The Mystery Of Capital Why Capitalism Succeeds In The West And Fails Everywhere Else

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!
econ

Ever wonder why certain countries are rich even when they have few resources, and others are poor although rich in natural resources? We all can cite examples of each. De Soto essentially argues that in developed countries real property is effectively leveraged (it leads a "parallel life") through mortgaging to provide start-up capital for entrepreneurs. It's an interesting thesis, and one that empirically he demonstrates quite well.

But the book is more than just that one key insight into secured financing. In chapter 3, De Soto becomes his most philosophical, asking and attempting to answer the question "What *is* capital?" This is a question that at first blush appears easy to answer, but is not. And although Mr. De Soto is largely correct in his answer, he appears to fumble somewhat in describing it. Capital is trust. Money is trust that a piece of paper can be exchanged for an equivalent amount of goods or services in the future. A mortgage is trust that if money is not paid that a tangible asset can be sold and the money repaid. Even more exotic financial instruments are merely manifestations of trust; for example, a derivative is trust that the value of a contract will either increase or decrease, and that amounts arising from that contract will be paid to the derivative holder.

This is where De Soto overplays his hand. Yes, property rights are key to having a developed mortgage market, which is then key to wealth creation by borrowing against real property to engage in business ventures. But there are other factors as well, factors related to the creation and retention of trust, and therefore of capital, that De Soto does mention but underplays. Things like the speed and certainty of the underlying legal system, bankruptcy laws and corruption. There are also more generic issues such as a country's or culture's general entrepreneurial character, and attitude towards education. As a sometimes-resident and devoted fan of one Latin American country, I can attest to the fact that the reformation of key institutions and a general change in cultural attitudes towards corruption and education can take decades. So even though De Soto has grabbed the elephant's trunk, he's not paying sufficient attention to the rest of it.

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.

DeSoto has uncovered the taken-for-granted truths about our (The West's)economic system in conjunction with the enormous difficulties faced by Third World countries. His starting point is that Capitalism requires its participants to have an address--an address where potential lenders can find the participant (1) to assess what they own and (2) to be able to sue and repossess for repayment. That sounds simple until you consider the millions of people living around Mexico City, Rio, and the like who are not registered with any "address" system. Those people have been living there for generations and have accumulated various forms of property--property that cannot be readily turned into capital, i.e., by getting a loan and mortgage, because they do not have a legal address. De Soto explores these issues as well as the solutions. He faces the fact that all legal systems are put into place to protect those who are putting them in place, not because they are venal prople but because that is the way of the world. Even the essential Uniform Commercial Code. He reminds us that the USA did not square away its property rights system until late in the 19th century. This book is an absolute classic. It also opens the eyes of capitalists to the ingredients of capitalism. What is capital, how can we be sure what our money is worth--these kind of unthought of concepts. It is "Wealth of Nations" type of break-through book.

This is a very good book. The idea that property rights are necessary for economic growth is not especially new territory, but there were three things the book brought to the table that I was not aware of, or was very impressed with.

1. The nature and degree of extralegal activity in third world countries. There were several fascinating examples of what goes on in the informal sector. I found it very encouraging that there is so much untapped resource available and more than ready. It is also a powerful argument against the idea of culture being the limiting factor to growth.

2. The idea that a set of property rights will need to incorporate the preexisting "social contract" property rights of the informal sector in order to include most or all of the nation. This was backed up with a lengthy example of the formation of property rights in the US. This explains why it has been so difficult for countries to implement a property system that is usable for the poor.

3. A comprehensive plan to implement a usable set of property rights for a third world country. Most political economy books focus on finding problems and are not nearly as forthcoming with solutions, let alone one that is as detailed and real-world based as this one.

Overall the book left me with a reason for optimism about the possibility of third-world countries being helped along in their desire to improve their economic condition. My only complaint is that it tended to be a bit repetitive, but it was a small price to pay for a potentially world changing idea.

Although De Soto is trumpeted in the halls of the Chicago School as a person directly in line with his ideological primogeniteurs, it is clear that De Soto is not an ideologue.

His main thesis is that property rights are one of the fundamental underpinnings of western capitalism. Property rights allow the smooth functioning of capital accumulation without the diversion of too many supernumerary laws and institutions, and form the base impedements that allow capital markets, lending institutions and wealth creation mechanisms to function smoothly. If property rights are not highly developed then the "friction" this creates in the movement of capital impedes growth. As a concrete example, people in Africa and much of Latin America and Asia live in hovels that do represent accumulations of capital, but because these hovels, many owned by squatters cannot be leveraged to create capital or cannot be lent against. They in effect at dead capital because their ownership is in limbo. Advanced societies have smooth functioning property laws and markets that allow the process of wealth creation.

All of this is simple and De Soto does chronicle, as well as he can the underlying condition of dead capital formation, historical development of property rights and solid policies for implementing more legal property controls in the third world.

De Soto is also profoundly motivated to move backward societies forward and feels the poverty profoundly. In this sense he is very much a thinking man's economist and not an ideologue.

The one thing I would state is that the concepts De Soto is propounding are simple in nature and scope. As such I think that De Soto does repeat himself from time to time. Also the historical developments of property rights in the US is a good example of how a country with essentially third-world property rights, emerged to relatively advanced property rights. But I do think that his historical scholarship suffers a little as an Economist outside of his area of interest.
The writing style, though good, is not so exciting at times and would do better with a bit more details on specific human examples. But that should not detract from its scholarship.

I thought de Soto's book was amazing. So influential to my thinking that I actually wrote a short story about it. When you think about the value of the black market, the sheer number of transactions that fall far below the data radar, and the cost that these (mostly valid) transactions have on society when not recognized by a cultural of law is startling. When you think it takes 300 steps and 5 years to buy property in Peru, it's no secret that only the wealthy and the secure can make it in these economies.

In The Mystery of Capital, Hernando De Soto, President of Peruvian think tank "Institute for Liberty and Democracy," seeks to explain (as stated in his ambitious subtitle) "why capitalism triumphs in the West and fails everywhere else." His answer is that Western countries have developed flexible legal systems that recognize emerging property interests, especially in land.

De Soto notes that the United States from the start faced the issue of illegal squatters. George Washington experienced squatting on his land in Virginia. He called squatters "banditti." The United States was dragged into recognizing squatting and "homesteading" rights, not as a matter of liberal enlightenment, but rather as the result of social upheaval often mixed with bloodshed. The expansion of the Western frontier, and particularly the California Gold Rush, exposed tensions over uses of federally owned land that still continue. What was so propitious to capitalist development in the United States, De Soto asserts, is that the traditional view of property rights caved in and masses of people became independent property owners.

In contrast, De Soto points to many Third World countries, including Peru, where the masses have developed much potential property, both in the countryside and in squatters' cities, but no solid legal foundation to back up their claims. Without uniformly recognized property rights, they cannot borrow against (mortgage) their property to make other investments. Their capital is not fungible or tradable. It doesn't enter into the spiral of accelerating benefits that De Soto attributes to a fully integrated capitalist system. De Soto and his researchers have labored admirably to detail the hundreds of steps it typically takes in such pre-capitalist legal systems to develop a clear title to land.

De Soto's thesis: those countries that develop a flexible system to recognize property rights develop capitalistically; those that fail to develop such a system don't. However, De Soto fails to explain adequately why it is that some countries are able to cross this legal threshold and others haven't. He makes many generalizations about the West "and Japan." What allowed Japan to become an exceptionally developed society? Are countries such as Singapore and Taiwan on the same (sustainable) path?

