The mystery of capital

Mystery of Capital

In his book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere else, Hernando De Soto discusses his theory regarding the state of capitalism in the West and elsewhere following the end of the Cold War. De Soto analyzes the differences between Western deployments of capitalism which manage to include the vast majority of citizens in the economic cycle and those developing nations where large amounts of property and wealth are not officially recognized or recorded. De Soto sees this difference as the crucial factor contributing to poverty and inequality, and examining how De Soto views the relationship between government and economics will help to reveal the intricacies of his argument.

De Soto argues that the ideal role of government is the maintenance of property rights, and in the case of developing countries, transitioning "dead capital," which is that capital existing outside of the politically organized and protected economic sphere, into "live capital," which is capital existing within the official economic order and thus capital whose ownership is recorded in official records (De Soto 158). De Soto argues that live capital exists under a kind of "bell jar" which allows the owners of that capital far greater political and social freedom than dead capital, so the role of government is to expand or lift that bell jar in order "interact with extralegal arrangements outside the bell jar to create a social contract on property and capital" (De Soto 158). As a capitalist it makes sense that De Soto argues that the ideal role of government is to protect private property, but what is particularly important about his argument is the attention to fact that "the real task in developing and former communist countries is not so much to perfect existing rights as to give everyone a right to property rights -- 'meta-rights,' if you will" (De Soto 158). So, while his definition of the ideal role of government is relatively straightforward, his analysis demonstrates that in many instances where capitalism has been at least partially deployed, this ideal role has been impossible to attain due to the difficulty of integrating and building capital.

According to De Soto, countries build capital by maintaining easy and ubiquitous accounting of private property, because "if you think about it, it is property representations that allow entrepreneurs to simulate business strategies to grow their companies and build capital," and "once assets are in a formal property system, they endow their owners with an enormous advantage in that they can be split up and combined in more ways than an Erector set" (De Soto 58). Thus, countries build capital by ensuring that citizens are able to easily understand the value of their possessions and have access to the advantages only afforded through a robust system of property management and rights. In this view, the role of the government in the building of capital is to offer the logistical and bureaucratic structure in which individuals and corporations can effectively deploy and grow their capital. This reveals an important connection between capitalism and participatory governments, and a look at how De Soto views the relationship between democracy and capitalism further demonstrates how countries, and especially developing countries, can more effectively grow and protect capital.

Naturally, De Soto views democracy and capitalism as two forces existing in a symbiotic relationship, but only when the political and economic systems are integrated at the same level. This means that the disparate property systems of developing countries must become "interconnected in a larger network" because only then can they "become tremendously powerful," thus incentivizing citizens to participate politically (De Soto 72). The relationship between democracy and capitalism can serve to support and refine each one, but in many developing democracies "what national leaders are missing is that people are spontaneously organizing themselves into separate, extralegal groups until government can provide them with one legal property system" (De Soto 73). Political democracy cannot flourish so long as large portions of the population are precluded from accessing the economic protections and rights provided by that political organization, because only when citizens' property is protected and they are subsequently invested in the government both personally and commercially "can government begin to administer development instead of heroically rushing to plug each and every leak" (De Soto 72). De Soto's main critique of many developing democracies, then, is that their institution of capitalism and the development of property rights have not occurred on the same scale or to the same extent as the institution of democracy, thus leading citizens to develop their own economic organizations, and subsequently, retreat from the public sphere as well, creating a vicious cycle in which government becomes less and less receptive to the needs of its citizens, and the citizens retreat further and further into localized, extralegal organizations.