Saturday, May 17, 2008

Read: The Mystery of Capital

In all of American history, you probably learned just how land ownership was conferred, approved, and made transferable. In Texas, empresarios recruited colonists to settle in the then-Mexican state. The Texas General Land Office says,

Mexico retained ownership of the land within a colony until the colony's land commissioner issued title to it. The colony's actual boundaries were therefore determined by the extent of settlement within it, rather than by the boundaries specified in the contract. Mexico made more than two dozen empresario contracts, about half of which were even partially carried out. However, empresarios brought about 50,000 settlers to Texas between 1821 and 1836.


The Colonization Law of 1825 also created the office of land commissioner. Because Texas was so large, the governor was authorized to appoint commissioners who would issue land titles, maintain land records and provide the colonists with copies, maps their regions and supervise surveys. In addition, commissioners were to take the oath of allegiance from new settlers, appoint surveyors, select sites and mark the streets for new towns and provide and maintain ferries. Payment for performing these duties would come from title fees collected from colonists.


Texas apparently did not go through the same trouble that colonists went through in other parts of the United States, and what people in many developing countries currently experience.

The problem of land ownership, title, and transfer is a major stumbling block, and that is the thesis of Hernando de Soto's book, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. This book is important, and explains why some countries, like the United States, Canada, Western Europe, Japan, and others are wealthy, and why some seem to stumble or spin their wheels.

De Soto claims that mystery of capital is such because it has received the least amount of attention from activists and the media. Economic reforms have been tried before, and in many countries, they have failed to bring about the long-term economic growth that the US has experience since the 1930s. Even today, leaders like Hugo Chavez propose economic policies that are troublesome at best, and disastrous at worst.

The mystery of capital, of why many countries have trouble building wealth, is actually five separate mysteries: the mystery of missing information, of capital itself, of political awareness, the lessons of US history, and that of legal failure. De Soto devotes a chapter to discussing each of these, and proposing solutions.

The missing information is just that: no one really knows who owns what, outside one's inner circle of friends. Much of this comes from fairly recent, post-1950 economic development. De Soto compare's the post-World War II development of the third world to the post-Revolution developments that occured in Europe and the new United States. The Industrial Revolution was not isolated to the city; its impact was felt in the countryside. Then as is now, people left the agricultural sectors permanently. When they left, they found themselves against a legal system that made entry into legal property ownership, employment, business management so difficult as to be impossible. De Soto cites the example of Lima, Peru:
Our goal was to create a new and perfectly legal business. The team then began filling out the forms, standing in the lines, and making the bus trips into central Lima to get all the certifications required to operate, according to the letter of the law, a small business in Peru. They spent six hours a day at it and finally registered the business-289 days later (18).
With hurdles like these, no one should wonder why so much the economy in developing countries is underground. De Soto has charts in his book that details the mind-numbing process that people in countries like Peru, Phillipines, Egypt, and Haiti must go through to become legit. It takes 168 steps and 13 - 25 years to formalize property in Phillipines. Seventy-seven steps and 6 - 14 years to "gain access to desert land for construction purposes and to register these property rights in Egypt" (22 - 24).

De Soto and his colleagues have done a stunning amount of historical research, going back to Adam Smith and Karl Marx. Economists such as these attempted to define capital, and de Soto says that capital is an abstraction that must be realized, that is, made into something concrete, fungible. Only that which can produce greater value is capital. A car that transports one to work, so that one may earn money, to buy other things (like a replacement car) is capital. A car used for joy-riding is not capital, until put to productive use. De Soto claims that several billion dollars of "dead capital" exists in most of the world, mostly in people's houses, workplaces, and business transactions. Few of these are recorded, made public, and given titles, proof of ownership.

What does exist is an ad-hoc network of informal systems. How to prove that you own what you own? You have a piece of paper, issued by some office, but that office is itself not a legal establishment. The only proof you have is your word, the word of your friends and family, and your neighbors. A stranger has little reason to trust you, and you have little reason to trust them. Among those strangers, is the local, state, provincial, and federal governments.

