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

Foundation for Economic Education ^ | Jan 2002 | Reviewed by William B. Conerly

[Burkeman1]

Taking things for granted isn’t always a bad idea. Anyone who checks the morning paper to see if the sun will rise in the east is wasting his time. But the role of property has been taken for granted, with awful results. Economics textbooks may discuss incentives to invest, but they seldom, if ever, make clear the assumption that a person investing in property would have some confidence that he could continue to own the property. That assumption turns out to be pivotal to economic development.

Several recent books have raised our awareness of the dramatic role that property plays in economic development and in freedom. Tom Bethell wrote The Noblest Triumph,, a readable, broad survey of the role of property in economic development. Then Harvard historian Richard Pipes wrote Property and Freedom, inspired by his study of Soviet Russia.

The latest of the property trilogy is Hernando de Soto’s The Mystery of Capital. De Soto runs a free-market think tank in Peru and was widely hailed for The Other Path, which made the case for free markets in less-developed countries. His new book show-cases a multi-country study of how difficult it is for poor people to get legal title to property in various Third World countries.

Where most of the land is government-owned, poor people become squatters. In America, we build a house and then add furniture. In the Third World, poor people reverse the process, putting simple belongings on a piece of unoccupied ground. If no one disputes their claim, a bit of a roof follows. As time goes by, and as the neighbors come to recognize the newcomer’s property, a regular structure will be added. Over time, not only do the neighbors recognize the squatter’s property, but also informal local organizations may “register” the ownership—unofficially, of course.

But what if the squatter wanted to acquire legal title to the property? In the Philippines, de Soto shows, it would take 168 steps, and 13 to 25 years. In Haiti, it’s 111 steps over 11 years. Egypt looks like a hotbed of freedom with only 77 steps that could possibly be completed in six to ten years.

As a result of these difficulties, legal title is not sought, and this type of property is called “marginal.” The research team that de Soto led estimated the size of the marginal sector and found that it’s anything but: “In fact, it is legality that is marginal; extralegality has become the norm. The poor have already taken control of vast quantities of real estate and production.” In fact, de Soto estimates that four of every five rural Peruvians live in untitled property, with similar figures for other countries. A shanty may only be worth $500 or so, but the shanties add up. In Haiti, the value of untitled property is estimated at $5 billion, four times the value of assets of all legal businesses in the country!

Again, the broad conclusions hold across all the countries studied. The lesson is that poor people can accumulate capital, but without legal title they cannot fully exploit their assets. De Soto shows that property has several uses. Not only can it provide a dwelling, but it can also provide collateral. Where legal title does not exist, however, its collateral value is limited.

Throughout the world, extralegal organizations have formed to register property. De Soto cites neighborhood business organizations, residents’ committees, farming conventions, and so on. Those organizations recognize and document extralegal property claims. “We did not find a single extralegal plot of land, shack, or building whose owner did not have at least one document to defend his right—even his ‘squatting rights.’” The limitation, though, is that there is no good source of information for outsiders who might lend money based on the extralegal collateral. The potential lender will also not know whether the local property-recognizing organization would recognize the lender’s lien. The government typically does not want to surrender its own title to land, and the economic elite may also have claims to land occupied by squatters. The result of conflicting claims is that no one can realize the full value of the property.

Hernando de Soto has done a great service by demonstrating that the poor people do have property and can accumulate capital. But the poor cannot realize their potential because of the conflict between their real but extralegal claims and the unreal but legal property systems. Taken with the fine books by Bethell and Pipes, The Mystery of Capital demonstrates that property rights must never be taken for granted.

William Conerly is an economic consultant in Portland Oregon, and chairman of the Cascade Policy Institute.

[Burkeman1]

I strongly recommend this book. If we have to be in Iraq- then I think Bremer should read this book first and foremost. Iraqis need - above more than anything else- solid property law. All else will fall into place if we can establish a just and stable system of property protection and exchange.

[Burkeman1]

Well, if we are going to be in Iraq for the forseeable future. And we want a good outcome. I think the powers that be should read this book.

[Burkeman1]

Ping*

[IncPen]

... like we've been saying ...

