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

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“The hour of capitalism’s greatest triumph,” writes Hernando de Soto, “is, in the eyes of four-fifths of humanity, its hour of crisis.” In The Mystery of Capital, the world-famous Peruvian economist takes up the question that, more than any other, is central to some of the crucial problems the world faces today: Why do some countries succeed at capitalism even as others fail?In strong opposition to the popular view that success is made up our minds by cultural differences, de Soto finds that it if truth be told has everything to do with the legal structure of property and property rights. Every developed nation in the world at one time went through the transformation from predominantly informal, extralegal ownership to a formal, unified legal property system. In the West we’ve forgotten that creating this system is also what allowed people all over the place to leverage property into wealth. This persuasive book will revolutionize our understanding of capital and point the way to a major transformation of the world economy.

It’s become clear by now the fall of the Berlin Wall and the collapse of communism in most places around the globe hasn’t ushered in an unequivocal flowering of capitalism in the developing and postcommunist world. Western thinkers have blamed this on everything from these countries’ lack of sellable assets to their inherently non-entrepreneurial “mindset.” In this book, the renowned Peruvian economist and adviser to presidents and prime ministers Hernando de Soto proposes and argues another reason: it’s not that poor, postcommunist countries don’t have the assets to make capitalism flourish. As de Soto points out by means of example, in Egypt, the wealth the poor have accumulated is worth 55 times as much as the sum of all direct foreign investment ever recorded there, including that spent on building the Suez Canal and the Aswan Dam.

No, the real problem is that such countries have yet to establish and normalize the invisible network of laws that turns assets from “dead” into “liquid” capital. In the West, standardized laws allow us to mortgage a house to raise money for a new venture, permit the worth of a company to be broken up into such a lot of publicly tradable stocks, and make it imaginable to govern and appraise property with agreed-upon rules that hold across neighborhoods, towns, or regions. This invisible infrastructure of “asset management”–so taken without any consideration in the West, although it has only fully existed in the United States for the past 100 years–is the missing ingredient to success with capitalism, insists de Soto. But although that link is primarily a legal one, he argues that the process of making it a normalized component of a society is more a political–or attitude-changing–challenge than anything else.

With a fleet of researchers, de Soto has sought out detailed evidence from struggling economies around the world to back up his claims. The result is a fascinating and solidly supported look at the one component that’s holding much of the world back from developing healthy free markets. —Timothy Murphy

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