Montreal, November 22, 2003  /  No 133  
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Frantz L. Alcindor is Program Manager of the Emerging Minority Business Leaders at Wheeling Jesuit University in West Virginia.
by Frantz L. Alcindor
          Hernando De Soto's The Mystery of Capital is insightful and written in a captivating style. It explains that poverty lingers in the Third World because of the failure to create a system of recognizing and organizing each citizen's property that will allow for it to be converted into dynamic capital usable to produce wealth. For instance, in much of the Third World, if you don't have a legal address then you cannot use your house as collateral for a loan to open a business. 
           However, despite his accurate analysis of the Third World's problems, De Soto misses the mark in fully explaining why most western nations, particularly the United States, have been so successful in converting property into capital that produces wealth. As a result, this unfortunately weakens the effectiveness of the solutions he offers to developing nations. 
An unconscious endeavor 
          De Soto references the history of western nations and indicates that they once had conditions and problems similar to those in the Third World. He states that over time, especially during the last 200 years, through an unconscious endeavor, these nations were able to weave together a system of laws and social contracts that allowed for property to be accounted for, and for people to be held accountable to their obligations.  
          However, he fails to explain why the framework for this "unconscious endeavor" was able to exist within the "bell jar" of western nations. He explains how western nations were able to integrate their extralegal world, but not why this happened. He fails to identify what happened 200 years ago in western nations that allowed for a revolution in capital management. 
          De Soto suggests that if governments only paid attention to the "barking dogs" (a term he uses meaning that dogs know the extralegal boundaries of their owner's property), then they will be on their way to converting their nation's dead capital, which exists in the vast extralegal or non-legal realm of a nation, into vibrant, dynamic capital. 
          His solution is essentially that a nation needs a strong central government that responds to the needs of the people and can responsibly orchestrate individual property rights. An entrepreneurial government, if you will, that both responds to the market demands of its citizens (expressed through the extralegal realm) and is "consciously" aiming at converting its dead capital. 
     « His solution is essentially that a nation needs a strong central government that responds to the needs of the people and can responsibly orchestrate individual property rights. »
          Here's where De Soto falls short. How does a government become centralized enough so that it can properly coordinate individual property rights and obligations, yet not become so centralized that it falls back into the tyranny it is resisting that will eventually infringe on individual property rights and create an extralegal world that will produce more dead capital? 
          Part of the answer is in the US model of government (three branches and a federal system of states, counties, etc.), where the very infrastructure of government is localized, decentralized and organized. However, the main answer lies in what took place approximately 200 years ago within the United States that never happened before in human history and explains why this "unconscious endeavor" to harness property into capital that produces wealth took place. 
          The founders created a nation that recognized that individual rights were endowed by a higher power, a creator. This concept prohibits the government from assuming that it has a monopoly on property rights. The government recognizes that property rights are inalienable and that they come from a higher power, which is not the government itself. Accordingly, the government is a humble servant, not the ultimate master, which serves to protect individual property rights. Laws are created to insure that government or other individuals do not abrogate an individual's property rights. This explains the "unconscious endeavor" that took place within the US and in other western nations to account for all property, because ultimately it was about creating a system that secured individual rights in deference to a higher power. 
Securing individual rights 
          This is the critical piece missing in De Soto's analysis. The drive for converting dead capital into liquid capital isn't necessarily about converting all illegal property into legal property; it should first be about securing individual rights. Once this is established, it will be easier for all of the mechanisms to fall into place within a nation and systemically transform property into capital. 
          The reason De Soto missed this is because he wanted to show that there are few differences between developing nations and the First World. For example, he discusses how people in most nations are entrepreneurial and how the histories of western nations are similar to the current conditions of the third world. Unfortunately in the process he overlooked what made the US method of governing so radically revolutionary, which was its recognition that individual rights need to be secured because they come, not from the government, but from a higher source.
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