The Mystery of Capital, Why Capitalism Triumphs In The West and Fails Everywhere Else

by Hemando DeSoto, 2000, Basic Books.


This remarkable book actually succeeds in demonstrating the thesis described in its subtitle: capitalism depends on documentation of property values and ownership enabling small entrepreneurs to do business with strangers. Early in the industrial revolution only the rich with access to barristers, contracts and other people's money could be entrepreneurs.


The author had many collaborators throughout the world who helped him confirm the virtual impossibility of documenting property values in the underdeveloped world. Even where such documentation is theoretically possible; it took a decade or two to jump through all of the bureaucratic hoops as demonstrated by his collaborators on the ground.


The U.S. had similar problems with squatters on private and government land until late in the 19th century. In colonial Virginia soon after independence, the beginnings of the solution to squatters and their evolving rights was "preemption" legislation. This legislation entitled a landowner to evict squatters after paying them for their improvements.  Or if the landowner did not choose to pay, the squatter could buy the land. In either case, the ultimate valuation of the disputed property value was determined by a jury of 12. Later the federal government was empowered to sell settlers 640 acres for $1 per acre, but almost no one could raise that much money so the settlers squatted on the frontier anyway. There were some violent episodes between militia, sheriffs, and settlers.  Hemando DeSoto describes the result on page 107 with these words. "What U.S. politicians eventually learned, as Francis Philbrick put it, was that the ‘forces that change the law in other than trivial ways lie outside it’. Even the celebrated Homestead Act of 1862, which entitled settlers to 160 acres of free land simply for agreeing to live on it and develop it, was less an act of official generosity than the recognition of a fait accompli: Americans had been settling---and improving---the land extralegally for decades." These changes primed the settlers and miners with documented property to use for investment.


One of the most thoroughly covered parts of the book is the section about settlers' and miners’ property associations in the 19th century.  A quote from page 136: "What interests me about the claim associations and miner organizations is that they show that extralegal groups played an important role in defining property rights in the United States and adding value to the land." Groups of squatters in the modern Third World have many similar arrangements in place among themselves.


The book describes with detailed examples from the underdeveloped world how our history cannot fully be applied elsewhere. The implication is that we can expect the underdeveloped world will take some time to work through the particulars of their needed changes. Hopefully, they can speed it up with insightful assistance. Here are some examples from the book.  The author was in Indonesia to launch the translation of his previous book and was asked to discuss extralegal land arrangements with five cabinet ministers. He despaired of getting his point across encumbered with too much detail, so he described to the ministers how he had been strolling through the rice paddies in Bali…. "I had no idea where the property boundaries were, but the dogs knew. Every time I crossed from one boundary to another, a different dog barked, ‘Ah’, responded one of the ministers, ‘Jukum Adat’ (the people's law)!" And later when discovering the greater difficulty of selling the elite compared to selling the poor on needed reforms the comment was,   “It is more like rearranging the thousands of branches and twigs of a huge eagle's nest---without irritating the eagle." The context was that there was a need for a charismatic, popular leader to do the rearranging (from pages 162 and 188).


While I was reading DeSoto's account of the disconnect between formal law and what was happening on the ground and how the law finally had to accommodate the reality of existing events, I was impressed that the Drug War needs to make some similar accommodation with the reality of recreational drug use and its unnecessary financing of criminal activity.  I am not sure what the new approaches should be, but it is clear that they need to be radically different from present practices. (Personally, I not only did not inhale, I did not even come close to using any illegal drugs). DeSoto even has something to say about property law and illegal drugs: "Property also provides a legal alternative to drug trafficking. As long as farmers remain illegal landowners, short-term cash crops, like cocoa and opium poppies, remain their only alternative.  For small farmers in some areas of the developing world, money advanced by drug traffickers is practically the only credit available."


Many leaders in world politics and economics agree that DeSoto's work is not only innovative but also valid. It was a privilege to read of these new ideas so clearly and convincingly expressed.    One small caveat: be prepared for the main message to be repeated at least every few pages, a small price for the rest of us to pay for casual readers to get it: successful capitalism depends on formal documentation of property ownership even for the poor.


John A. Frantz

March 22, 2003


Here is a pertinent quote from Letters from an American Farmer by J. Hector St Jean De Crèvecoeur, 1782.  The author came to New York City as French Consul, acquired a farm 60 miles from the city, and married an American in 1769.


…Formerly they were not numbered in any civil lists of their country, except in those of the poor; here they rank as citizens.  By what invisible power has this surprising metamorphosis been performed?  By that of the laws and by that of their industry.  The laws, the indulgent laws. Protect them as they arrive, stamping on them the symbol of adoption; they receive ample rewards for their labors: those lands confer on them the title of freemen, and to that title every benefit is affixed which men can possibly require.  This is the great operation daily performed by our laws.  From whence proceed these laws?  From our government.  Whence the government?  It is derived from the original genius and strong desire of the people, ratified and confirmed by the crown.


I stumbled on this last week in an anthology of literature prepared for secondary school students in Italy.  It made me proud of our American history and traditions. I was also impressed by the overall high quality of the selections in the anthology.

April 13, 2003



The law in its majestic equality forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.

                                                                                  Voltaire, 1694-1778