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The Mystery of Capital

The Mystery of Capital by Harnando De Soto is a summary of the economic situation in developing countries. The author explains why some countries succeed in capitalism, while others fail. He suggests numerous methods that developing economies may adopt to remedy their economic situations. De Soto says that contrary to popular believes that economic success depends on cultural differences, this is not always the case in most countries. De Soto continues arguing that success of any society depends on constitutional and legal frameworks of property and property rights. According to the book, every developed country at one point or another went through transformation from informal economic systems of owning property to formal unified ones. Such systems allowed people in the west to own wealth. The book is persuasive, and redefines the meaning of capital, and suggests a way to a major revolution in the world’s economy. This paper gives an in-depth analysis of the use of private property rights and corresponding legal frameworks that empower the aspect of the private ownership of property. The paper criticizes the author’s assertion that the absence of comprehensive legal frameworks regarding the private ownership of property is the cause of economic failures in most developing economies. Criticism is also directed at the entire book with a focus on legal rights and private property rights.

De Soto in his book, Mystery of Capital, says that capitalism is a sure way to economic success. In the book, he writes that the poor are not actually poor, but it is because of the lack of necessary laws governing what they posses. In the western world, everything that is owned is properly documented. Laws are enacted in such a way that every aspect of property is owned perfectly. There are corporate laws, copyright laws, and these regulations, which encourage innovation. They serve as incentives and reward innovation and creativity. However, this is not entirely correct. Some legal statutes that give people absolute ownership are detrimental to the society. Copyright laws are a major impediment to the society’s economic growth. They encourage and promote monopoly. The provision that allows people to solely own products of their creation kills creativity. The fact that a person has developed a product does not mean that somebody else cannot build on it and even make it better. Laws that guarantee absolute ownership limit people’s participation in economic affairs in their countries (Soto, 2000).

In his research, the author notes that incentives, especially financial ones, inspire people. People tend to work hard, take risks, and venture into businesses, because they are assured of something tangible at the end of the day. According to the book, these businesses are the ones that contribute to a large extent to the economic growth in the society. However, the situation in poor countries is totally opposite. People literally own what they do not have. The author attributes the absence of necessary private ownership laws to the heritage of British laws. De Soto noted that most countries modeled the British style of administration, which encouraged only a few to own property at the expense of the native population. As a result, these countries ended up with capitalism on the one hand and socialism on the other hand. Capitalists included the ruling class and the few, who were sympathetic to their establishment. This scenario has exacerbated poverty in developing countries. It has led to the emergence of a class society, where those at the helm are filthy rich, while those at the lower cadre wallow in abject poverty.

According to the author, the majority of people do not have the power to own property. They own houses built on land that is not theirs; they own businesses that are not recognized by the law. It is the lack of necessary laws that has made people in poor countries to ape almost everything that happens in the west with little success. They failed to turn around their domestic market economy. Capitalism transformed the status of the United States and other western countries as rich ones into one of the world’s stable economies. Most countries of the world have wanted to borrow the American example and replicate the same capitalism principles in their countries to spur economic growth. This was easy for these countries: the journey to capitalism was difficulty with little success to most countries that inherited British style of leadership. Many countries, including Russia, Haiti, and Egypt, have not succeeded in building capitalist economies. Capitalism can only work in the United States. The American society is the only classic example, where capitalism can work. It seams that there are many underlying factors that affect the ownership of land and not just legal frameworks as it is claimed by De Soto (Soto, 2000).

The author provides details how capitalist states have nurtured big multinationals and other strong business establishments that invest almost everywhere over the globe. Leaders from poor countries have employed every strategy at their disposal to lure this multinationals to invest in their countries. Economists warn that capitalists come with mean strategies to siphon from the poor. They allege that foreign investors repatriate profits back to their home countries. In essence, the impact of foreign investments in poor countries is little contrary to the author’s view that foreign direct investments are a source of many economic problems in most developing economies. Foreign investors have huge financial and technological muscles that local investors can not match. Thus, they are a threat to local investments, which are crucial for economic development.

