Journal of Libertarian Studies

Volume 16, no. 1 (Winter 2002), pp. 99114

2002 Ludwig von Mises Institute
www.mises.org

BOOK REVIEWS
Edited by N. Stephan Kinsella*

HERNANDO DE SOTO. THE MYSTERY OF CAPITAL: WHY

CAPITALISM TRIUMPHS IN THE WEST AND FAILS EVERYWHERE ELSE. NEW YORK: BASIC BOOKS, 2000. PP. 276.
Why capitalism triumphs in the West and fails everywhere else
is the question that Hernando de Soto, the acclaimed author of The
Other Path,1 tries to answer in The Mystery of Capital. To be sure,
the question is not new; the worlds libraries are filled with books
which claim to answer it. Indeed, there is a glut of books claiming
that the continued existence of poverty (underdevelopment is the
technical, fashionable word in the economics jargon) is the result of
such factors as culture, religion, geography, meteorology, human
greed, and lack of entrepreneurship.
However, books claiming that the problem is the lack of respect
for private property rights are as scarce as a cup of water in the desert.
De Sotos new work should attract the attention of every libertarian
reader because it is one such cup of water. However, as I will explain,
drinking from de Sotos cup is not always refreshing.
The author points out that capitalism has failed in the third world
and former communist countries because of the lack of easy access
to formal property. In fact, a huge part of their populations deal with
so many legal barriers to formal recognition of their property (the
scarce resources over which they have control) that their alternatives

General Counsel and Vice President for Intellectual Property at Applied

Optoelectronics, Inc. To submit reviews for this section, visit him online at
www.stephankinsella.com.
1
Hernando de Soto, The Other Path: The Invisible Revolution in the Third World
(New York: Harper & Row, 1989).

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Journal of Libertarian Studies

are either resignation or entry into the informal extralegal sector (the
black market). In de Sotos book, the black market is a promising
fountainhead of solutions (p. 88), rather than a source of guilt for the
problems of poverty.
As examples of these legal barriers, it took de Sotos team in Peru
six years and eleven months, and 207 administrative steps in fiftytwo different governmental offices, to obtain legal authorization to
build a house on state-owned land. Obtaining the legal authorization
of ownership required 728 steps. Similarly, it took 289 six-hour days
of work by his team, as well as $1231 in prepayment fees, to legally
open a small garment workshop in the same country, an objective that
was accomplished in a single morning in the United States. Moreover,
taking into account the fact that $1231 for a Peruvian represents approximately thirty-one times the monthly minimum wage, one can
understand why so many people prefer the black market. De Sotos
team conducted similar investigations in the Philippines, Egypt, Haiti,
and other Third World countries with the same kind of striking and
discouraging results.2
Given these barriers to formal property, the creation of capital in
these countries is nearly impossible. And the solution is not that leaders of the Third World and former communist nations wander the
worlds foreign ministries and international financial institutions seeking their fortunes (p. 37), but to make formal property universally
accessible (p. 218).
This is so, de Soto claims, because the poor in these countries already own an incredible amount of land, houses, and businesses. They
own capital, but of a special kind: dead capital, capital that is not
officially recognized.
By the calculations of the authors team, 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). By
comparison, the foreign aid or assistance from developed state governments to their Third World colleagues is relatively insignificant.
Likewise, the value of this real estate is more than twenty times the
2

A similar analysis of the U.S., Hong Kong, and India can be found in John
Stossel, Is America Number One?, ABC News Home Video, 1999, videocassette. Stossel found that he could go into business in Hong Kong in one
day, and in New York City in a few weeks, but in India it would take several
months at least, and possibly several years.

