Review of the Book:
The Mystery of Capital: Why Capitalism
Triumphs in the West and Fails Everywhere Else
by Hernando DeSoto
H. William Batt
[The book is published by Basic Books, 2000. This review is
reprinted from
GroundSwell, November-December 2004]
After its winning nine prestigious awards from mainstream economic
and public affairs organizations, (www.ild.org.pe/awards_ild.htm)
why have we Georgists not reviewed this book earlier! No book's
thesis more directly flies in the face of our own arguments than
what Dr. Hernando DeSoto has proposed. And now, with the rave
reviews given to this, his second work, we are compelled to confront
what he claims and to demonstrate the sleight- of-hand in his
argument. In the absence of more qualified adherents of the Georgist
persuasion, I have set myself this task.
DeSoto is president of the Institute for Liberty and Democracy
headquartered in Peru. Coming from the global South, he is able to
say things that, coming from the World Bank, the International
Monetary Fund, or any similar organization, would be crass and
self-serving. Early on in the book (P. 37), he says that "[l]eaders
of the Third World and former Communist nations need not wander the
world's foreign ministries and international financial institutions
seeking their fortune. In the midst of their own poorest
neighborhoods and shantytowns, there are -- if not acres of diamonds
-- trillions of dollars, all ready to be put to use if only the
mystery of how assets are transformed into live capital can be
unraveled." The conscience of the global North is thus
assuaged: it's not the fault or the insensitivity of the wealthy
nations that so many people of the world live in poverty; rather it
stems from an inability of impoverished countries themselves to
leverage the capital assets that they have. The rest of the book
attempts to substantiate this argument, or rather to explain why "the
one thing that the poor countries of the world cannot seem to
produce for themselves [i.e., investment capital], no matter how
eagerly their people engage in all the other activities that
characterize a capitalist economy." (P.5.)
The key to capital development and economic modernization, he
argues, comes from the capacity to leverage what capital assets
already exist. And the most commonly and easily leveraged asset is
real estate. But because titles in poor nations, to real estate
property especially, are not secure and protected in the law, they
cannot serve as collateral for further loans. "The result is
that most people's resources are commercially and financially
invisible. Nobody really knows who owns what and where, who is
accountable for the performance of obligations, who is responsible
for losses and fraud, or what mechanisms are available to enforce
payment for services and goods delivered. Consequently, most
potential assets in these countries have not been identified or
realized; there is little accessible capital, and the exchange
economy is constrained and sluggish." (P.32) He goes on to
argue that, conservatively, "about 85 percent of urban parcels
in these nations, and between 40 percent and 53 percent of rural
parcels, are held in such a way that they cannot be used to create
capital. ... By our calculations, the total value of the real estate
held but not legally owned by the poor of the Third World and former
Communist nations is at least $9.3 trillion."
Where is this capital? It lies in every legally-secured asset: "every
piece of land, every house, every chattel," all "formally
fixed in updated records governed by rules contained in the property
system." (P.48) He suggests that in developed economies "up
to 70 percent of the credit new businesses receive comes from using
formal titles as collateral for mortgages," (P.84) and that "real
estate accounts for some 50 percent of the national wealth of
advanced nations." (P.86) Nowhere, however, is this
identification of "capital" parsed for what it really is:
largely land. As a true neoclassical economist, despite his ritual
homage to Adam Smith, everything that the classical economists and
we Georgists would call land is conflated into capital. To DeSoto it
is the land in almost all instances that provides the leverage for
capital equity and accumulation, secured under authorized titles as
property.
The metaphor that he employs to distinguish land as a capital
asset from other forms of capital is revealing. His analogy is a
lake, first available only as potential energy, until such time a
dam is built to capitalize its kinetic power. The lake's utility as
capital is "locked up" until such time as its title makes
it securely available for exploitation. "Just as a lake needs a
hydroelectric plant to produce usable energy, assets need a formal
property system to produce significant surplus value." (P.48)
Nowhere does he explore the origins or legitimacy of those titles,
how they might have been secured or whether they were fairly gained.