The book states that in the capitalist economy, it is what others call mean strategies that are needed to ensure that people rightfully own what is theirs. Human beings are capitalists in nature. Capitalist strategies motivate people, make them take risks, spur innovation and build economies. According to the book, socialism was not appealing, because it did not provide for the individual ownership of properties contrary to human nature. People want to own their own things. Humanitarian organizations have demonstrated misery and the state of helplessness that poor people find themselves in under capitalism. From the author’s point of view, it seams that no one cares to know issues concerning the power to own property, including land. De Soto says that through the research carried out by him, a team of about one hundred people traversed the world to find out how much do the poor in the society own. According to the book, findings were overwhelming. The poor in most societies own so much as compared to the western world. The only deference is that they do not have the right of ownership. In other words, they have dead capital (Soto, 2000).

The book suggests that for the poor countries to transform their economies, they need necessary laws for people to own property. When individuals own property, they can acquire more wealth. Resources enable one to participate in economic matters of the society. That is the essence of capitalism. It benefits those, who contribute, as opposite to those, who do not contribute. The author rebukes experts, who criticize capitalism, and cautions poor countries to think outside the box and come up with suitable structures to transform their economies. They sight an example, whereby rich countries have conspired to deny poor countries an access to their rich markets to keep poor countries in perpetual poverty. In the book, the influence of capitalism is virtually observed everywhere. It is like every country strives for setting a capitalism-based economy.

The book gives an account of how the question of capital dominated the minds of many thinkers in the last centaury. They stated that capital is nurtured in an environment that recognizes the owner, which focuses on the potential of what they own, as opposed the material value. In capitalist economies, one should estimate the potential of everything. De Soto points out that in rich societies, market economies have proved successful and spread all over the world, because systems of those countries are integrated into a single official representative system. The author adds that accountability is crucial in any economy. People should be hold responsible for what they own, and property interests should be left out. This provides a sense of security that cushions potential investors. Fungible assets should be made available and the red tape in asset acquisition should be reduced to make people acquire them easily. There should also be mechanisms in place to facilitate networking. Communication should be easier, and information must be easily accessed. People should be allowed to transport and travel faster to their working places. Protection laws should be strengthened, transactions should be secure. Rich nations allow their people to move large transactions with minimal charges.

Almost every person wants to gain from capitalist economies. In the book, there are details of how poor countries desperately try to come up with policies that favor capitalism, but most countries seam stuck in their quest. They have no idea how wealth has been created in the west, creating a connection between real life situations and enacting laws to support those realities is an impediment to most poor societies. People in developing countries are not actually poor. In fact, they are capitalists and own property. They save for the future and what they lack is necessary property rights and laws to back up their possessions. With legal frameworks governing their possessions, these people can reproduce more. Without property laws, the population has been denied the power to reproduce wealth. In capitalism, it is what you own that enables you to amass more wealth. Wealth is built on primary resources. In the book, the author provides details how poor countries fail to convert their rich resources into meaningful wealth.

The author outlines benefits of capitalism to a larger extent. However, I disagree with him in a number of points. The success, which he attributes to capitalism, exists only on paper. Capitalism has only benefited a clique of some people, but the rest of the society is hangers-on. Capitalism to me, favors those with resources. It enriches those, who contribute to it. The system is designed in a way that if you are not a player, then you are out of the game. The vast majority of population in these capitalized states consists mostly of poor people struggling to meet costs of living. Capitalism does not take care of those, who do not contribute. Neither the society has any places for those, who do not contribute. In Marxist or socialism, these could have been taken care of. Socialism treats all people equal. The system is all-inclusive. The writer seams to condemn those, who support socialism and points out that it is because of socialized policies that their economies lack behind. To my mind, capitalism could succeed much, if all the parties involved in the transaction benefited. The author down-played demerits of capitalism and he was biased on merits of capitalism.

In my opinion, disadvantages of capitalism cannot be eliminated easily. In capitalism businesses exploit people. Monopoly is the order of the day. Businesses collude through copyright laws to sell things at maximum profits. Such situations create an imbalance in the society with a small fraction of population owning a big percentage of the country’s wealth. How could De Soto say that capitalism is a way to financial prosperity? When companies make huge profits and pay their workers meager salaries. These companies are just owned by a few people, and in some cases they are family businesses. In capitalized economies, free markets are supposed to turn poorly performing sections into profitable businesses. In my mind, this seems impossible. In entirely capitalized economies with no welfare structures, poverty can strike seriously. This may lead to the loss of homes, unemployment, diseases, emergency of slums. Such situations may make people move elsewhere. This problem will be spread to big cities. Another major setback of capital is limited government control in a liberal economy. Governments can only watch as things go from bad to worse. They can not act to protect the vulnerable.

