1

The Mystery of Capital

Group 2 Members

David Oburu, Maame Ansaa Ansah-Obiri, Tellisa Amanfu, Jacques Wemegan, Oluwapeyibomi
Oyelohunnu
ABOUT THE AUTHO

HERNANDO DE SOTO POLAR was born on the third of June in the year 1941 in Arequipa,

Peru as the first son of a Peruvian diplomat. After the 1948 coup in Peru, his parents fled with both

him and his brother Alvaro who would later serve in the UN’s Peruvian Diplomatic Corps, to

Switzerland where De Soto began his education at the International School of Geneva. He also

completed his post-graduate studies at the Graduate Institute of International Studies in Geneva

after which he worked as an economist, consultant and corporate executive. He also served as the

governor for Peru’s Central Reserve Bank (LFB, 2013). He returned to his home country in the

year 1979 at the age of 38 years and met majority of the country’s population living in poverty

owing to the unstable political history of the country. He decided to retire early since he had made

quite a fortune working in Switzerland and other parts of Europe. He formed the Institute for

Liberty and Democracy in 1980 and dedicated the rest of his life to his research on salvaging the

economies of poor countries. He authored many books such as, the Other Path, the Mystery of

Capital and helped in the development of blockchain technology. He served as an economic

advisor to many world leaders especially in the Middle East and North of Africa.

His work has won him countless awards worldwide some notable among them being the

Milton Friedman Award for Advancing Liberty in 2004, the Adam Smith Award in 2002 and most
 2
The Mystery of Capital

recently the Global Award for Entrepreneurship Research in 2017 (Springer Link, 2017). He

currently works as the co-Chairperson for the World Justice Project which seeks to promote

development and equity around the world and he also manages his organization, the Institute for

Liberty and Democracy in Lima, Peru.

THE MAIN MESSAGE OF THE AUTHOR

The main message of De Soto is that politicians should take measures to provide the informal

sector with access to the formal economy by granting the formal property rights and to break down

bureaucratic barriers. De Soto believes that when poor people are given formal property title, they

will be able to have credit and escape poverty.

De Soto believes that the answer to the question why capitalism triumphs in the west and fails

everywhere else is not cultural differences or genetic heritage but the inability of the Third world

countries to produce capital. Per the research in Asia, Africa, Middle East and Latin America, by

De Soto and his colleagues, they found out that most of the poor already possess the assets they

need to make a success of capitalism but unfortunately the poor people hold these resources in

defective form which he terms as ‘dead capital’. This is because these assets cannot be readily

turned into capital.

More still, De Soto, came up with the five mysteries in his attempt to answer question why

capitalism thrives in the west and fails everywhere else namely; The mystery of missing

information, the mystery of capital, The mystery of political Awareness, The missing lessons of US

History, and The mystery of legal failure: Why property Law does not work outside of the West.

De Soto devotes a chapter to each of the mysteries and proceeds to explain in detail as discussed

below.
 3
The Mystery of Capital

THE MYSTERY OF MISSING INFORMATION

According to Hernando, while charitable organizations put much emphasis on the poverty of the

poor, him and a hundred of his colleagues from six different nations have gone out to the streets

and countrysides of the 4 different continents to do the accountability of the savings of the poorest

sectors of a society. They found out that the quantity was huge but most of it was dead capital. In

his view, this is what he refers to as the missing information.

Furthermore, De Soto, addresses the obstacles to legality. In this case, he argues that the effort the

poor people must do to obtain legal or formal property or to start a formally recognized business,

is so tremendous, that their only choice is to live in informality. For example, in Egypt, it takes 77

bureaucratic procedures at 31 public and private agencies, and 5 -14 years to acquire a piece of

land with no guarantee that the deed will not be revoked by the next ministry to process paperwork.

