The Mystery of Capital

The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else
Hernando De Soto
Basic Books, 2000

The problem with most third world countries, Mr. De Soto tells us, is not that there is no capital, it’s that the capital is dead. Dead in the sense that it can’t be used to its full economic potential. It can’t be mortgaged, it can’t be divided into shares, and it simply can’t be used in the same way we make productive use of our assets in the West.

What is the difference between the West and the third world? The answer is formal property systems that allow the economic potential stored in property to be put to work. Until these poor countries develop the type of formal property systems that Western countries did, mostly during the 19th century, they are destined to remain poor.

The obstacles in the way of development of formal property systems are many, including social, political, and legal issues. One interesting fact is that third world countries do have property systems, in the sense that it is possible to know who “owns” property, but that knowledge is extralegal and local. It isn’t as valuable as the knowledge contained in formal property systems, but it is there nonetheless.

We see advocates for poor people in third world countries constantly calling for more aid or debt relief for these countries. It is sadly true that many people are hungry and in poor health, and formal property system that unlock capital won’t help these people tomorrow. But until poor countries start the process of developing formal property systems, they are unlikely to change and develop economies that can support themselves.

Unfortunately, everyone does not hold capital and private property rights in high regard. In 1992 Libya burned all land titles. Former socialist states are reverting to their former ways. In America, not all people agree that capitalism is good.

This book contains some interesting history of how private property systems developed in the United States.