The Mystery of Capital

by Hernando De Soto

1. Lester Thurow, The Future of Capitalism (New York: Penguin Books, 1996), p. 5.

  2. Hernando de Soto, The Other Path: The Invisible Revolution in the Third World (New York: Harper & Row, 1989).

  3. “Side Effects of Egypt’s Economic Reform Warned,” Xinhua (CNN), February 4, 1999.

  4. George F. Will, The Pursuit of Virtue and Other Tory Notions (New York: Simon & Schuster, 1982).

  5. Klaus Schwab and Claude Smadja, “Globalization Needs a Human Face,” International Herald Tribune, January 28, 1999.

  6. Tim Padgett, Newsweek, September 16, 1996.

  7. George Soros, The Crisis of Global Capitalism: Open Society Endangered (New York: Public Affairs, 1998), p. xxvii.

  8. Eugene Kamenka, ed., The Portable Marx (New York: Viking Penguin, 1993), p. 463.

  9. Nancy Birdsall and Juan Luis Londoño, “Assets in Equality Matters,” American Economic Review, May 1997.

  10. Kamenka, ed., The Portable Marx, p. 447.

  11. Karl Marx, “Capital,” Collected Works, Vol. 28, p. 235.

  12. Thomas of Aquinas, Summa Theologica, Part I of Second Part Q. 12., Art. 4 (London: Encyclopaedia Britannica, 1952), p. 672.

  13. Ronald H. Coase, “The Nature of the Firm,” Económica, November 1937.

  14. Margaret Boden, The Creative Mind (London: Abacus, 1992), p. 94.

  15. Daniel C. Dennett, “Intentionality,” in The Oxford Companion to the Mind, ed. Richard L. Gregory (Oxford: Oxford University Press, 1991), p. 384.

  16. John R. Searle, The Construction of Social Reality (New York: Free Press, 1995), p. 46.

  17. See Michel Foucault, Les Mots et les choses (Saint Amand: Gallimond, 1993).

  18. Karl Popper, Knowledge and the Body-Mind Problem (London: Routledge, 1994).

  19. Viviane Forrester, L’Horreur économique (Paris: Fayard, 1996), p. 61 (my translation).

  20. Karl Marx, in Kamenka, ed., The Portable Marx, pp. 444–447.

  21. Claude Lévi-Strauss, Tristes tropiques (Paris: Plon, Terre Humaine/Poche, 1996), p. 354.

  22. Fareed Zakaria, “The Politics of Port,” Slate Magazine, Internet, March 16, 1999.

  23. Crucial reading regarding the phenomenon of trust and social cooperation is, of course, Francis Fukuyama’s Trust (New York: Free Press, 1995).

  Acknowledgments

  No one ever writes a book alone. I have benefited from the information, opinions, encouragement and support of many people—so many, in fact, that it is impossible to thank them all individually. But there are several without whom this book would never have come to be what it is, and I would like to register my gratitude in print.

  First, there are my colleagues from the Institute of Liberty and Democracy (ILD) in Lima, Peru, who have been my constant companions in our quest to create a nondiscriminatory market system where the law helps everyone to have an opportunity to prosper. The ideas in this book are backed up by the facts and figures my ILD team has uncovered in the field in our projects throughout the world. I truly stand on their shoulders. Manuel Mayorga La Torre, my chief operating officer, applied his long experience as a power plant project engineer to planning and organizing all our projects, day to day, right down the critical path. Luis Morales Bayro is the ILD’s top economist, supervising the research and cost-benefit analyses in the countries we work in. His work is crucial to our success in identifying the hidden costs of laws and institutions. Luis is assisted by Mario Galantini and backed up, when necessary, by Vittorio Corvo.

  On the legal side are my two trusted and beloved colleagues of the past fifteen years: Ana Lucia Camaiora manages ILD’s legal teams and is responsible for bringing together the whole legal picture. She is closely supported by Maria del Carmen Delgado, our top legal analyst. They possess the sharpest minds in legal pluralism that I know. Not only do they understand the law but also its implications. Their efforts are supported by many other ILD lawyers, the principal heroes amongst whom, for the purpose of this book, are Gustavo Marini, Jackeline Silva, Luis Aliaga, and Guillermo Garcia Montufar. Our chief technical aide is Daniel Herencia, whose team, including Javier Robles and David Castillo, set up our computer systems in the field. Elsa Jo runs the administration of ILD, ably assisted by her chief accountant Eliana Silva and the rest of her staff.