In chapter 7, De Soto continues to argue that, only capital provides the means to support

specialization and the production and exchange of assets in the expanded market. He further

believes that it is capital that is the source of increasing productivity and hence the wealth of

nations

THE MYSTERY OF CAPITAL

This chapter is the key of De Soto’s book. Here, he seeks to unravel this mystery by finding what

makes capitalism quite workable in some countries and not in others. The question is not of

whether the same amount of capital exists in both areas, rather De Soto points out what he calls

‘Dead Capital’, which is capital that exists in underdeveloped or ex-communist nations that

someway has not been made productive. Thus, an almost equivalent amount of capital in the form

of houses, natural resources and wealth exists in these countries, however they have not been made

productive because of the absence of the needed processes to ensure this. De Soto argues that even
 4
The Mystery of Capital

for Western countries that have been able to find a way around the generation of capital, they have

been unable to teach this to other undeveloped countries.

To find the root of the problem, one must first find the cause. The author revisits the historical

definition of capital in terms of what it was used to represent. In the medieval era, capital was used

to describe herds of cattle and livestock, these were mobile and could be quantified. But again,

they provide even more products, like hide, leather, eggs and milk. De Soto therefore, defines

capital as the force that raises the productivity of labor and creates the wealth of nations.

De Soto’s arguments in the book also touches on theories by renowned economists Karl Marx and

Adam Smith. They both believed that capital was the central driving force of any market economy.

It was because of this belief that the word ‘capital’ became one showing pre-eminence.

Regarding property effects, De Soto studied some effects of the existence of formal property

systems in the West that other countries lacked and their effect on the ability of Western countries

to generate wealth. He argues that this formal system gave them a great advantage over other

countries and he summarizes these effects in six main points namely, Fixing the Economic

Potential of Asset, Integrating Dispersed Information into One System, Making People

Accountable, Making Assets Fungible, Networking People and Protecting Transactions

The Strong Link Between money and Capital

Capital for centuries has been quite mysterious since it cannot be perceived physically but rather,

represented in the human mind as the existence of a potential for wealth generation. Thus, it

became necessary to create a means of representing this wealth as well as quantifying it. This

meant that there was a need to find a means of measuring this wealth or property to make people

accountable and take note of wealth generation as well. The author argues that money is a way to
 5
The Mystery of Capital

quantify a person’s property and even facilitate exchange. Therefore, money alone cannot work,

one requires some rights over a property to earn any amount of money.

Braudel’s Bell Jar

De Soto describes the case of capitalism using an analogy created by French philosopher Fernand

Braudel. Braudel questioned the stagnant nature of capitalism even in the West as it seemed to

benefit only the wealthy in that society. These privileged few were able to use capitalism to their

benefit by being more productive, hence creating more wealth. Thus, this minority lived quite

separately from the rest, as though they were in a bell jar cut-off from the rest of the world. It was

quite astounding to him that physically, both people benefiting from capitalism and the

underprivileged lived in the same society, however when it came to the phenomenon capitalism it

could not be shared as a piece between two people from the opposite sides.

Using this analogy, the author shows the same disparity that exists between Western countries and

underdeveloped ones. He believes that the real reason why this gap exists is because of the

existence of a formal property system in the west and not in the Third world nations. These systems

are however available to only this privileged few leaving the rest to live outside the bell jar.

THE MYSTERY OF POLITICAL AWARENESS

In this chapter, the argues that the problems that are being faced by developing countries and ex-

communist countries face for example, presence of beggars on the streets in the cities, corruption

in government institutions, unemployment, presence of shanty towns or slams etcetera, have

already been faced by the European countries and the United States during the period of the

industrial revolution and were only overcome when the governments of these nations decided to

integrate the extralegal sector into their economy rather than fight it. He believes that these
 6
The Mystery of Capital

problems can be solved if the governments of developing and ex-communist nations choose to

create systems that allows them to adapt to the continual changes in the revolutionary division of

labor by fixing the outmoded system of legal property.

