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

Rating:
Summary: It's still happening in Asia
Review: I , an taiwanesee real estate ageent, read the chinese version. Comparing with the book "the ecnomic analyze of argricultual developement in Taiwan" writtent by our former President Li, Deng-Hwe, Taiwan developed so quickly in 50 years due to the same process that happened in western hundreds years ago. Now, it is happening at every coner in Mailand China. Millons of acres of land are sold to foreigner's manufactories and the government is spending those money to develope infarstructure. People in shaing-hai could amazingly finish any real estate transacton within 20 days. Vietnam also trigger that system 3 years ago. Where's the next one ? I think oppotunities are full of Asia, I just keep searching it.

Rating:
Summary: Excellent ideas, well argued, but overly long.
Review: This book argues that the strength of modern Western capitalism is in allowing all segments of society to adequately describe and protect their assets, which allows those assets (1) to be traded to whomever might have the best use for those assets, (2) to be used to borrow against for other productive enterprises, and (3) to be purchased using debt financing as opposed to lump sum payments.

The book demonstrates how most of the non developed world, including those places where capitalism has been perceived to have failed and the modern Western nations before they became developed, fails to adequately describe and protect assets. It is therefore an extremely powerful and important argument that deserves to be widely disseminated.

One of the critics of this book on this website has indicated that there are two problems with de Soto's argument.

The critic argues that the amount in unrecognized assets, divided among the number of people involved, will get an average of $2000 to $3000 of assets per capita, which is not sufficient to solve the problem of world poverty. The fallacy with this counter argument is that (a) that much in assets greatly exceeds the current wealth per person of the people at question, (b) while modern Western businesses are generally hard to capitalize on this small amount of money (counterpoint: Dell Computer was started on this much) a great many businesses in developing nations could be started by borrowing on this much in assets, and (c) making these assets liquid would encourage companies to serve these unserved peoples because they would form a gigantic market and it would allow for these assets to be traded to whomever would most productively use them. Thus, recognizing the assets will cause them to grow in value.

The critic also states that even in the United States, home mortgages are NOT an important source of business finance. On this point the critic is simply wrong. The majority of small businesses start based upon a home equity loan or a bank loan which is itself made possible because the bank has hard assets such as a house to secure the loan against.

De Soto's ideas therefore work in two ways. They make the poor into a sizeable, recognizeable market to be served by capitalism, and they recognize the assets of the poor so that the poor can take advantage of the productivity enhancing methods of capitalism.

De Soto's ideas are also intriguing because they are counterintuitive. Recognizing the housing rights of squatters illegally on land may actually be the right thing for society. Rooting the law in reality is a major theme of this book.

The places the book fails for me is that it is too verbose for its purposes, and it does not see all of the potential consequences of its programs. However, perhaps such caution and belaboring of the point is necessary when establishing ideas that are so important.


Rating:
Summary: Insightful but Zealous
Review: The primary focus of this book is on the historical, legal, and political processes for converting the "dead" capital of the extralegal sector into liquidity. The author presents his main idea as a revolutionary way to make capitalism more universal, and his single-mindedness occasionally results in repetitious writing.

As an American, I found the chapter on the history of US land rights a real eye-opener, particularly the transformation of "squatter" into "pioneer" in the public mind during the first half of the 19th century. As a resident of Indonesia, I found the book helpful for understanding why 80-90% of the economy remains extralegal.

Aside from transcending both the left (land reform) and right (property rights), this book is valuable because it reminds us that value is an abstraction. The author leads the reader on a kind of intellectual adventure that shows how philosophical ideas relate to very down-to-earth matters.

He also makes a convincing argument that laws only work when they reflect the customs and behavior of the people. Title registration succeeds when it embraces existing extralegal ownership relationships and when the cost of legality is cheaper than the cost of extralegality (which includes not only bribery of officials and local mafiosi but also the lack of economy of scale and public services).

An important point related to converting the extralegal sector to legality is the task of integrating local legal and economic arrangements into larger units in order to increase a nation's capital. Often, one of the obstacles is a country's own elite, trained in western universities to promote policies regardless of whether they benefit their countrymen. Quoting Fernand Braudel, de Soto frequently uses the image of a bell jar to describe the clueless attitude of the elite and the consequent restriction of capitalism to a small segment of society. Elites in various third world countries may think they're working together to further globalization when in fact they're only linking up their individual bell jars.

