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- Sales Rank: #1977664 in Books
- Published on: 2000-09-21
- Binding: Hardcover
Most helpful customer reviews
129 of 132 people found the following review helpful.
This Ain't Your Father's Economics!
By A. Ross
In the past five years I've read a shade under a thousand books, and this is easily the most important of them. In it, Peruvian economist de Soto sets out to do nothing less than explain why capitalism has worked in the West and been more or less a total disaster in the Third World and former Communist states. This has long been a pivotal question for anyone interested in the world beyond their own back yard, and there have been plenty of attempts to explain it before (often in terms of history, geography, culture, race, etc.). However, de Soto's is the most compelling and logically argued answer I've come across. But it's not just me. I don't generally quote other reviews, but my general reaction echoes the most respected policy journals, newspapers, and magazines, who tend to repeat the same words in their reviews:"revolutionary", "provocative", "extraordinary", "convincing", "stunning", "powerful", "thoughtful". Perhaps my favorite line comes from the Toronto Globe and Mail: "De Soto demolishes the entire edifice of postwar development economics, and replaces it with the answers bright young people everywhere have been demanding." Of course readers (especially those on the left) will have to swallow a few basic premises from the very beginning, such as "Capitalism stands alone as the only feasible way to rationally organize a modern economy" and "As all plausible alternatives to capitalism have now evaporated, we are finally in a position to study capital dispassionately and carefully." And most importantly, "Capital is the force that raises the productivity of labor and creates the wealth of nations.... it is the one thing that the poor countries of the world cannot seem to produce for themselves no matter how eagerly their people engage in all the other activities that characterize a capitalist economy." No matter how badly some of us may want to hold on to cherished ideals of collectivist economies, the reality is that at present these are only viable on a micro scale. For the moment, capitalism has won, and the only question is how to make it work to improve the lives of the bulk of the world. De Soto writes: "I do not view capitalism as a credo. Much more important to me are freedom, compassion for the poor, respect for the social contract, and equal opportunity. But for the moment, to achieve those goals, capitalism is the only game in town. It is the only system we know that provides us with the tools required to create massive surplus value."
According to De Soto, the problem outside the West is that while the poor have plenty of assets (land, homes, businesses), these assets lie overwhelmingly in the extralegal, informal realm. De Soto's on the ground research reveals that this is the result of an accelerated process of urbanization and population growth, coupled with the inability of legal systems to adapt to the reality of how people live. What has happened is that throughout the Third World, the costs of making assets legal (obtaining proper title to a house, registering a business, etc.), are so prohibitive both in terms of time and money, that the assets end up being what de Soto calls"dead capital." In the West, a web of financial and legal networks enable people to use their assets to create further wealth, through such tools as mortgages, publicly traded stocks, and the like. Outside the West, most people live and work outside the kind of invisible asset management infrastructure that we take for granted, and thus are unable to use their assets for the "representational purposes" we are able to. Thus the full set of capitalist tools are not available to them and it becomes incredibly hard to realize any kind of upward mobility.
One of the key sections of the book is "The Missing Lessons of U.S. History", in which de Soto demonstrates how the US faced the exact same challenge several hundred years ago. The difference is that the legal system was flexible enough over a century and a half to realign itself with the reality being created on the ground by an energetic citizenry. However, it occurred over the long-term and long ago, and has thus been forgotten by history. What de Soto says needs to be understood is that the less developed nations of today are trying to accomplish the same thing over a much shorter time and with much greater populations, and without a clear understanding of how the West managed to do it. The ultimate challenge is raising the social awareness and political backing necessary to implement major legal change in the face of resistance from an entrenched bureaucracy and elites who benefit from the status quo. This is a daunting and provocative challenge-but not impossible.
Of course, all of the above is greatly simplified, so anyone interested in the state of the world should read it for themselves. De Soto's writing is remarkably clear (especially for an economist), and no background in economics or law is needed to follow his argument. There is a little repetition here and there, but always in the service of making sure the reader doesn't miss the big picture. In the end, whether you agree with his thesis or not, I guarantee it'll challenge your preconceived notions about global capitalism.
0 of 0 people found the following review helpful.
Why is the West so much wealthier than the rest?
By Mal Warwick
One of the world’s enduring mysteries is why there is such a wide gap in prosperity between the developed nations and those so often referred to as “developing.” Two centuries ago, China was the world’s wealthiest nation, and many of today’s developed countries were still poor by the day’s standards. Including the USA. There exists a plethora of explanations for this discrepancy, which has emerged over the last 200 years. Included are neocolonialism and the ascendancy of the multinational corporation in world affairs. Neither is especially convincing. But one of the most satisfying explanations comes from a noted Peruvian economist named Hernando de Soto. He spells it out in detail in The Mystery of Capital, the second of his books describing his life’s work.