THE MISSING LESSONS OF US HISTORY

The fifth chapter of Hernando de Soto’s “Mystery of Capital” focuses on two things. (1) Allow

the reader to appreciate the journey the country went through to have “extralegal” —social

contracts made outside the boundaries of the law— embedded in the law and (2) give emerging

and post-communist countries advice as to how they can achieve more capital using the American

Method. The author explains that when early America was first discovered, squatting was a big

issue. In addition, Squatting is the appropriation of land by individuals that do not own it by means

of the law. Although under the English law squatting was illegal, squatting became common for

settlers in the United States because they did not experience any resistance when they initially

arrived. De Soto believes that it is not wise for governments to disregard “extralegal” because they

back most of the populations’ assets; not taking them into account in the legal system creates dead

capital, which will never help create wealth. Concluding his chapter, he advocates for an

integration of the extralegal arrangements in the laws of developing countries while not copying

verbatim the model of the US.

THE MYSTERY OF LEGAL FAILURE

In this chapter, De Soto identifies that the main reason Property Law has failed to work outside of

the west is because developing nations have been copying the property laws and regulations of the

west to provide their societies with a framework for the generation of wealth. De Soto attributes

this to 5 basic misconceptions that the governments of these countries operate under:
 7
The Mystery of Capital

1. All people who take cover in the extralegal or underground sectors do so to avoid paying

taxes.

2. Real estate assets are not held legally because they have not been properly surveyed, mapped

and recorded.

3. That enacting mandatory law on the property is sufficient and governments can just ignore

the costs of compliance with that law.

4. Existing extralegal arrangements or ‘social contracts’ can be ignored.

5. You can change something as fundamental as people’s conventions on how they can hold

their assets, both legal and extralegal, without high-level political leadership. But to lift the “bell

jar”, the most critical of all the misconceptions that must be removed has to do with the method

by which people’s conventions on the property must be changed. De Soto establishes that this can

only be achieved through implementing Legal Changes through political means. Therefore, the

steps to this capital revolution, something De Soto calls the “Capitalization process Movement

from Dead Capital to Live Capital” are provided by two major components of what De Soto

calls the Legal challenge and the Political Challenge.

Legal Challenge

The Legal challenge as outlined by De Soto encapsulates the measures by which useful legal

frameworks can be created to create a good property system.

Political Challenge

The Political Challenge surmises how the legal theorizations of the previous challenge can serve

as an anchor to the physical properties’ that are of interest to members of society. De Soto believes

that this aspect of creating the useful property system can be surmounted by acquiring a political
 8
The Mystery of Capital

leader who takes the perspective of the poor, co-opts the elite and deals with the legal and technical

bureaucracies that will be put forth by the beneficiaries of the current inhabitants of the bell jar.

A Critique of De Soto’s work

Although De Soto tells developing countries how to enrich themselves through capitalism and is

revered in the high spheres of politics in the world, he still has a few critiques. According to Paul

Van Der Molen (2012), there are at least six recurring critiques that De Soto faces. For example, De

Soto neglects in his book instances where titling fails to work. More still, He “neglects the role of

customary tenure and management as existing legal institutions, although not under the formal

‘bell jar’. He “neglects that formalizing is not a simple confirmation of informal rules. It legalizes

thievery, dispossession and colonial grabbing and neglects the gender issue”. De Soto also

“neglects that the ‘poor’ are not a homogenous group (there are ‘rich’ poor, and ‘’poor’ poor) so

that single solutions will not work. According to Van Der Molen (2012), De Soto does not provide

adequate evidence for his statements. Thus, based on the critique of De Soto’s work, Van Der

Molen concludes that, “De Soto’s ideas would have gained better acceptance if he had elaborated

and explained and explained his statements”.

