"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 world-famous Peruvian economist takes up the question that, more than any other, 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 finds that it actually has to do with the legal structure of property and property rights. Every developed nation in the world at one time went through the transformation from predominantly informal, extralegal ownership to a formal, unified legal property system, but in the West we've forgotten that creating this system is also what allowed people everywhere to leverage property into wealth. This persuasive book will revolutionize our understanding of capital and point the way to a major transformation of the world economy.
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Most Helpful Reviews
★★★★★
5.0
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Brilliant
I spent 5 years in Cambodia doing development/legal reform work and never could figure out why it was so often frustrating and kept running into dead ends. I only wish I had had this book at the beginning of my time there. It reveals what needs to be done to bring the third world out of poverty. Full of simple but powerful ideas. I only hope the development bureaucracy will adopt it. Sound property laws enable land and other assets currently not marketable, saleable or mortgageable to be used as collateral for enterprises (as in the West), and there is more of such property out there in the world than all the Western aid since the beginning of time to all other countries! The author has done his homework on the ground and has compelling and important ideas. An interesting read even if you are not involved in this area.
98 people found this helpful
★★★★★
5.0
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A book by an economist
The Mystery of Capital is recommended, among others, by no less than Milton Friedman, Ronald Coase, Margaret Thatcher, and William F. Buckley Jr. That's not why you should read the book. De Soto examines a necessary and misunderstood topic: why are poor countries poor? His arguments and insights make the book a necessary read for the economist, or other educated person.
The main point of The Mystery of Capital is that the seemingly intractable and hopeless situations in Third World countries is due in large part to one common problem: the issue of property rights. Macroeconomic policies make piecemeal improvements (or may improve nothing at all). Money is not the source of the wealth in a nation. Capital is the source of the wealth of nations! Facilitating the proper legal environment is an integral part of the creation and growth of capital, something First World nations had to develop, and something de Soto argues that Third World nations can develop.
The book gets a bit dry in the latter half, but is definitely worth the read. De Soto covers legal ramifications and reforms that will help build a bridge for "dead capital" to be converted to "live capital". The Mystery of Capital will be a surprise for some, because of de Soto's synopses here and there about what life is like for those who live in Third World countries, and the enormous amount of (untapped) wealth the people of Third World Nations possess.
De Soto is a decent economist, in part because he draws from so many disciplines and sources. He also did a prodigious amount of observation and collection of data (hardly an ivory tower academic). If you have an interest in developmental economics, law and economics, entrepreneurship, History of Thought, Economic History (especially that of the U.S.), or political science, among other areas, The Mystery of Capital is especially for you. I recommend the book to any social scientist - the book is so well done and relevant that you may find yourself developing an interest in any of the above!
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50 people found this helpful
★★★★★
4.0
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Valuable if you're interested in 3rd world countries
Why Capitalism failed everywhere but succeeded in the West? This is a question that haunts many politicians and economists in 3rd world countries and in the West as well. Eventually the mystery became a quarrel between the two worlds, having the third claiming that Capitalism is just a hoax for the West to tap into their trifling fortunes, and the first claiming that 3rd world countries are failing to implement Capitalism efficiently.
The author of this book, Hernando De Soto, is siding with the second team in this dispute. And for that purpose he extends a very strong argument, which is that 3rd world countries failed to utilize the most basic element of Capitalism. And that would be Capital itself!
De Soto defines what he calls "Dead Capital" as property and real estate that is not fungible and can serve only in its most basic usage. Capital goes dead when the government fails to establish a real estate system that is accessible to the common public and is appropriate to the people and their property. What De Soto found after years of research and study is that in most developing and ex-communist countries the real estate systems are troublesome, drastically complicated, and out of touch with the real world. These systems nurtured a burgeoning extralegal style of living, where capital and businesses are not adherent to the legal systems of those countries. Instead, they work based on laws and regulations the people developed themselves among their social circles.
De Soto extends many shocking statistical information proving that 3rd world countries posses vast amounts of dead capital in their extralegal sectors. The author describes this capital as dead because property in extralegal sectors cannot serve as collateral for loans, are not fungible, and their transactions are not protected by the law. De Soto believes that the poor people living in extralegal sectors of 3rd world countries are the real entrepreneurs of their countries. They are very innovative in creating jobs and forming their own systems of protecting assets and their transactions. The author says that the biggest mistake of their governments is that they are trying to enforce the legal system on them when they should adopt their systems instead.