  Second, there are those who provided the intellectual subsoil that allowed me to process the information I obtained. No one has been closer to me during the saga of writing this book than Duncan Macdonald, my old friend and cosmic guide from Scotland. It was Duncan who introduced me to cognitive science, especially to the research being carried out in the theory of mind. To my delight, I was able to use what I read to analyze the results of my work in the field. I had already learned from the American anthropologist Douglas Uzzell about the usefulness in my work of the anthropologist’s skill of “participatory observation,” and Georgetown University law professor Warren Schwartz had taught me how you could apply economic principles to the analysis of law. But it was Duncan who showed me how philosophers of mind could help me capture the connections I had been searching for between property and development. Our discussions about how humans can transform their environments into an extension of their minds were crucial to my understanding of how modern capital is created. When I was confused, stuck in an intellectual corner, or just plain in the dark, Duncan saved me.

  I also wish to thank the German philosopher Dorothee Kreuzer for leading me through the subtleties of the French post-structuralists, particularly Jacques Derrida and Michel Foucault. From Derrida I learned that you could use categories from one culture to describe another in a way that everyone can understand—without violating the culture’s unique character. And thus I was better able to understand how we were successfully integrating extralegal property arrangements into formal property law. From Foucault I learned the basics of the “secret architecture” that links the invisible to the visible, also inferring from his writings how a good system of representations increases la condition de possibilité of all mankind. My sense of the economic power and significance of representations was increased even further by my reading in semiotics, principally Umberto Eco and Ferdinand de Saussure, and in philosophy of mind, particularly the work of John Searle and Daniel Dennett.

  But it is my friend and colleague Mariano Cornejo who ensures that my ideas pass the severe test of landfall. No matter how ingenious or elegant an idea might be, it will not be allowed into an ILD project unless it passes his two primary requirements: that it works, and that it can be applied by very ordinary people. When I am right, he simply smiles and tells me I have stumbled over the obvious (“No es problema, no es problema”); when I am wrong, he points me in the right direction.

  Then there are those without whose inspiration, encouragement and support I would have never been in the position to write this book. After twelve years of partnership, Stephan Schmidheiny has become a dear friend. An intellectual and philanthropist, as well as an extremely successful businessman, Stephan has contributed in many ways to the ILD’s success. He has reinforced our efforts to find ways of giving opportunity to those who have been unjustly deprived of it. He has also fortified our belief that global markets without global laws are dangerous. But the principal way that Stephan has influenced the ILD’s work is by insisting on the need for realism: If idealism is not businesslike, ideals remain just ideals and of no use to those we have set out to help. Another very important and dear friend is Lawrence Chickering, a brilliant intellectual from San Francisco, who has helped the ILD to initiate many projects and adventures of the mind while continually helping me personally with his compassionate “pastoral” counseling.

  I could not forget my friends at the Agency for International Development: Brian Atwood, Dick McCall, Jim Michels, Norma Parker, Aaron Williams, Paula Goddard, and especially the terrific people at Latin American and Caribbean Department, Mark Schneider, Carl Leonard, Michael Deal, Timothy Mahoney, William B. Baucom, Donald Drga, and Jolyne Sanjak. They not only provided the I
LD with their support and encouragement throughout the years but also created many opportunities for us. And when I ran into an organizational problem, my old friend John Sullivan, who directs the Center for International Private Enterprise, explained to me how U.S. institutions would tackle it. He also taught me how the right set of institutions could turn conflicting positions into workable and profitable solutions. From my friend Bob Litan, from the Brookings Institution, I learned not only how law affects economic behavior but also that there are valuable lessons for the rest of the world in how the financial revolution in the United States has increased capital formation. One June day in 1999 Bob walked into my house in Lima and said, “I’ve got a great title for your book—The Mystery of Capital.” For that, too, I thank him.

  Special thanks are due to the Smith Richardson Foundation, which supported much of the work done for this book in the form of a generous grant. The foundation is an old and loyal friend which, when the ILD was being bombed and shot at during the early 1990s, provided us with a bullet-proof vehicle, thus enabling us to continue with our work.