Contributions to the development of the ‘Good Society’ debate

Upon deliberation on the ideologies of Hernando De Soto in his book The Mystery of Capital, we

believe that pertaining the four poles of The Executive’s Compass as proposed by James Toole,

De Soto advocates for the efficiency of the economy and Liberty of the poor. In the research he

conducted with his colleagues in some developing countries and ex-communist nations, he found

that a lot of economic activity takes place in the extralegal sector of the economy and also, a large

portion of these countries’ GDP were not accounted for since they were in the extralegal sector of

the economy. Due to this, he states that if these businesses that operate extralegally because they
 9
The Mystery of Capital

are not catered for by the law of the nation were to be integrated into the law, then the profit they

make could be taxed by the governments. In addition to being taxed by the government, these

businesses would also be able to obtain loans for the expansion of their businesses thereby

increasing the efficiency of the economy.

Implications for Contemporary Leaders

1) Leaders should understand that a great reason why the poor remain poor is because of the

absence of property rights and lack of legal recognition of their capital (Dead Capital) rather than

their inferiority in being. Furthermore, Leaders should know that formal property rights are the

key to division of labor and an increase in productivity.

2) Leaders should see that existing social contracts should serve as the base for the creation of

New Legal Laws rather than Mandatory passing of laws. More still, Leaders, the users of

capitalism, should know that it is a system that provides the tools required to cater for the desires

of freedom, compassion for the poor, respect for the social contract and equal opportunity rather

than just an exploitative system.

3) Leaders should know that formalization by the government in certain aspects of capitalism

i.e. property and information protection is beneficial for the socio-economic system. In addition,

Leaders should see that geographical and technical mapping is not enough to solve the issue of

property rights alone.

4) Leaders in reforming the legal process of land rights, should target reform minded lawyers

that understand the implications of law on the common man and see law as fluid and not rigid.

5) Political Leaders must have the support of the Proletariat and a sizeable part of the

Bourgeoisie before enacting reforms.

 10
The Mystery of Capital

How it informs the group’s leadership thinking and development

1. De Soto’s writing offers the African continent a practical way of generating wealth from

its vast resources. It allows us as a group to see the economic growth of the continent not

as a distant dream but as one that can happen if authorities are able to put the right structures

in place to facilitate this.

2. De Soto’s doctrines on property rights also relay on the idea of accountability. When

leaders are made more accountable in society they tend to make better decisions for fear of

punishment. As a group we are taught to take absolute responsibility for our actions.

3. We have learnt as leaders that, we should ensure inclusivity in a society in order to foster

development and growth. For example, the laws that we make should favor every citizen

in a society such that they are able to achieve their end goals.

4. In our opinion, we have realized that Capitalism is one of the ways to build a good society.

Therefore, there are other ways that nations can choose to apply to achieve development.

For example, societies can decide to be a communist nation or socialist nation, but they

must have clear developmental policies. And this calls for leaders to strike a balance among

these approaches to achieve a good society.

5. We have also learnt that as leaders, we should not remain stagnant on one method in regard

to promoting growth and development of a society, but we should embrace new changes

that seem to work for our economies.

 11
The Mystery of Capital

References

Soto, H. D. (2000). The Mystery of Capital: Why Capitalism Triumphs in the West and Fails

Everywhere Else. New York: Basic Books.

Hernando de Soto’s Biography | Cato Institute. (n.d.). Retrieved March 14, 2018, from

https://www.cato.org/friedman-prize/hernando-desoto/biography

Hernando de Soto: recipient of the 2017 Global Award for Entrepreneurship Research | SpringerLink.

(n.d.). Retrieved March 14, 2018, from https://link.springer.com/article/10.1007/s11187-017-

9948-5

Hernando de Soto Polar |. (2013). Retrieved March 14, 2018, from

http://www.leadersforbusiness.com/hernando-de-soto-polar/

The economist versus the terrorist. (2003, January 30). The Economist. Retrieved from

https://www.economist.com/node/1559905

Soto, H. de. (2001). The Mystery of Capital: Why Capitalism Triumphs in the West and Fails

Everywhere Else. Black Swan.

Van Der Molen, P. (2012). After 10 Years of Criticism: What is Left of De Soto’s Ideas?