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 20^th/21^st 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 3^rd 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.

2. 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.

3. 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.

4. The Missing Lessons of US History. In studying American history, de Soto observed that it was in the same situation that many 3^rd 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.

5. 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.

Crisis and opportunity in the May 14 Philippine elections

The upcoming May 14 elections provide many opportunities. Unfortunately, many of these opportunities are not for the country. Aging, education-deficient B-actors and singers, disgraced politicians, Marcos loyalists, vacuous oppositionists, and rent-seeking administration candidates fill the roster of political applicants. Of the 37 Senate candidates, only a handful led by Joker Arroyo and the Ang Kapatiran candidates are worthy of the Filipino vote. In Congress, at least 160 family-based political-dynasties are seeking to further entrench themselves. The stench of their sense of entitlement is overwhelming. They will murder to ensure they win. Already, the PNP has recorded 125 election related deaths. Who let the dogs out (with apologies to our canine friends)?

What options do we have amidst this game-fixing political contest? Despite the barren political landscape, there are cracks, which instead of falling into; we can use to improve our lot. All we need to do is identify and recognize the opportunities, band together, and seize it. Most of you know these already, but let me frame it this way: Let not the politicians or mass media dictate the political conversation. It is us who should put forth the ideas that address poverty and social inequality. The current climate, that of political cynicism and indifference, presents opportunities for a radical break with how things are done. The vision is known, the ideas articulated, the strategies are there. Some of these are:

1. Direct Cash Transfers (DCT) to the poor. The term for a handful of proposals to help the poor in ways that recognizes their resilience, capabilities, assets, and rights. Worldwide, there is a growing movement for a movement for a basic income guarantee (see BIG). With BIG, the government periodically provides a uniform amount to each adult permanent resident, regardless of economic and employment status, as subsistence. This amount will replace most welfare services, shrink the government bureaucracy, promote economic liberty, raise wages, and stimulate economic activity, among others. DCT and BIG initiatives have documented successes worldwide. Funding for a BIG can be sourced from more efficient tax collection, less tax exemptions, collection of economic rents (use of natural resources), savings from downsized welfare services, etc.

2. Hyperwage. The StreetStrategist (SS) aka Thads Bentulan has formulated the Nobel Prize-potential Hyperwage Theory (See HT, you will need to join the discussion group first.), which is more radical than a communist revolution or right wing junta. According to the SS, pricing human labor at its true value will launch the country into developed country status in the shortest time possible. Extending Keynesian multiplier theory into its fullest potential, higher wages with base reference point of P20,000/month for household helpers, directly transfers cash to the poor; generates higher quality productivity; increases consumption; and ultimately stimulates investment. Objections to HT such as runaway inflation, barriers to implementation, cost, etc. are discussed and resolved. For example, inflation will reach an asymptote (a physical limit). Besides, we are already paying for many First World prices (consumer electronics, foreign travel, foreign consultants, etc.). While redistributive, the rich, especially the entrepreneurs, will eventually benefit from increasing consumer purchasing power.

3. Conscious capitalism. An emerging buzzword for social entrepreneurs’ (another buzzword) use of capital. Simply, poverty, social inequity, and environmental degradation are prevalent. However, the solutions can make for good business. Alternative energy, loans to small start ups and poor communities, fair trade business, socially responsible investing (SRI) etc. have good profit potential. Using ICT (information communication technologies), peer-to-peer lending and microfinance are beginning to carve an alternative niche to the banking industry, pay day cash loans, and predatory lenders. Prosper.com ( U.S. ) for example reported at least 240,000 users and nearly $60 million in loans since 2005. Other versions are Zopa (UK), and CircleLending. Lenders earn from loan interest. With Kiva, lenders do not earn interest but they do fund livelihood projects worldwide. Kiva’s repayment rate is 100%.

Providing other financial services to the poor, aside from capital, is also needed. Remittance and payment fees are too high for the poor, their overseas relatives, or farmer cooperatives. Firms such as B2bpricenow.com have teamed up with LandBank, IT, and telephone companies to offer free e-commerce subcription services such as a trading and settlement platforms. Using SMS and working with cooperatives and local business shops, they are lowering the transaction costs for the “last mile of payment” or cash delivery to the barrio. The challenge for the expat Filipino community is the “first mile of delivery” or from the OFW to the Philippines. Gawad Kalinga’s Reunion Village, an integrated farm, retirement, husing, tourst, resort complex that is environment-friendly, will eventually have a market value of at least PhP100 Million. More affordable transportation, medical equipment and services, basic tools and machinery, housing, energy, water supply, tourism, retirement facilities, IT services, food production, medicine are among the markets that Filipinos can enter.

