is making people accountable, for in an integrated formal system of law anonymity becomes impossible. Another effect is making assets fungible, which he means to give a value in dollars to a variety of assets. The fifth effect is networking people, where credit records allow for more investment of greater yield. The final aspect of formal property is protecting transactions, where law guarantees safety in trade of large quantities of assets.
De Soto substantiates his claims through analyzing the history of the United States. He presents 19th century settlers in the U.S. to being in a similar situation as in developing countries today. In the wake of the ever increasing amount of squatters in the western United States, these extralegal settlements were integrated into formal property law by observing existing social contracts. De Soto argues that this integration must be mimicked by developing and former communist countries today in order for them to become integrated into global capitalism.
Throughout the book, De Soto places the blame for these extralegal settlements entirely on labyrinthian legislation and short sighted lawyers. It is because of the difficulty to obtain legal property that people choose to behave informally. He demonstrates this by trying to open a clothing store in Lima, Peru. It took him an entire year to open the store legally, and they soon found that it is just as difficult to maintain legal status as it is to get it.
Although this book has been highly acclaimed and has been implemented into several government policies since, I see De Soto's understanding of capitalism fatally flawed. Particularly, his conception of capital is highly influenced by his bourgeois lifestyle and he is unable to understand that the reason for poverty in developing countries is because of capitalism, not the lack thereof.
Capitalism allows for great wealth to be amassed, but it would be with great naiveté to believe that "capital" is the Higgs boson of economic growth. It is evidenced by the disparity of income in developed countries that the wealth of the capitalist is gained at the expense of those he employs. For the capitalist, capital is everywhere, and once found, he can exploit it.
To demonstrate this point, let us examine the capitalist practice of renting property. Because the poor cannot afford to own property
 

Contents

The Five Mysteries of Capital
1
The Mystery of Missing Information
15
The Mystery of Capital
39
The Mystery of Political Awareness
69
The Missing Lessons of US History
105
The Mystery of Legal Failure
153
By Way of Conclusion
204
Notes
226
Acknowledgments
238
Appendix
246
Index
256
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About the author (2000)

Hernando de Soto is President of the Institute for Liberty and Democracy (ILD), headquartered in Lima, Peru. He was named one of the five leading Latin American innovators of the century by Time magazine in its May 1999 issue on "Leaders for the New Millennium." De Soto played an integral role in the modernization of Peru's economic and political system as President Alberto Fujimori's Personal Representative and Principal Adviser. His previous book, The Other Path, was a best seller throughout Latin America and the U.S. He and ILD are currently working on the practical implementation of the measures for bringing the poor into the economic mainstream introduced in The Mystery of Capital. He lives in Lima, Peru.

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