Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else

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The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else

By: Roger Smith
Economic Systems
04/08/2012

Abstract: This paper aims to review and analyze main ideas and concepts from the book by the renowned Peruvian economist Hernando De Soto. In this paper I will look at the causes of the phenomenon of failed implementation of capitalist systems in the developing and former communist countries, paying special attention to the importance of the capital, as a life-blood of capitalist system. The paper will examine causes and reasons for the inequality between advanced nations and the third world and will try to come up with the solution for successful implementation of capitalism in those countries, paying special attention to the institution of property rights as the primary solution to solve the problems of economic growth, prosperity and equality.

Introduction
The book starts with the statement that “capitalism stands alone as the only feasible way to rationally organize a modern economy” (p.1). From the very beginning of the book, De Soto shares his view of the modern capitalist world. There is a clear failure of implementation of capitalism in third world and former communist nations. In the west, there’s an ever-increasing concern that the failure of capitalism in the rest of the world will eventually drive developed nations into recession. But what are the causes? The streets of Cairo, Lima, Manila and any other major cities of the developing world are filled with slums, street merchants, sweatshops and dozens of small unofficial businesses. Millions of people in these countries live in what De Soto calls an “extralegal” sector – a sector of society and economy that operates outside of established formal property law. In contrast, only a small percentage of population of those countries lives under a “bell jar” – a sector of economy protected by the formal statues of property laws. And the reason is not that developing countries haven’t tried to adopt capitalist system, or haven’t put any effort into following west’s model. De Soto writes, “In Latin America, for example, reforms directed at creating capitalist systems have been tried at least four times since independence from Spain in the 1820s” (p.3). Contrary to popular misconceptions, people in third world countries do have assets and possessions; however they lack an access to legal arrangements that would allow them to benefit from those assets by converting them into capital. This brings us to the main idea of the book. The main argument that De Soto poses is that a formal property system that allows to use assets to convert them into capital, is the source of success of capitalist systems of the west. Therefore, developing and former communist countries are still poor and undercapitalized, because they can’t find a way to create a formal property system that will allow to use massive amounts of assets so they can be used to their full potential to produce extra capital, which will ultimately create economic growth and prosperity. This is the main idea that the book examines, and it tries to understand the reasons for such under-capitalization and to come up with the viable solution for those countries. In the rest of the paper I will try to first compare western and third world’s property systems, then I will address problems that arise from the system that developing countries currently have and what those problems mean for the economy and society. Next, I will quickly review why this situation occurred. After that I will look at how west implemented its property system and will try to come up with solution for other countries and their governments. Finally, I will conclude with the summarization and final thoughts on the subject. Understanding “Capital”

To start off, we have to first understand the concept of capital. Contrary, to common misconception capital is not just money. Money is just a small part of the concept...
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