80. The Mystery of Capital

Note: This post is the eightieth in a series about government and commercial ethics. Click here for the full listing of the series. The first post in the series has more detail on the book 'Systems of Survival' by Jane Jacobs which inspired this series.

This week's post discusses the book, 'The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else' by Hernando de Soto.

Where Max Weber saw religion as a critical element in the success of a society, and Plato and Jane Jacobs saw a proper delineation of roles between the guardian and commercial sectors of society as the key, de Soto is focussed on a particular institution - property rights - as being the key to prosperity.

de Soto's argument has a few points:

1) Most of the wealth of the world's poor is in the land that they occupy
2) Red tape and a lack of proper property rights prevents them from translating the value of this land into economic opportunity in a number of ways:
-> by preventing it's use as collateral for loans
-> by not providing a fixed address to tie people into a system where people can hold them accountable for their actions (e.g. via credit bureaus, police investigations, etc.
-> by preventing land from being split or consolidated or transferred until it ends up in the hands of the best users of the land.
-> etc.

Wikipedia sums up his main argument as follows:

"The main message of de Soto's work and writings is that no nation can have a strong market economy as long as most of its people remain on the outside just looking in. "The existence of such massive exclusion generates two parallel economies, legal and extra legal. An elite minority enjoys the economic benefits of the law and globalization, while the majority of entrepreneurs are stuck in poverty, where their assets –adding up to more than US$ 10 trillion worldwide– languish as Dead capital in the shadows of the law. To survive, to protect their assets, and to do as much business as possible, the extra legals create their own rules. But because these local arrangements are full of shortcomings and are not easily enforceable, the extralegals also create their own social, political and economic problems that affect the society at large."

One of the things we've seen in the series so far is that one of the contrasts between guardian world and commercial world is that guardian world is the world of monopoly. It hadn't really occurred to me before, but after reading de Soto's book, it makes sense that it is best if each individual piece of property is a monopoly in the sense that it has a clearly recognized, undisputed owner. In some sense, that is almost part of the definition of property. For something to be property, it must have a defined owner.

One hazard of strong inequality, as documented by de Soto, is the creation of a government in which even the most basic elements such as securing land title or security are unaffordable for the poor, so that even though there is a government in place, most of the citizens no longer benefit from its existence in a meaningful way.

One interesting element of the book was the part where de Soto described the history of the process in the U.S. of creating a formal land registry system. From the struggles over squatter rights as settlers moved West to elaborate sets of rules for claims developed independently by gold rush miners and eventually recognized by the governments of the day it was a long and conflict filled process.

Another of the interesting things about the book is that even though de Soto has spent his life working with sometimes recalcitrant, often corrupt, generally ineffective governments, he still believes that the only way forward is for government to eventually succeed at creating a land registry that meets the needs of the poor people. Clearly de Soto believes that, aside from government, there is no entity that can really settle the question of ownership in an efficient manner.

While I found myself agreeing with de Soto that the poor could benefit from being brought 'in from the cold' of being outside the legal system with respect to their property, I wasn't really convinced that it was much an ultimate cause of poverty and poor development, as opposed to being one of many proximate causes.

In other words, if some countries were failing to develop an effective property rights system and others aren't, what is making the difference? Although, as documented by de Soto, the countries of the West had to develop property systems and it took them a long time to do so, it seems as though this was just one challenge out of a long list that was overcome on the road from the dark ages to the moon.

Maybe the countries of the current third world are just going through the same process and de Soto is just trying to nudge it a long a little faster, in which case, there's certainly nothing wrong with that but it doesn't tell us too much that is relevant to our investigation into ethics. Which is OK, I guess some things are just technical issues, not really related to ethical concerns directly.