The Mystery of Capital

by Hernando De Soto

  The difficulty is that few lawyers understand the economic consequences of their work, and their knee-jerk reaction to extralegal behavior and to large-scale change is generally hostile. All the reformers I have met working to make property more accessible to the poor operate with the presumption that the legal profession is their natural enemy. Economists involved in reform have become so frustrated with legal conservatism that they have invested time and money to discredit the legal profession. Using economic data from fifty-two countries from 1960 to 1980, Samar K. Datta and Jefferey B. Nugent have shown that for every percentage point increase in the number of lawyers in the labor force (from, say, 0.5 to 1.5 percent), economic growth is reduced by 4.76 to 3.68 percent—thus showing that economic growth is inversely related to the prudence of lawyers.19

  What especially irritates many reformers is how lawyers shift the blame for bad property systems to other people. I have often heard lawyers commending existing property law, while in the same breath conceding that legally issued property titles were difficult or impossible to use. This is, of course, unacceptable. A lawyer cannot design the law and the administrative procedures for implementing it and then blame its failure on the inadequacies of the low-level technocrats who implement the law or the poor education of those who use it. It is not enough to draft elegant laws. They must also work in the administrative and social reality for which they were drafted.

  Interestingly enough, the strongest criticism of lawyers’ efforts to stall property reform often comes from their fellow attorneys. This is how S. Rowton Simpson, a lawyer and the world’s most renowned author on the subject of land registration, writes of his colleagues:

  Lawyers, the world over, are notorious for their reluctance to accept even the smallest changes in their traditional procedures…. Torrens [the Australian creator of one of the world’s most secure recording systems], who was opposed tooth and nail by the legal profession, overcame the opposition of the lawyers in South Australia; but his story is exceptional. It takes a diamond to cut a diamond, and in most countries registration of title has, as a rule, owed its introduction to the efforts of a lawyer, handicapped as he may have been by the active opposition of the practicing members of his profession; and passive opposition may be even worse than active, which at least either wins or is defeated. Passive opposition is more insidious; it can stultify progress. Not a few statutes have withered on the vine after receiving a welcome from practitioners which proved to be merely lip service or even “the kiss of death”; other statutes have had built into them a procedure so long-term as to make progress almost imperceptible; such statutes certainly offer no dangers to established practice, and so tend to be acceptable to the legal profession, but they do not really achieve the objective; they merely swell the list, if not of failures, at least of “non-successes.”20

  Although lawyers often concede that other disciplines have to be dynamic, they argue that the law must be stable. Such veneration of the rule of law, no matter the consequences, can reach the point where attorneys who support reform risk ostracism by their peers. In German-speaking countries during the nineteenth and early twentieth centuries, the legal profession’s hostility toward property reform ran so high that any reformist lawyer was called a Mestbeschmutzer—a beast that fouls its own nest.

  The good news for reformers is that the most brilliant (but not necessarily the most successful) lawyers believe that law is made to serve life and not the other way around. Forward-looking jurists ultimately triumphed over the reactionary tendency of their profession in the West, even in the context of Roman law. To be sure, the battle was uphill all the way, mainly because, as Peter Stein has remarked, lawyers’ “contribution to a proper understanding of legal institutions was obscured by their emphasis on antiquarianism and their acceptance of Roman law as a finished product.”21 Nevertheless, over time, great European jurists overcame excessive rigidity because as Stein points out, they “made it their profession to become experts in the intricacies of the Roman law, and to ensure that it moved with the time.”22 Against their colleagues’ rampant unresponsiveness, in every European country an elite band of lawyers emerged to help lift the bell jar.

  Any government eager to pursue an integrated property system must therefore draw up a careful strategy for dealing with the legal profession. The key is choosing the right lawyers. It takes a wise and cunning political leader to avoid the lawyers skilled at the subtleties of scaring politicians into a state of immobility and to find instead those who will give legal form to an agenda for transformation even if it means bucking the system. Unless the reform-minded politician handpicks his lawyers, he will be at the mercy of the ruling legal technocrats who will give lip service to reform while subverting it in the shadows.

  Courageous, reform-minded lawyers exist in every nation, and once the selection criteria for such qualities is clear, the right people can be identified. Many understand that the primary determinants of change rest outside the law. In every country I have visited, I have found groups of government lawyers very familiar with the extralegal sector, striving daily to find harmony between the formal system and the extralegal arrangements. Some academic lawyers are also acutely aware that the parallel orders of legal and extralegal law operate simultaneously. But their work tends to go unnoticed in the higher reaches of government, and so they, too, remain invisible. Indeed, it is nearly a rule that lawyers who are clued in to the existence of the two orders and are sympathetic with reform are pushed to the margins of political decision making.

