Tuesday, December 6, 2011

FORUM - An Undergraduate Book Review: The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Hernando De Soto - Reviewed by Marc Zimmerman

The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. By Hernando De Soto. New York: Basic Books, 2000. ISBN # 10-0-465-01615-4

Hernando De Soto’s book, The Mystery of Capital, attempts to address the root problems of why capitalism has only thrived in the West and has failed in developing and former communist countries. More importantly, however, the book also drives at why the success of capitalism, not the failure of capitalism, is paramount in the continuing growth and eventual economic success of developing and former communist countries. Too often in today’s society, the problem of poverty in third world and developing countries is handled ineptly by the West. The West has tried countless times to provide financial aid, food aid, medical aid, city planning, government reform, etc. to these countries. All of these efforts, however, have thus far proved unsuccessful. De Soto argues that although these efforts have short term benefits for developing and former communist countries, they do not address the root causes of the problems. The bottom line of De Soto’s argument is that capitalism triumphs in the West and fails everywhere else because the West has succeeded in reincarnating their material possessions into capital, which is the life blood of small business, entrepreneurship, and the success of capitalism.

Uniformly throughout developing and former communist countries, there is a lack of formal systems of property. This causes much of the economic activity to take place outside of the legal sector. De Soto does a fantastic job of presenting factual and empirical evidence as to why so many people in developing and former communist countries engage in the extralegal sector. In Peru, for example, De Soto and his team of six associates attempted to set up a small garment workshop. Working six hours per day, it took them 289 days to complete all the necessary paperwork and gain official government approval to open a small business. Moreover, the entire process cost them $1,231—thirty-one times the monthly minimum wage. Similar results were found when De Soto and his team tried similar experiments in Egypt, Haiti, the Philippines, and other developing and former communist countries. Thus, the formal systems of property in the developing and former communist countries exclude the vast majority of people from ever partaking in them.  The extralegal sector that is created as a result of the failure of governments to make their property systems more inclusive fail to produce six effects that the legal sectors in the West produce that are keystones to the success of capitalism. 

Nearly every developing and former communist nation has some form of a formal property system. The problem is, however, that the overwhelming majority of citizens cannot gain access to it. The extreme complexity and overregulation of the formal property system makes it financially impossible for almost all citizens in developing and former communist nations to gain access to the formal system of property. Thus, citizens of these countries are forced to turn to the extralegal sector of the economy where they are never able to convert their assets into capital. De Soto lists five reasons why these governments have historically failed to open up their systems of property to the masses: First, they believe that all people who take cover in the extralegal sector do so to avoid paying taxes. Second, those real estate assets are not held legally because they have not been properly surveyed, mapped, and recorded. Third, enacting mandatory law on property is sufficient, and governments can ignore the costs of compliance with the law. Fourth, existing extralegal arrangements or “social contracts” can be ignored. Fifth, it is possible to change something as fundamental as people’s conventions on how they hold their assets, both legal and extralegal, without high-level political leadership.
Although De Soto does a brilliant job of systematically examining the problems found in developing and former communist countries, he does a somewhat lackluster job of bringing all of his ideas together in his conclusion. De Soto spends much of his conclusion comparing his findings with the predictions of Karl Marx. Having nowhere else in the book talked about Marx, I found this examination somewhat confusing and misplaced. Furthermore, his comparison with Marx does not seem to flow with the rest of his conclusion. Despite this, however, one can still gain valuable  conclusions from De Soto’s work even though De Soto himself does not bring do a great job of tying all of his findings together. The conclusion that is spread out throughout his work is that it is only when governments in developing and former communist countries open up their systems of property that the potential of the unparalleled amounts of dead capital in developing and former communist countries will be unleashed. Once this capital becomes realized, capitalism will finally triumph throughout the world.

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