Although de Soto draws on huge amounts of data and some actual successes in the third world, this book strikes me as the kind of "grand explanation" that makes a lot of sense when you read it, but pales when you read the next person's "grand explanation." As several reviewers pointed out, it's hard to believe that real estate is the key factor in capitalization, though registering titles may well be the most effective next step that can be taken in developing countries. I disagree with the analysis of the reader who calculated the average per capita dead capital in the third world and asserted that USD 2,000 to 3,000 is not enough to start a business -- this figure is well above what many small entrepreneurs begin with, being several times the per capita income in their respective countries.

Rating:
Summary: Resurrecting Dead Capital
Review: Imagine a large lake on top of a hilly terrain. This water body has potential energy that can be tapped if we can make the water turn turbines at a power plant located at a lower elevation. This energy lies waste if we fail to recognize the potential or are unable to build the technology that converts it into electricity. The same analogy is applicable to the vast amounts of dead capital in developing and former communist countries. These countries together have about 10 Trillion Dollars of such untapped capital due to the inability of the legal and political system to integrate it into the national system of legitimized existence. In the absence of clear titles and legal safe guards, large amounts of assets continue in their extralegal domain.

In contrast, in the developed west, every piece of land or building is meticulously recorded in a central database with accurate details of ownership. Here the word property needs to be distinguished from its physical form to that of the legal aspect of ownership and title that can be accounted for and converted into fungible capital.

Once capitalized, the asset can be developed, mortgaged and traded, leading to a large stream of economic activities which in turn generates income and accumulates more capital. If this is so simple, then why doesn't the developing world recognize this vital aspect that is key to prosperity ?. That is precisely the mystery that the book attempts to solve.

The book excels on the following counts:

- The hypothesis on dead capital
- Listing of and discussion of the mysteries of capital
- An in-depth analysis of the issue of extralegal assets in developing countries from a legal, social and historical perspective
- A chapter devoted to the US experience over the last 300 years
- Suggestions for changes in legal and political systems to align with the ground reality of social systems and to kick start the capitalization process.

In a certain developing country where the government had no records on land ownership in its remote villages, the dogs that roamed freely in the country side knew precisely the boundaries of their owners' lands and would start barking immediately if a stranger crossed the line into their territory. Governments struggling with outdated records and impractical laws on public property better consult their dogs when in doubt.


Rating:
Summary: Answers some of the questions about national development
Review: Ever wonder why certain countries are rich even when they have few resources, and others are poor although rich in natural resources? We all can cite examples of each. De Soto essentially argues that in developed countries real property is effectively leveraged (it leads a "parallel life") through mortgaging to provide start-up capital for entrepreneurs. It's an interesting thesis, and one that empirically he demonstrates quite well.

But the book is more than just that one key insight into secured financing. In chapter 3, De Soto becomes his most philosophical, asking and attempting to answer the question "What *is* capital?" This is a question that at first blush appears easy to answer, but is not. And although Mr. De Soto is largely correct in his answer, he appears to fumble somewhat in describing it. Capital is trust. Money is trust that a piece of paper can be exchanged for an equivalent amount of goods or services in the future. A mortgage is trust that if money is not paid that a tangible asset can be sold and the money repaid. Even more exotic financial instruments are merely manifestations of trust; for example, a derivative is trust that the value of a contract will either increase or decrease, and that amounts arising from that contract will be paid to the derivative holder.

This is where De Soto overplays his hand. Yes, property rights are key to having a developed mortgage market, which is then key to wealth creation by borrowing against real property to engage in business ventures. But there are other factors as well, factors related to the creation and retention of trust, and therefore of capital, that De Soto does mention but underplays. Things like the speed and certainty of the underlying legal system, bankruptcy laws and corruption. There are also more generic issues such as a country's or culture's general entrepreneurial character, and attitude towards education. As a sometimes-resident and devoted fan of one Latin American country, I can attest to the fact that the reformation of key institutions and a general change in cultural attitudes towards corruption and education can take decades. So even though De Soto has grabbed the elephant's trunk, he's not paying sufficient attention to the rest of it.


Rating:
Summary: An important book
Review: Actually, after reading De Soto (is that a great name for a South American economist, or what?), I've come to the conclusion that this work is perhaps the most important economics text written since The Road to Serfdom. I'd love to find a way to use it in my classroom, but have to content myself with merely recommending it to my students.

De Soto starts with a very simple question, "Why do some countries seem to remain poor no matter how much aid they receive?" His answer will disappoint the development economists, but offers a lot for public policy wonks to sink their teeth into. It seems, that they don't have property rights. Sounds simple, but many significant ideas do when finally reduced to their core.

What we do about this, is another problem entirely. But, it does give the international community some clear pointers on how to at least begin to solve the problem of failed states and intractable poverty.