  It is these people whom the political leadership must marshal to storm the status quo and implement an irresistible national program to formalize property. Such an army, however, does not step forward spontaneously. Each lawyer must be located and recruited. Altogether, they will form the vanguard that can make the case of reform to their fellow lawyers. It is they who will be able to beat back the dinosaurs and explain to the legal profession in its own language how crucial it is to their own and their nation’s future to integrate all property into one unified legal system open to all people. They alone can explain to the rest of the profession that existing legal procedures have become not simply a nuisance but the insurmountable obstacle that keeps most of the people of the world from being in a position to create capital. Lawyers are human, too. Once they understand that the system they defend is hopelessly outdated, they will react positively.

  The Technicians. Developing and former communist countries are forever spending hundreds of millions of dollars on mapping and computerized record-keeping technology to modernize their property systems—and they still cannot integrate their extralegal sectors. This no longer surprises anyone who has thought hard about the priorities of property reform. In 1993, a World Bank expert warned that “there has been a tendency to consider land titling a technical problem. Often the maps are made and surveys carried out, but the titles are not made or issued because of a blockage in systems or legal problems.”23

  Even the technicians are concerned that they may be too mesmerized by the amazing new technologies. One of Canada’s foremost experts in land and information systems has expressed concern that some governments continue to view mapping as the cornerstone of property:

  We are currently in danger of perpetuating this myth by trying to reduce resource management to a geographical information system (GIS) problem. Technology is attractive; it produces tangible results. But it is only part of the solution…. Consultants and aid organizations frequently export systems they are familiar with (usually their own or ones they have worked with) without giving sufficient consideration to the needs and constraints of the recipient country…. There is a need for more modesty among professional consultants; there is a need to occasionally admit that they do not always know the answer or that their system may not be appropriate.24

  Property creation programs will continue to fail as long as governments think that creating property requires only getting acquainted with physical things—that once
they have photographed, surveyed, measured, and computerized the inventories of their physical assets, they have all the information required to issue property titles. They do not. Photographs and inventories only inform authorities of the physical state of the assets; they say nothing about who really owns those assets or how people have organized the rights that govern them. All the photographs and computer inventories in the world cannot tell anyone what local rules enforce these rights or what network of relationships sustains them. As important as maps and inventories are to measure and locate the physical assets to which property is anchored, they do not tell governments how to build the national social contract that will enable them to create widespread legal property.

  The propensity in some countries to squeeze the issues related to property into the departments of mapping and information technology has obscured the real nature of property. Property is not really part of the physical world: its natural habitat is legal and economic. Property is about invisible things, whereas maps are resemblances of physical things on the ground. Maps capture the physical information of assets but miss the big picture. Without the pertinent institutional and economic information about extralegal arrangements, they cannot capture the reality outside the bell jar. They are thus unable to do their real job, which is to help anchor the property aspects of assets in physical reality so as to keep virtuality and physicality in sync.

  Until the obstacles to using formal property systems are removed and the extralegal arrangements have been replaced by the law, people have little incentive to supply the information necessary to keep maps and databases updated and reliable. People do not want to get inside the formal property system because they are eager to be mapped, recorded, or taxed; they will join the system when its economic benefits are obvious to them and when they are certain their rights will continue to be protected.

  As long as these rights are protected by an extralegal social contract, people will see no reason to notify authorities of any changes in the disposition of their assets. Only when formal law replaces extralegal arrangements as the source of protection for property will people accept its legitimacy and be interested in providing authorities with the information required to keep their maps and records current. The place where the social contract is located determines where the records and maps can be kept current.

  This is not a trivial point. Technically driven titling projects tend to degenerate into identification systems for physical stock, outdated Domesday Books, or historical relics. The mapping and computer industries suffer as a result. Their project budgets are approved by politicians who expect that these new methods will incorporate the poor. Once they realize they do not, the mapping projects get scaled down or terminated. My team and I have found this happening time and again.

  The reason why these technologies work so well in advanced nations, without the need for much legal and political tinkering, is that the tinkering was done more than a hundred years ago. The all-encompassing social contract on property is already firmly in place. When the database systems, geographical information systems, remote sensing, global positioning systems, and all the wonderful information technology tools became available during the past thirty years, they fit neatly into a well-integrated information and legal infrastructure. Thus the written and graphic representational devices and facilities for better storage, retrieval, and manipulation of information could be put to good use.

