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20201122 – The Mystery of Capital




Here is how author defines objective of this book:” In this book I intend to demonstrate that the major stumbling block that keeps the rest of the world from benefiting from capitalism is its inability to produce capital. Capital is the force that raises the productivity of labor and creates the wealth of nations. It is the lifeblood of the capitalist system, the foundation of progress, and the one thing that the poor countries of the world cannot seem to produce for themselves, no matter how eagerly their people engage in all the other activities that characterize a capitalist economy. I will also show, with the help of facts and figures that my research team and I have collected, block by block and farm by farm in Asia, Africa, the Middle East, and Latin America, that most of the poor already possess the assets they need to make a success of capitalism. Even in the poorest countries, the poor save. The value of savings among the poor is, in fact, immense—forty times all the foreign aid received throughout the world since 1945. …. Because the rights to these possessions are not adequately documented, these assets cannot readily be turned into capital, cannot be traded outside of narrow local circles where people know and trust each other, cannot be used as collateral for a loan, and cannot be used as a share against an investment.”


CHAPTER ONE: The Five Mysteries of Capital

Here author expresses his view that poor countries are poor mainly because they failed to create legal and cultural conditions necessary to use  available resources as Capital, which means applying resources into process of generation of goods and services in such way that they would generate profit that would increase amount of available resources, creating eventually self-supporting process of economic growth. Author notes that it did happed in currently developed Western countries centuries ago and in Asian Tigers economies after WWII, but it did not happen in Latin America and Africa.  In order to analyze why and how such process occurs or fails to occur author defines what he calls 5 mysteries of capital:

  1. The Mystery of the Missing Information
  2. The Mystery of Capital
  3. The Mystery of Political Awareness
  4. The Missing Lessons of US History
  5. The Mystery of Legal Failure: Why Property Law Does Not Work Outside the West

Then author dedicates one chapter of this book to each “mystery” and concludes by suggesting solution.

CHAPTER TWO: The Mystery of Missing Information

Here author discusses lack of information about savings and overall wealth of poor countries due to lack of formal property accounts. Author reviews multiple obstacles to legalization of business and real estate property such as overwhelming bureaucratization of all processes that makes it just about impossible to open legal business. Based on research of his group author developed table demonstrating amount of dead capital:

CHAPTER THREE: The Mystery of Capital

Here author discusses damages from the lack of legality:” Capital, like energy, is also a dormant value. Bringing it to life requires us to go beyond looking at our assets as they are to actively thinking about them as they could be. It requires a process for fixing an asset’s economic potential into a form that can be used to initiate additional production.” After this author enumerates specific effects that would result from obtaining ability to use potential of dormant capital, for example a house that could  be used as collateral. These effects are:

Property Effect No. 1: Fixing the Economic Potential of Assets

Property Effect No. 2: Integrating Dispersed Information into One System

Property Effect No. 3: Making People Accountable

Property Effect No. 4: Making Assets Fungible

Property Effect No. 5: Networking People

Property Effect No. 6: Protecting Transactions

Author summarizes this using metaphor of Bell Jar, which makes capitalism in poor countries isolated from majority, limiting effective use of wealth concentrating in the hands of lower classes unavailable for productive use.  

CHAPTER FOUR: The Mystery of Political Awareness

Author’s definition of this mystery:” If there is so much dead capital in the world, and in the hands of so many poor people, why haven’t governments tried to tap into this potential wealth? Simply because the evidence they needed has only become available in the past forty years as billions of people throughout the world have moved from life organized on a small scale to life on a large scale. This migration to the cities has rapidly divided labor and spawned in poorer countries a huge industrial-commercial revolution—one that, incredibly, has been virtually ignored.”

Author then discusses mass movement of people from rural areas to cities and industrial revolution that is occurring in poor countries. This often happens despite legal restrictions on relocations so much so that around and inside of big cities there is huge population living extralegally and this population is beginning process of self-organization, forming into political power. This is the same process that occurred in developed countries a few centuries ago during industrial revolution.

