The Mystery of Capital

A great deal of the power of legal property comes from the accountability it creates, argues Hernando de Soto, from the constraints it imposes, the rules it spawns and the sanctions it can apply. The lack of legal property thus explains why citizens in developed and former communist nations cannot make profitable contracts with strangers, cannot obtain credit, insurance or utilities services. Because they have no property to lose, they are only taken seriously as contracting parties by their immediate family and neighbours. To put it another way, while most western homeowners dream about paying off their mortgage, their counterparts in the less developed countries could transform their existence if they could only access such sums.

It's rare to come across a book about such an arcane subject that is simultaneously interesting and illuminating, entertaining and thought-provoking. The Mystery of Capital is all these and more. De Soto paints a procession of vivid pictures, from Cairo to the Wild West, from the Andes to the Urals. "The cities of the Third World and the former communist countries are teeming with entrepreneurs," he says, dismissing the notion that entrepreneurialism is the exclusive preserve of the west. "You cannot walk through a Middle Eastern market, hike up to a Latin American village or climb into a taxi in Moscow without someone trying to make a deal with you. The inhabitants of these countries possess talent, enthusiasm and an astonishing ability to wring a profit out of practically nothing."

In The Mystery of Capital, de Soto believes he points to a way in which capitalism can be used to help developing nations. In his vision, the poor are not the problem. They are the solution. --Brian Bollen

According to De Soto, the problem outside the West is that while the poor have plenty of assets (land, homes, businesses), these assets lie overwhelmingly in the extralegal, informal realm. De Soto's on the ground research reveals that this is the result of an accelerated process of urbanization and population growth, coupled with the inability of legal systems to adapt to the reality of how people live. What has happened is that throughout the Third World, the costs of making assets legal (obtaining proper title to a house, registering a business, etc.), are so prohibitive both in terms of time and money, that the assets end up being what de Soto calls"dead capital." In the West, a web of financial and legal networks enable people to use their assets to create further wealth, through such tools as mortgages, publicly traded stocks, and the like. Outside the West, most people live and work outside the kind of invisible asset management infrastructure that we take for granted, and thus are unable to use their assets for the "representational purposes" we are able to. Thus the full set of capitalist tools are not available to them and it becomes incredibly hard to realize any kind of upward mobility.

One of the key sections of the book is "The Missing Lessons of U.S. History", in which de Soto demonstrates how the US faced the exact same challenge several hundred years ago. The difference is that the legal system was flexible enough over a century and a half to realign itself with the reality being created on the ground by an energetic citizenry. However, it occurred over the long-term and long ago, and has thus been forgotten by history. What de Soto says needs to be understood is that the less developed nations of today are trying to accomplish the same thing over a much shorter time and with much greater populations, and without a clear understanding of how the West managed to do it. The ultimate challenge is raising the social awareness and political backing necessary to implement major legal change in the face of resistance from an entrenched bureaucracy and elites who benefit from the status quo. This is a daunting and provocative challenge—but not impossible.

Of course, all of the above is greatly simplified, so anyone interested in the state of the world should read it for themselves. De Soto's writing is remarkably clear (especially for an economist), and no background in economics or law is needed to follow his argument. There is a little repetition here and there, but always in the service of making sure the reader doesn't miss the big picture. In the end, whether you agree with his thesis or not, I guarantee it'll challenge your preconceived notions about global capitalism.


A simple idea with revolutionary potential   November 27, 2001
37 out of 41 found this review helpful

