The Clash of Me and We
Near the end of this eye-opening book, the renowned Peruvian economist and businessman Hernando de Soto trots out Bill Gates, the world’s richest man, to bring home his argument about the world’s poorest people. Apart from his personal genius, how much of his success is due to his cultural background and his Protestant ethic’? And how much is due to the legal property system of the United States?
For now, hold those questions about the Microsoft king and consider de Soto’s macro-explanation of why poor nations haven’t capitalized on capitalism. It is not because of laid-back cultures perpetually waiting for mañana. Cities of the third world and former Communist bloc are swarming with entrepreneurs. And it is not because the poor are everywhere starved of assets. According to a grand calculation by de Soto’s research team at the Institute for Liberty and Democracy in Lima, the value of all real estate held by the poor of these lands is at least $9.3 trillion. That is 93 times the amount of all handouts by Western democracies to poor and struggling nations since the Communist crackup in 1989.
The hitch: this property is held but not exactly owned by the poor. More than 80 percent of all their ownership in these countries is not legally represented in property documents. It is extralegal and practically impossible to register in most bureaucratic venues. They [the poor] have houses but not titles; crops but not deeds; businesses but not statutes of incorporation, the economist explains in his typically lucid way. Why is that important? Because most formal property can be used as collateral for credit, for one thing, which spawns capital, the stuff of capitalism. This is routine in the United States, where the single most important source of funds for new businesses is a mortgage on the entrepreneur’s house. In much of the developing world, the house is just a house. De Soto calls it dead capital.
Basically, the impoverished world lacks the legal institutions of asset ownership. He speaks metaphysically of a vast hidden process that connects all these assets to the rest of the economy, including lenders, creditors and suppliers, beyond narrow circles where people know and trust each other. Thanks to this representational process, assets can lead an invisible, parallel life alongside their material existence. They can be leveraged on the open market. This is the mystery of capital, unraveled in the formal property systemwhich we in the West take thoroughly for granted. De Soto reminds us that the United States was once a developing country. Squatters battled for rights to their land, and gold miners warred over their claims in a legal quagmire like that in the third world today.
Capital is the top quark of this parallel universe. Not really material, capital is an abstract concept, pure potential, as classical economists peculiarly understood. It is the house that transcends the house. Even Karl Marx (who gets a clean shave in these pages) waxed almost theological about the difference between mere things and capital. For Marx, a table could be made of something material, like wood, but as soon as it steps forth as a commodity, it is changed into something transcendent. It not only stands with its feet on the ground, but, in relation to all other commodities, it stands on its head, and evolves out of its wooden brain grotesque ideas, far more wonderful than table-turning ever was.
Because poor countries don’t have the juridical keys to unlock these mysteries of capital, most of their citizens are bolted out of what de Soto calls the bell jar of successful capitalism. This unlooses a remarkable case against globalization as usual, by so earnest a capitalist.
It makes no sense continuing to call for open economies without facing the fact that the economic reforms underway open the doors only for small and globalized elites and leave out most of humanity, he submits. At present, capitalist globalization is concerned with interconnecting only the elites that live inside the bell jars. De Soto even predicts that Marx will break out of history’s broom closet. Marxist analysis will once again expose the contradictions of capitalism, which can self-immolate by concentrating capital in few hands.
De Soto’s research has begun to inspire reforms in Peru, where he once served as an advisor to President Alberto Fujimori, and in other countries, among them Egypt, Haiti and the Philippines. Some think he leaves too much out of his development agenda. Good property systems would be great, but so would liberal democracy and uncorrupt government.
One of my quibbles is that de Soto gives short shrift to culture. I’ll concede his point that Mexico City taxi drivers and Filipino rice farmers do not lack the entrepreneurial spirit. But that’s not the same as arguing that all major cultures can get with the individual-property-rights program, as he does. Think of African villagers who see themselves as collective guardians of land entrusted to them by their ancestors. Or rural dwellers in India who believe that knowledge about ancient herbal medicines belongs to everyone and should not be patented by drug companies (which are doing just that under the shelter of global trade rules).
Then there’s de Soto’s truncated view of capitalism’s success in the West. Leave aside his assumption that the poor have been fully integrated into the American economy. His bottom line is that America might have remained a developing nation if not for the property-law system that came together in the second half of the 19th century. He is persuasive, but the tale ends too early. His chapter The Missing Lessons of U.S. History misses the part where industrial capitalism (even with good property law) is almost upended by its contradictions. He overlooks the labor organizing and progressive reform that eventually threw capitalism back into balance. That too is a missing lesson for the global economy.
Quibbles and qualms aside, de Soto’s singular insight presses beyond the margins of his book. His analysis gives no quarter to the myth of the New Economy genius whose riches owe scarcely anything to society and nothing to government. Which gets back to de Soto’s questions about Gates. Where would he be without patents to protect his software, enforceable contracts and limited liability? Quite possibly in his parents’ garage, messing with computer games on Saturday night, if de Soto has it right.
The message lurking here is that wealth is socially constructed, which means it should be held accountable. There is, to use Catholic talk, a social mortgage on all private property. The Mystery of Capital doesn’t go down that road; it doesn’t have to. De Soto has traced a distinctive path to a global marketplace that puts the yearnings of the poor above all else. In that way, he supplies material for a credible, capitalist theology of liberation.
This article also appeared in print, under the headline “The Clash of Me and We,” in the February 19, 2001, issue.
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