On The Mystery Of Capital

I recently finished reading The Mystery of Capital – Why Capitalism Triumphs in the West and Fails Everywhere Else by Hernando De Soto.

This book, unveils the basis of why capitalism was successful as an econo-socio-political system in the West, but continues to struggle in the developing world. The central premise as best summarized by the author: “That past is many nations’ present. The Western nations have so successfully integrated their poor into their economies that they have lost even the memory of how it was done, how it was done, how the creation of capital began back when, as the American historian Gordon Wood has written, “something momentous was happening in the society and culture that released the aspirations and energies of common-people as never before in American history.” The “something momentous” was that Americans and Europeans were on the verge of establishing widespread formal property law and inventing the conversion process in that law that allowed them to create capital. This was the moment when the West crossed the demarcation line that left to successful capitalism – when it ceased being a private club and became a popular culture, when George Washington’s dreaded “banditti” were transformed into the beloved pioneers that American culture now venerates.”

Numerous books have been published around globalization, but few have been successful at exposing the heart of the matter – as to what it will take for the developing world to truly embrace capitalism. This book is successful in doing that by going back to the roots of capitalism through re-examining history, extracting its timeless lessons and developing a path to change this disparate reality. A highly recommended thought-provoking read.

Below are key excerpts from the book that I found particularly insightful:

1- “In the West, by contrast, every parcel of land, every building, every piece piece of equipment, or store of inventories is represented in a property document that is the visible sign of a vast hidden process that connects all these assets to the rest of the economy. Thanks to this representational process, assets can lead an invisible, parallel life alongside their material existence. They can be used as collateral for credit. The single most important source of funds for new businesses in the United States is  a mortgage on the entrepreneur’s house. These assets can also provide a link to the owner’s credit history, an accountable address for the collection of debts and taxes, the basis for the creation of securities (like mortgage-backed bonds) that can then be rediscounted and sold in secondary markets. By this process the West injects life into assets and makes them generate capital.”

2- “The moment is ripe to solve the problem of why capitalism is triumphant in the West and stalling practically everywhere else. As all plausible alternatives to capitalism have now evaporated, we are finally in a position to study capital dispassionately and carefully.”

3- “Leaders of the Third World and former communist nations need not wander the world’s foreign ministries and international financial institutions seeking their fortune. In the midst of their own poorest neighborhoods and shantytowns, there are – if not acres of diamonds – trillions of dollars, all ready to be put to use if only the mystery of how assets are transformed into live capital.”

4- “As Adam Smith pointed out, money is the “great wheel of circulation”, but it is not capital because value “cannot consist in those metal pieces.” In other words, money facilitates transactions, allowing us to buy and sell things, but it is not itself the progenitor of additional production. As Smith insisted, “the gold and silver money, which circulates in any country, may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either.””

5- “…I have seen that the formal property systems of the West produce six effects that allow their citizens to generate capital…1) Fixing the Economic Potential of Assets…2) Integrating Dispersed Information into One System…3) Making People Accountable…4) Making Assets Fungible…5) Networking People…6) Protecting Transactions”

6- “The lessons of the West is that piecemeal solutions and stopgap measures to alleviate poverty were not enough. Living standards rose only when governments reformed the law and the property system to facilitate the division of labor. With the ability to increase their productivity through the beneficial effects of integrated poverty systems, ordinary people were able to specialize in ever-widening markets and to increase capital formation.”

7- “The real problem is that we have still not recognized that all these difficulties constitute a sea change in expectations: As the poor flow into cities and create extralegal social contracts, they are forcing a major redistribution of power. Once the governments of developing and former communist countries accept that, they can begin to catch the wave instead of being engulfed by it.”

8- “The American experience shows that this is a threefold task: We must find the real social contracts on property, integrate them into the official law, and craft a political strategy that makes reform possible.”

9- “To integrate all forms of property into a unified system, governments must find out how and why the local conventions work and how strong they actually are.”

10- “The lifeblood of capitalism is not the Internet or fast-food franchises. It is capital. Only capital provides the means to support specialization and the production and exchange of assets in the expanded market. It is capital that is the source of increasing productivity and therefore the wealth of nations.”

11- “I hope this book has conveyed my belief that this state of affairs is relatively easy to correct – provided that government are willing to accept the following: 1) The situation and potential of the poor need to be better documents. 2) All people are capable of saving. 3) What the poor are missing are the legally integrated property systems that can convert their work and savings into capital. 4) Civil disobedience and the mafias of today are not marginal phenomena but the result of people marching by the billions from life organized on a small scale to life on a big scale. 5) In this context, the poor are not the problem but the solution. 6) Implementing a property system that creates capital is a political challenge because it involves getting in touch with people, grasping the social contract, and overhauling the legal system.”

Regards,

Omar Halabieh

The Mystery of Capital

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