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The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (Paperback)
by Hernando de Sato
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| MSL Pointer Review:
Getting back to the roots of capitalism covering markets, property rights, and fighting poverty, this eye-opening book is one of the essential readings on the future of developing countries. |
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Author: Hernando de Sato
Publisher: Basic Books; Reprint edition
Pub. in: July, 2003
ISBN: 0465016154
Pages: 288
Measurements: 8.2 x 5.5 x 0.8 inches
Origin of product: USA
Order code: BA00029
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- MSL Picks -
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, recognizable 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. (From quoting Ranjit Mathoda, USA)
Target readers:
General readers
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Hernando de Soto is President of the Institute for Liberty and Democracy (ILD), headquartered in Peru and regarded by The Economist as the second most important think-tank in the world. He was recently named one of the five leading Latin American innovators of the century by Time. As Personal Representative and Principal Advisor to the President of Peru, he initiated that country's economic and political reforms. His previous book, The Other Path: The Economic Answer to Terrorism, was a bestseller throughout Latin America as well as in Washington, D.C.
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From the Publisher:
"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 what also allowed people everywhere to leverage property into wealth. This persuasive book revolutionizes our understanding of capital and points the way to a major transformation of the world economy.
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| View all 16 comments |
Washington Post (MSL quote), USA
<2006-12-25 00:00>
The Mystery of Capital makes a powerful case... An important book. |
The Economist (MSL quote), USA
<2006-12-25 00:00>
The most intelligent book yet written about the current challenge of establishing capitalism in the developing world. |
Roberto Helgera (MSL quote), USA
<2006-12-25 00:00>
Like Economics in One Lesson, by Hazlitt, The Mystery of Capital is one of those books that opens your eyes with one single lesson: the importance of strong private property ownership rights and its consequences. De Soto argues, not theoretically, but with proven experience that this is the key to unleashing the potential of capital and its benefits. Suffice it to say that De Soto's advice got rid of the guerrilla in Peru by giving their farmers title to their property and therefore desincentivating them from the growth of drug crops. He also has been hired as a consultant to Egypt, the fastest growing economy in the Middle East, since the reforms proposed have been implemented.
This is a must read to all those wishing, wanting, willing to do away with poverty and to protect property, and it does not have to apply to the third world only: the US and Europe could use a good dose of deregulation and less State intervention in property rights in order to combat poverty, inequality and all the evils modern politicians like to talk about but do little to solve. Were I president of a nation one day I would immediately hire De Soto and his team. Can all evils be resolved with property rights? No, but by aligning the incentives correctly most economies would benefit greatly and much corruption would disappear, eliminating a lot of poverty with it. This book should be a required reading on any economics university program, and De Soto's researched should be further expanded and discussed. |
M. Strong (MSL quote), USA
<2006-12-25 00:00>
De Soto and his team deserve a lot of credit for this book and the research underpinning it. De Soto asked the question of why capitalism, a system that works so well in parts of the world, fails miserably in other parts of the world. Rather than sitting in an office somewhere and coming up with a theory, he and his team headed into the third world and literally attempt to buy homes and start businesses; their findings are enlightening.
The premise of the book is that basic property rights, and the set of laws that guarantee them, are prerequisites to effective capitalism. In the parts of the world that do not have these rights and laws, capitalism cannot take root. De Soto finds that the ability to take material holdings (like a house) and leverage them (through something like a mortgage) into capital is absolutely critical. In many parts of the world, however, it can take between two and ten years to get legal title to a home. Even then, your rights to continued legal ownership of the property are far less than perfect. The effects of this legal quagmire on capitalism are crippling.
One of the most interesting points that De Soto makes is that the West, in its efforts to spread capitalism, never recognizes the need for property rights as an underpinning of its own economic system. He argues that we take our system of property rights so for granted that we can't even recognize them as essential to capitalism.
The book would be five stars except for a tendency of De Soto to get a bit preachy and the fact that he actually seems to blame capitalism for not having its own mechanism to create the property rights upon which it depends. It's a little like blaming the rain for not coming with the concrete that would make it into a pool in my backyard - it just isn't the rain's responsibility.
That said, there are amazing ideas in this book that hold real power to improve the lot of billions of people if they can be recognized and effectively implemented. Highly recommended. |
View all 16 comments |
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