  I am also most grateful to Harold Krent, Saul Levmore, Rick Messick, Tom Romero, and Larry Stay for their herculean efforts in researching the history of U.S. property. My gratitude also goes to my friends at Her Majesty’s Land Registry in London—especially John Manthorpe and Christopher West—for pointing me to the books that helped me understand the evolution of British property. Monika Bergmeier and Klaus Joachim Grigoleit helped me investigate the origins of German property, and Hans-Urs Wili introduced me to the origins of Swiss property, instructing me on the conversion of Roman law in the Swiss and German traditions from a rigid system of rules to a more people-friendly one. Peter Schaefer, my friend in Washington, D.C., has contributed his thoughts, notes, and observations, introducing me to others with valuable insights for our work.

  Merran Van Der Tak helped me explore the relationship between property rights and the development of public utilities. Oscar Beasley taught me how title insurance and securitization of real estate assets worked. Robert Freedman deepened my shallow knowledge of Marxism. Lee and Alexandra Benham were extremely helpful in revising an early draft of this book.

  This book also benefited from the invitations of various governments and nongovernmental organizations to design and implement projects in their own countries aimed at capitalizing the poor. The opportunity to collect information, analyze institutions and legislation, and interview participants in both the legal and underground sectors in virtually every continent helped me make this book relevant to most of the countries in the world. At this stage, I can publicly thank associates in only four of the countries in which we are currently working. In Egypt I am indebted to my friends and counterparts at the Egyptian Centre for Economic Studies, Ahmed Galal, Hisham Fahmy, Taher Helmy, and Gamal Mubarak and their staff. Sherif El Diwany has been instrumental throughout to the ILD’s work in Egypt. Also crucial was the support of Prime Minister Atef Ebeid, Minister of Finance Medhat Hassanein, Minister of the Economy Yousef Boutros Ghali, and Minister of Social Affairs Mervat El Talawi. In Haiti, I am grateful for the continual support of President René Preval and former President Jean Bertrand Aristide and their staffs. I am also indebted to the Centre pour la Libre Enterprise et la Democratie, particularly Georges Sassine, Lionel Delatour, Bernard Craan and Jean Maurice Buteau. In Mexico, I am indebted to President-elect Vicente Fox and those who at his behest supported us, including Eduardo Sojo, Juan Hernandez, Fausto Alzati, Alfonso Galindo, Emilio Duhau, and various clever researchers. In the Philippines, the aid we received from President Joseph Estrada and Executive Secretary Ronaldo Zamora was crucial for our progress. Our research has been completed thanks to the efforts and support of Vic Taylor, along with Ernesto Garilao, Jose P. Leviste, Arturo Alvendia, Alex Melchor and many others.

  The manuscript of this book would never have seen the light of day without Iris MacKenzie, who guided my English through countless drafts; as my first reader and copy editor, it was Iris who constantly directed me toward clarity. I want to thank my assistant Miriam Gago for helping us make the manuscript fit for the eyes of publishers throughout the world. But, most important, it was her efficient supervision of my life and paperwork that allowed me to spend great chunks of time away from the office writing this book.

  Finally, I want to extend my gratitude to several people who helped me turn a few good ideas into a book. My agent Andrew Wylie has been a shrewd source of wisdom in how to make a book come alive for an international audience. He set a high standard and never permitted me to fall short of it. Once I had a manuscript, my friends David Frum and Mirko Lauer became its architects; in ten days, they took the existing draft, turned it upside down, and in Frum’s phrase, “pressed the water out of it,” shaping it into its current structure. To ready the final manuscript for meeting potential publishers, I was fortunate to have Edward Tivnan on my side. A journalist and author, whose doctorate in philosophy makes him as comfortable with ideas as he is with deadlines, Tivnan spent fifty days with me in Lima, rewriting the entire book, sentence by sentence.

  Bill Frucht, my U.S. editor, did a magnificent job of preparing the book for publication, helping me clarify many points and thus improving the book immensely. Sally Gaminara was my British editor. Her editorial talent was superseded only by her ingenuity and creativity for publishing and promoting this book.

  The success of the final product is due to all of the above. Its limitations are mine.

  Appendix