Review of the Book:
The Mystery of Capital: Why Capitalism Triumphs
by Hernando DeSoto
in the West and Fails Everywhere Else
H. William Batt
[Reprinted from GroundSwell,
November-December 2004. DeSoto's book
was published in 2000 by Basic Books]
After its winning nine prestigious awards from mainstream economic
and public affairs organizations, why have we Georgists not reviewed
this book earlier! No book's thesis more directly flies in the face of
our own arguments than what Dr. Hernando DeSoto has proposed. And now,
with the rave reviews given to this, his second work, we are compelled
to confront what he claims and to demonstrate the sleight-of-hand in
his argument. In the absence of more qualified adherents of the
Georgist persuasion, I have set myself this task.
DeSoto is president of the Institute for Liberty and Democracy
headquartered in Peru. Coming from the global South, he is able to say
things that, coming from the World Bank, the International Monetary
Fund, or any similar organization, would sound crass and self-serving.
Early on in the book (p. 37), he says that "[l]eaders of the
Third World and former Communist nations need not wander the world's
foreign ministries and international financial institutions
The key to capital development and economic modernization, he argues,
comes from the capacity to leverage what capital assets already exist.
And the seeking their fortune. In the midst of their own poorest
neighborhoods and shantytowns, there are -- if not acres of diamonds
-- trillions of dollars, all ready to be put to use if only the
mystery of how assets are transformed into live capital can be
unraveled." The conscience of the global North is thus assuaged:
it's not the fault or the insensitivity of the wealthy nations that so
many people of the world live in poverty; rather it stems from an
inability of impoverished countries themselves to leverage the capital
assets that they have. The rest of the book attempts to substantiate
this argument, or rather to explain why "the one thing that the
poor countries of the world cannot seem to produce for themselves
[i.e., investment capital], no matter how eagerly their people engage
in all the other activities that characterize a capitalist economy."
most commonly and easily leveraged asset is real estate. But because
titles in poor nations, to real estate property especially, are not
secure and protected in the law, they cannot serve as collateral for
further loans. "The result is that most people's resources are
commercially and financially invisible. Nobody really knows who owns
what and where, who is accountable for the performance of obligations,
who is responsible for losses and fraud, or what mechanisms are
available to enforce payment for services and goods delivered.
Consequently, most potential assets in these countries have not been
identified or realized; there is little accessible capital, and the
exchange economy is constrained and sluggish." (p.32) He goes on
to argue that, conservatively, "about 85 percent of urban parcels
in these nations, and between 40 percent and 53 percent of rural
parcels, are held in such a way that they cannot be used to create
capital. . . . By our calculations, the total value of the real estate
held but not legally owned by the poor of the Third World and former
Communist nations is at least $9.3 trillion."
Where is this capital? It lies in every legally-secured asset: "every
piece of land, every house, every chattel," all "formally
fixed in updated records governed by rules contained in the property
system." (p.48) He suggests that in developed economies, "up
to 70 percent of the credit new businesses receive comes from using
formal titles as collateral for mortgages," (p.84) and that "real
estate accounts for some 50 percent of the national wealth of advanced
nations." (p.86) Nowhere, however, is this identification of "capital"
parsed for what it really is: largely land. As a true neoclassical
economist, despite his ritual homage to Adam Smith, everything that
the classical economists and we Georgists would call land is
conflated into capital. To DeSoto it is the land in almost all
instances that provides the leverage for capital equity and
accumulation, secured under authorized titles as property.
The metaphor that he employs to distinguish land as a capital asset
from other forms of capital is revealing. His analogy is a lake, first
available only as potential energy, until such time a dam is built to
capitalize its kinetic power. The lake's utility as capital is "locked
up" until such time as its title makes it securely available for
exploitation. "Just as a lake needs a hydroelectric plant to
produce usable energy, assets need a formal property system to produce
significant surplus value." (p.48) Nowhere does he explore the
origins or legitimacy of those titles, how they might have been
secured or whether they were fairly gained. It is sufficient, only,
that they are guaranteed for current purposes. "Capital is born
by representing in writing - in a title, a security, a contract, and
in other such records - the most economically and socially useful
qualities about the asset as opposed to the visually more striking
aspects of the asset." (p. 49) The moral dimensions of land
ownership are totally overlooked. The way to challenge his whole
thesis is by asking him to defend the legitimacy of real estate titles
- wherever they are.
De Soto spends considerable ink in exploring the history of American
economic development, as he sees in its history the key to success
elsewhere. Chapter Five is an extended treatment of the "evolution
of property" in the USA (p.108), and in believing that the
progress making it "open to all" ( p.109) is not yet
complete. The granting of titles is treated extensively - the eviction
of squatters, the reward to soldiers, the surveying and marking of
boundaries, and the employment of "cabin rights" and "corn
rights." DeSoto notes at one point (p.117) that squatters "were
constantly provoking conflict with Native Americans by invading their
lands," but the moral questions he never addresses.
His debt to most of the prominent historians on the subject is
replete - Gates, Hoffer, and even an Aaron Sokolski book published in
1957 by the Robert Schalkenbach Foundation. There is also an extensive
treatment of a controversial 1821 case that attempted to ground the "rules
of property" in English common law. One Richard Biddle, a
squatter who had settled on land titled to Green, was adjudged liable
to pay not merely for the land he occupied but for any improvements
that were made. The Court then later reaffirmed that occupancy laws
deprived "the rightful owner of the land, of the rents and
profits received by the occupants." But the backlash to this
decision was so profound that it inspired statutes in rapidly settling
western states quickly making Green a nullity. (Green v Biddle, 8
Wheaton 1, 1823) The sanctity of title in fee simple continues to
evolve over the course of the next century. Titles for mining claims
came to have the same standing as those for farm lands.
DeSoto accepts the argument of historian Richard White by quoting in
part: "[T]hrough occupancy, preemption, homesteading, miners'
laws, and such, Americans built a new concept of property, 'one that
emphasized its dynamic aspects, associating it with economic growth,'
and which replaced a concept 'that emphasized its static character
associating it with security from too rapid change.' American property
changed from being means of preserving an old economic order to being,
instead, a powerful tool for creating a new one. The result was
expanded markets and capital needed to fuel explosive economic growth.
This was the 'momentous' change that still drives U.S. economic
growth." (p.149-150) I'm tempted to check White's 1991 book soon,
as the title is It's Your Misfortune and None of My Own: A New
History of the American West.
Not recognizing land as a separate factor of production, there is of
course no further mention of economic rent. One can only wonder how
any economic surplus arises - doubtless from labor, even if he
provides no indication that workers reap the rewards of their toil.
Somehow, rather, capital is transmuted into more capital, simply by
virtue of the security of property titles.
Despite our Georgist criticism, DeSoto's thesis is definitely sound
in parts: security needs to be granted to its users if improvements
are to be tied to locational sites, else the risk to investment will
likely be too high to sustain. No homesteader can venture a large
stake in a site if he realizes that it may be taken from him. No miner
can risk so much transformation of labor to capital, if the land on
which he builds may soon be lost. Land titles are important. DeSoto
has a point. But his reliance on freehold property title to land, the
birthright of us all, to provide financial collateral is problematic
The failure to recognize land rent means that the bases of taxation
will necessarily derive from other factors, i.e., labor and capital.
By taxing those other factors, the efficiency and productivity of the
economy is compromised. DeSoto fails to recognize that the collection
of land rent, were it identified, would provide the perfect revenue
source. It would not reduce the wealth of societies and the growth of
capital one whit; rather it would inspire it. The Georgist point of
view is a compelling answer to The Mystery of Capital; it
needs only to be told again and again.