Capitalism breeds a class society. It creates a society, where some individuals own more resources at the expense of others. Under capitalism, individual rights to own property are acknowledged. In this case, all property is privately owned. A small fraction of people will own land, technology, factories and other means producing goods and services, though the author seams to portray this as fundamentals of capitalized economies. According to Do Soto, land, factories and other means of production make the basis of the economy irrespective of what a percentage of the population owns it. I openly beg to differ with the author in regard to the above view. The working class constitutes a big percentage of people, who sell their abilities in the labor market in exchange for a wage or salary: this is a definition of capitalism. The author countered this by stating that capitalism opened up a democratic space and separated politics from economy, but capitalism did not just stop there. One must go deep to try to understand its real meaning on the ground. One should understand intricate issues of class division and profit motives. Capitalism is incomplete, unless issues relating to profit motives are defined.

The book outlines various advantages of capitalism, although the author says that these advantages are a result of many other factors and not just capitalism. Given that capitalism separates politics from economic matters, chances of corruption, the lack of information and incentives, such problems are only associated with government intervention. The author defines other factors such as education, and also claims credit for the same. Education enlightens people about their rights, and they will ask for what belongs to them (Soto, 2000).

There is a cost effective allotment of resources. In capitalism, there is a free market. Capitalism requires that resources are dispersed based on a consumer’s choice. No firm is given preference if its products are not chosen by people. However, the author wonders why this has been witnessed in other countries, where capitalism has never existed. It means that there are other underlying factors that have made this possible and not just capitalism, as it is suggested in the book. Furthermore, the author states that capitalism led to successful production. This means that businesses are given incentives to do their best in production in marketing systems and cost cutting. This led to an exponential growth in American firms, and they went outside the United States to establish their brands in other countries. This proved to be successful, and indeed I agree with the author. Most countries actually want to have their firms in other countries. China though seams to have made it. Its mission in third world countries, especially in Africa, seems to have been a success.

The author notes that in competitive economies, financial incentives exist to encourage people to work hard. People really work hard, when there is a possibility of financial gains. They will take risks to set up businesses. In the long run, this significantly contributes to economic growth. On the on hand, these incentives are not just limited in capitalized countries. It is possible to come up with such business strategies elsewhere. De Soto is quick to add that capitalism may not be a cause of robust businesses in the west, as it is outlined in the book, but there may be also other factors.


De Soto in the book Mystery of Capital emphasizes the need for governments to adopt systems that can transform their economies. He suggested capitalism was the best model of economic success in the west, especially in America. Countries elsewhere in the world can domesticate capitalist ideas for economic prosperity. The author points out that poor nations have a lot of wealth, but lack necessary legal frameworks to transform it into valuable capital. He goes on to say that without laws that allow people to own what they have it is just dead capital. The author argues that most third world countries and former communist states have poor systems: these systems deny many people the power to own property. In his discussion about what he referred to as the undocumented lessons within the United States history, he says that problems facing third world countries and former communism countries are not new. The United States went through similar problems, but the country succeeded, because it enacted good laws regarding property ownership.

In conclusion, De Soto says in his book about what he referred to as the mystery of failures that legal systems in most third world countries and former socialized states make it hard for most people to own property, and he calls upon these countries to come up with good property laws to empower them to succeed like the western world. In regard to equity, social capital can be defined as an average of the actual potential that is linked to a permanent system of networks of mutual consent. These can be social responsibilities that can be converted into economic resources. When people organize themselves and form meaningful associations, the ability to obtain meaningful achievements causes default in social capital. This means that people stand to gain from meaningful associations.

Hattery, (2010) reckons that in the contemporary society, social capital does not have a clear undisputed meaning. It depends on various aspects among norms and values of the society. In the west, for example, the concept of social capital is not well-entrenched. The society is highly capitalized. Imitating friendship and personal ties, people easily find their way in the legal system. Taking into consideration other societies in Africa or Middle East, the concept of social capital is highly entrenched in these cultures. There, social capital is not a new concept in comparison with the west. People in those societies have been socialized in a manner that encourages strong personal ties.

Lin (2002) says that in such highly socialized societies, the concept of social capital is extremely valued and protected. As a result, many economical developments have been realized because of social capital. It is easier for people to mobilize their resources and invest wisely. The question of collective bargains comes into play. It is easier for people to come together and invest successfully than to act individually. Social capital is based on social networks. Having adequate structures that integrate people together and bridge their diversity causes a boost of social capital. It means that the society will develop as a community, but not as a group of individuals.

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