[secretagent]

Also important: ease of starting a legal business and having recourse to the official court system.

In Lima, Peru, DeSoto found that 90% of the economy ran "informally", i.e., illegally, because of the enormous cost of the red tape. I wonder how much of the same problem afflicts Egypt, Israel, the West Bank, and Gaza.

[Burkeman1]

Good point. I imagine Isreal and the Palistinian Authority have enormous amounts of red tape to start a business or just establish ownership.

[GeronL]

Economics textbooks may discuss incentives to invest, but they seldom, if ever, make clear the assumption that a person investing in property would have some confidence that he could continue to own the property. That assumption turns out to be pivotal to economic development.

well DUH!

[LS]

I am just finishing it now. While it is excellent, in too many places he glosses over the western fundamentals of sanctity of contracts, right to life, and religious toleration that were present in most of Europe before the kinds of property rights he emphasizes existed.

This is especially true of his analysis of the U.S. Yes, these ad hoc laws were subsumed into the mainstream legal foundations, but the PRESUMPTION that the land belonged in the hands of the people---not the government---was what made all this work. I don't think that presumption exists in, say, Egypt or much of Latin America. Jefferson's genius was to legally move as much land into the hands of as many people as quickly as possible, THEN to base their citizenship essentially on land ownership. I think de Soto glosses over these prerequisites too easily.

[lelio]

Iraqis need - above more than anything else- solid property law.

I'm beginning to think that local governments in our country need to read the book with all the seizures of property to put up a mall or condos.

[tbeatty]

He's exactly right. Which is why the socialist libs will oppose it. Most of Iraq was already nationalized. The libs will want the oil and other natural resources to be controlled by whatever government there is in a vain attempt to "feed the poor" without realizing (or maybe they do) that it keeps them poor and hungry.

Or the environmentalists will try to stop oil production altogether. After all, there is a rare and elusive rat that is now known to populate spider holes.

Seriously though, the biggest opponent to private property will be Saudia Arabia. They have government controlled land and creating that much opportunity in your neighborhood is not healthy for socialist economies (i.e. Mexico). Middle class Saudi's will see huge investment opportunities in their Iraq and capital will flee Saudi Arabia. Democracy and private property will be hard to establish in Iraq without some form of change in SA government.

[Burkeman1]

Your criticism is valid. I think the same. He glosses over the cultural aspect almost entirely. But- if we can establish such a system in Iraq- "resistance" would wither away rather rapidly as making money and the possibilty of making a better life was opened up to unemployed or under employed males.

[GeronL]

Your right, originally you had to be a white, male (nor surprising considering the times) landowner to vote!

Adding that last one was a stroke of genius. It still resonates today that he who owns land owns something real.

[GeronL]

The libs will want the oil and other natural resources to be controlled by whatever government there is in a vain attempt to "feed the poor" without realizing (or maybe they do) that it keeps them poor and hungry

Oh, they know, they know very well.

[Lady Eileen]

bump

[Burkeman1]

If Bush can free up the Iraqi economy and establish property law that easily recognizes ownership and makes transferring of property just as easy as it is here- then we have shot at suceeding in Iraq. But if we keep major industries in public hands and let the existing government order of the baathists stay in place but with new faces- we are doomed to fail.

[LS]

And, surprise surprise, when there were property requirements to vote, the % of those eligible to vote who actually voted was in the high 60% range, and in some states in particular elections, in the 90% range!! For all those who want to "get out the vote," the quickest way to do so would be to impose minimal property requirements.

[searchandrecovery]

My question would be: "What is the difference between first & third-world countries?". My answer would be: IQ. It's the bell curve, baby.

[LS]

Oh, no question. He's on the right track. I just think that the "basics" of why western culture works is deepter than legal access to property. That's a biggie, but not the only one. Look, for example, at Victor Hanson on western combat: there are big differences in how the west fights and how everyone else fights.

[GeronL]

well, tourism might boost if they can turn some of those 40?50? palaces into hotel-resorts =o)

Iraq Hospitality Inc??

[GeronL]

ys, I think the culture has a lot to do with it