The five mysteries of capital
Many world economies, if not all, are founded on capitalism, socialism or communism. The needs of the people in a particular region or country will determine which option the government takes in order to meet them. Many of the world’s developed economies apparently used capitalism as the best option to organize their economies in ways that will meet the needs of its people.
Most of the countries in the West employed capitalism as an option which, as it can be seen, has enabled them to a large extent to create much of the wealth they have now. The way market forces in existence relate to each other, helps these countries in sustaining the created wealth.
Developing countries on the other hand, employed a different approach to this; they adopted the socialist and communist options as the best options of organize their economies. And as it has been witnessed, many of these countries struggle to sustain these forms of governance.
It is this disparity in wealth creation between developed countries and third world countries that compelled Hernando to say that capitalism is the only feasibly way logically, that can be effectively used by countries to organize their economies in this modern age.
He starts this book by suggesting that capitalism has not been maximized fully and therefore, has not achieved its optimum potential in the developing world. He goes ahead to say that the reason for this failure is that most of these developing or centrally planned nations have not been in a position to ‘globalize’ capital internally, in their own boundaries.
To clearly articulate his ideas about capitalism, he has summarized his many years of research to bring out the economic realities of life faced by countries such as Egypt, the Philippines, Haiti and even Peru, his native country. Studying these nations, Hernando was able to come up with conclusions as to what is the main cause of the failure of the economies in these countries.
In his effort to find out why capitalism does well in developed nations especially those in the West and not in the developing countries, Hernando embarked on unraveling a number of mysteries that had been neglected by many scholars for many years.
He summarized them into five, the first one he called it the mystery of missing information, the second as the mystery of capital, the third he called the mystery of political awareness, the fourth as the missing lessons of the US history, and the last one he called the mystery of legal failure. Basically, these mysteries summarized Hernando’s whole idea of how countries and people can form capital.
The mystery of missing information
The defenselessness and troubles of many of the people who are not blessed financially have been recognized and emphasized by many of the voluntary bodies in the world. However, the capacity of these people to accumulate their own wealth in terms of assets seems to be ignored.
Researchers write about the plea of these people from the comfort of their homes or offices but they have never gone on the ground to look at the potential that these people have. This is why Hernando and other research sought set out to go on the ground and look at how much wealth the poorest people have in the poor backyards. They discovered that these people had enormous wealth; however, most of this wealth is just dead capital that only serves a few people.
This is why according to Hernando, despite that fact more than five-sixths of the world’s population is poor, it is this fraction that owns the world’s houses, crops and even business, although they are all extralegal. This type of property needs legal documents such as articles of incorporation, titles, and deeds, which most of the poor do not have, and therefore, they do not use them. This why Hernando calls these property “dead capital” because, according to him, it is property that cannot be used by people in the generation of more capital.
Hernando sees this dead capital as the inherent potential in these poor people which cannot be used simply because its existence in terms of infrastructures is only implied instead of being legal. It is very difficult for governments and people in developing countries to confirm addresses, compel people to pay their debts, apportion property ownership into shares, secure legal housing, and legal jobs or participate in formal businesses, if there are no laws put in place to establish ownership.
He goes ahead to expound on these by saying that poor people have businesses but lack statutes of incorporation. They have houses but lack their titles. They have crops but no deeds to them. These are very important representations, lack of which, makes it impossible to grow economically. Many developing nations have adopted almost all western inventions, but have not been able to generate enough capital, sufficient to sustain their economies domestically simply because they lack the above mentioned representations.
Hernando argues that having a government in place is not the problem, because many of these so called governments have copied everything that western governments do in appurtenance. However, these governments have concentrated all their focus and efforts on this appurtenance instead of putting in place structures that can meet the needs of a market economy. Hernando notes that many people in developing countries encounter many roadblocks in their quest for legal property rights.
He has cited an example from Egypt whereby it takes many procedures through many agencies over a long period of time for one to acquire land. This is besides the fact one is not guaranteed that the deed to the land will be revoked by the next government to process the needed paperwork. He therefore feels that it is these cumbersome bureaucratic measures that make resources in developing nations invisible both commercially and financially.
They are the ones responsible for the many extralegal sectors in developing nations. They have lead to a very active area in the business field. That is why Hernando thinks that despite the poor status of these countries, they posses millions of treasure that is just waiting to be used only if these people unravel the mystery of how to profitably transform their assets.
The mystery of capital
This is the most important chapter of the book because it covers the major mystery of creating sustainable wealth. He suggests ways that can be used to revive the so called dead capital found in the developing world and make them sustainable just like those in the western world. He suggests that the solution to these problems is to put in place what is called formal property rights. He delves here in explaining what he implies by active capital borrowing from the ideas of classical economists such as Karl Marx and Adam Smith who tried to define what capital is.
He shows how the history of capital started right from the medieval times. For instance, he shows that capital was taken to stand for the number of cattle or livestock and how this was valued in terms of money in Medieval Latin. Using Smith’s definition of capital, Hernando managed to figure out that capital does not necessarily mean the number of accumulated stock of assets as many people believe, but rather the potential that these assets hold in facilitating more and new production.
