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

(this is a book + review that I wrote well before starting my Blog. However, the recommendation still stands!)

A basic conclusion of the book is that the primary govt contribution towards wealth maximization -- regardless of country -- is consistent, clear, enforceable property rights. Fine, this isn't very new stuff if you're a libertarian.

Where it really shines and takes on new light is his application & derivation of this basic principle in developmental economics. The core assertion is that the lack of workable property rights systems in 3rd world countries results in underground or "extralegal" economies which lock away the majority of the "capitalization" of the country in a manner which prevents market efficiency around those assets. Startlingly, the vast majority of these assets (which in turn make up most of the "wealth" of these nations) are held by the poorest of the poor in shanty-towns and villages in the form of their physical property. For example, De Soto estimates that the "off-the-books" assets held by the poor in Egypt are "55x greater than all foreign investment ever recorded, including the funding of the Suez Canal and the Aswan Dam."

Because these assets are extra legal, they do not inherit the clean transferability and divisibality inherent in govt/legally protected property. For ex, it's impossible to get a mortgage. or a home equity loan. or issue "shares" in your tailor shop to raise capital, or consolidate your shop with a neighbor to gain manufacturing efficiencies, etc. As a result, property that has a potential of 4-10x the entire legal market capitalization of some of these countries goes underutilized. De Soto's research team did very interesting field research cataloging the off-the-book wealth of the shanty-residents in Haiti, Peru, etc. and come up with surprising valuation of the assets held by these individuals.

His scholarship is very thorough and detailed and his frequent use of international anecdotes make the book a very quick read. He goes through the history of western countries -- particularly the US -- and details the evolution of consistent, court-enforced property rights. The parallels between the US in colonial times up to the civil war vs. the 3rd world w.r.t. property rights, squatters, capital utilization, etc. is particularly insightful.

Throughout the book, you come away with an understanding of the invisible forces & social contracts at work in the US. These forces, of course, are part of the enviornment for us & so the size and shape of these entities can't be truly understood until you start with the perspective of a system that lacks these conventions. I came away with a much better understanding of the micro-econ & social factors at play in US-style capitalism.

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