But how come the West never encountered this problem, you wonder. Wrong, the author tells you. The West did go through this and had to sort out many extralegal property and real estate into the legal system. But the West didn't enforce the law on extralegal property, instead they adopted the various extralegal systems and integrated them into the law. The author extends a thorough research in the U.S. history to explain in detail what created the problem of extralegal property and how the Americans overcame it.
One thing you'll notice if you read the book to that point is that the book is too long for its topic. And even though it's little less than 300 pages, but by page 150 I felt that the author had said everything he wanted to say. I believe that once an author begins to say "like I said in chapter x" numerous times he should stop immediately.
However this is a valuable book indeed and I learned a lot of lessons from it. De Soto is a man who will not make a claim without being able to back it with intensive and thorough research and study. His arguments are sound and make a great deal of sense.
If you're interested in the economies of 3rd world and ex-communist countries then I recommend buying this book. This book might fail to appeal you otherwise.
38 people found this helpful
★★★★★
3.0
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Argument not complete
Found this to be a refreshing book , particularly after that silly and amazingly boring "Open Society Endangered" by George Soros. Even this book becomes repetitive at times , but on the whole the style is breezy. However de Soto did not make an intellectually watertight case to support his thesis.
The book basically tries to make one case - The poor people in less developed countries and former communist countries own a huge amount of assets. But all of it is in the informal sector - there is no official record to back up these possessions. Therefore , these are what de Soto calls "dead capital" - they cannot be used as collateral for a loan or for any of the "representational" purposes that assets are used in the West or in Japan. De Soto claims that if only these countries showed enough flexibility to adapt their laws to these informal social contracts that are already in place, rather than try to impose ivory-tower laws from above, then poverty can be easily eradicated. How? Because the poor people have enough innovative drive that they will now use their "legalized" assets to raise capital for a whole range of business. This innovative zeal is currently stiffled because any attempt to transition from the extralegal to the legal sector is a bureaucratic nightmare. The laws must be simplified to reflect the intelligent social contracts already in place....
de Soto also takes great pains to quantify the value of these informal sectors, focussing primarily on Lima, Manila, Cairo and Port-au-Prince , and makes the convincing case that these informal assets constitute not a small fringe economy, but a rather large chunk.
While de Soto does a good quantification of the size of these informal sectors , he fails to make any projection about how big an effect deSoto's medicine will actually have on the economy. In other words, if Phillipines successfully legalized its extralegal sector, how much of extra growth will it see owing to the fact that the poor people now have access to "live capital" as opposed to "dead capital"? de Soto merely asserts that the effect will be large. Even granting that making projections based on an intangible thing like enterpreneurial zeal of the poor is a difficult task, surely some reasonable ballpark estimates can be made?
No such estimate appears in the book. We are left with the bald assertion that the effect will be large. As even a small acquaintance with economic calculations shows, sometimes what may appear to be a qualitatively important effect , can actually turn out to be trivial when one actually starts fitting the numbers to make a rough estimate.
Second, deSoto's assertion that extralegality of their assets is the major stumbling block for the poor doesn't sound so convincing when one actually scans even the most rudimentary literature regarding development. Surely, unless India can raise the literacy and educational levels of her poor masses, simply legalizing their assets may not be able to release their entrepreneurial energy? In other words, the usual development concerns like basic education, basic health care may actually play a larger role than deSoto's "right to property rights" medicine? deSoto doesn't make a direct comparison with these immensely important impediments to prosperity, but implicitly assumes that extralegality of assets is the strongest causal factor behind continued poverty.
Other readers have pointed out the difficulties of the process itself. deSoto points to similar programs in Peru as success stories. Ultimately, the book is based on an important insight, but is marred by the fact that deSoto trumpets this insight as the one exclusive magic lamp.
32 people found this helpful
★★★★★
3.0
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An intellectual swindle
This book should be read but not swallowed. In my opinion, it contains some valuable research and analysis. However, ultimately it is an intellectual swindle.
Here are the main points, as I see them:
1. Much of the Third World and the post-Communist world has been unable to make a successful transition into the modern economy.
2. In those countries, it is difficult to obtain permits to start new businesses.
3. In those countries, many people have dwellings for which they do not have legal title.
4. The absence of legal title makes the people's assets illiquid.
5. Governments often attempt to enforce a legal system for real estate, only to have the law collapse in the face of extra-legal squatting. To succeed, a legal system of property rights needs to build on the conventions that have developed around extra-legal squatting.
