Freedom Book of the Month for December 2000:
The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else
by Hernando de Soto
Basic Books, 2000, 276 pp.

The problem of economic development outside the West has bedeviled economists and politicians since the turn of the last century, and has become more urgent and puzzling with each passing decade. The end of the Cold War merely added to the confusion as former Communist countries have demonstrated a lack of ability to convert to viable market economies. They look much like the Third World nations that were once their client states.

In "The Mystery of Capital," Hernando de Soto summarizes years of research into the reality of economic life in places as disparate as Haiti, Egypt, the Philippines, and his native Peru, and comes to some remarkable conclusions as to the causes of their failure to make capitalism work.

The basis of capitalism, of course, is capital, and the basis of capital as an economic tool is rational property law. Without a complex system to delineate and protect rightful ownership, capital is "dead" -- it can't be used as collateral for a mortgage, it's not attractive as an enticement to investors. Its potential as a wellspring for further production can't be tapped, because owners, lenders and investors have no certainty of ownership beyond the moment.

De Soto's team documented the existence of trillions of dollars in "dead capital" in the economically blighted areas of the globe -- assets far in excess of every World Bank loan, foreign aid package and foreign investment portfolio combined. What the "poor" countries lack, they concluded, is not the assets necessary to economic success, but the framework in which those assets can be rightfully called capital.

The problem isn't lack of government. The people of the Third World have government coming out of their ears. It's just that, while they've adopted the trappings of western governance (i.e. the bureaucracy and the paperwork), they've attached meaning and substance to the trappings rather than building structures which fulfill the needs of a market economy.

As an example, it takes 77 bureaucratic procedures, the involvement of 31 agencies, and 5-14 years to acquire a piece of land in Egypt -- with no guarantee that the deed won't be revoked by the next ministry to process the paperwork. With so much red tape and so little certainty, is it any wonder that entrepreneurs and investors don't see much potential there?

Naturally, a large part of a nation's commerce is bled off into the underground economy under such a regime. This helps, but it still leaves the fundamental problem -- lack of clear, defensible title to property -- unsolved. Capital moves, but not in a manner transparent and secure enough for collateralization or to attract the investment of those outside the immediate milieu.

Looking to history for answers, de Soto analyzes the experience of the United States (which had similar problems in its early existence) and to the musings of economists from Adam Smith to Karl Marx, building a model of capital as a living resource whose bloodstream is property law and whose beating heart is the freedom to own property with clearly understood and enforced rights to that property.

"The Mystery of Capital" is essential reading for anyone who desires a full understanding of economic life today, and it stands next to Jean-Francois Revel's "Democracy Against Itself" as an expose of the challenges facing the Third World and the former communist nations on their journey from poverty and despotism to freedom and economic success.

Order "The Mystery of Capital" from Laissez Faire Books for $19.25 (30 percent off the publisher's price of $27.50.)

November 2000: Escape from Leviathan by J.C. Lester

October 2000: The Art of Political War by David Horowitz

September 2000: An Enemy of the State by Justin Raimondo

August 2000: The Triumph of Liberty by Jim Powell

July 2000: A Generation Divided by Rebecca Klatch

June 2000: Law's Order by David Friedman

May 2000: Forge of the Elders by L. Neil Smith

April 2000: Reciprocia by Richard G. Rieben

March 2000: The Art of Fiction: A Guide for Writers and Readers by Ayn Rand

February 2000: Addiction is a Choice by Jeffrey A. Schaler

January 2000: Revolutionary Language by David C. Calderwood

Special December 1999 Feature: The Freedom Book of the Year: Send in the Waco Killers: Essays on the Freedom Movement, 1993-1998 by Vin Suprynowicz

November 1999: Conquests and Cultures by Thomas Sowell

October 1999: A Way To Be Free by Robert LeFevre, edited by Wendy McElroy

September 1999: Assassins (Left Behind) by Tim LaHaye and Jerry B. Jenkins

August 1999: Don't Shoot the Bastards (Yet): 101 More Ways to Salvage Freedom by Claire Wolfe

July 1999: The Mitzvah by L. Neil Smith and Aaron Zelman

June 1999: The Incredible Bread Machine by R.W. Grant

May 1999: Send in the Waco Killers by Vin Suprynowicz

April 1999: It Still Begins with Ayn Rand by Jerome Tuccille

March 1999: The Dictionary of Free-Market Economics by Fred Foldvary

February 1999: Feminist Interpretations of Ayn Rand edited by Mimi Reisel Gladstein and Chris Matthew Sciabarra