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The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, by Hernando De Soto
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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.
- Sales Rank: #68807 in Books
- Published on: 2003-07-09
- Released on: 2003-07-09
- Original language: English
- Number of items: 1
- Dimensions: 8.00" h x .66" w x 5.28" l, .60 pounds
- Binding: Paperback
- 288 pages
Amazon.com Review
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
From Booklist
The author, president of an influential Peruvian think tank and a prominent Third World economist, sets out to solve the mystery of why some people in the world can create capital and others cannot. Outside the West, in countries as different as Russia and Peru, it is not religion, culture, or race issues that are blocking the spread of capitalism but the lack of a legal process for making property systems work. Implementing major legal change so as to establish a capitalist order involves changing peoples' beliefs, and de Soto contends this is a political rather than a^B legal responsibility. He believes such a change can be achieved if governments seriously focus upon the needs of their poor citizens for a legally integrated property system that can convert their work and savings into capital. Political action is necessary to ensure that government officials seriously accept the real disparity of living conditions among their people, adopt a social contract, and then overhaul their legal system. Mary Whaley
Copyright � American Library Association. All rights reserved
Review
"A must read among the globalization jet set." -- Time
"A must-read among the globalization jet set." -- -Time
"A provocative and elegantly written book." -- BusinessWeek
"Fastidious in its search for the facts but passionate in spirit and language...the blueprint for a new industrial revolution." -- -The Times London
"Fastidious in its search for the facts but passionate in spirit and language...the blueprint for a new industrial revolution." -- The Times (London)
"If a nonmathematician can win a Noble Prize in Economics, I nominate de Soto." -- -Lawrence Minard Forbes Global
"Stunningly conceived, compellingly argued, and impressively written." -- Kirkus Reviews (starred review)
"The Mystery of Capital makes a powerful case.... An important book." -- Washington Post
"The blueprint for a new industrial revolution." -- The Times (London)
"The most intelligent book yet written about the current challenge of establishing capitalism in the developing world." -- The Economist
Most helpful customer reviews
129 of 132 people found the following review helpful.
This Ain't Your Father's Economics!
By A. Ross
In the past five years I've read a shade under a thousand books, and this is easily the most important of them. In it, Peruvian economist de Soto sets out to do nothing less than explain why capitalism has worked in the West and been more or less a total disaster in the Third World and former Communist states. This has long been a pivotal question for anyone interested in the world beyond their own back yard, and there have been plenty of attempts to explain it before (often in terms of history, geography, culture, race, etc.). However, de Soto's is the most compelling and logically argued answer I've come across. But it's not just me. I don't generally quote other reviews, but my general reaction echoes the most respected policy journals, newspapers, and magazines, who tend to repeat the same words in their reviews:"revolutionary", "provocative", "extraordinary", "convincing", "stunning", "powerful", "thoughtful". Perhaps my favorite line comes from the Toronto Globe and Mail: "De Soto demolishes the entire edifice of postwar development economics, and replaces it with the answers bright young people everywhere have been demanding." Of course readers (especially those on the left) will have to swallow a few basic premises from the very beginning, such as "Capitalism stands alone as the only feasible way to rationally organize a modern economy" and "As all plausible alternatives to capitalism have now evaporated, we are finally in a position to study capital dispassionately and carefully." And most importantly, "Capital is the force that raises the productivity of labor and creates the wealth of nations.... it is the one thing that the poor countries of the world cannot seem to produce for themselves no matter how eagerly their people engage in all the other activities that characterize a capitalist economy." No matter how badly some of us may want to hold on to cherished ideals of collectivist economies, the reality is that at present these are only viable on a micro scale. For the moment, capitalism has won, and the only question is how to make it work to improve the lives of the bulk of the world. De Soto writes: "I do not view capitalism as a credo. Much more important to me are freedom, compassion for the poor, respect for the social contract, and equal opportunity. But for the moment, to achieve those goals, capitalism is the only game in town. It is the only system we know that provides us with the tools required to create massive surplus value."
According to De Soto, the problem outside the West is that while the poor have plenty of assets (land, homes, businesses), these assets lie overwhelmingly in the extralegal, informal realm. De Soto's on the ground research reveals that this is the result of an accelerated process of urbanization and population growth, coupled with the inability of legal systems to adapt to the reality of how people live. What has happened is that throughout the Third World, the costs of making assets legal (obtaining proper title to a house, registering a business, etc.), are so prohibitive both in terms of time and money, that the assets end up being what de Soto calls"dead capital." In the West, a web of financial and legal networks enable people to use their assets to create further wealth, through such tools as mortgages, publicly traded stocks, and the like. Outside the West, most people live and work outside the kind of invisible asset management infrastructure that we take for granted, and thus are unable to use their assets for the "representational purposes" we are able to. Thus the full set of capitalist tools are not available to them and it becomes incredibly hard to realize any kind of upward mobility.
One of the key sections of the book is "The Missing Lessons of U.S. History", in which de Soto demonstrates how the US faced the exact same challenge several hundred years ago. The difference is that the legal system was flexible enough over a century and a half to realign itself with the reality being created on the ground by an energetic citizenry. However, it occurred over the long-term and long ago, and has thus been forgotten by history. What de Soto says needs to be understood is that the less developed nations of today are trying to accomplish the same thing over a much shorter time and with much greater populations, and without a clear understanding of how the West managed to do it. The ultimate challenge is raising the social awareness and political backing necessary to implement major legal change in the face of resistance from an entrenched bureaucracy and elites who benefit from the status quo. This is a daunting and provocative challenge-but not impossible.