It is sufficient, only, that they are guaranteed for current
purposes. "Capital is born by representing in writing - in a
title, a security, a contract, and in other such records - the most
economically and socially useful qualities about the asset as
opposed to the visually more striking aspects of the asset."
(P.49) The moral dimensions of land ownership are totally
overlooked. The way to challenge his whole thesis is by asking him
to defend the legitimacy of real estate titles -- wherever they are.
De Soto spends considerable ink in exploring the history of
American economic development, as he sees in its history the key to
success elsewhere. Chapter Five is an extended treatment of the "evolution
of property" in the USA (p.108), and in believing that the
progress making it "open to all" ( p.109) is not yet
complete. The granting of titles is treated extensively -- the
eviction of squatters, the reward to soldiers, the surveying and
marking of boundaries, and the employment of "cabin rights"
and "corn rights." DeSoto notes at one point (p.117) that
squatters "were constantly provoking conflict with Native
Americans by invading their lands," but the moral questions he
never addresses.
His debt to most of the prominent historians on the subject is
repleat -- Gates, Hoffer, and even an Aaron Sokolski book published
in 1957 by Schalkenbach. There is also an extensive treatment of a
controversial 1821 case that attempted to ground the "rules of
property" in English common law. One Richard Biddle (indeed!),
a squatter who had settled on land titled to Green, was adjudged
liable to pay not merely for the land he occupied but for any
improvements that were made. The Court then later reaffirmed that
occupancy laws deprived "the rightful owner of the land, of the
rents and profits received by the occupants." But the backlash
to this decision was so profound that it inspired statutes in
rapidly settling western states and quickly making Green a nullity.
(Green v Biddle, 8 Wheaton 1, 1823) The sanctity of title in fee
simple continues to evolve over the course of the next century.
Titles for mining claims came to have the same standing as those for
farm lands.
He accepts the argument of historian Richard White by quoting in
part: "[T]hrough occupancy, preemption, homesteading, miners'
laws, and such, Americans built a new concept of property, 'one that
emphasized its dynamic aspects, associating it with economic
growth,' and which replaced a concept 'that emphasized its static
character associating it with security from too rapid change.'
American property changed from being means of preserving an old
economic order to being, instead, a powerful tool for creating a new
one. The result was expanded markets and capital needed to fuel
explosive economic growth. This was the 'momentous' change that
still drives U.S. economic growth." (p.149-150) I'm tempted to
check White's 1991 book soon as the title is It's Your Misfortune
and None of My Own: A New History of the American West.
Not recognizing land as a separate factor of production, there is
of course no further mention of economic rent. One can only wonder
how any economic surplus arises -- doubtless from labor, even if he
provides no indication that workers reap the rewards of their toil.
Somehow, rather, capital is transmuted into more capital, simply by
virtue of the security of property titles.
Despite our Georgist criticism, DeSoto's thesis is definitely
sound in parts: security needs to be granted to its users if
improvements are to be tied to locational sites else the risk to
investment will likely be too high to sustain. No homesteader can
venture a large stake in a site if he realizes that it may be taken
from him. No miner can risk so much transformation of labor to
capital if the land on which he builds may soon be lost. Land titles
are important. DeSoto has a point. But his reliance on freehold
property title to land, the birthright of us all, to provide
financial collateral is problematic and unjust.
The failure to recognize land rent means that the bases of
taxation will necessarily derive from other factors, i.e., labor and
capital. By taxing those other factors, the efficiency and
productivity of the economy is compromised. DeSoto fails to
recognize that the collection of land rent, were it identified,
would provide the perfect revenue source. It would not reduce the
wealth of societies and the growth of capital one whit; rather it
would inspire it. The Georgist point of view is a compelling answer
to The Mystery of Capital; it needs only to be told again and again.