The word "messy" does not begin to describe the chaotic approach millions of people have taken to securing employment, buy houses, set up utilities, and, well, build capital. It is as if the way that undocumented immigrants have gotten jobs were extrapolated to most of the US population. People like you and me, driving cars, working on computers, renting apartments, blogging, doing all of that without licenses, registration, an accurate electric meter, housing inspections, and a journalist license. Imagine spending years of your life to get an officially sanctioned house. You would probably blow the process off, find a house, arrange payment, move in. You hope that nobody comes knocking on your door, claiming to have a piece of paper demonstrating ownership of the property that was given to them decades ago by the previous government.

At one point, something like that existed even in the US. De Soto writes how in centuries past, the transition from extralegal arrangements to inclusive was made throughout Europe, North America, and Japan. The process then was not easy, and in the US took nearly the entirety of the 19th century. Progress was made in fits and starts, with a lot of emotional rhetoric on the part of lawmakers.

The part where de Soto describes US history is for me the most alive part of the book, no doubt at least in part because I'm an American, and the Wild West is romantic, if only in very fuzzy hindsight. He writes,
The governments and judiciary of the young states, not yet so legally united, were trying to cope with the law and disorder of migrants, squatters, gold diggers, armed gangs, illegal entrepeneurs, and the rest of the colorful characters who made the settling of the American West so wild and, if only in hindsight, so romantic. To a Third Worlder like me [de Soto], this picture of the gringo past is astonishingly familiar. Although my colleagues and I have trouble relating to 11,000 on the Dow Jones, we feel quite at home among the squatters in Thomas Jefferson's Virginia or the log cabin settlements of Daniel Boone's Kentucky (107).

This is an important fact: America was a 3rd World Country, too. Its progress from 3rd to 1st was not due solely to technology or (as some would have it) providence. It was the way that the law reflected the vast majority's outlook on life and its processes. The law reflects society's habits, not commands it. The law is useless if irrelevant and impossible to enforce. Every citizen would do well to be acutely aware of that fact.

If only modifying the law were to be so easy. De Soto says that developing nations have spent more than a century trying to reform property laws, but to little avail. He thinks the problem rests on misconceptions on the part of the reformers. The people who attempt to fix the problem seem to fall in the trap of thinking that people who live and work extralegally do so to avoid taxes, or that proper surveying and recordation is necessary. Maybe the powers-that-be think that the current law is sufficient enough, and that enforcing compliance is the issue. Maybe other leaders think that the current social contracts, however informal, can just be ignored, and that in any case high-level leadership is not necessary.

De Soto deconstructs each of these arguments and demonstrates their fallibilities. Living in the extralegal sector is hardly a tax break, compared to all the "favors" that one must pay to avoid crossing the local gangs. Proper surveying in the United States was not conducted until after property law was reformed.

There is a point in the book that makes me wonder if de Soto contradicted himself. At one point in the book, de Soto writes "Does that mean that lawyers should lead the integration process? No. Implementing major legal change is a political responsibility" (158). Later, he says, "To be sure, the battle [of property law reform] was uphill all the way, mainly because, as Peter Stein has remarked, lawyers' 'contribution to a proper understanding of legal institutions was obscured by their emphasis on antiquarianism and their acceptance of Roman law as a finished product.' Nevertheless, over time, great European jurists overcame excessive rigidity because as Stein points out, they 'made it their profession to become experts in the intricacies of the Roman law, and to ensure that it moved with the time.' Against their colleagues' rampant unresponsiveness, in every European country an elite band of lawyers emerged to help lift the bell jar" (201).

Maybe de Soto thinks that lawyers need to stop venerating the law so much, and assist or lead the political process in adapting the law to be more inclusive. This is a call to profound citizenship.

De Soto concludes that if capitalism is not introduced on a micro-economic scale, then the problems afflicting developing countries threatens their already fragile stability. Earlier I mentioned that non-capitalist movements are seeing a revival, with all their problems. Capitalism for the elite is a bad investment in the long-term.

I conclude by saying that this is one of the most important books of this era. This book should have been published, distributed, and injected into the popular global mindset back in 1991. I posit that many, if not most, economic problems are unnecessary. They are the result of bad management, poor risk evaluation, and now as the case has been demonstrated, an impossible legal framework for the majority of people in developing countries. We the people of Earth deserve better than that.

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