The Mystery of Capital (Paperback)

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.

The author of this book, Hernando De Soto, is siding with the second team in this dispute. And for that purpose he extends a very strong argument, which is that 3rd world countries failed to utilize the most basic element of Capitalism. And that would be Capital itself!

De Soto defines what he calls "Dead Capital" as property and real estate that is not fungible and can serve only in its most basic usage. Capital goes dead when the government fails to establish a real estate system that is accessible to the common public and is appropriate to the people and their property. What De Soto found after years of research and study is that in most developing and ex-communist countries the real estate systems are troublesome, drastically complicated, and out of touch with the real world. These systems nurtured a burgeoning extralegal style of living, where capital and businesses are not adherent to the legal systems of those countries. Instead, they work based on laws and regulations the people developed themselves among their social circles.

De Soto extends many shocking statistical information proving that 3rd world countries posses vast amounts of dead capital in their extralegal sectors. The author describes this capital as dead because property in extralegal sectors cannot serve as collateral for loans, are not fungible, and their transactions are not protected by the law. De Soto believes that the poor people living in extralegal sectors of 3rd world countries are the real entrepreneurs of their countries. They are very innovative in creating jobs and forming their own systems of protecting assets and their transactions. The author says that the biggest mistake of their governments is that they are trying to enforce the legal system on them when they should adopt their systems instead.

But how come the West never encountered this problem, you wonder. Wrong, the author tells you. The West did go through this and had to sort out many extralegal property and real estate into the legal system. But the West didn't enforce the law on extralegal property, instead they adopted the various extralegal systems and integrated them into the law. The author extends a thorough research in the U.S. history to explain in detail what created the problem of extralegal property and how the Americans overcame it.

One thing you'll notice if you read the book to that point is that the book is too long for its topic. And even though it's little less than 300 pages, but by page 150 I felt that the author had said everything he wanted to say. I believe that once an author begins to say "like I said in chapter x" numerous times he should stop immediately.

However this is a valuable book indeed and I learned a lot of lessons from it. De Soto is a man who will not make a claim without being able to back it with intensive and thorough research and study. His arguments are sound and make a great deal of sense.

If you're interested in the economies of 3rd world and ex-communist countries then I recommend buying this book. This book might fail to appeal you otherwise.