This is a book of enormous insight and significance. The revolutionary potential of its central idea is so great that it could transform the world by bringing wealth to many people who are today considered poor. In spite of the fact that enthusiastic entrepreneurs all over the world are able to wring profits out of practically nothing, the wealth and fruits of capitalism continue to be primarily enjoyed by the West. Hernando de Soto argues that many of the poor work as hard as anyone else and already possess significant assets - both in savings, businesses, industries and houses - to make a success of capitalism. So why have they remained poor? What's lacking in many Third World and former communist countries is easy access to documentation - in particular the title deeds to property - as a visible sign that connects all these assets to the rest of the economy. In the West ownership is comparatively easily documented while in many other countries it can take years to obtain. "Thanks to this representational process, assets can lead an invisible, parallel life alongside their material existence. They can be used as collateral for credit." By this relatively simple means wealth is released - as it has been in the West but fails to be in the Third World and former communist countries. This is the essence of de Soto's insight which he deepens in chapter after chapter, drawing on the histories of a number of countries and the work of his team of researchers who had to go out amongst the poor before they could fully understand why capitalism is failing in so many countries. One small drawback of the book - if one can call it that - is that its thesis is developed somewhat exhaustively. But having said that, the conclusions in the final chapter were of such lucidity as to bring joy to this particular reader. Implementing de Soto's insight will bring enormous benefit to many people everywhere. Not implementing it will put us all in peril.


Packed with Knowledge!   October 16, 2003
Rolf Dobelli (Luzern Switzerland)
1 out of 1 found this review helpful

Hernando de Soto's ideas cannot and should not be ignored. This book will open many eyes to the nature of capital. The author suggests a radically simple yet enormously challenging way of bringing the world's impoverished billions onto the track of capitalism and development: give them legal property rights to what they "own." The author's intriguing case is that a lack of property rights - not a lack of entrepreneurial zeal or competence - stymies development in the former East Bloc and Third World countries. This seemed to be a shockingly original notion when the author first propounded it in his bestseller The Other Patch, and it still does. If the book has a flaw, we warn, it is that the author's undisguised missionary ardor sometimes makes one wonder whether he is merely a zealot. Even if he were one, the book would merit reading.


Packed With Knowledge!   June 8, 2004
Rolf Dobelli (Luzern Switzerland)
1 out of 1 found this review helpful

Hernando de Soto's ideas cannot and should not be ignored. This book will open many eyes to the nature of capital. The author suggests a radically simple yet enormously challenging way of bringing the world's impoverished billions onto the track of capitalism and development: give them legal property rights to what they "own." The author's intriguing case is that a lack of property rights - not a lack of entrepreneurial zeal or competence - stymies development in the former East Bloc and Third World countries. This seemed to be a shockingly original notion when the author first propounded it in his bestseller The Other Patch, and it still does. If the book has a flaw, we warn, it is that the author's undisguised missionary ardor sometimes makes one wonder whether he is merely a zealot. Even if he were one, the book would merit reading.


Great   October 15, 2007
Erik Cleves Kristensen (Mozambique)
Mr. De Soto's book has almost become a classic in the field of development economics. It is also a compelling and excellently written small book, with good argumentation, not overly using the immense amount of statistical data that underpins it.
The argument is basically that economic development of a more equitable and prosperous for the poorest, could happen by simply creating good legal and administrative framework for property and investment. That is the so-called "mystery of capital": when this is in place, people will be able to extract capital from their property, just as they are largely doing informally in much of the developing world, but completely outside the formal economic system.
The argument is excellent. Therefore, I believe the book is a must-read for anyone working with poverty and development (not only in the developing countries).
Nevertheless, there are still some things that may be discussed. Mr. De Soto is a firm believer in the invisible hand of the market: when the framework is in place, people will be able to help themselves. In that sense, I can't help but thinking that Mr. De Soto is largely speaking of poor people as mostly urban dwellers, who although informally, are already to a degree incorporated into the economic system, and have a (minimum) knowledge and understanding of how the market works and how to extract capital from it.
But what about the poorest of the poorest subsistence farmers in some African countries? I personally don't believe the arguments put forth in the book would change anything for them. On the contrary, without proper protection, they might be in for more exploitation from more capable people...
While I still don't believe the links of market capitalism are directly related to reducing poverty (an argument implicit in Mr. De Soto's book), I do believe that the easing of market restrictions and clarification of property rights which Mr. De Soto argues for, are a pre-condition for economic development, which may help but will not alone alleviate the precarious situation for the poorest of the poor.
Great book.