4. Civil society as convergence points. Because politics and government are dysfunctional at so many levels; because many of our government officials and politicians do not have transformational leadership skills; because they have not articulated a national vision; there is a yawning opportunity for those outside of government and politics to articulate and implement a national vision. As the Gawad Kalinga, RockEd Philippines, GILAS, etc. movements show, nation building starts with a sense of community. Filipinos are also active in the international internet based volunteer group called NABUUR. It could be in housing, the youth, the educational sector, the environment, artists, etc. A relatively flat organization, open source type of communication and knowledge type, national focus, creative, energized, multi-media, and mass based is reviving civil society in the country. Without waiting for anyone, they are addressing the needs of specific sectors of society. They are providing opportunities for Filipinos who want to help- and there are many- in direct ways. They have national scope with transnational links. They are collectively challenging the status quo not with anger and pessimism, but by modeling change and edifying daily heroic actions to one another (GK’s bayani sa isa’t isa). They bring to the table skills, resources, imagination, persistence, and a will to succeed. See what happens when all these groups support and get together on a national scale.

5. Cultural resources. A direct consequence or probably a cause of (you choose) of civil society is a conscious focus on our cultural resources. You can observe it everywhere. Indigenous Philippine psychology (Sikolohiyang Pilipino) is gaining ground. The arts sector is booming, as well as the music scene (RockED seems to be the premier concert promoter these days). Because of the Indigenous Peoples Rights Act (IPRA), IP groups are now more active and confident, especially in their negotiations with mining companies. The youth is active in design, outdoors, environmental, adventure travel, ICT, etc. that blend global standards with native innovations. Retirees and expats are enriching local initiatives. Futkal (football sa Kalye) in slums, Pinoy podcasts, adventure racing in the Rice Terraces, the annual Tour of the Fireflies (cycling around Metro Manila), the Philippine Hobie sailing challenge, Pinoy science and research, etc. are generating a lot of buzz. Promote culture and people run away with it with so many innovations.

6. Alternative technologies. Global warming, deforestation, regional conflicts over energy sources, increasing energy prices amidst increasing energy demand, water supply constraints, etc. are some of our challenges. However, these present opportunities. With billions living below the poverty indicator ($1/day), without adequate housing, water supply, and electricity, innovations which address these challenges have much potential. Whether you laugh at him or not, Daniel Dingel’s water car has spawned an international e-group that has built on and innovated on his original concept car. I won’t anymore hark on the economic and energy potentials of coconut, bagasse, rice, corn, recycled cooking oil, solar, wind, etc. We’re doing it already. The Enhancing Household Biomass Energy Use in the Philippines for example is a good resource. A major issue though seems to be maintenance and scaling up. Once communities purchase or receive donated equipment, i.e. water pumps, solar cells, its maintenance and replacement becomes costly. What is needed is an indigenous way of maintaining tools and equipment. Again, open source provides a solution. For example, the MULTIMACHINE tool, made out of recycled car parts is a transportable, easy to build, affordable, all-purpose machine tool, steel-rolling equipment, educational and livelihood project for rural communities. It can be used to build homes, repair water pumps, manufacture tools, etc.

These are just but a few of the emerging trends not only in the Philippines , but worldwide. The Philippines and the United States , as well as many other countries have incompetent, corrupt, and uninspiring leaders. Why haven’t these countries collapsed? It is because of its resilient and innovative citizenry. This is where change will ultimately emerge. Last year, the global warming debate was burning out (excuse the pun) because of the heavy lobbying of the oil industry. Look what happens when various sectors of society get together. Clean energy and conservation are now the IN thing.

The ultimate goal of national development is fulfillment of basic household needs, green industrialization, social equity, and a knowledgeable and cohesive citizenry. With so many challenges facing us, all we need to do is get together, innovate, and work hard. Politics is only one of several ways to achieving it. If we can’t access political power, let us remake the political landscape.

Disruptive technology and ideas are needed.