De Soto's book is potentially valuable to emerging markets investors. We are now seeing many Latin American countries, after an era of reform, reverting to anti-capitalist sentiment and statist policies. Consider Venezuela and Bolivia, for example. The implication of De Soto's these is that the State can make many good reforms, but if it fails to recognize property rights in the disenfranchised masses, economic development will fall short, and the political constituency to support it may also fail. De Soto's thus book provides an echo in economic theory of English Prime Minister's Margaret Thatcher's famous doctrine of an "ownership society." The implication for investors is to go where the masses are developing clear property rights.

(The author of this review, Andrew Szabo, is founder of MindBodyForce.com)

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."

There are already many good reviews to this book, so I will only suggest reading the following books in addition to this work on the vexing question of why Western countries have dominated the world during the last few centuries [the very way the question is posed is controversial!]: 1) "Power and Plenty: Trade, War, and the World Economy in the Second Millennium" by Ronald Findlay and Kevin H. O'Rourke; 2)"The Great Divergence", by Kennetz Pomeranz; 3 - 4): "The world economy. A millennial perspective" (2001) plus "The world economy: Historical Statistics" (2003) by Angus Maddison (a combined edition of these two volumes appeared on December 2007); 5) "Why Europe Was First: Social Change and Economic Growth in Europe and East Asia, 1500-2050" by Erik Ringmar; and 6) "The Origins of Capitalism and the "Rise of the West"" by Eric H. Mielants.

New thinking on any matter is rare and sometimes it can sound simplistic. That could be the case with De Soto's theory and recommendation to bring the extralegal sector into the 'alfresco' economies of underdeveloped nations, except if I consider the anecdotal evidence relating to myself and many, many others in this country, it doesn't sound simplistic at all. Certainly a bold, intensive step would be required to register and legalize properties. Many steps, in fact. De Soto doesn't downplay this. Even in a place where it is seemingly impossible to say where property lines should be drawn, there is the suggestion in the book to watch the members of the local canine population who know their borders and those of their masters. Whatever works! No good reason to wait for cultural attrition, to accept slow transformation. A bold step. That's what this book is putting forth to finally energize a great number of countries, and unless someone can successfully hypothesize about a dreadful consequence resulting from such a step, the move should go forward.

Many of the other reviewers have given excellent in depth summaries of DeSoto's book, and I will not regurgitate what others have already done a good job of saying. I will just say this: if you want to know why 3rd world countries are 3rd world countries, and what Gov'ts around the world can do to create prosperity for their people, read this book. Nations are poor because of ill-guarded private property rights. It's that simple. They aren't poor because of lack of socialism (quite the opposite), they aren't poor because of lack of resources, it's because "It's the property rights, stupid!"
Books like this can give hope to the pessimist, that it is possible to end serious poverty in the world. Relative poverty will always exist, but the civilization-destabilizing poverty that exists in the Arab world, in Latin America, *can* be cured if Gov'ts would just put in place a system that allows capital (ie entreprenuers) to grow from the natural resources within the country. Replace Socialism w/ Rule of Law. I hope every member of the Iraqi CPA has read this book and heeded its lessons...

The debate has raged for nearly two centuries: Is capitalism the answer or the problem? Rather than rehashing the arguments of either side of the political spectrum, Hernand de Soto has changed the nature of the debate by asking a different question: Why does capitalism apparently work so well in some places and so poorly in others?
The author and his colleagues didn't treat this question as a mere intellectual enterprise, but went into the field - the burgeoning underground economies of the Third World - to find the answer. And the answer they found was deceptively simple.
The problem, he argues, is not capitalism, per se, but inadequate property systems either through the inability of law to keep up with economic reality or counterproductive regulation. Inadequate recording systems, limitations on commercial activities and barriers to entrepreneurship in developing and former communist countries prevent the use of assets to generate growth capital that is identifiable, transferable and able to grow.
The book is easily approachable and not too overlong (the text is a mere 228 pages, including charts). It spells out the author's thesis clearly in the first chapter. In later chapters he discusses the historical evolution that occurred in the United States that has allowed "dead" capital to be brought to life to the benefit of all and the steps that must be undertaken to achieve such a system in the developing and former communist countries.
Be warned, however, (and this is the reason why the book doesn't get 5 stars) that the second and third chapters are needlessly (and annoyingly) repetitive, covering the same ground over and over again, often using the same words. The first three chapters might easily have been boiled down to one. But persevere. The remaining chapters are worthwhile.

This book is one of the most important economic treatises of
all time. It shows--through real field research undertaken by
hundreds of colleagues over decades--that capitalism flourishes
where property rights are secure, well defined, and tradable.
When capital can be traded, it is freed up from being "dead"
and becomes liquid, and can be used to support more productive
ventures. The researchers show that everywhere in the world,
people are entrepeneurial, know how to make money, and have
ingenuity. They also have created massive amounts of private
wealth that's untradable. They need to be able to trade it, and
to secure loans based on this tradability.
Laissez-faire economists have yet to grasp the fullness of this
message. The typical laissez-faire economist--even the most
devout libertarian--notes, almost in passing, that "of course
we need well defined property rights, and the government needs
to get involved here." This assumption then underlies all that
economists do, concerning exchange, investment, etc. It also
underlies all the evaluative work economists do, such as the
conclusions regarding the superior qualities of free market
systems.
Economists need to take seriously the message that capitalism--
the system that allows investment, capital formation, and the
consequent increases in labor productivity and material well-
being--hinges on property rights. They also need to go into the
field, as have De Soto and colleagues, to find out whether
policy reforms do what they are meant to do.
Everyone in the development community--from the western institutions such as the World Bank, IMF, IADB, USAID, to the
governments in less developed countries--needs to read this book
and act on it as urgently as possible.

Hernando de Soto's ideas cannot and should not be ignored. This book will open many eyes to the nature of capital. The author suggests a radically simple yet enormously challenging way of bringing the world's impoverished billions onto the track of capitalism and development: give them legal property rights to what they "own." The author's intriguing case is that a lack of property rights - not a lack of entrepreneurial zeal or competence - stymies development in the former East Bloc and Third World countries. This seemed to be a shockingly original notion when the author first propounded it in his bestseller The Other Patch, and it still does. If the book has a flaw, we warn, it is that the author's undisguised missionary ardor sometimes makes one wonder whether he is merely a zealot. Even if he were one, the book would merit reading.

Like Economics in One Lesson, by Hazlitt, The Mystery of Capital is one of those books that opens your eyes with one single lesson: the importance of strong private property ownership rights and its consequences. De Soto argues, not theoretically, but with proven experience that this is the key to unleashing the potential of capital and its benefits. Suffice it to say that De Soto's advice got rid of the guerrilla in Peru by giving their farmers title to their property and therefore desincentivating them from the growth of drug crops. He also has been hired as a consultant to Egypt, the fastest growing economy in the Middle East, since the reforms proposed have been implemented.

This is a must read to all those wishing, wanting, willing to do away with poverty and to protect property, and it does not have to apply to the third world only: the US and Europe could use a good dose of deregulation and less State intervention in property rights in order to combat poverty, inequality and all the evils modern politicians like to talk about but do little to solve. Were I president of a nation one day I would immediately hire De Soto and his team. Can all evils be resolved with property rights? No, but by aligning the incentives correctly most economies would benifit greatly and much corruption would dissappear, eliminating a lot of poverty with it. This book should be a required reading on any economics university program, and De Soto's researched should be further expanded and discussed.

