The Mystery of Capital

Of Course!

We have just completed reading Hernando De Soto's The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Perseus/Basic Books, 2000.)  It is a seminal piece of work and deserves wide readership.

De Soto's thesis can be summarised in a series of seven propositions (which he sets about establishing in the book).

1.  The existence of capital is inextricably related to establishing a system of legal title for property.

2. Once legal title is established, property can be transformed into other forms of wealth.  Land to which one has legal title, for example, can be used as collateral for a bank loan.

3. Long before a system of legal title is established in a country or state, an informal system of ownership usually exists which recognises (amongst the participants) a person's title to property.

4. When a state refuses or fails to recognise these informal legal systems of ownership and title, it perpetuates slums and systemic poverty.

5. Modern legal property systems in Europe and the UK were preceded by informal systems of ownership which were subsequently formally codified into law.

6. A similar process of legal evolution occurred in the United States in the eighteenth and nineteenth centuries, where informal law in "pioneering" areas was eventually recognised as valid property law, allowing ownership titles to be recognized.

7. Codifying and recognising informal title produces rapid increases in wealth by reducing the risk of capital formation, borrowing, buying and selling, and passing assets and property to following generations.  In other words, capital recognition and formal legal titles permit and promote more capital formation.

Third world economies will not grow rapidly, nor reap the benefits of capitalism, without formal codification of informal property rights.

De Soto illustrates these theses repeatedly throughout his book, drawing upon his own research and the experience of his team of consultants working in third world countries over decades.   His arguments and propositions are almost self-evident.  They generate an "of course!" reaction in the reader.

Highly recommended.