Bystanders to Success

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Since Sept. 11, a lot of people have attempted to explain “why they hate us.” Yet the vast majority of people in the world don’t hate us, or if they do it is because they envy what we have. They want to live the way we do. They want to live a normal life. They want to make some money and buy a nice house and send their children to college and achieve some success that they can be proud of.

This kind of normal life, seemingly so simple, is available to only a few. Why?

That is the question that Hernando de Soto addresses in The Mystery of Capital. And he offers a pretty good answer. The vast majority of people “still linger at the periphery of the capitalist game” (p. 207).

They “may wear Nike shoes and flash their Casio watches, but even as they consume the goods of the West,”

they are bystanders. They live in a country whose government, like most governments, has made it virtually impossible for them to own property legally. They can’t start businesses because it takes a morass of bureaucratic actions to obtain a permit. They can’t own a home because they are squatters, and even if the government theoretically allows them to claim ownership, it takes hundreds of steps (728 in Lima, Peru for example) to acquire title. Most people can’t navigate that labyrinth.

Thus, de Soto argues, millions – in fact, billions – of people in the world don’t have capital. Or, in his phrase, the capital they own is “dead.” Unlike in this country – and parts of the world such as Europe, Japan, and Hong Kong – their assets are not protected or respected by the government. Thus, they can’t formally buy and sell their homes, purchase stock, use their property as collateral for businesses, or even have a legal address for telephone lines, mail, and cable installation. They can’t make their assets work as capital to earn more money through investment or collateral.

This story is not new. De Soto has been preaching the basic message since he published The Other Path in 1989. He has persuasively argued that local people know and recognize the property rights in their community, but these rights cannot be put to use. The “owners” are not part of the legal infrastructure that converts property into capital. He has made his point with the now-famous example of dogs barking: All the evidence of ownership you need is the serial barking of dogs as a stranger walks by the homes of different families. Ownership is real but ineffectual because it is not official.

De Soto’s book has captured the attention of the establishment publications of the United States. The New York Times has published two articles about The Mystery of Capital – not merely reviewing the book favorably but also interviewing the author. I don’t know exactly why the book has aroused such interest, but I welcome it.

The reason may be that de Soto is sympathetic to Marxism. Marx, he says, was perceptive in seeing that capital was more than just pieces of equipment or physical assets. However, Marx “did not see that it is the mechanisms contained in the property system itself that give assets and the labor invested in them the form required to create capital.” Marx recognized that resources are “more than their physical properties” but”did not quite grasp that formal property was not simply an instrument for appropriation but also the means to motivate people to create additional usable value” (215). There may be something to this praise of Marx, but it strikes me as overreaching.

There are some flaws in the book. For one thing, it’s repetitive. Second, it’s frustrating to read because he alludes to, but does not relate, what must be fascinating stories about living on the outskirts of capitalism. De Soto’s team of researchers actually went through the process of setting up businesses in places like Port-au-Prince and Lima and attempted to measure the value of underground or nonlegal assets. He reveals the results in numerical terms (the number of steps to start a business in Peru, for example), but he declines to bring the message home with anecdotal information about what his team encountered.

And I can’t help but wonder whether he has misstated the problem. I’m not sure that this problem is really about capital. I think it is about property rights. Dressing it up as a mystery about capital drenches it in Marxism and avoids the main point, which is simply that private ownership is essential to economic growth.

Also, de Soto writes too sympathetically about governments. Their intentions are always good, it seems; “governments in developing countries have tried for 180 years to open up their property systems to the poor” (153). Oh, come on.

Yet in spite of these flaws, The Mystery of Capital is an extraordinary book. Emily Dickinson once said, “If I feel physically as if the top of my head were taken off, I know this is poetry.” I felt that way when I read that de Soto is talking about four-fifths of the peo-

De Soto’s researchers actually went through the process of setting up businesses in places like Port-au-Prince and Lima.

 

pIe of the world who are outside what he calls the “bell jar” of capitalism.

I had thought that the fall of communism would bring capitalism to most people in the world. But it hasn’t. “Capitalism is in crisis,” de Soto says, “because developing and former communist nations have been unable to I globalize’ within their own countries.” In spite of cell phones and Internet cafes, the world of trade remains off-limits to most people. The reason is that they don’t have capital. They are not allowed to own property.

This is more than an observation. It is the articulation of a tragedy, one that changed my thinking almost as much as the attacks on Sept. 11 did. How can the world be stable if one-fifth of its population has property rights and four-fifths don’t? This must change. Perhaps de Soto’s next book will tell us how to do it.

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