CHAPTER FIVE: The Missing Lessons of U.S. History

Author’s definition of this mystery:” What is going on in the Third World and the former communist countries has happened before, in Europe and North America. Unfortunately, we have been so mesmerized by the failure of so many nations to make the transition to capitalism that we have forgotten how the successful capitalist nations actually did it. For years I visited technocrats and politicians in advanced nations, from Alaska to Tokyo, but they had no answers. It was a mystery. I finally found the answer in their history books, the most pertinent example being that of U.S. history.”

Here author looks in details at American history, quite convincingly demonstrating that it was far from nice and clean with squatting and “tomahawk rights” being examples of extralegal acquisition of property, “shooting the sheriff” a way to protect acquired property, and political organization, with elections and legal struggle eventually resulting in formal legalization of this property and establishment of such legal system that supported effective functioning of mainly peaceful control over property rights.

CHAPTER SIX: The Mystery of Legal Failure

Author’s definition of this mystery:” Since the nineteenth century, nations have been copying the laws of the West to give their citizens the institutional framework to produce wealth. They continue to copy such laws today, and obviously it doesn’t work. Most citizens still cannot use the law to convert their savings into capital. Why this is so and what is needed to make the law work remains a mystery.”

Here author defines reasons for this failure as based on basic misconceptions:

•​all people who take cover in the extralegal or underground sectors do so to avoid paying taxes;

•​real estate assets are not held legally because they have not been properly surveyed, mapped, and recorded;

•​enacting mandatory law on property is sufficient, and governments can ignore the costs of compliance with that law;

•​existing extralegal arrangements or “social contracts” can be ignored;

•​you can change something as fundamental as people’s conventions on how they can hold their assets, both legal and extralegal, without high-level political leadership.

Author then provides detailed description for how to move from extralegal to legal capital. Here is top level graphical representation:

Then author discusses challenges to this process in details, allocationg a part of the chapter to each:

Part I: The Legal Challenge

Part II: The  Political Challenge

The final part of the chapter is discussion from perspective of the poor and how to coopt elite into supporting this process of legalization and conversion of resources into capital.

CHAPTER SEVEN: By Way of Conclusion

Here author suggests solution to all the mysteries reviewed in this book. In pretty much in expansion of real property rights to people outside elite, making just about everybody into capitalist. Author looks at Marx’s ideas and finds them outdated in the West, but still highly popular elsewhere. Author makes an interesting point that industrialization pretty much means that small business owners, legal or extralegal, practically deprived of their businesses by increasingly big corporations not only because of competition, but also because of government intervention. Marx’s solution was removing multitude of big corporations and substitute them with one huge super corporation: government. Author generally rejects this idea as historically failed in communist countries, leaving capitalism as “the only game in town”. He believes that the problem could be resolved if: governments are willing to accept the following:


My believes and ideas are pretty close to author’s with quite a few differences:

I do not think that term “capitalism” is meaningful because I do not think it is possible separate resources into capital owned by capitalist and resources controlled by everybody else, including ability to work, as non-capital. For me the difference in not qualitative, but quantitative. When individual who owns business (capitalist) and individual who owns only self (in Marx’s term proletary) cooperate in creation of new resources and then divide these resources unequally the problem is not ownership, but market value of input, which for non-capitalist could be so low that capitalist may decide not cooperate at all. In this case non-capitalist has no other choice as to use violence and coercion to obtain resources necessary for survival, which is usually done via political struggles forcing governmental transfers. Historically societies were capable maintain stability because non-capitalists had clear path of either becoming capitalist by acquiring business experience and some initial assets. As result any individual starting in live has option of working hard and either become small business owner or high market value specialist. Since majority of population possess physical and mental ability to use this option, it is quite realistic to achieve satisfactory level of resource acquisition usually identified by term Middle Class. The author’s stress on formalization of property rights would definitely open the way to such achievement for many people in developing countries, the same way as it did occur in developed countries before. This would allow much better use of resources leading to some economic catching up to occur. The bigger problem is that such, historically Western, road to prosperity is getting outdates because human labor is increasingly redundant for production of goods and services, but this problem is outside of the scope of this book.

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