I picked up Hernando DeSoto's book shortly after a trip to South America, and a staunch recommendation in "The Economist", and I found it to be a very well written, thought provoking book with very good ideas on "capitalizing the poor" and thus allowing the third world to generate wealth. Much of what he said resounded very well with me and my first hand experiences in Peru and he has convinced me that his proposals are very much win-win proposals for all involved.
However, he has failed to convince me that he has discovered the linchpin of capitalism that would live up to the title "Why Capitalism Triumphs in the West and Fails Everywhere Else." Is property ownership the critical reason for capitalism's success in the West? One could argue that there are other obstacles to the development of capitalism in the third world, possibly including political corruption and internal strife. These reasons in turn might have stifled both the capitalization of the poor and the countries development.
Nevertheless, these reasons do not detract from what is a great work, and I still contend that this book is a must-read for anyone interested in the Third World.

It is an amazingly hopeful thing that the first major work of the twenty-first century should be entirely free of the dominant ideologies of the previous century (namely the notoriously flawed anthropological, historical and economic views of Marxism, and its counterweight, free-market Messianism.) De Soto, in contrast, gets to the heart of the matter with a simple and convincing account of the role of legally titled property in a functioning 'above-ground' economy. His 'roll up the sleeves and hit the streets ' style does well to contrast the absurd abstractum of most economic writing, which, especially in its Marxist version, has done more to hinder than alleviate the conditions of poverty. A hopeful premise and thorough argument, this book should offer a new and REALISTIC approach to the reality of the global economy.

How do you make capitalism work? Make all your citizens capitalists!

De Soto argues that the reason why capitalism isnt working in many parts of the developing world is because of an immature system of property rights... In a nutshell, he asserts, the costs of obtaining property are so high (thanks to government over-regulation in most cases...lots of paper work and trips to the capital and fees) that the poor are unable to own property. Unable to obtain property they can't do things like get a loan put on the value of that property so they can develop a business or expand a business.

The book gets back to the roots of capitalism...property. If the poor don't have access to property they can't dig themselves out of poverty and when they can't do that your economy stagnates and falters. Instead their business will remain extralegal and thus benefit far fewer people (and do little in the way of building wealth).

This book illuminates one of the many areas of capitalism that needs to be addressed before it can truly work to eliminate poverty (creating more egalitarian property right laws is only part of the puzzle but a very important piece).

This book is a great read, though the middle part is mostly repeating the central theme over and over. Any fan of capitalism, markets, or fighting poverty should have this book on their shelf.

The Mystery of Capital posits the theory that development of capitalist economies is a function of the ability to accurately record and protect the private ownership of property as a means of allowing that property to function as capital. Once the nature of ownership passes beyond just the realm of physical possession, property can be synthesized into non-physical forms that can be sold, rented or borrowed against to generate more economic activity. The problem in Developing Nations isn't a lack of property, but rather an inability to convert property into its most productive uses. The author includes numerous statistics to substantiate his hypothesis, but not so many that your eyes glaze over.

I enjoyed this book, particularly the legal history of property rights in the United States.

DeSoto doesn't really explore the nature of capitalism, nor the terms one can use to gauge its success. His claims that a reorganization of 'property rights' statutes can free up cash for investments has some obvious truths, but the equally obvious dangers are never considered. For example, China and Taiwan seem to be excellent example of DeSoto's recipe producing the desired prosperity. Unfortunately, neither get much attention. Several critics have suggested the Chinese real estate boom is based on forcing impoverished farmers off their land and reorganizing ownership to better suit investor needs. The reality of poor losing their land in the process of bringing land into the 'general market' contradicts DeSoto's claim about the book helping 'the poor'. In the context of US politics, consider recent controversies regarding civic use of 'eminent domain' powers to take land from small property owners and deliver it to 'investors'. At a minimum, DeSoto needs to address such issues.

Most reader comments on the "political" and "Policy" side of the book. They applause by embracing the idea of less government intervention, better legal protection, better property right and so on. But I will comment the Economic side of the book. The most important point in this book is that there is a lot of "dead capital" in under developing countries. My wonder to this point is that which mechanism generate so huge amount of "dead capital". From the content of De Soto book, it is sure that all these "dead capital" comes from "black/underground Market" or "Illegal Free Market". The "Illegal Free Market" generate 9.3 trillion dollar. Actually I think De Soto is still highly under estimate the value since De Soto does not include all the human capital estimation. I think De Soto agree Free Market is the real source of economic growth.
Also in De Soto analysis, capital is the fuel for economy growth while the Keynesian believe that both individual and government spending the fuel for economy growth. De Soto book does not directly compare this 2 different ways to go. But De Soto clearly show that Foreign loan or aid does no help since it only simulate spending only. From my understanding, De Soto recommends to use Market to replace the government to release the "dead capital". Government is only require to provide minimum effect to ensure that the contract is fulfilled.

The implications of De Soto's book are simple but revolutionary: economic and social development will not be achieved by throwing money at the problem but by dramatically changing the legal systems to allow and encourage the efficient and legal exchange of capital.
De Soto thoroughly documents his arguments estimating that "the total value of real estate held but not legally owned by the poor of the Third World and former communist nations is at least $9.3 trillion." $9.3 million is a staggering number -- especially in the context that it is forty-six times all the World Bank loans in the past 3 decades.
De Soto follows the processes and legal barriers to gaining title on property: to gain property rights and construction permits in Egypt can take up to 14 years and that it can take up to 4112 days to gain a five year lease in Haiti! With the amount of time and money required, people have skipped the process of legalizing their property resulting in their lack of liquidity.
De Soto speaks with the authority of a practitioner having put in place the groundwork of formalization in Peru with significant results. Is this truly the panacea to world poverty as De Soto comes very close to arguing? Given the results and the dead capital that exist in the world, it may very well be.
With the increasing number of violent protesters who will stop at nothing but the complete annhilation of capitalism, De Soto stands firm in his arguments that the problems are not with the concept of capitalism but the legal systems to allow for the creation of capital. For this reason, De Soto's The Mystery of Capital will be always be unpopular and attacked by those who cannot look beyond their own ideologies to see his greater message.

This is an important book if it encourages economists and policy makers to look again at the resources the poor of the world already have at their disposal - far more than ever received in aid payments.
However there is a real problem with de Soto's insistance that formal property rights will give the poor access to their 'dead' capital. When the property rights of the poor are formalised they are usually taken away and given to the rich. De Soto can give no guarantee that this will not happen again. In Churchill's words, the price of freedom is eternal vigilance. There is an ambiguity in de Soto's rhetoric on this point. He writes: 'In Haiti, for instance, no one believed we would find documents fixing representations of property rights. Haiti is one of the world's poorest countries; 55 per cent of the population is illiterate. Nevertheless, after an intensive survey of Haiti's urban areas, we did not find a single extralegal plot of land, shack or building whose owner did not have at least one document to defend his right - even his 'squatting rights'. (p. 167) This would be reassuring were it not a contradiction of his earlier point about Haiti and its problem of 'dead' capital; 'In Haiti... according to our surveys, 68 per cent of city-dwellers and 97 per cent of people living in the countryside live in housing to which nobody has clear legal title' (p. 26). When it suits de Soto's argument, Haitian squatters 'own' their land; when it doesn't suit him, they don't. While this ambiguity is merely problematic for de Soto's argument, one can only imagine what the eagle-eyed legal representatives of rich property developers might do with it.