6. In the United States, this problem of extra-legal real estate ownership existed until nearly 1900, and it was solved by adapting the law to common practice.
Fine. Do you see the swindle coming? De Soto is going to argue that the magic bullet to solve world poverty is to adapt property laws to give squatters better title to their dwellings.
De Soto says that poor people have $9.3 trillion in illiquid assets. If they could borrow against these assets, as you can in the U.S. with home mortgages, they could start businesses and climb out of poverty. He says that this $9.3 trillion is much more than can be provided with foreign aid.
Two problems with this:
1. Divide $9.3 trillion by the number of people involved, and you get an average of $2000 to $3000 of assets per capita. There are not many businesses you can start on that.
2. Even in the United States, home mortgages are NOT an important source of business finance.
There is nothing wrong with making it easier for people to start businesses by making permits easier to obtain. There is nothing wrong with improving the liquidity of assets through more effective legal titles. But this is not a magic bullet.
26 people found this helpful
★★★★★
4.0
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Worth reading, but has minor flaws
The book is definately worth reading. It basically points out that a legal system that values private property rights is essential for entrepreneurs to use that value to create or expand businesses. He argues the point persusavily and give concrete example from origial research. If a person is unfamiliar with ideas, this would be a good primer for the subject.
The only drawback is that he take a tone that he has made an amzing discovery that no one else has ever figured out. This same thing has been proposed by (for example) Landes in the Wealth and Poverty of Nations and in the collection: Culture Matters, both recently. Looking further back into the past, however, F. Hayek discussed this issue in many books as far back as the 30's and it is not so far from ideas explored by Weber at the turn of the century.
I think it would have been a better book if he had pointed readers into ways of exploring the ideas instead of acting like he was the first to discover the concepts. He does present the concepts well and the book is definately worth reading.
26 people found this helpful
★★★★★
5.0
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A great read on socio-economic policy development
In this book Mr. De Soto seeks an answer to why capitalism is succeeding in the West and not in many former communist nations. In general I learned quite a bit from the book and found the sections on law development/social contracts and American property history to be a HUGE learning experience full of insight. If you read this book you can truly learn a lot but you have to read it with an open mind.
At times Mr. De Soto is VERY REPETITIVE. Chapters 1-4 keep on repeating his conclusion in different manners and I found that reading those chapters was like him trying to beat his conclusion into my head.
His conclusion: Such countries have yet to establish and normalize the invisible network of laws that turns assets from "dead" into "liquid" capital, specifically as it pertains to property and ownership of land. In the West, standardized laws allow us to mortgage a house to raise money for a new venture, permit the worth of a company to be broken up into so many publicly tradable stocks, and make it possible to govern and appraise property with agreed-upon rules that hold across neighborhoods, towns, or regions.
Mr De Soto backs up his claims with some profound numbers too. For example, in Egypt, the wealth the poor have accumulated via real estate/property is worth 55 times as much as the sum of all direct foreign investment ever recorded there. He also provides data in the countries of Haiti and Peru.
Mr. De Soto provides insights as to how these countries are currently organized/operate via an "extra legal" sector. Rather than operating under a formal code of law local cooperatives enforce and provide dispute resolution and he argues that, since law evolves out of social contract that property laws/organizations could be made a part of the law to help unleash capital through the economy.
If you want to read a good book on socio-economics I highly recommend the book.
25 people found this helpful
★★★★★
3.0
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great ideas, something missing
Having done agricultural planning in 20+ Third-World countries, I find that De Soto makes some vital points. First, that globalism, the international free flow of capital, touches only a small minority. Second, that property titling and registration procedures in those countries are so slow and expensive that few people can afford them. They are inappropriate to these countries. One might say that also of the justice procedures of these countries. The book misses what practically all pundits miss. It fails to look at What Works. Taiwan is the prize example, where the reforms of the Fifties made industrial capitalists out of small rural landowners and created a broad market for industrial products that led to dynamic industrial exports. I was a prime pusher of the Second Land Reform of Vietnam, starting in the late Sixties. It had a radical retention limit which afforded some land to everyone. It moved fast, thanks to 1)excellent mapping, 2) computerization and 3)procedures managed by the villagers themselves. It immediately led to lots of on-farm investment, particularly in low-lift pumps. Someone please send a copy to Bill Gates. He uniquely has the money and the talent to do the job everywhere.
