Monday, 10 January 2011

Book Review: The Mystery of Capital by Hernando de Soto

Years ago a former boss gave me some advice when I too enthusiastically waxed on about the merits of a project I proposed to him - "Don't oversell". While interesting and with a good point to make, this book suffers from the same mistake I made. It is a serious flaw.

The book's subtitle is Why Capitalism Triumphs in the West and Fails Everywhere Else. Unfortunately, the author demonstrates nothing of the sort. All that the book demonstrates - and even then at too great length (I figure the author could have made his point in about a quarter of the pages) - is that property systems in the West (i.e. developed countries) are effective in allowing everyone to turn their real estate into capital. In contrast, in the "everywhere else" countries, the legal property system is dysfunctional and effectively serves only the few of the elite, leaving the mass of society with enormous assets in total, in extralegal, informal, localized, ad hoc property systems that severely their use as capital for other purposes. The assets are locked in and more or less "dead".

The book's big mistake, stated by the subtitle, is that an effective property system is a sufficient condition to ensure the success of capitalism and by implication to promote prosperity and wealth in a society. Property rights are a necessary condition to societal wealth but they alone do not suffice. So much is made clear in more comprehensive tomes such as Rosenberg and Birdzell's How the West Grew Rich (reviewed here) and Lipsey, Carlaw and Bekar's Economic Transformations (reviewed here). Many other factors like rule of law, science, societal institutions for commerce, favourable culture and religion and most especially technology and innovation all must combine. Capital formation apparently has not been the most important factor at all. Thus, the deficiencies of property systems in many countries in preventing effective use of assets for capital would not explain on their own why capitalism, which de Soto seems to use as shorthand for the western economic system, triumphs only in the West.

For the individual, the main value of this book is for general interest to understand and recognize how laws and formal systems like property arise successfully only out of real, on-the-ground practice and not from theoretical, logical constructions devised by lawyers in the abstract. Such a lesson would apply today, for instance, in the methods being used to reform pensions. We should be practical and not ideological, providing pensions that actually suit people's needs, just as our property systems have successfully evolved.

Favorite quote from the book: "Lawyers are the professionals most involved in the day to day business of property. They sit in the key government offices where they can suppress major decisions. No group - aside from terrorists - is better positioned to sabotage capitalist expansion. And unlike terrorists, the lawyers know how to do it legally." Ouch! (He does say a minority of lawyers do help drive reform.)

In short, Mystery is more an essay than a book, maybe worth borrowing from the library for a quick scan (read the first 68 pages, then the concluding chapter).

My rating: 2 out of 5 stars.

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