Property rights lie at the core of the problem
The gist of de Soto’s argument is straightforward. Developed nations have over time adopted a system of property rights that enables those who possess them to unlock their potential as capital through such means as mortgages. Developing countries lack the infrastructure to enforce the property rights of the billions of people who have crowded into shantytowns in major cities or work the land they occupy in rural areas without acceptable documentation. As a result, they do not “own” their land or the improvements they have built on it and cannot capitalize on them. Thus, trillions of dollars in capital remain locked up in the homes of many of the world’s poorest people. Unlock that potential, and economic growth will soar, he contends.
De Soto’s solution to this quandary is to put such a system of property rights into place. The premise of his argument is undeniable. Anyone who has worked in any one of the scores of developing countries in Africa, Asia, Latin America, or the former Soviet satellites should be well aware of the problem. Unfortunately, de Soto’s proposed solution poses several problems.
(1) In most of the world, respect for the rule of law is lacking.
Simply putting a new legal regime in place is unlikely to clear this hurdle. Many if not most developing nations have admirably crafted laws which are routinely ignored. De Soto claims that he and his team have demonstrated the feasibility of his approach in Peru and several other nations. In fact, there is evidence that they have succeeded in Peru, at least to a degree. Peru is now one of the world’s fastest-growing nations; perhaps at least some of the credit belongs to de Sot0. And the heads of state in many other countries have hired him to consult on the reforms he proposes.
However, I’m unaware that any of de Soto’s efforts have been effective nationwide anywhere in the world, with the possible exception of Peru. I can easily imagine countries like Estonia, Uruguay, or Tunisia adopting such an approach; perhaps they already have. But it strikes me as unthinkable that Zimbabwe, Somalia, South Sudan, or Haiti, much less North Korea or Cuba, would ever consider such reforms anytime in the foreseeable future. Surely the world’s failed states or those that are nominally Communist will not do so without enormous changes in governance. Even India seems unlikely to me; one-third of the world’s people who live on $2 a day or less live there. Economic reforms in India require years of negotiations and often fail, even with a pro-business Prime Minister on the scene.
(2) Dominant elites find it to their benefit to sustain the status quo.
De Soto argues that conferring property rights on the poor would, in fact, benefit everyone, because it would dramatically lift the level of a nation’s economic activity. He asserts that elites can be educated and will come to understand the benefit, and he claims he has succeeded in doing this in Peru. Apparently, that is true to at least some degree. However, my observations above about other countries are applicable here, too.
(3) Entrenched bureaucrats benefit from the existing system by holding scarce jobs and securing bribes.
De Soto and his team have studied four countries most closely: Peru, Egypt, Haiti, and the Philippines. He makes abundantly clear that in every one of them it can take years — as many as nineteen in one case — for poor people to complete the innumerable forms and secure the permissions needed to establish title to their land and homes. Simply put, property rights are entirely out of reach for huge numbers of the world’s people. Surely, dozens of bureaucrats are involved in some fashion in the application process. How likely is it that those office-holders will give up their jobs? Consider India as just one important example: many if not all government jobs are awarded on a quota system to permit the members of oppressed castes to gain access to the secure salaries and prestige represented by jobs in government.
(4) Discriminatory caste and class systems persist in many underdeveloped nations.
Nearly 70 years after independence, India’s caste system remains powerful, seemingly impervious to significant change. In most other poor countries, similarly discriminatory caste or class systems prevent people at the bottom of the pyramid to advance economically. In many, tribal origins or religious differences get in the way. Since such divisions have often persisted for many centuries, it strikes me as unreasonable to expect that they can be quickly overcome. Even higher education often fails to erase such differences.
(5) The biggest problem of all: the fallacy of growth.
Advocates of accelerated economic growth such as de Soto (or the leadership of China) fail to recognize the limits on the earth’s carrying capacity or the environmental damage that results from the rush to big cities and building ever more factories. India will soon surpass China (with one-fifth of the world’s people) in population. Should India ever manage to match the living standard in the Global North, that will represent the equivalent of adding five new USAs, doubling the world’s demand for goods and services. The consequences of such a development are unthinkable. Unrestrained economic growth is not just unsustainable — it’s suicidal.
A flawed but fully engaging book
In most respects, The Mystery of Capital is well written. The exception lies in the author’s tendency to repeat himself. The book reads as though it was adapted from a series of lectures strung together in sequence, with the repetition that is so common in such compilations. A number of de Soto’s key points are repeated several times.
About the author
Though Peruvian, Hernando de Soto was educated in Switzerland. He had left Peru at the age of seven and didn’t return until he was 38. (He’s now 75.) An economist, he specializes in studying the informal economy and property rights. He is considered to be a neo-liberal. The major influence in his professional life was the work of Milton Friedman.
9 of 9 people found the following review helpful.
Excellent ideas, well argued, but overly long.
By Ron
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.
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