24 people found this helpful
★★★★★
1.0
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Know The History of Capital: Money and Centralized Banking
De Sotos analysis is partial at best in that it leaves the crux of the problem which is still not discussed in mainstream economics. The blindspot of "Capitalism" is the question of the design of "capital" or "fiat currency system" itself. the post colonnial world inherited the Western model of colonnial capitalism with its Centralized private commercial banking. That is why "Capitalism" is in it's dying phase now, it can only be maintained by perpetuating financial imperialism via War and Reconstruction (massive investment in military- defence- intelligence- think tank-media complex). Read the articles "Billions for Bankers, Debt for people" and "Transforming Capital in Capitalism". Learn to discriminate between knowledge and illusions of knowledge (later is based on false premise and limited view of things). The third world was the first world in pre-colonnial times in matters of wealth and prosperity and how that changed is connected to development of centralized commercial banking following model bank of England, which came out of East India Company (first imperial corporation fighting and financing wars for the British government). Also read "50 years is enough" the disastrous legacy of World Bank and IMF activities in the Third World. For macro-economic changes we need to rethink the very design, perception and definition of money which is a collective agreement.
22 people found this helpful
★★★★★
4.0
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Excellent, but doesn't completely solve the "mystery"
In "The Mystery of Capital," Hernando de Soto presents a fascinating, powerful, and relatively simple (but far-reaching) thesis that, to the extent it is correct, and to the extent that it is listened to by political and economic elites, could have enormous potential for affecting positive change throughout the world. The thesis, in sum, is that the key to creating wealth is turning "dead" capital into "live" capital by guaranteeing property rights, and even more broadly than that, the "right to property rights." To the extent that this is done, according to de Soto, good things begin to flow, as they have in much of the Western world (the prime example being the United States). To the extent that this is NOT done, as is the case in most of the "Third World" (usually referred to, inaccurately, as the "developing" world - inaccurate because the vast majority of this world is manifestly failing to develop!), good things will NOT flow, and the country will remain mired in poverty no matter how rich it might be in raw materials, a stable political system, beautiful beaches, or a benign climate. The issue is that, without secure property rights and a legal system which facilitates capital mobility and "fungibility," poor people (otherwise known as budding entrepreneurs, or as de Soto argues "the solution," not "the problem") will not be able to access their accumulated assets in a way that would "capitalize" those assets, which then could be used to generate further wealth. Thus, millions of people will remain mired in poverty, despite sitting on POTENTIALLY huge assets (trillions of dollars worth according to de Soto's estimates) and regardless of how hard they might work (and I definitely don't believe that people in the "Third World" are inherently "lazier" than in the "developed" world!).
Overall, I find it difficult to disagree outright with most of what de Soto has to say, but as I read his book I did feel somewhat uneasy at times. Perhaps this is because I tend to be naturally suspicious of monocausal, oversimplified explanations for highly complex problems. More importantly, while I believe that de Soto has most likely identified a NECESSARY condition for rapid capitalist development, I continue to have doubts as to whether or not this condition alone is a SUFFICIENT one for development at all. I also worry that this book will be misread or misused by some, who will say "see, all we need the government for is to guarantee property rights, then get the hell out of the way, and everything will be great." While I don't believe this is what de Soto is arguing, his omission of such critically important issues as the place and role of women (a cultural issue?), the role of serious diseases like AIDS, the problem of severe environmental degradation, the prevalence of illiteracy and the lack of education in general in much of the world, overpopulation, etc., implies that de Soto doesn't see these as serious obstacles (or complicating factors) to economic development. One could argue just as strongly as de Soto does in his book, it seems to me, that there is a strong, direct, positive correlation between women's education levels, lower birth rates, and economic development, and that the key to "Third World" economic development, therefore, is making sure that women are well-educated, healthy, and political empowered.
Anyway, the point is that while de Soto is definitely on to something very important in "The Mystery of Capital," he has not told the whole story or completely solved the "mystery" - not even close! One other quibble with the book is that, unfortunately, it's just not very well written - repetitive, didactic, tedious at times, and just plain too long (de Soto's argument probably could be made just as strongly, or more so, in 30 or 40 pages, as opposed to 230 pages). Still, on balance this is an important book, and I definitely recommend it, at the very least for provoking serious thought (and maybe even action) on a problem that, to many people, continues to be just an inscrutable "mystery."