  I am not saying that engineering, systems integration, information technology companies, equipment vendors, registry advisors, and all the others who provide property documentation services specialized in surveying, mapping, and the modernization of registries are unimportant to property creation—quite the contrary. If appropriately adapted to massive registration and to operating in an extralegal environment, they are indispensable for defining physical locations as well as for processing and integrating information. They will consume most of the money spent on property reform, but only after the legal and political problems of bringing in the extralegal sector are solved.

  Only true political leadership can coax the law of property out of its preoccupation with the past and into an appreciation of the present, from being much too impressed with technology to becoming concerned with the good of society. Politicians are needed because existing institutions are inclined to favor and protect the status quo. It is a political task to persuade technocracy to make itself over and support change.

  Political intervention is also necessary because government organizations within the bell jar are generally not designed to undertake swift, broad reform programs. They are usually organized as specialized departments, a structure that makes more sense in developed nations, where only gradual change is necessary because the law and formal property are already functioning for all. Property creation is not at all like a privatization program, which involves selling only a dozen or so bundles of assets a year. The goal of property reform is to award property rights for millions of assets to millions of people in a short time. This means that at least half the job is about communications. The leaders of property reform need to describe how popular capitalism will affect many different interest groups, show them the benefits they will derive from it, and persuade them that it is a win-win exercise for all segments of society. For the extralegal sector, these leaders must address their pent-up entrepreneurial energy and demonstrate the advantages of integrating a new formal law. For the legal sector, they must explain that the proposed reforms will not hurt legitimate and enforceable rights and that there will be aggregate gains for all interest groups.

  Creating a property system that is accessible to all is primarily a political job because it has to be kept on track by people who understand that the final goal of a property system is not drafting elegant statutes, connecting shiny computers, or printing multicolored maps. The goal of formal property is to put capital in the hands of the whole nation.

  CHAPTER SEVEN

  By Way of Conclusion

  Where is the wisdom we have lost in knowledge?

  Where is the knowledge we have lost in information?

  —T. S. Eliot, Choruses from “The Rock”

  The Private Club of Globalization

  Capitalism is in crisis outside the West not because international globalization is failing but because developing and former communist nations have been unable to “globalize” capital within their own countries. Most people in those nations view capitalism as a private club, a discriminatory system that benefits only the West and the elites who live inside the bell jars of poor countries.

  More people throughout the world may wear Nike shoes and flash their Casio watches, but even as they consume the goods of the West, they are quite aware that they still linger at the periphery of the capitalist game. They have no stake in it. Globalization should not be just about interconnecting the bell jars of the privileged few. That kind of globalization has existed before. In the nineteenth century, Europe’s ruling royals were literally one big family, related by blood and in constant contact about politics and commerce with their cousins in England, France, Holland, Spain, and Russia. Capitalism triumphed in the nineteenth century and prevailed throughout the industrialized world until the Russian Revolution and the Great Depression. But as Spain’s Ortega y Gasset and the American pundit Walter Lippman pointed out, despite its dominance and sophistication, the capitalist system was always vulnerable. The American economist Lester Thurow points out that as recently as 1941,

  the United States and Great Britain were essentially the only [major] capitalist countries left on the face of the earth…. All the rest of the world were fascists, communists or Third World feudal colonies. The final crisis of the 1920s and the Great Depression of the 1930s had brought capitalism to the edge of extinction. The capitalism that now seems irresistible could, with just a few missteps, have vanished.1

  Latin Americans do not have to be reminded. On at least four occasions since their independence from Spain in the 1820s, they
have tried to become part of global capitalism and failed. They restructured their debts, stabilized their economies by controlling inflation, liberalized trade, privatized government assets (selling their railroads to the British, for example), undertook debt equity swaps, and overhauled their tax systems. At the consumer level, the Latin Americans imported all sorts of goods, from English tweed suits and Church shoes to Model T Fords; they learned English and French by listening to the radio or records; they danced the Charleston and the Lambeth Walk, and chewed Chiclets gum. But they never produced much live capital.

  We may now all be benefiting from the communications revolution, and some may see progress in the fact that the Egyptian Sphinx now stares directly at the neon sign of a Kentucky Fried Chicken franchise. Nevertheless, only twenty-five of the world’s two hundred countries produce capital in sufficient quantity to benefit fully from the division of labor in expanded global markets. The lifeblood of capitalism is not the Internet or fast-food franchises. It is capital. Only capital provides the means to support specialization and the production and exchange of assets in the expanded market. It is capital that is the source of increasing productivity and therefore the wealth of nations.