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Book Reviews
total direct foreign investment made during the 1990s into all Third
World and former communist countries.
But how could the simple formal recognition of property be the
solution for the development of Third World and former communist
nations? Continuing along the same line, de Soto argues that easy and
universal access to formal property would allow people to generate
productive capital. Formal property enables people to think about
assets not only as physical materials, but also as the description of
their latent economic and social qualities (p. 51). It integrates dispersed information into one standardized and integrated legal representational system, thereby making people accountable, since it shifts
the legitimacy of the rights of owners from the politicized context
of local communities to the impersonal context of law (p. 54).
The standardization that brings about formal property also serves
to make assets fungible, thereby reducing transaction costs involved
in mobilizing and utilizing assets. Moreover, these effects convert
people into a network of individually identifiable and accountable
business agents through which they can conjoin their assets into more
valuable combinations (p. 61). Finally, this network created by a formal property system constitutes a protection of property records (titles
and contracts) every time they are involved in transactions in time and
space.
Reduced to its bare essentials, de Sotos argument is that an easy,
universal, and integrated system of formal property enables people
to use their assets to produce and accumulate capital. Hence, the argument runs, formal property is the key to the division of labor and
increase of productivity; thus, it is the key to the success of capitalism in the Third World and former communist nations. Likewise, in
the international arena, it is the tool with which to take advantage of
the globalization process.
In order to illustrate his argument, de Soto turns to the American
experience. He shows that the problems now facing Third World and
former communist countries are not new. Not so long ago, the citizens of North America had to struggle against their governments and
their privileged elites in order to receive recognition of their property
over the resources they already controlled. Only then did the U.S. begin the process of capitalization that made this country what it is today: a rich, capitalized country.
There may be nothing logically wrong with this explanatory chain,
so far as it goes. Unfortunately, as soon as you go beyond the main
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Journal of Libertarian Studies

arguments, the structure of his hypothesis loses balance, and the entire edifice loses its value as a coherent defense of property rights and
capitalism as the salvation for developing countries.
While The Mystery of Capital is full of statements concerning the
need for the formalization of private property, nowhere does it offer a
definition of private property. Likewise, the book makes no effort
to define what kinds of goods can be the object of a rightful appropriation, much less when such rightful appropriation can occur.
How, then, does the author articulate property rights? And why
should they be defended? De Sotos defense of property rights is not
grounded on justice, nor is it a pure, logical defense. Rather, de Soto
takes an extremely narrow utilitarian approach based on efficiency
and rooted in social contract. He argues that property derives its legitimacy from social contracts that determine the existing property
rights (p. 172).
De Soto even appeals to Kant against Locke when he writes that
all property rights spring from social recognition of a claims legitimacy (p. 171). But if a social contract has to precede real ownership (p. 171), how is it possible to have a valid social contract where
the contracting parts do not own themselves? To be sure, if individuals
can make a contract, it is because they own themselves, and if they
have to own themselves to make a contract, it follows that property
has to precede contracts. If it does not, only violence, and not peaceful contract, is possible.
In this context, why does de Soto believe that formal property must
be universally accessible? To this question he has a clear answer: to
bring everyone into one social contract where they can cooperate to
raise societys productivity (p. 218). However, this answers utilitarianism does not allow it to escape the trap of circular reasoning.
As far as I can understand this argument, property, and, therefore,
formal property, requires a previous social contract, and, once it is
legitimate, universal access to it must be defended because it unites
everyone into one social contract. It may be that these two social
contracts are totally different, but, if so, he should start the explanation from the beginning.
Once this problem is seen clearly, the reader is not astonished that
de Soto finishes the book by saying,
I am not a die-hard capitalist. I do not view capitalism as
a credo. Much more important to me are freedom, compassion for the poor, respect for the social contract, and equal

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Book Reviews
opportunity. But for the moment, to achieve those goals,
capitalism is the only game in town. It is the only system
we know that provides us with the tools required to create massive surplus value. (p. 228)

Another interesting question is who should be in charge of recognizing ownership, since this is the way that de Soto plans to solve the
whole problem. For the author, the answer is clear: the State, through
its group of managers (the government), is the ideal agent to remedy
the chaos created through its previous policies. In fact, de Sotos vision of government is not one that passively allows people to arrange
their own lives; rather, he desires a government that actively moves
people in the right direction (possibly through the governments
contracting with a private company that will search for the needed
information). Thus, de Soto reasons that
[c]itizens inside and outside the bell jar need government
to make a strong case that a redesigned, integrated property system is less costly, more efficient, and better for the
nation than existing anarchical arrangements. (p. 159)

In the same vein, de Soto reminds governments that without the

tools of formal property, it is hard to see how . . . tax collection [could]
work (p. 60). Later, he states that
Formalization will provide government . . . with . . . taxes
. . . . In addition, a formal property system supplies a database for investment decisions in health care, education,
tax assessment, and environmental planning. (p. 195)

