By Hernando de Soto
(New York: Basic Books, 2003)
Reviewed by Rodolpho Carrasco
I was raised and educated in environments that viewed moneymaking as unrighteous and free markets as exploitative. Being poor and Mexican in Southern California meant that I had a hard heart toward rich, white capitalists who I perceived valued money over justice. As time passed, however, I changed my view of our economic system. My life was transformed by the educational and economic opportunities afforded me by our free-market system. I learned I was blessed to attend high school for free when I discovered that my counterparts in Mexico had to pay for the same privilege. That blessing was connected to the robust U.S. economic system, and toward this system, I felt gratitude.
My experiences as an urban youth minister have cemented my understanding of the magnificent potential of free markets to lift people out of poverty. I know Mexican immigrants who spent years living several families to one house while they saved the money to purchase that property and two others. I know young African Americans who built legitimate and sizable savings accounts while delaying gratification and working at multiple minimum-wage jobs.
Even so, I remain concerned about the pain that free-market capitalism causes around the world and at home. Admittedly, the rise of widespread health insurance and advances in medicine were principally driven by market forces, but there is something wrong when one episode in the hospital can create a hole from which a poor person spends years digging out.
There is also the ever present question of why a small percentage of the world’s population is as rich as Croesus while a great number remain as poor as Stone-Agers. Peruvian economist Hernando de Soto’s latest book echoes my conflicting feelings: an admiration for the free market tempered with concern about its inequities.
The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (Basic Books, 2003) directs attention to the importance of property law in making capitalism work for poor people around the world.
De Soto, who runs a think tank in Peru that the ECONOMIST magazine considers the second most important in the world, delivers a compelling set of arguments that good property law makes all the difference:
- Capitalism is a tool that has improved the lives of millions and has the potential to improve living standards in every nation on earth. However, it has lost its way in developing nations and former communist nations.
- Capitalism’s failure in the two thirds world is not an issue of culture. WASP culture is not the magic ingredient that makes capitalism work, and the traditions of indigenous peoples are not inextricably at odds with capitalist tenets. De Soto puts it like this: “Is illegal squatting on real estate in Egypt and Peru the result of ancient ineradicable nomadic traditions among the Arabs and the Quechuas’ back and forth custom of cultivating crops at different vertical levels of the Andes? Or does it happen because in both Egypt and Peru it takes more than 15 years to obtain legal property rights to desert land?”
- The tipping point for the seemingly inexhaustible wealth of the United States is property law. Effective property law secures an asset, such as a home, in a way that allows it to be used for another purpose, such as getting a loan against that property. This is what we call working capital. Americans take for granted that we can obtain a loan against the value of our homes and thus acquire working capital. But such a means of acquiring startup money – the number-one method of funding a new business – is unavailable in most parts of the world.
- The United States was in the exact same mess 150 years ago – lacking a uniform property law that could title property in a way that a bank would make a loan against it – as most countries on earth are in today. The lack of uniform property law was a headache as the U.S. government and the Supreme Court contended with illegal squatter settlements throughout the Western territories. De Soto’s chapter, “The Missing Lessons of U.S. History,” details the transformation of competing land claims and hundreds of legal jurisdictions into a singular, coherent set of property statutes.
- Uniform property law is the difference between capitalism as a system accessible by the masses, as we have in the United States today, and capitalism as a tool only for a clubby elite, as prevails in most of the world.
De Soto’s ability to pinpoint capitalism’s shortcomings while glorying in its potential is rare. If your book club is populated equally by rabid free-marketeers and storm-the-gates anti-capitalist protestors, start with Mystery. Of course, I don’t know where one would find such a book club, given the radical divide that exists between the two groups. Nevertheless, I do not doubt that poverty fighters on both sides of the divide will turn to De Soto’s theses for years to come.