Thursday, May 24, 2007

De Soto's Mystery of Capital and Hyperwage Theory

Hernando de Soto published The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else in 2000. He is a Peruvian economist, president of the Institute for Liberty and Democracy (Peru), and consulted with the Philippines and other developing countries. De Soto is one among many economist-social scientists exploring the nature of capital and how it affects not only the economy, but other aspects of society. Because of the poverty and inequality prevalent in Peru, he explored the liberating aspects of capitalism. The other side of de Soto would be the geographer David Harvey who explored the dysfunctional aspects of capitalism. Once you read both of them (and others), you get a clearer picture of capitalism in the 20th/21st century. It may be boring to economists and businessmen, but the debates are intense among social scientists interested in globalization, neoliberalism, environmental issues, etc.

De Soto sought to explain why capitalism propelled the USA to First World status, while countries who have embraced neoliberalism/capitalism are still mired in poverty. Capitalism, to him, is the only way out of poverty; but making it work for the Third World involves addressing the five mysteries of capital. In other words, capital must adjust to the Third World setting. This involves:

  1. The Mystery of Missing Information. In the 3rd world, there are many assets/ resources that have not been “monetized” or documented/ legalized as “economic assets”. Hence, they are dead capital and their utilities are not maximized. Further, most developing countries do not have legally enforceable transactions on property rights. The West has invested time, resources, intellect, even wars to establish this property rights system. Lastly, there are so many obstacles to legality. He cited the Philippines, where it takes 168 steps/13-25 years to formalize informal urban property.

  1. The Mystery of Capital. Capital facilitates transactions. The West maximizes capital by the property rights system. It (a) fixes the economic potential of assets, (b) integrates dispersed information into one system, (c) makes people accountable, (d) makes assets fungible, (e) networks people, and, (f) protects transactions. All these facilitate business, investment, etc.

  1. The Mystery of Political Awareness. The history of the economic development of the West is filled with extra legalities, underground economy, migration to cities, rapid, unsustainable urbanization, etc. The elite used the law to protect their interests. But emerging property rights raised expectations while the informal/underground sector, along with the urban problems forced the elite to make laws to meet the rising expectations of the populace. They had to respond to the sea of change. Increasing economic activities engender change and somehow redistributes power.

  1. The Missing Lessons of US History. In studying American history, de Soto observed that it was in the same situation that many 3rd world countries are in today. However, when Americans as a society recognized and integrated extralegal property rights, this paved the way for the expansion of the US market economy and production of capital.

  1. The Mystery of Legal Failure. The cost of being legal determines whether people remain in the informal/underground sector. Thus, the State should make being legal attractive. Bad legal and administrative systems undermine established property systems as evidenced in the developing world. “Law is the instrument that fixes and realizes capital. In the West, the law is less concerned with representing the physical reality of buildings or real estate than with providing a process or rules that will allow society extract potential surplus value from those assets. Property is not the assets themselves but a consensus between people as to how those assets should be held, used, and exchanged” (de Soto 2001:157).

De Soto ends by emphasizing:

  1. “The situation and potential of the poor need to be better documented
  2. All people are capable of saving.
  3. What the poor are missing are the legally integrated property systems that can convert their work and savings into capital
  4. Civil disobedience and the mafias of today are not marginal but the result of people marching by the billions from life organized on a small scale to life on a big scale.
  5. In this context, the poor are not the problem but the solution.
  6. Implementing a property system that creates capital is a political challenge because it involves getting in touch with people, grasping the social contract, and overhauling the legal system” (p. 227).

Filipinos know all of these already, but de Soto wrote it so he’s the often cited one.

In the years since de Soto tested his thesis, he has had mixed results. The main criticism is that his prescription is not a sure fire way to prosperity. Some of the poor who got loans from their newly documented property, entered into business then failed. Loan interests were sometimes too much. So, some got into deeper debt and once again became squatters.

The main contribution of De Soto is in articulating the nature and potential of capital in a developing world setting. It lays the groundwork for HT. Achieving the form of capitalism that benefits the majority of Filipinos, however, will entail a host of institutions, social movements (Gawad Kalinga working with the poor), political will, servant leadership, national vision, etc.

Thus, my question on HT is whether Philippine society has the institutions to implement it. That is why I like to hark on how social movements such as GK or those promoting direct cash transfers/ basic income guarantee can help HT.

HT requires legislation as written by the SS. How do we get Congress to legislate something that will dilute their power?

Attending to economic issues entails social/cultural work.

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