There are thousands hacking at the branches of evil to one who is striking at the root. -- Henry David Thoreau.
In his book, De Soto strikes at the root of the developing world's economic problems. For all the books, debate and talk shows dedicated to whether capitalism is good or evil, government regulation necessary or not, people are naturally greedy or generous (for examples see other reviews), few set aside their dogma long enough to address a simple question: why is the standard of living higher in the west than in the rest of the world? De Soto's book provides one explanation.
Although obviously a 'capitalist,' De Soto doesn't preach morality issues but instead focuses his book on the mechanics of capitalism. Using the USA as an example, he examines how capital is created through borrowing, and how the squatter's rights laws in the turn of the century USA reclaimed vast amounts of unused capital in a 'use it or lose it' proposition - land owners who did not develop their land risked losing it to squatters who did. When the squatters obtained clear title to their developed land, it freed up the capital locked up by the previous, dormant owner. Such capital is the basis for investment, which improves the standard of living of the owner (you can live in your house and borrow against it at the same time). Surprised to hear that such socialistic laws were at the heart of what made the capitalistic USA so powerful? So was I.
De Soto also addresses how the laws of developing countries need to be reformed to allow this process to happen once again. He addresses the concerns of the current legal landowners, and provides a plan in which the squatters and landowners both benefit, knowing full well that any plan that only benefited squatters at the expense of landowners would not be politically viable.
I've heard all the philosophical arguments about capitalism I need to hear, from Ayn Rand to Karl Marx, and one would have to be as blind as Kim Jong Il to deny that capitalism works better in the US and Europe than in South America, Africa and Eastern Europe. De Soto's book is a refreshing glimpse as to why.

The Mystery of Capital attempts to "reopen the exploration of the source of capital and thus explain how to correct the economic failures of poor countries." I believe the author makes an interesting argument within the book concerning the failure of capitalism to catch on in developing and post-communist countries. His argument deals with institutions we here in the West take for granted-property rights and other legal institutions. The connection between these legal institutions and economic growth is clear-and de Sota is clear on this point as well.
He states that an individual living outside the West faces an impenetrable wall of rules that bar them from legally established social and economic activities-such as deleterious bureaucracies that retard growth by wielding red-tape. De Sota sent teams to Peru, the Philippines, Egypt, and Haiti and they experienced firsthand how it takes several years to obtain legal verification of assets-years compared to days here in the West. Under these burdens, individuals create new laws-extralegal laws. These social contracts have created a vibrant but undercapitalized sector. This sector is known in economic layman's terms as the underground or informal economy. The author estimates that over half on the inhabitants in developing countries engage in this sector-using Dead Capital. The value of the assets in the informal markets are huge-surpassing the assets of rich countries sometimes. De Sota has brought attention to the core of the problem-he then states that the solution can be found at the heart of the countries.
He supplies the formula to fix the backwardness of the nascent capitalist nations. The first objective is to unify the many social contracts already existing in the extralegal sector into one, all encompassing social contract-by listening to the "barking dogs", or the people. Past attempts with this aim have failed because they have lacked the legitimacy and support from the current extralegal world. De Sota creates a bridge to fix this dilemma-a bridge that integrates old social property customs into a new all encompassing social contract. By working with their people, government leaders can forge a new regulatory framework. The second task is a task of a political nature because the plan outlined above requires the support of the poor, the elite, and the lawyers. The poor will gain the most because they will greatly increase their economic lifestyles with a more unified social property system that will enable them to use their assets as full functioning capital. The elite will harvest gains as well; they will benefit from an expanded market and growing capitalist economy. The lawyers must not use the current law, but instead fine-tune the law and change it to make it work for all.
De Sota's real world studies and solutions make sense in my mind. He identified a problem and supplied the solution. He may fall short though in his solution because a complex capitalist economy requires much more infrastructure than only property rights-of course I mean other forms of capital, such as human capital. By De Sota is on the right tract; a capitalist economy demands strict and discrete property laws that enable individuals to utilize their assets. His premise is right-under capitalism, the rich get richer, and the poor get poorer. In the third world, the poor don't have access to their assets, and they thus flounder in the extralegal sector.

Hernando De Soto's basic theme is that outside the Western developed countries, none of the countries has a unified system for fixing property rights in a form that gives poor people the ability to effectively establish ownership of property and to use the value of that property to develop capital to build a business, etc. The property systems in the undeveloped and former communist countries are very fragmented and, apparently, designed to protect the elite, making it virtually impossible for poor people, even though, collectively, they have an enormous amount of extralegal property, to obtain sufficiently clear title to their home to get a loan from a bank to enable them to start or develop a business. In the west, the most common way entrepeneurs start a business is to obtain a loan on their home. Poor people in undeveloped and formerly communist countries are deprived of this alternative who must take literally hundreds of steps over months and even years to obtain questionable title to their homes which are on land they don't own. This effectively prevents the poor from becoming a part of the middle class and fosters a Marxian analysis leading to potentially revolutionary consequences, e.g., the developing anti-globalization movement.
The author analogizes this situation with the westward development of the U.S. 200 years ago. Squatters took over government and private lands by simply establishing a home and growing crops. They developed localized extralegal systems of property ownership which were necessarily fluid in nature because they depended on the good will of the extralegal property owner's neighbors. Eventually, the settlers gained sufficient power to force the incorporation of their extralegal institutions of property ownership into the formal legal system and the reconciling the interests of all those who had interests in property through a unified system that fixed the ownership in property. A fascinating point for me was that developing such a unified, easily accessible system of property ownership will not only greatly expand capital, but will also open wide the ability to accumulate capital, helping to offset one of the great "evils" of capitalism, the concentration of capital. This would undermine the Marxian analysis and many of the objections to globalization. It took me a while to get into the book, but it got better and better as I progressed through the book. I recommend it.

Other reviewers have commented on De Soto's originality in relation to prevailing economic tradition. They have also praised his style - very clear prose, interspersed by passages of honest elegance. Yet, for me, at least, what stands out most about De Soto is his interest in discovery, in reawakening a long forgotten question.
Who asks oneself seriously what capital is today? Is one even generally capable of understanding the question of what capital is? I doubt it - the first reaction is ridicule. Of course one knows what capital is, for one lives in a capitalistic society. One can hardly take such a question seriously.
Yet, this provocative question moves this book. De Soto has carried out first-hand research among the boiling global centres of 'marginal' economic activity. He has not looked for the 'right' theoretical answer to the question of capital, rather, he has tried to discover a way to pose, and answer, the question meaningfully. Meaningfully for whom? To those who have forgotten - those in the West - and to those who wish to learn in the developing world and the former communist nations. What is capital?
Other reviewers have criticised De Soto for redundancy, repetition. These criticisms are off the mark. De Soto has discovered the conceptual solution to the question of the potential of capital: a legitimate system of representation of property. Yet, he can not simply elaborate it in a few words, for one does not still understand the question he is answering. Because it is disturbing and fleeting, it is very difficult to grasp. Thus it requires constant reformulation. Shakespeare used parallel structure, De Soto uses masterful analogies (I particularly like his profound observation on something so seemingly apparent as barking dogs).
De Soto also tries to situate his thought within diverse traditions of Western thought, combining Continental philosophy with American analytics (it is rare to see someone who is capable of synthesizing Derrida with Wittgenstein, to say nothing of Searle!). He seems to be trying to say the same thing in many different ways - yet it is very difficult to understand what that thing (capital) is. De Soto helps the reader by offering many different pathways to the thing (capital) itself.
I feel that De Soto might have engaged more deeply with Plato's thoughts on representation and his analysis of the cave parable is somewhat superficial. A more in-depth engagement might provide the basis for a rethinking of some of the precepts behind private property and capital, which De Soto simply accepts as given. This is a personal quibble only, however, as such speculation would reduce the clarity of the book, and thereby reduce its tremendous practical value for concrete action, obviously the author's main intent.
De Soto has written a masterpiece around a a simple kernal of truth. It seems so obvious in hindsight! Yet, it is the very stillness of those words in which it is expressed which will bring on a storm.

