The Mystery of Capital, by Hernando de Soto

I first read about de Soto’s research in a 2017 column by Andreas Bergh (in Swedish). In the column, Bergh writes about formal rules that are unaligned with social norms and the possible negative consequences for society of such discrepancies.

Later that year I interviewed Åsa Burman for the Swedish Journal of Political Philosophy (Tidskrift för politisk filosofi). In the interview, Burman mentioned de Soto’s research as one example of empirical investigations building from a philosophical analysis of institutional facts.

I just had to read The Mystery of Capital. And I am glad that I did.

The central finding reported in the book is that the property of a lot of people in poor parts of the world is not included in formal legal systems and that it therefore cannot render surplus value. Let me explain.

People in poor countries own things. To mention only one example, they own houses. There is value to their houses, in the sense that they provide shelter. But, in parts of the world with functioning legal systems for property, houses can also »produce« value. In Sweden, for instance, we can borrow money using our houses as security. Thus, there is a value to our houses beyond the tangible value of providing shelter. In large parts of the world this is not possible, and the reason is that poor people’s property is not included in formal legal systems.

Simply put, there is a lot of dormant economic value in the world. de Soto writes, ”the total value of the real estate held but not legally owned by the poor of the Third World and former communist nations is at least $9.3 trillion” (p. 35). Poor people’s assets ”not only far exceed the holdings of the government, the local stock exchanges, and foreign direct investment; they are many times greater than all the aid from advanced nations and all the loans extended by the World Bank” (p. 34).

Incorporating this value into formal legal systems would enable poor people to capitalize on their property, sparking economic development. Achieving this is a political problem, but it should not be impossible. According to de Soto, this is pretty much what has happened in the West over the last couple of hundred years.

Of course, the book was published in the year 2000 but I would expect the basic analysis to hold. And even if it does not, I have still gained philosophical insight from reading it. The Mystery of Capital triggers the philosophical question, ”what is property, really?”

de Soto writes, ”Formal property is more than a system for titling, recording, and mapping assets—it is an instrument of thought, representing assets in such a way that people’s minds can work on them to generate surplus value” (p. 218). This is social ontology! And, it is an ontology which provides a base for normative thought on political legitimacy; ”That is why formal property must be universally accessible: to bring everyone into one social contract where they can cooperate to raise society’s productivity” (ibid). Thus, the book is also philosophically meaningful.

To conclude, I have learned a lot from The Mystery of Capital. It has certainly made a difference to how I think about property, which is a topic I have planned to write about in the near future. Stay tuned. And buy the book.

de Soto, H. (2000). The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Basic Books.