In view of all this, it should not amaze anybody that the author
dedicates six pages to the bright side of Marx (pp. 21218). While
do Soto is clearly not a Marxist, his facing up to Marxs ghost turns
out to be a cheerful reading of several Marxist concepts, especially
his class theory. For example, de Soto writes that when people are
extremely dissatisfied, the Marxist tool kit is better geared to explain
class conflict than capitalist thinking, which has no comparable analysis or even a serious strategy for reaching the poor in the extralegal
sector (p. 213). Marx divides social classes according to ownership
of the means of production, and de Soto adapts this theory to his main
claim, i.e., that classes exist because some people have access to formal property, while others do not; the latter, then, are condemned to
poverty (p. 213).
Although this view is popular and prevalent, it is incorrect. One
can hardly contend that Marxist class theory is richer in explanatory
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Journal of Libertarian Studies

power than, e.g., Oppenheimers.3 It makes far more sense to point
out that some individualsespecially those in governmentimpose
access restrictions on others. By specifying who can use force to constrain access to non-owned scarce resources, the government creates
the very classes that de Soto and Marx claim are products of the economic system. Once we recognize this, we can apply it to formal property by making the distinction between individuals who use political
powerwho use violence or the threat of it to prevent others from
gaining access to the full exercise of their property rightsand individuals who do not use means that violate the property of others, or
prevent them from formalizing it.
As long as someone can legally use force or political power for
aggression against anothers property, it is possible to differentiate
between two distinct classes. And, by the way, this is a perfectly
capitalist analysis of the problem. Unfortunately, de Soto is inconsistent on this issue. He sometimes disregards the use of violence
against non-aggressors, and relies on the ownership of factors of
production as his yardstick of a class theory; at other times, he correctly points out how official documents have been used for outright
domination. If de Soto consistently and explicitly applied the latter
distinction, he would not be stuck trying to restore Marxist class
theory to explain visible class distinctions.
Once this analytical tool is adopted, it becomes puzzling how an
institution whose main feature consists in being the legal monopoly of
the use of violence against aggressors and non-aggressors, as well as
being the ultimate judge of all disputes, can be the guarantor of formal
recognition of property. Instead of recognizing this problem and calling for a halt to government aggression in this field, de Soto relies on
a change in the way politicians use political means and legal violence
(p. 205). His proposed solution seems to rely on a state takeover of
the competing extralegal organizations that currently administer formal property access.
Other obscure points of this book are his out-of-place, or at least
disproportionate, attack on lawyers as the most probable saboteurs
of the necessary reforms (pp.197201), his incorrect use of the term
anarchism (pp. 30, 159, 175), and his poor and unconvincing defense of patents and copyrights (pp. 70, 8384, 198, and 224).
3

See Franz Oppenheimer, The State: Its History and Development Viewed
Sociologically, trans. John M. Gitterman (New York: B.W. Huebsch, 1922).

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Book Reviews
Finally, the book seems to follow from a good intuitionthat
you cannot have development without respect for property, and that
you cannot understand poverty or underdevelopment while disregarding the formal situation of property rights. But in the book itself, this
argument goes only so far. You cannot hold that, once you create a
framework where formal property is easily accessible for everyone,
development will be attained. It is true that, once you have a society
where legitimately acquired property is respected, development would
obtain or, at least, the best possible condition for development would
exist.
This environment can be reached by a voluntary restraint on aggression against other peoples property, or by using force to defend
legitimately acquired property. In the case where others do not engage
in voluntary restraint, we will need to defend property against aggressors. Such a defense can be undertaken directly by the property owner, or by contracting for it with a third party or agency. In this context,
formal property is just one factor that can be helpful in the defense
of property rights.
We still have to look at what kind of institution or agency would
certify this formal property, and, what is even more important, at the
very definition of property rights that the agency would use. During the
National Socialist period in Germany, formal property was respected
more fully than in many developed countries, but this did not prevent
property from being practically and legally managed from the Reichstag. Given enough time, the productivity and capital structure in Germany would have collapsed in a way similar to its subsequent collapse
in socialist countries.
Ultimately, and contrary to de Soto, while the formalization of
property rights might be of great importance for their respect and,
hence, for the development of a society, it is neither a sufficient nor
a necessary condition.
GABRIEL CALZADA LVAREZ
Universidad Complutense
de Madrid

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