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

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1) Paperback Book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Basic Books. This book reveals what needs to be done to bring the third world out of poverty. The everyday American does not have a clue about what made America´s economy the best in the world. Property rights are the key to advance any civilization out of poverty. Just look at china and how with their economy has exploded with the limited property rights they have granted.¤

2) Paperback Book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Basic Books. To what extent do private property rights--dividing up the earth among individuals, making everything a commodity which can be bought or sold--facilitate economic development? Are they absolutely required? Could a planned economy manage to guide development, perhaps with (nearly) as much speed, but a lot more consideration for humanity?

This is an important question for Marxists as well as others. It´s also a controversial one. Adherents of Trosky´s theory of Permanent Revolution (Bolsheviks more generally, in fact), and of Che Guevara´s theory of peasant-based rural guerrilla rebellion, insist that it is possible and desirable to make the transition directly from an underdeveloped, largely agrarian society to an advanced, industrial capitalist economy under the auspices of socialist planning. In terms of legal systems, they believe it is possible to bypass a system of private property and free enterprise, moving directly from feudalism (landlords and peasants) to socialism (collective ownership of the means of production, distribution and exchange).

Classical Marxism--represented by Marx himself, most Marx scholars, and politically speaking, by (for instance) the Russian Mensheviks--holds instead that every society must pass through a long period of capitalist industrialization before it is ready for socialism. Private property rights must be granted and protected by the government, development must take place under the "guidance" of capitalists (they are really just seeking their own individual self-interest, but in the aggregate they guide things), productive capital must become ever more concentrated into fewer hands, until eventually the forces of modern production are too large and too concentrated to be held by any one person in a society that considers itself democratic, and control of them must be taken away from individuals and given to society as a whole.

Like any honest Marxist, although I´m convinced of the need for a planned economy in any highly industrialized society, I´m torn on the question of third world development. On the one hand, the classical Marxist argument seems more compelling and more in tune with reality. On the other, there is a strong emotional impetus to accept the revisionists´ theories about moving straight to socialism. Must all of humanity really pass through the ugly period that the West experienced while capitalism was developing here? Modern sweatshops, all over the world, are like Charles Dickens´ London on a massive scale. Is it really necessary to see all this suffering happen again? Surely it would be inexcusable to dogmatically hold to the classical Marxist view if there was indeed an alternate, more humane path to development.

The Mystery of Capital takes the basically libertarian viewpoint that an extensive and rigidly enforced private property system is necessary for development to occur--roughly in line with the classical Marxist view about the capitalist development stage that must precede socialist planning. It makes the case rather well. Since 100+ reviewers have already summarized the book, I won´t. Instead I´ll suggest reading De Soto in conjunction with Law and the Rise of Capitalism by Michael Tigar, which documents the *actual* role that libertarian (bourgeois) law had in the *actual* development of capitalism in the West. It rounds out De Soto´s argument nicely.

Even if the argument of De Soto/classical Marxism is correct, no one should think that legally-enforced private property is all that is necessary for development today. For we live in a different age than the one in which classical Marxism was born. Today there is an unprecedented development gap between the industrialized and undeveloped world, something that wasn´t faced by the early industrializers (Britain, Western Europe, America). New and unique obstacles therefore face those who wish to industrialize in today´s global economy.

Even with extensive private property laws in place, no infant manufacturing industries are able to compete on the free global market with those of the advanced industrialized nations. Thus, complete free trade provides another stumbling block to development even if private property laws were extensive and thoroughly enforced. Perhaps developing nations can freely trade their agricultural products and raw materials, but if they do not protect their markets for industrial products, they won´t ever develop their own industries. An Indonesian car is not going to be able to compete on the free market with Japanese and American ones. The industrially undeveloped countries must be protectionist about their manufacturing industries until they are sufficiently developed to compete against established global companies. To continue with the same example, protectionism would allow an Indonesian car maker to grow to the point where it was providing cars for the entire Indonesian domestic market. At this point, it would be robust enough to have at least a fighting chance should the Indonesian government open up the automobile market to free trade, allowing foreign companies to sell cars in Indonesia and the Indonesian company to sell cars in foreign companies. For a further development of this argument, check out books by Ha-Joon Chang (Kicking Away the Ladder) and Erik Reinert (How Rich Countries Got Rich...Why Poor Countries Stay Poor). Needless to say, this will require a political battle by common working people of the first world against the economic elites of their own countries. Overseas development can only help working people in the first world: as other countries develop, their wages rise, and Western capital stops going overseas to exploit super-cheap labor, so more jobs stay here in the West. However, Western economic elites--by which I mean to refer to that select group of people who are in a position to actually profit from lack of development overseas, the owners of the capital that is benefiting by exploiting cheap foreign labor--will continue to try and make free trade, which is an impediment to development, a condition of Western loans and aid. For them, development of industries in the undeveloped countries represents merely a loss of cheap labor and a bunch of new competitors.