Hernando de Soto, a Peruvian citizen who runs "the second most important think tank in the world" according to the Economist magazine and who has consulted with numerous governments around the world, including Peru, Egypt, Mexico and the Philippines, has a profound, timely, and deeply researched (e.g., extensive studies of virtuually every square mile of Egypt, Peru, the Philippines and of the bueaucratic and legal hurdles to property rights therein) study of the key to successful economic development and liberation of the poorer nations of the world from poverty, hopelessness and powerlessness.
This book is perhaps the most important book of the early 21st Century.
As one who has travelled in and sometimes lived in over 66 countires, his thesis absolutely correlates with and rings true with what I have observed with my own eyes: there is a universal human aspiration to home ownership and people do amazing things with property which they own, I know because a close relative of mine, with his host country national partners, built hundreds of thousands of homes in the 50s and 60s which are privately owned by a small emerging middle class in Peru, Colombia, Thailand, Taiwan, Morrrocco, Pakistan, Egypt, and other while property not owned by individuals, owned by "the state" tends to be abused, neglected and common ownership (communism) is a predicate for many of the most egregious environmental crimes in the world. (As is the case in Russia with the Siberian oil fields (where we observed "no signs of life; not even birds") and China with their air and water polution; 8 of the 10 most polluted cities in the world, according to the UN, are in the Peoples' Republic of China; I could feel my vitality decline each day I was in China from the air pollution while I was there.
The key: legal title to real property, and instituting the "rule of law" in place of "extra-legal" black market sectors of third world economies, which frees up $9.3 TRILLION of "dead capital" estimated to exist in developing nations.
Real property title is the basis or foundation upon which virtually ALL "capital formation" for other economic enterprise is built.
Surprise: Developing nations have the KEY to their own economis and political problems in their own hands TODAY, but they mustreform and be helped to reform (using their own unique cultural characteristics) their own legal institutions by "formalizing" the reality which already exists in the "informal" sector, i.e., by granting property rights, empowering the "poor" whao have built and often already live in these homes, and by granting legal title to property!
Foreign aid and the conventional development economics paradigm of Kofi Anan and other conventional thinkers rewards and tends to perpetuate and reinforce dysfunctional and often corrupt and oppressive regimes, while wasting billions of dollars;
Whereas changing legal institutions toward giving individuals property rights of the "poor" by giving them title to their created homes and other real property is the only rational, moral, effective, and efficient path to economic success and out of hopelessness and poverty.
Moreover, the estimated value of such "dead capital" -- $9.3 TRILLION dollars ---- in the developing nations exceeds the market value of the top 20 stock exchanges in the world and exceeds 150 YEARS(!) of foreign aid at Kofi Anan's recommended level of .7% of GDP of the developed nations.
Finally, through de Soto's vision and specific remedies can the world be purged of the hoplessness, not just the poverty, that are "associated with" (but NOT the sole causes of!) terrorism.
De Soto's vital and timely book is a "MUST READ" for any person who cares about TERRORISM, economic and political FREEDOM, the RULE OF LAW, PROPERTY RIGHTS, the elimination of POVERTY, by freeing up of human potential and the liberation of "dead capital" to create new enterprises in the developing world,as well as all who care about INTERNATIONAL RELATIONS, and INTERNATIONAL ECONOMIC DEVELOPMENT!

The Mystery of Capital, by Hernando DeSoto, could be among the most important books on economics of any century. DeSoto notes that more than a decade after the fall of Marxism, the expected capitalist revolution has not occurred. Capitalism has been successful only in the developed nations and has made little progress in the third world or in the former communist states.
He and his team are convinced that the problem is the lack of well defined property rights. He notes that the poor in under-developed countries have assets, but that their real property is often owned informally, and thus cannot be used to generate capital. As a result, the crucial role of real property is simply absent in under-developed countries.
He proposes the obvious solution --- formalization of informal property rights and notes that acquisition of property through informal means (squatting) has a storied history in the United States and other developed nations. DeSoto understands that formalization will be politically difficult, but points out that both rich and poor will benefit economically. One might call it "trickle up economics."
Finally, formal property rights are under attack in developed nations, through overly intrusive land use and environmental regulations. It is well to reflect upon the potential for slipping toward a system that allows virtual squatters to seize or nullify property rights through regulation, threatening a principal source of national income.
Wendell Cox

We find ourselves living in a day where there seems to be an ever increasing concerning for justice for the oppressed. Also we are increasingly being called to remember the poor and to fight on their behalf. While many are more and more compelled by the moral responsibility to the suffering among them, one finds that the response to those suffering have a number of different expressions. Within navigating the diversity of these expressions, it does not take long for one to move to some of the macro-structures that either seem to be apart of the solution or the problem for alleviating suffering and poverty. Globalization, capitalism, the free market are deified by some and demonized by others who have shared concerns for the "have nots" of our day. While understanding these macro issues is a complex endeavor, one thing that is not complicated to understand is that it is necessary for those of different perspectives to listen openly and honestly to one another as truth often seems to be found within conversation rather than monologue. One of these voices that needs to be heard is Hernando De Soto. He is one who has grown up in the third world country of Peru which enables him to bring a unique perspective to this ever important conversation.

De Soto's work attempts to address the question of why Capitalism is triumphing within the west yet failing throughout the rest of the world. For De Soto "capitalism alone stands as the only feasible way to rationally organize a modern economy (1)," so therefore understanding its non-western failures becomes increasingly important for him as there are no other viable alternatives. In pursuing this concern, De Soto began his research in his home country of Peru, one of those countries that was experiencing the failure of capitalism. What De Soto uncovered within that study (it is available in his former book The Other Side) is what the title of this book attempts to unpack..."the mystery of capital." As his team did research they began to discover an enormously large extralegal network of economic exchange where the vast majority of Peru's citizens were operating outside of the "legal" sector of society. As this extralegal sector was more fully understood, De Soto's team realized this group of people had enormous capital developing potential, but their inability to participate in the legal sector of society handicapped their ability to develop any substantial amount wealth. At its core, De Soto's team discovered there was not an appropriate legal framework to help these people expand their assets. The reason for this is because the vast majority of what they possessed is what is referred to as "dead capital." That is capital that does not have the potential to develop. It deals with houses that are built on land the "homeowner" does not own, which undermines their ability to establish loans and other endeavors necessary for a greater capacity to create wealth.

It was not as though this enormous sector of society was failing to "do business," for more economic activity was taking place within this sector than outside of it. It was just the context from which it "did business" which meant it would never allow for much flourishing. It is as though there is an economic ceiling to all extra-legal activity as their capacity to go big simply does not exist. To put some numbers to this, De Soto's team calculated that the total value of real estate held but not legally owned by the poor of the Third World and former communist nations was at least $9.3 trillion (which they argue are very conservative numbers). To put context to $9.3 trillion, this is about twice as much as total circulating U.S. money supply. It is nearly as much as all the companies listed on the main stock exchanges of the world's twenty most developed countries. It is more than twenty times the total direct foreign investment into all Third World and former communist countries in the ten years after 1989, forty-six times as much as all the World Bank loans of the past three decades, and ninety-three times as much as all development assistance from all advanced countries to the Third World in the same period. Given this, the problem is not as much about not having as not being able to legally have and legally produce.

