Must Read for leaders who preach successUser 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
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276 pages, with 30 pages of indices. His premise is that the developing world, like the developed world earlier in their history, has trouble adapting their legal systems to the needs of the poor when they seek title for their land, homes and possession. His argument is that the extra-legal systems always develop, people always figure out ways of getting agreements in their local communities of who owns what. But the key step is to modify existing processes so that the mechanisms developed in the extra-legal systems have an easy & cheap way of integrating. Once integrated, they will continue to keep the standard methods of describing property, so that the property can be put to its highest and best use. The improvements that people make are protected. It’s an impressive argument, because it goes to the absolute fundamentals of capitalism. Fascinating and a bit depressing. But then, North America, Europe and Japan have been able to make the same transitions, each in smaller and smaller time increments.