Unraveling 'The Mystery of Capital'

Posted: Aug 27, 2002 12:00 AM
The ultimate answer to terrorism is to eliminate the fertile environment of hate and hopelessness in which it breeds. Once terrorism erupts, it must be extinguished by force, as the president is trying to do. To prevent it from arising again or spreading, force must be leavened with enlightened policies to give people hope of a better life and a democratic future. Russia faced terrorism during the early part of the 20th century and early on, Tsar Nicholas' premier and interior minister, Piotr Stolypin, broke the back of the socialists' terror cells and prevented the revolutionaries from winning over the masses by his efforts, fashioned after Lincoln's Homestead Act, to create millions of free farmers and middle-class land owners. "The desire for property," Stolypin said, "is as natural as hunger, and the ownership of land is a guarantee of order in the state." As Aleksandr Solzhenitsyn observed in "August 1914," the lack of land undermines the peasant's respect for other people's property so that without land of his own the peasant lends a ready ear to false doctrine and violence. How true today in the Middle East. Hernando De Soto, president of the Institute for Liberty and Democracy headquartered in Peru, also clearly understands and writes about these truths in his seminal book, "The Mystery of Capital." He has devoted his life to opposing the Shining Path revolutionary terrorists in his home country and showing the world el otro sendero (the other path) toward property rights and democratic capitalism. According to syndicated columnist Georgie Anne Geyer, De Soto told Russian President Vladimir Putin that "all capitalism is a legal framework. If you get it right, everything will fit together. All countries start out the same way with black markets until property rights are established." That's why throughout the Third World, in spite of repeated efforts to emulate the Western democracies by engaging in acts of capitalism -- working hard, producing goods and growing crops, buying and selling, creating small enterprises, building homes and accumulating real assets like livestock, tools, machines and structures -- these nations still remain poor. De Soto believes it's because of the "inability to produce capital." He distinguishes "saving" from "capital formation." Poor people save large amounts, which never get transformed into capital because their assets are held in "defective forms" -- such as "houses but not titles, crops but not deeds, businesses but not statutes of incorporation -- and this is why many countries seem to be modern but aren't." Businesses also operate outside a well-developed accounting framework so that their liabilities cannot even be defined. Hence, potential investors and financiers shy away from investing in them or lending them money. The way to breathe life into dormant saving and latent intellectual potential, which will bring the underground economy to the surface, is to construct a legal framework that protects individual property rights, enforces contracts, defines and records deeds, patents and copyrights in a systematic manner, and establishes a rule of law and a system of civil courts to, in De Soto's words, unleash the "capacity of property to reveal the capital that is latent in the assets we accumulate." De Soto describes the process by which inanimate saving in the West is transformed into living capital: "The single most important source of funds for new businesses in the United States is a mortgage on the entrepreneur's house. These assets can also provide a link to the owner's credit history, an accountable address for the collection of debt and taxes, the basis for the creation of reliable and universal public utilities, and a foundation for the creation of securities (like mortgage-backed bonds) that can then be rediscounted and sold in the secondary markets." De Soto concludes that the West takes its system for producing capital for granted and doesn't really understand the transformation process very well. President and CEO of Fannie Mae Franklin Raines illustrates how this lack of understanding holds back minorities in this country who historically have been denied access to capital by circumstances and legal impediments. In a recent speech to Howard University, Raines said, "Homeownership is absolutely critical to closing the wealth gap. Owning a home is the working man and woman's capital engine, the democratization of capital." Last year, for example, homeowners in America withdrew about $80 billion in equity wealth out of their homes and put it to use improving their lives. Raines said owning a home is the most important investment most Americans ever make, and it is their only leveraged investment, which allows them to transform their savings into capital, transmit the wealth they have created to the next generation and transform entire neighborhoods at the core of our cities. That is why I am so glad to see the Bush White House, HUD and Fannie Mae make expanding minority homeownership a key to their economic strategy. If the World Bank and the Western nations want to bring hope to those in despair, they should enlist De Soto to go to places like the Middle East and Central Asia. He could help them build on the insights of Lincoln and Stolypin, and more recently the Marshall Plan, and unravel the "mystery of capital," which is not a mystery at all but the truth of democratic capitalism.