To make this more practical, let's say you are a business owner. The length of time it takes in some of these developing countries for you to actually become "legal" is profoundly time consuming. It can often take months and months and perhaps even years. Not to mention the amount of money needed up front to go legal. So operating legally is simply a luxury many do not have and you chose not to become legal. It helps that the majority of society is already doing this and now you find yourself doing business from the "illegal sector." Now, as a business owner, contracts do not mean much or perhaps anything because there are few ways of enforcing them so you need to develop relationships of trust to maintain your business. The reason for this is because if someone you are in business with fails to follow through with the terms you agreed to, the loss you might incur could be devastating. It doesn't take much imagination to see how violence and large groups of organized crime can easily become extremely powerful in this type of world. Therefore you only do business with those you trust which is a profoundly smaller number than what operations under the legal sector of society would allow where an enforcement of contracts exist, thus allow exchanges to take place with people you do not know. Given this, the extra-legal sector necessarily limits expansion, for you are dealing with exchanges that could be thought of as "nickel and dimes" rather than anything of substance. Not to mention that in some countries since the land is not legally yours, the business buildings that you developed can easily be taken by the government for the land you built your building on is probably theirs. Knowing this it helps you to keep a small building lest it eventually find itself in the hands of the government. This type of practice destroys the incentive of the people of your country to actually build into the value of your country as you have no protection that what you "own" will actually be in your possession tomorrow. Now the list could go on regarding issues that handicap your capacity to develop wealth but this illustration at least highlights how destructive it is to you and society as a whole to operate illegally.

So what needs to happen or what can happen that will address this problem. De Soto and his team argue that what needs to happen is what happened here in the U.S. Laws were in existence and it increasingly became evident that some of these laws were actually hurting those they were intended to help. The laws had to change in order for our country to continue to develop. Thus eventually and within the context of a large struggle, these laws began to match and help the practices that were taking place rather than opposes and hinder them. Law began to be seen as something that was shaped by and in need of evolving to the interaction of human experience rather than as something human experience needed to shape itself to. Out of this struggle more and more people were able to move from the illegal sector with no legal ownership of their property to the legal sector of society with ownership of their property. This is the shift De Soto and his team argue needs to take place. Much of the developing world's inability to develop capital stems from their lack of property rights. Therefore De Soto and his team see this as an unavoidable next step for developing countries. They have already waited long enough and this has helped to perpetuate the poverty we hear so much about. Clearly the problems are more complicated than merely property rights but they argue they are never beyond these rights. If these societies can begin to create these rights for their citizens, a great deal of poverty will be reduced and wealth created.

With this brief summary of De Soto's work, it seems clear that our discussions about HIV/AIDS, poverty, etc. need to look closely at some of the legal realities that either help or hinder people who are on the receiving end of aid. If the laws continue to handicap growth, the money we pour into these global issues will have little significance. If the legal sector can begin to help those it has been hurting for so long, then the next hundred years will see a reduction of poverty and creation of wealth like the world has never known.

There are not many social science hypotheses that can be tested. This is especially true with the perennial debate of geography versus culture and their effects on wealth. Everything I have read about this subject heretofore is 99% speculation and unconvincing, and therefore not of much value to actually elevate the living standards of the poor.
By contrast, I found this book a welcome relief from the other books I have read on the subject because it provides a fairly specific mechanism for improving the lot of the poor and provides testable hypotheses, which de Soto and his associates are using.
Are de Soto's hypotheses logically necessary? We shall see from the data of his work in Peru and other poor countries.
Are de Soto's hypotheses logically sufficient? My guess is that the positive effects of de Soto's experiments will not result in a rich and powerful Peru, Egypt, or Haiti. The effects of various social institutions that comprise "culture" are a lot more complex than the limited hypotheses of this book. Also, the influence of geography, which cannot be isolated from culture, may mitigate success.
Nevertheless, the work of de Soto and his team can only be lauded. They are actually improving the living standards of the poor, at least to a limited extent, instead of just writing about it. That sets de Soto and this book apart from sterile authors who weave abstract theories that can never be proved.
I can only wish de Soto and his colleagues well and ultimate success in helping the poor. The other problem of making the poor countries rich is a far more complex problem that no one has really figured out.

Being a student of Economics (one looking into doing a dissertation on Capital Theory in a few years, actually), I thought this book looked like a great book in the field. So, I bought it.

When I started reading it, I was a bit shaken. Mostly because it wasn't the book I expected. I expected a book on capital theory (the theory of capital goods, I was hoping). Instead, I got a book about the importance of legal property rights being derived from the existing social norms among the poor in Third World and post-communist countries. So, from a technical standpoint, I question if "capital" is really the term De Soto should have used for the mystery he was uncovering.

But, after the initial shock, De Soto's point really caught on. The lack of legally enforceable property rights make it so that all the savings the poor of the Third World have can't be converted into "live capital". Personally, I think a better way of saying it would be "The lack of legally enforceable property rights prevent the Third World's poor from being able to join the global markets due to the resulting lack of unenforceable contracts." In addition, laws should be based on pre-existent social contracts. Good points, and I agree with De Soto: pouring money into the developing world just won't cut it as far as economic development is concerned. Until strong legal property rights exist, any investment is more or less waste. (With the exception of charity to the very poor, which isn't with the goal of economic development, anyway.)

But, after giving me 6 good chapters of evidence as to how Third World and post-communist governments are failing to provide good property systems, De Soto decided that his final chapter should be a short essay on how great Karl Marx's analysis of certain capitalist phenomena are, and how tempting his philosophy will be to the Third World if it doesn't shape up soon. Thanks, De Soto. But, perhaps you should reread Marx a bit more critically. Fortunately, this chapter did explain why De Soto felt it necessary to continuous use the phrase "produce surplus value" instead of "make a profit" or "increase standards of living". Either way, much of the last chapter felt like useless conjecture about how Marx would feel about the state of the modern world. So, it's not a 5 star book.

If you're looking for a decent book on a very specific issue in development economics, this book provides good evidence for the necessity of relevant property law to economic development. If you're looking for a book that's actually about capital, then look somewhere else.

The third world is poor, in spite of abundant real resources and financial capital , because clear title to new capital - houses, factories etc. cannot be obtained as readily as in the US and similar first-world nations. De Soto advocates improvement in legal systems; he has written previously on this subjecty and leads a research institute in Peru. This book is both useful and inadequate. The trouble is real but the remedy is not a mere wave of the hand.
Cadastral systems exist in every society - to determine property rights and facilitate investment. But they collapse when colonial rule is swept away, when serfdom is abolished or when a society is vanquished. New technology crushes old wealth - pollution, transportation and communications ( e.g. Napster), De Soto's perspective is surprisingly limited. (He seems to misunderstand the word "fungible;" "real" property is non-fungible by definition.) There are many important differences between real assets and financial assets.
My impression is that de Soto underestimates the diffiulty of establishing an efficient system of property registration and transfer. The rights of occupants, investors, creditors, heirs and neighbors need to be clear and assignable. This is a very complex package, enlessly contentious even in so "orderly" a society as the US. And every society has its special blend of rules that are religious and traditional, so for what de Soto visualizes "one size does not fit all."
Worse - the chaos he complains of serves some people very well, not least the legal profession. Indeed, it is reasonable to think the disorder is by design. But De Soto is right - the mess should be cleared away to let human beings work in harmony to build the life that is possible, promising and just.
Just don't hire lawyers to write the rules.

As I write this, there are already 99 reviews, so I will keep this 100th review brief.

De Soto's argument is that the problem of poverty in the third world is primarily caused by the inability of the people to make use of the capital they already posses, because the government won't allow them legal title to it. So while they occupy the land, build houses and markets, all of their activitity is technically illegal. So while I, in the U.S., can get a loan to start a business, using my house as collateral, no bank will give them such a loan because they don't have legal title to their property and so cannot use it as collateral.