He acknowledges that poor people have great potential, but this potential can only be realized or discovered if they are granted or are facilitated with proper ways of getting property rights. He compares capital to electricity which, hidden in water, must first be harnessed in order to be realized and used.
He notes that Western nations were in a position to create capital simply because they put in place formal property arrangements. The process of putting in place such type of system entailed the collection and preservation of information pertaining to assets in recorded data. According to him, this system of formal property is a representation of the shared concepts of what can be termed as meaningful economically as regards assets.
He asserts that in formal property system, capital is generated in transactions that relate to property. It is the formal property system that gives authenticity to transactions that bring about capital in most of the western countries. He appreciates the fact the putting information that is diverse and dispersed into a single system is not an easy task, but it is a worthy one because it part and parcel of property rights. He goes ahead to show just how long it took western countries to put in place property rights that are fully integrated in the system.
For a long time, people have blamed poor and developing nations for lacking an entrepreneurial spirit or put simply, a market orientation. In his research, Hernando discovered that the major obstacle to the people in third world nations lies in their inability to generate capital.
Many of the western countries however, are not able to pinpoint out exactly how this system works for the developing and poor nations. The reason for this failure lies in the fact that the system is buried deep in regulations, legislations, statutes and institutions which have specifically been established to govern it. He therefore, strongly believes as seen in this book “Mysteries of capital” that it is only the extra legal sector that can appreciate the beauty and the workings of the system used in these poor and developing nations.
He suggests that to make people accountable regardless of their location will create individuals from the masses, individuals who will come out and bring change to the respective localities. Previous impossibilities can only be realized if people are granted formal property rights because these rights are not personal thereby preventing one from getting lost in the masses. With formal property rights in place, one becomes legally attached to his or her property and therefore, is bound to work towards improving it by creating more property.
Property rights have made assets freely interchangeable with others setting a standard, both nationally and globally for their trade, which has in turn allowed assets to flow easily between persons. This has enhanced networking among individuals, a factor that has necessitated easy flow of information on assets and the potential that they carry in respect to generating more capital.
He therefore concluded this important chapter by observing that the difference that exists in the ability to create wealth between poor and developing nations lies in the fact that developing nations lack the ability to access formal property system and the inaccessibility of the system to the western nations.
The mystery of political awareness
In this chapter, Hernando discusses the third mystery by trying to find out why there is a lack of awareness pertaining to this crucial issue, why existing governments have year after year, failed to tap into this promising potential that the poor carry? He attributes this to the mass influx of people into urban centers that has been happening around the world.
He however notes that recent migration of people from rural areas to urban centers in non-western countries is not the main problem, to him; it is the failure or the delay in realizing that the disorder created by this migration of people in developed countries as being the result of a revolution that brings much promise than harm. He therefore, sees this migration as a problem that we as a people, must accept as something unavoidable and find ways of solving it.
He cites urbanization as a problem that should be addressed urgently because many of the countries experiencing it are poor and therefore, lack necessary institutions to tackle mass migration into the few and poorly developed urban centers. The migration also causes fragmentation of property arrangements.
These problems coupled with the fact that governments in these countries lack standard laws that permit assets and the agents of the economy to freely interact and pave way for the rule of law to apply. The best way he thinks can solve this problem is for such governments to exploit the inherent potential that the urban influx of people carries.
Hernando however, says that the real problem is not tackled because of the existence of two blind spots. In the first blind spot, Hernando shows that migrations from one area to the other had been around for many years. He shows that the famous industrial revolution in Europe was as a result of the influx of people into European cities.
Restrictions and economic hardships then forced these people into extra legal undertakings. Therefore, from the very beginning, the increase in the world’s extra legal populations brought into existence a new and unique class of entrepreneurs wholly with new legal arrangements to govern them.
However, more often than not, the government always felt threatened by these migrations, they saw problems with each and every migration. They associated them with the spread of diseases and increase in crime. They always failed to notice that root cause of this disorder was not population or the poor few, but rather the old-fashioned system of owning property. This was the main cause that simply needed to address in order to solve the problems facing its people.
The second blind spot came in the failure of the people and governments to realize that the problems facing them were not new at all. What they had to do was to simply adapt to the new realities, but instead, governments embarked on putting in place new legal mechanisms in order to stamp out the new settings. However, new legalities brought with them new infringements leading to enactment of a series of laws after old ones were broken.
Too much restriction left migrants with extra legal work as their only option of getting an income and therefore increased extra legality. Many of the western nations were overwhelmed with the increase of extra legality; they slowly and gradually started to give in just as it is happening today in developing nations. After many years of infringements and defying of law by extra legalities, politics came in and forced governments to adapt to the new realities to conform to the needs of the common people.
He therefore, notes that the past of the developed nations resembles to a large extent to what is currently happening in developed nations. He therefore concludes by showing us that many of the so called developed or western countries went through this process.
He shows how the west tried many times to solve this same problem little by little but it proved to be an ineffective approach. What these countries needed to do was to simply reform their laws and put in place a property system that would have ensured that there was division of labor, that everyone was integrated into the system.