Of course, all of the above is greatly simplified, so anyone interested in the state of the world should read it for themselves. De Soto's writing is remarkably clear (especially for an economist), and no background in economics or law is needed to follow his argument. There is a little repetition here and there, but always in the service of making sure the reader doesn't miss the big picture. In the end, whether you agree with his thesis or not, I guarantee it'll challenge your preconceived notions about global capitalism.
106 of 109 people found the following review helpful.
Trickle-Up Economics
By Wendell Cox
The Mystery of Capital, by Hernando DeSoto, could be among the most important books on economics of any century. DeSoto notes that more than a decade after the fall of Marxism, the expected capitalist revolution has not occurred. Capitalism has been successful only in the developed nations and has made little progress in the third world or in the former communist states.
He and his team are convinced that the problem is the lack of well defined property rights. He notes that the poor in under-developed countries have assets, but that their real property is often owned informally, and thus cannot be used to generate capital. As a result, the crucial role of real property is simply absent in under-developed countries.
He proposes the obvious solution --- formalization of informal property rights and notes that acquisition of property through informal means (squatting) has a storied history in the United States and other developed nations. DeSoto understands that formalization will be politically difficult, but points out that both rich and poor will benefit economically. One might call it "trickle up economics."
Finally, formal property rights are under attack in developed nations, through overly intrusive land use and environmental regulations. It is well to reflect upon the potential for slipping toward a system that allows virtual squatters to seize or nullify property rights through regulation, threatening a principal source of national income.
Wendell Cox
291 of 315 people found the following review helpful.
Two Cheers for de Soto
By Adam Wasserman
Attempts to explain why the 3rd world (and the 2nd world, now that communism has largely collapsed) is different from the developed world tend to fall between two poles. At one end are those who seek an Archimedean point--a single underlying cause which, once grasped, will allow us to quickly move developing countries up the socio-economic ladder. Such explanations have the virtue of being useful to people who actually work in 'development', because they convince us that we know how to produce fundamental change. But they run the risk of oversimplifying and, if taken as a guide to policy, of raising expectations only to see them dashed by the complexities and historical quirkiness of the real world.
At the other pole are holistic, multifaceted explanations, taking into account history, culture, economics, religion--the whole nine yards. Such accounts may be more intellectually satisfying, but often lead to frustration by convincing us that the problems are too complicated, too resistant to quick fixes, for practical solutions.
The Mystery of Capital falls for the most part in the first camp. It's author, Hernando de Soto, is one of the 3rd World's most dedicated and intelligent reformers. He wants desperately to do something to help the poor, and has been heroically influential--and successful--in arguing against the failed statist solutions long in vogue in Latin America. Now he wants to move beyond criticism to a positive agenda for change. De Soto's impeccably pro-capitalist credentials make his initial criticism especially convincing: actual capitalism in most of the world is restricted to a small elite, while most remain on the outside looking in.
The question is whether de Soto's solution is equally convincing. He does not believe poverty is due to the evil intentions of capitalists or capitalist countries (though he acknowledges that powerful interests in developing countries do not want to make the system more inclusive--a subject which could use more discussion). Nor is it because of culture or any inherent faults in the poor, or in poor countries. No, the real problem lies in a kind of intellectual or historical blindness, which has kept everyone from seeing what the real source of wealth is: real property, or more exactly well-defined and socially accepted property rights. Once a society has this, it has the secret of capital, since these assets can then be used to generate loans, credit, insurance, liabilities and the whole apparatus of capitalism.
It is hard to argue, looking at the real experience of the undeveloped or maldeveloped world, that the lack of property rights is not a huge impediment to economic growth. De Soto and his team have done tremendous work in documenting exactly how this holds back and frustrates the poor and disenfranchised.
But it is equally hard to believe that this is the key or only reason. More accurately, it seems--from de Soto's own account of what is required--that having property rights is a sort of 'meta-cause'. It depends on such a host of other developments in the economy, in society, in the political system (where access historically often depended on property, limited to a few), in the legal system, in the informal norms and mores, that it is hardly practical to point to it as 'the solution' to 3rd world poverty. For this reason, it seems unlikely that simply pointing out that developed countries have complex systems of property rights, though useful, will be enough to allow for the development of similar systems in the developing world.
If de Soto is right, why is China developing so fast, without anything like the formal, all-encompassing property system he thinks is essential? Why did European economic development begin to outpace the rest of the world centuries before the property systems which, he points out, in most Western countries were only arrived at within the last 100 years?
As a recipe for action, The Mystery of Capital is excellent in pointing to a dimension of development that has been neglected, and for its path-breaking research on the ground, discovering what it takes to bring the newly urbanized poor into the modern economy. But as a satisfying account of what ultimately causes poverty and why some countries are rich and others are not, it falls short. For this, one should go to books like David Landes' The Wealth and Poverty of Nations, or Jared Diamond's Guns, Germs and Steel.
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