Finally, what about the revisionist Marxist view, that of Trotsky, Che Guevara and others? It is possible to empirically check up on that line of thinking: just examine the record of states which have attempted development under capitalist and socialist legal systems. Compare existing and formerly existing socialist states and their efforts at development against the efforts of *comparable* (you don´t compare Cuba with the United States, obviously) nations who have followed the liberal capitalist model of development. Many books have been written on the Cuban case, putting it in comparative perspective against Latin American nations with similarly undeveloped economies who have followed the capitalist model, and looking at whether Cuba´s policies can potentially serve as an alternative path to development. Hopefully these books also take into account the effect of the crippling American-led embargo, or else their conclusions will be flawed in favor of the libertarian/classical Marxist view. I personally haven´t read any of these books on comparative development in Latin America, but I plan to do so soon. After all, the entire third world is just waiting on my answer about what it should do! :)¤

3) Paperback Book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Basic Books. Life changing book, should be read by everyone. Very easy to comprehend and very easy to read in one or two settings. What is capitalism, what is a capitalist and what is capital? More importantly, why do some have the good fortune to be capitalists? And, why have so many missed the boat? DeSoto doesn´t give the formula for alleviating world poverty. More importantly he provokes the reader to start looking for answers. The "Mystery of Capital" essentially becomes the source of knowledge capital in action. I´ve already started looking at the billions of humanity stuck at the bottom in a whole different way. Hopefully you will too after reading this book.¤

4) Paperback Book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Basic Books. The mystery of capital? Property rights.

Your reaction to this fundamental statement will probably determine your enjoyment level of this book: are you in the "Oh, really?" camp or the "Of course!" camp? Although de Soto seems to stake this out as his first "Eureka!" moment, this is far from a new insight--the role of property rights in economic development is well-known in a number of fields, including business, law, and economics. Therefore his claim that everyone has simply "forgotten" about the source of the mystery of capital requires some suspension of disbelief. To a large extent, de Soto undermines his claim to novelty by citing a number of renowned property rights scholars (such as Coase and Demsetz, and of course Marx) and noting that Latin American governments have recognized property rights as being key to economic development for the past 200 years. Somewhat shocking to me is the absence of reference to Douglass North, the Nobel Prize-winning economist who deals with virtually the same question ("why do some countries consistently outperform others?") and arrives at virtually the same conclusion: countries with institutions that foster property rights do better. De Soto rightfully concludes that culture is not to blame for everything, but North has a more developed framework that encompasses not only culture but other informal norms (such as those that allow the extralegal economy to function) as well as the formal institutions and their enforcement. What I´m trying to say is that if the "mystery of capital = property rights" part was at all surprising (or even if it wasn´t), give North´s 1990 book on institutional economics a read.

Personally, what I found more interesting was the focus on the extralegal economy of developing & underdeveloped countries. Undoubtedly, this is a topic that does not garner much attention, and when it does it is more from a human rights standpoint than an economic standpoint. De Soto´s point that these "extralegals" are often not extralegal by choice, and often productive members of society is well taken. So is his point that formal laws must be harmonious with informal customs (although it is interesting that he spends much time arguing this point, which is taken as a given--and starting point--for North and other institutional economists). As other reviewers have noted, however, a degree of skepticism is needed when de Soto treats his "legalize what is not extralegal" mantra as a panacea for all poor countries´ ills. Not just because of the logistics necessary for such an endeavor (such as the simultaneous improvements in the many complementary institutions to property rights necessary in order to fully realize the economy´s potential), although that is a key stumbling block. Nor is skepticism needed purely because of the fact that de Soto apparently expects a virtuous politician (or enlightened consultant) to implement in a series of fell swoops what it took the US and Europe many centuries to achieve in a gradual, organic evolution kind of way. Even the success of Japan was not as precipitous as de Soto and others claim--Japan´s rise to power is best viewed as starting with the 19th century Meiji Restoration, not the post-war period. It´s not even because de Soto doesn´t seem to consider the situation where extralegal norms are inefficient or even run counter to capitalism (which is often a primary reason why reform is pushed by the IMF and other such actors).

No, what concerns this reviewer even more is that the causality de Soto argues seems counter to what his actual US/Europe examples imply. In other words, de Soto argues that the economic potential of extralegals would be unleashed if only they were allowed into the formal economy. That is, legalization of what is extralegal leads to economic development. Yet, the example of US settlers suggests the exact opposite. Rather than the legalization of extralegal activities (like squatting) being instrumental to the release of economic potential, it was largely an irrelevant, post hoc adjustment to reality. Politics certainly figured in, but purely from an economic standpoint, the extralegal institutions trumped the outdated and inefficient legal institutions anyway. The squatters were going to squat and the gold diggers were going to dig, and the law was at worst a minor nuisance to them as they pursued their economic activities. Economic changes heralded legal changes, not the other way around. Not only that, but the decision to tolerate and even reward squatters--while an economically justified decision--actually undermined property rights in the traditional sense, ironically.

