Why capitalism triumphs in the West and fails everywhere
Lovemore Ranga Mataire The Reader
“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 Peruvian economist De Soto takes up the question that 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 argues that it has everything to do with the legal structure of property and property rights. De Soto’s starting point is that nowadays – after the demise of other political ideologies – capitalism seems to be the only realistic way of rationally organising and sustaining society.
The fundamental issue raised by De Soto is the need to take measures to provide the informal sector with access to the formal economy by granting formal property rights and breaking down bureaucratic barriers.
It cannot be discounted that De Soto has been one of the leading lights in demystifying a lot of economic myths. Former United States president Bill Clinton called him “the greatest living economist” at the 2000 World Urban Forum in Davos, Switzerland.
He advances the view that every developed nation in the world at one time went through a transformation from predominantly informal, extra-legal ownership to a formal, unified legal property system. De Soto argues convincingly that capitalism seems to triumph in the West because it has managed over time to leverage property into wealth.
Written in a dynamic and captivating style, the book explores how poverty persists in the Third World because of failure to create a system of recognising and organising each citizen’s property that will allow for it to be converted into dynamic capital usable to produce wealth.
This persuasive book definitely revolutionises the understanding of capital and points the way to a major transformation of the world economy. One of the illuminating views that stands out in De Soto’s book is his chronicling of how in the past many countries have attempted and failed to introduce a capitalist mode of existence because of their inability to produce capital. De Soto posits that in the Western world, capitalism works.
De Soto says capitalism works because they have mastered the ability to describe possessions on “paper”, which allows possessions of an invisible life parallel to their physical existence.
“In the West, by contrast, every parcel of land, every building, every piece of equipment, or store of inventories, is represented in a property document that is the visible sign of a vast hidden process that connects all these asserts to the rest of the economy.”
Unfortunately, most developing nations seem to have not mastered this paper world, which makes them undercapitalised in the same mould as companies that fail to issue shares and bonds, making them unable to generate capital stock.
The inability to convert equipment or property into capital is mainly caused by the absence of legal infrastructure, which is implicit in the system of property rights. When it comes to understanding what “capital” is, De Soto refers to renowned economists Adam Smith and Karl Marx, who understood that capital is part of any country’s possessions that can be used to generate extra production capacity and extra productivity.
However, despite his incisive analysis of the Third World’s problems, De Soto does not fully explain why most Western nations, particularly the United States, have been successful in converting property into capital that produces wealth. His solutions are severely weakened by this glaring lack of detail.
Furthermore, the author references the list of Western nations as having similar problems, stating that over the last 200 years, through unconscious acts, the West was able to weave together a system of laws and social contracts that allowed for people to be held accountable to their obligations. He however does not explain why the framework for what he calls “unconscious endeavour” was able to exist within the “bell jar” of Western nations.
While he explains how Western nations were able to integrate their extra-legal world, he nevertheless fails to explain why this happened. He also fails to explain what happened 200 years ago in Western nations that allowed for a revolution in capital management.