January 11, 2004

The Mystery of Capital

-- unedited version, revisions to follow --

I've been aware of Hernando De Soto's The Mystery of Capital for a few years. A magazine article left me quite intrigued, amd I've picked the book up in story several times. Each time I recoil every time I see the names quoted on the back cover. Maggie Thatcher, Francis Fukuyama, Milton Friedman. Not my favorite people. His other book is worse, Nixon, Reagan, Bush... Now there are also more moderate voices I respect there too, Roland Coase, Bill Clinton. Still while the names might be impressive they sure weren't leading me to the cash register. Finally ordered the book from Amazon months ago, but the same quotes left it on the bottom of the too read pile.

I never should have waited. While De Soto's work has obviously been taken up by the neoliberal right, there is a hell of a lot more possibility contained within it. De Soto has quite a bit of the same faith in "the invisible hand" that underpins libertarians and other champions of the free market. But this faith is easily extracted from what makes this book important, his theory and his practice. De Soto also has a far broader intellectual range then his more conservative fans, he obviously has quite a bit of respect for Marx and free quotes thinkers like Foucault and Derrida that would leave most conservatives withering in disgust. To top it all off De Soto is a shockingly lucid and clear writer, for an economist that is.

There are two quite different aspects of The Mystery of Capital that both offer the potential to be quite revolutionary, one is his theory of Capital and the other is his process of economics. The theory gets all the attention, but its also unproven and there for may or may not wind up being important in the long run. His practice on the other hand is quite proven, both by his results and by years of use in other social sciences. Unlike so many economists, De Soto actually takes the radical step of going out into the field in order to observe and obtain data. Hardly a new concept, but one shockingly rare in a field obsessed with the metric. Lets hope De Soto's rise to stardom shakes this side of things up.

Of course, De Soto's practice hardly gets any notice when placed next to his theory, which ventures in to a place Marx and Braudel never quite reach by asking "where does capital come from?" Is answer is quite simple, capital comes from private property. More specifically though it comes from the liquidation, or abstraction, of private property. A simple concept, and De Soto's strength comes from his ability to clearly illustrate why this is actually important and relevant to the worlds poor.

De Soto spent years doing real fieldwork, in his home country of Peru and around the world, studying the parallel economies of those outside the official western style political economic system. Outside the "bell jar" of western capitalism, De Soto sees literally billions of people engaged in small business and building homes in extralegal spaces that are never formally recognized by governments and banks. And he values this economy at trillions of dollars.

The favelas, bidonvilles and barrios marginales all have their own codes of property and transactions, but they all exist in isolation. While governments sometimes go as far as paving and installing utilities in these extralegal settlements that house huge amounts of the worlds poor, there is no system for formal recognition of who actually owns these dwellings. Inside the neighborhood everyone knows whose house is whose, and there are usually codified processes for transferring ownership. But as soon as you leave the local those codes loose potency.

De Soto argues that by giving formal legal recognition to these extralegal property rights, the worlds poor will unlock access to vast amounts of capital that is currently frozen outside the law. Basically once given legal title to their land the poor can take out mortgages and capital can work its magic. Its at this point where his argument starts to sag. While he illustrates extremely well how people are locked out this system, he never really questions what the effects of the unlocking might be.

I suspect libertarians love reading De Soto's accounts of how it would take an unconnected individual 26 months of working 6 hours a day navigating Peru's government offices to obtain a legal taxi license and five years in Egypt to get a license to build on unoccupied desert land. The irony is that De Soto's solution is profoundly anti-libertarian, he wants the governments to formerly recognize the multitude of extralegal property codes, and untwine the conflicts between them. De Soto does share one thing with libertarians though, a seemingly unmitigated faith in the ability of capitalism to produce sustainable growth.

There is little question that capitalism produces just plain growth. When a bank hold 10% of its deposits in reserve while loaning out the rest there is 10x more abstract money circulating in the community. Phenomenal growth yes, but does it last? De Soto and fellow capitalists never really ask but roll by on faith that yes the system is sustainable. And I while I don't anyone for making that assumption, its one I sometimes make myself, I can never place any real faith in it. There are far to many unanswered questions.

De Soto also barely addresses the issue of culture. He mentions that his fieldwork has lead him to the conclusion that most of the worlds poor posses an extralegal property system very similar to the official ones in its definitions. But he never explores this point far. Is there a distinction between the extralegal codes of urban slums and spaces of rural poverty? Nor does he address any of the internal dynamics of extralegal spaces, do these cultures posses their own internal stratifications and conflicts? Of course one can not expect De Soto to cover everything and too his credit he does stress the essential need for policy makers to actually get out into the streets and learn from the culture.

In the end we can break The Mystery of Capital into three parts. One is a compelling and well argued theory on the origin of capital. A theory that could easily be worked into both capitalist and marxist economic theory, and hopefully some new ones as well. A second, less realized, part is De Soto's own extension of the theory into a capitalist view on poverty. But the most important part may well be his practice. Unlike most economists he's willing to get out into the world and see what goes on. And he makes it quite clear that governments can't solve the problems of poverty "by hiring lawyers in high-rise offices in Delhi, Jakarta, or Moscow to draft new laws. They will have to go out into the streets and listen to the barking dogs".

Posted by Abe at January 11, 2004 12:27 PM


Well, you've absolutely made me want to read it. On the other hand, I think any system of thought predicated on an underlying assumption of indefinitely sustanable growth is an irresponsible fantasy - so I guess we'll see.

De Soto is too smart to make blanket assumptions like that. If fact I wouldn't be surprised if he's a former marxist who has embraced capitalism pragmatically.

Thanks for the review! I bought a used copy of the book months ago and put it in the middle of my stack. I'll have to dig it out and git bizzy.

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Found it! see you on the grid! ;o)

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