In other words, it was the economic development that preceded legalization; this is not the causality for which de Soto argues. To that end, one cannot help but think that the economic potential of a Peruvian shantytown dweller--while positive, from a value-creation perspective--is dwarfed by that of a historical US frontiersman or UK suburban textile worker. In that case, the focus shifts to classic concepts like comparative advantage. The implication is that the question becomes: what sources of competitive or comparative advantage can be exploited to achieve sustainable economic development? The legality of these aspects becomes somewhat trivial. If economic development is fostered, the legal system will fall in line (case in point: China´s meteoric economic rise is finally being accompanied--albeit slowly--by legal reform, but clearly it was not legal reform that drove China´s economic ascent!). Don´t get me wrong: improving a country´s system of property rights can do nothing but good. But would legalizing what is currently extralegal propel a country like Peru into the ranks of the developed, "rich" countries? That´s a little harder to believe. It also casts a shadow on de Soto´s sunny optimism because it would then be possible for a country to "do all the right things" and still languish in poverty.

De Soto´s zeal is admirable, and he´s clearly on the right path in general. And even though his examples suggest that economic change precedes legal change, while he argues that legal change precedes economic change, these are not mutually exclusive processes so he is not necessarily wrong (he just has less anecdotal support than he presumes). I just worry that even if his suggestions are implemented, 10, 50, or 100 years from now we´ll still be asking the same basic question: why do the gods of economic prosperity smile on some places but not on others?¤

5) Paperback Book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Basic Books. The Mystery of Capital tackles one of the largest issues in development and comparative economics: non-convergence. Why is it that living standards do not converge? Is it because some nations have better technology? Is it because some nations simply have more capital? De Soto focuses on institutions rather than existing technology or capital. The reason why some nations succeed in developing a modern capital structure using modern technology is because their institutions protect the property rights of those who try to save and accumulate wealth.

The discussion of American history is detailed enough to make a strong case, yet focused enough to make it easy reading. De Soto does a good job of relating American experience to modern development issues. This is what economics should be about: using valid and sensible theoretical propositions to explain real historical events. Consequently, I have found this book useful in my classes on Comparative Economic Systems, and Law and Economics. The Mystery of Capital certainly does not read like a textbook, but it should be used as one anyway.

The main limitation of this book is that it tends to make observations about politics, rather than explaining it. In other words, De Soto does not get very far into Public Choice issues. This is a minor limitation, as no book can cover every angle. Read The Mystery of Capital and learn!¤

6) Paperback Book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Basic Books.

"The hour of capitalism´s greatest triumph," writes Hernando de Soto, "is, in the eyes of four-fifths of humanity, its hour of crisis." In The Mystery of Capital, the world-famous Peruvian economist takes up the question that, more than any other, is central to one of the most crucial problems the world faces today: Why do some countries succeed at capitalism while others fail?In strong opposition to the popular view that success is determined by cultural differences, de Soto finds that it actually has everything to do with the legal structure of property and property rights. Every developed nation in the world at one time went through the transformation from predominantly informal, extralegal ownership to a formal, unified legal property system. In the West we´ve forgotten that creating this system is also what allowed people everywhere to leverage property into wealth. This persuasive book will revolutionize our understanding of capital and point the way to a major transformation of the world economy.

7) Paperback Book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Basic Books. It´s become clear by now the fall of the Berlin Wall and the collapse of communism in most places around the globe hasn´t ushered in an unequivocal flowering of capitalism in the developing and postcommunist world. Western thinkers have blamed this on everything from these countries´ lack of sellable assets to their inherently non-entrepreneurial "mindset." In this book, the renowned Peruvian economist and adviser to presidents and prime ministers Hernando de Soto proposes and argues another reason: it´s not that poor, postcommunist countries don´t have the assets to make capitalism flourish. As de Soto points out by way of example, in Egypt, the wealth the poor have accumulated is worth 55 times as much as the sum of all direct foreign investment ever recorded there, including that spent on building the Suez Canal and the Aswan Dam.

No, the real problem is that such countries have yet to establish and normalize the invisible network of laws that turns assets from "dead" into "liquid" capital. In the West, standardized laws allow us to mortgage a house to raise money for a new venture, permit the worth of a company to be broken up into so many publicly tradable stocks, and make it possible to govern and appraise property with agreed-upon rules that hold across neighborhoods, towns, or regions. This invisible infrastructure of "asset management"--so taken for granted in the West, even though it has only fully existed in the United States for the past 100 years--is the missing ingredient to success with capitalism, insists de Soto. But even though that link is primarily a legal one, he argues that the process of making it a normalized component of a society is more a political--or attitude-changing--challenge than anything else.

With a fleet of researchers, de Soto has sought out detailed evidence from struggling economies around the world to back up his claims. The result is a fascinating and solidly supported look at the one component that´s holding much of the world back from developing healthy free markets. --Timothy Murphy¤

Page Updated: Robert N. Goolsby, 7-Sep-2008, 04650161549780465016150, 910-830-700-540-OMB-E0B-PIB-8

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

Author - Hernando De Soto ... [Goo?] [Posters]

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