He debunks the arguments that capitalism only works if you have a western ideology. Humans are the same under the skin, regardless of ethnicity or cultural upbringing, and people all over the world have the same goal--to improve their own condition. That desire, and the access to some amount of capital, however small (think of the success of the Grameen Bank's micro-loans), is what leads people out of poverty. Government cannot kill the desire, but it can prevent access to the capital--which is what nearly all 3rd world governments have done remarkabley well.

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.

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.

The Mystery of Capital attempts to explain the reasons why a capitalist system has not favored all people in third world nations in the same degree. Although Hernando de Soto focuses primarily in urban areas, he explains that there are far too many, if not difficult, obstacles for most citizens of third world countries to truly benefit from a capitalistic system. He has research poor neighborhoods in third world nations, and has found plenty of dead capital that could be put to use for the benefit of all people in such nations, if only politicians and lawmakers realize the enormous potential. Apparently, the value of property and extralegal businesses are far greater than the aggregate value of decades of foreign direct investments into those third world countries researched. Such assets are considered dead capital because they have been obtained or developed extralegally. Buildings and businesses exist, but they were not properly registered with the corresponding authorities, and in most cases developed in Government-owned land. A seemingly vibrant extralegal economy goes unnoticed. Why? The level of bureaucracy is overbearing, and therefore it becomes expensive for most people to go through the necessary steps for property establishing a business.
Hernando de Soto does not give you a definite method as to how to unlock "hidden capital", but it does give guidelines for developing a meaningful way to turn such unregistered assets into capital; the basis of a capitalistic system. He also offers some history as to how this kind of predicament was tackled by lawmakers in developed nations such as the United States and England. By using history, Hernando de Soto attempts to fill in the gap between theory and reality.

This interesting book begins with a haunting question: Why is it that Capitalism succeeds in Western -or Westernized- countries, but fails everywhere else? His main answer is easy to understand but apparently very difficult to implement: because in the rest of the world, laws and institutions are very far from the common people's everyday life, from the way these people actually work and organize themselves. As a result, a few people live "inside" laws and institutions (Braudel's "cristal bell"), while the rest live outside "legality". This situation is the cause that billions of dollars' worth of poor people's assets are unable to become live capital. The poor people's assets only produce what their use-value allows, and sometimes also what their exchange-value permits, but their extra-legal condition means they can not be used for their symbolic value (as collateral for loans, for example), and thus the said assets can not bring about other kind of revenue and benefits. That is, they do not constitute real capital.

At first sight, operating outside the law looks advantageous: you don't pay taxes and you can avoid regulations. But in reality, it is extremely expensive and inconvenient. De Soto takes us to a logical but frequently overlooked conclusion: the success of Capitalism passes through adequately defined and enforced property rights. When everybody in a society has access to property rights, then they come into a world of security, a world of networks that go well beyond the local, a world of physical and legal certainty. People break free from mafias, from perennial uncertainty and from dependence on factual, and often violent, powers.

The solution? Adapt laws to the actual "social contracts" governing people's lives, and not the other way around. Make the cristal bell larger, so that almost everybody has a place inside (sociopaths and incurably lazy people excluded). What needs to be done? Assume the poor's perspective, co-opt elites (making them understand that the end result will be good for everybody), incorporate visionary law-makers. All this demands a fine, strong political leadership. Is all this a Utopia? Hell, no, it is happening in many places, where politicians have understood the message. This is possibly the first economics classic book to have come out of Latin America. At least in Mexico, now that we seem to have a pro-capitalism leader in the next President, let's hope they understand what we need.

A one idea book by Peruvian economist Hernando de Soto: that capitalism will flourish in the Third World (where clearly it has not, give de Soto one mark for honesty) if the poor there, who live in many cases in land that is not legally theirs, would be given a title to the land. Once given a title, they would have collateral to enter the legal market. The idea is interesting; certainly, anybody who has been in a bustling third world market has seen it as a haven for capitalism, not socialism. But the notion that this would be a cure-all for third world poverty is preposterous. Worse, de Soto gives figures of wealth held by the poor (but not under legal title) that seems frankly dubious. Like most one idea books, the author ends up overselling its idea (which is not bad in itself).

Since the Keynesian revolution the economics profession has been busy writing up mathematical models of incentives that show how IMF and World Bank loans, free trade deals, "fiscal policy" or "game theory" can be used by governments to generate economic growth. Hernando de Soto's Mystery of Capital is a slap in the face for every economist that has ever had a high-paid position in the countless agencies built to promote growth. It turns out that the classical economists (and their Austrian school heirs) have been right all along, that the source of economic growth is individual businessmen. And what can these individuals do when it takes a year of full-time work and years of savings paid out in bribes to get a legitimate business license? Nothing. The only people that can do business in these countries are the already-wealthy and well-connected.

For all the talk about international free trade, contemporary economists have never really paid attention to internal free trade, free trade between individuals. There is no mystery of capital. The men who built the West knew it well. The real mystery is how a class of government-protected elite academics could have forgotten the basic lessons of economics. It took a non-academic, De Soto, to remind them. It remains to be seen if they will admit their failures.

An economist's book written so regular folks can finally understand how and why capitalism is a distinctly American animal. The Mystery of Capital provides a plain-language explanation of the foundation and founding of capitalism in the US and why its export to third-world and former communist nations have, thus far, been unsuccessful. Then it outlines logical methods necessary for making capitalism accessible in any country. Excellently researched, exceptionally well-written.

I won't go into explaining everything about this book except to say that it is an attempt to explain why capitalism has failed in third world countries. Mr. Desoto makes a very insightful case. This is a very important book for the future of the world. If you have any interest in progress and stability in the future spend some time with this work.

De Soto and Tom Friedman (The Lexus and the Olive Tree) are the two authors that make economics accessible. I have just graduated high school, and after basic economics, I understand what de Soto is saying. De Soto is one of the rare economists that has ditched the books and "gotten his hands dirty." He doesn't only forumlates theories, but also applies them in the real world. His research team is spread across the world - in nations such as Egypt, Haiti, Peru, and the Phillipines.
After reading this book, I have become cinvinced that the major problem in the developing and former communist world is the lack of property rights- de Soto's theory. He not only defends his theory, but explains how these thrid world countries can tap into the 9.3 trillion dollars worth of dead capital in their slums, shantys and "suburbs." The proposal is to adopt the society informal property laws into the national formal law in order to allow the poor to claim legal rights to their assets, and therefore allowing them to use their assets as collatoral for loans from banks. He is not idealistic -- he recognizes the problems and the obstacles that have to be met.
This book is fantastic. I read it in four days, and I am not a fast reader, especially econ books I HIGHLY recommend it.
-Joe

I recently finished "Mystery of Capital". It is fascinating and a seminal book in understanding 3rd world economies and my own American economy. I wish I had read it just prior to a recent visit to Cuba. I would have seen everything with different eyes. What I considered "hustling" of tourists is really very basic entrepreneurship in a country with few opportunities. I did not appreciate the skill and drive exhibited by the Cubans (and other third world populations) until I reflected on it after finishing Mr. DeSoto's book. If the reforms suggested by Mr. DeSoto and ILD are adopted, America could well become the new third world member. Once the hard working people of the third world have access to capital, their potentials for economic growth defy my imagination. A fine, fine achievement. jjm

De Soto fundamentally argues that the reason poor countries are poor is because they have bad property rights: it's incredibly difficult for poor people (specifically, recent urban migrants) to get legal title to their land. As a result, the poor make "extralegal" arrangements, squatting on and using land that neighbors (but not the government) recognize as theirs. But because they don't own the land, they can't get a mortgage on their house to start a business, electricity and water companies are less likely to reliably provide services, the government has difficulty taxing them because they don't have a legal address, and so on. And so on.

It's a very important point but de Soto oversells, arguing with exaggerated (and oft-repeated) ideological claims but weak empirical evidence that solving this problem will actually enrich the poor.

He occasionally shares insights from his interesting field work. For example, he has helped businesses in Peru to navigate the overwhelming bureaucracy and become legal, and he has found that most businesses would rather be legal and pay taxes than be illegal and pay bribes: a useful bit of empirical information, but those gems appear all too occasionally.

Before reading this entire book, I recommend going to the website of de Soto's foundation (the Institute for Liberty and Democracy at [...]) and reading the main point there (in one tenth the words).

This book answers questions that have been shrouded in the fog of socialism and communism. The main one : 'If a place does not have an infrastructure in place to protect property rights, then there are no property rights and therefore wealth cannot be created.' - 'One cannot acquire anything as the fruit of their labors permit, if one cannot safely store it somewhere.' - 'You own your car because somewhere in your country's infrastructure, there is document that says that you do own it, and everyone else believes in that document.' A seminal book on the subject.

The book is redundant and definately simplistic in its approach and solutions, but the research is important and compelling enough to warrant 5 stars. Anyone seriously interested in economic development, especially the macro gurus who think low inflation and balanced budgets is all capitalism needs to take off, should be aware of this research.
Unfortunately, the lack of point data and "hard" analysis may keep its importance from being recognized by the usual lot academic snobs that for some odd reason seem to dominate development debates.

DeSoto presents an elegant model for the creation of capital in a society. His examples focus on the infrastructure needed for capital formation, and they are clearly presented and explained in a historical context when applicable. In a field (economics) that is riddled with disconnected academics, DeSoto pleases the reader by presenting a model based on primary research. The reader also will enjoy DeSoto's clever phrasings and sentence structure. Thorough citations will aid a learner in the advanced study of the argument, while clarity and elegance in support work will please a reader considering for the first time why capitalism seems to thrive only in the West.

Insightful and written in a captivating style, Hernando De Soto in 'The Mystery of Capital' explains that poverty lingers in the third-world because of its failure to create a system of recognizing and organizing each citizen's property that will allow for it to be converted into dynamic capital that can produce wealth. For instance, in much of the third-world, if you don't have a legal address than you can't use your house as collateral for a loan to open a business. However, despite his accurate analysis of the third world's problems, he 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 his solutions he offers to developing-nations.
He references the history of western nations and indicates that they once had conditions and problems similar to 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, De Soto fails to explain why the framework for how this 'unconscious endeavor' was able to exist within the 'bell jar' of western nations. De Soto explains how western nations were able integrate their extralegal world, but he doesn't explain 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 'conscious' about converting its dead capital.
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 it not become so centralized so that it falls back into the tyranny it is resisting that will eventually impede on individual property rights and create an extralegal world that will produce more dead capital?
Part of the answer is in the U.S. 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 U.S. and in 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.
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 most nations are entrepreneurial and that the histories of western nations are similar to the current conditions of the third world. Unfortunately in the process he overlooked what made the U.S. 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.

Hernando presents a clear explaination of why capatilism fails in developing countries, and what is required for capatilism to succeed. He says that the lack of a law structure prevents the creation of capital from the real estate the "poor" posses. With a clear law and property foundation the poor wouldn't be so poor, they own real estate that could be mortgaged against and so. Being now extra-legal they are out of the system, out of the "bell jar" and can't get most of capatilism benefits.
I found the book clearly written and a real in-depth eye-opener.

This is a wonderful book. It explores both the history of capital, and how to apply historical models to third-world countries.
This book is easy to read, is constantly fascinating, and goes very fast. However, when I was done, I had a solid understanding of de Soto's view of the subject.
Highly recommended to anyone studying economics in general, or capitalism specifically.

At long last, Hernando de Soto has provided us with a sequel to his unparalleled tour-de-force The Other Path, which in merciless detail and with cool analysis described the appalling situation facing the poor in the Third World, who in fact have to fight an uphill battle against their own governments, with the only help they get from the West being trickle-down handouts. For, De Soto revealed, it was not the lack of energy or entrepreneurial capacity nor an invincible popular stupidity that produced the poverty in the Third World but governments, both national and foreign, that refused to recognize in their own citizens the spirit of entrepreneurship, their efforts to better themselves, their savings, their accumulated property, but rather wrote them off as shantytown riff-raff whose only hope was birth control. De Soto tore the lid off of this world and forever changed how we look at the poor there. And now he has published the further development of that book, purporting to provide a philosophical foundation for the phenomenon of capital, telling us again why it is the poor's last best hope, on the material plane, for the future.
The great merit of this book is De Soto's philosophical elaboration of the way fixed, established, secure property rights pave the way for the development of capital proper, that is, property as the means of obtaining credit in order to generate further investment. Property thus generates a multiplier effect that produces compound economic growth. This function of property was recognized most thoroughly by Marx, De Soto argues, and provided the basis for the Marxist critique of capitalism. But, De Soto says, Marx had it exactly backwards: it is precisely this function, succinctly captured in the term capitalism, that has proved the salvation of the lower classes of society. For when they too are able to have their property recognized before the law, they too can enter into the capitalist equation and benefit from material prosperity. This is a lesson that was learned in the West during the Industrial Revolution, and a lesson that must be learned in the Third World today. For the same kind of revolution is occurring there that occurred in the West a century ago.
But there is more. De Soto claims to teach us a great lesson in this book, above and beyond what he presented in The Other Path; and that is that extralegality, the informal sector of unrecognised property and its accompanying do-it-yourself judicial institutions, is a universal phenomenon which was only overcome in the West in the 19th century....
So De Soto argues that it was the customary-law orientation of pre-modern European society that lay at the heart of the problem of extralegality, and that overcoming this customary-law approach, as was accomplished in the 19th century in continental Europe through the codification of the private law, is the key to solving the problem of extralegality in the Third World today, and thus unleashing there a capitalist revolution that will sustain economic growth and bring Third World economies into line with the West.
But is De Soto fair in blaming customary law for extralegality and informality?
De Soto's argument hinges on equating the integration of property systems with the establishment of unified law codes. These two are, however, far from being identical. In fact, the one - an integrated property system - can exist quite independently of the other - a unified, centrally administered legal system. The one provides information about property that can be accessed centrally. The other provides protection of property. Information and protection are not the same, although protection - security - of property does provide the basis for valid information about property. Without security of property, there can be no accurate information about property, because ownership, the source of information about property, is not established.
But what does this have to do with extralegality? Security of property is not the discovery of the last hundred or two hundred years; yet it is this, or the lack thereof, that has created the situation of extralegality in the Third World. Owners cannot get recognition of their property before the law and before the courts of their own country: this is the problem. The problem is not that owners cannot get their properties properly advertised, or that they cannot adequately publish information about their property to potential buyers. But it is precisely these two categories that De Soto runs together in his argument.
Thus, the "extralegality" De Soto criticizes in the Western past is not the extralegality currently being experienced in the Third World. In fact it is not extralegality at all. It is another form of legality, that of customary law rather than centralized legislation. But De Soto never makes that distinction. He simply argues that because there was no centralized legislation and codified law, then there was extralegality. But that is a far cry from systems of law in which property rights are made into high hurdles that only the well-heeled and well-placed can take advantage of; in which great swathes of the population are excluded from the legal system altogether. That is the kind of exclusionary legal order that typifies the Third World, that makes extralegality a necessity for survival, and it is the product not of custom but of legislation and codification and law codes.

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.