The Mystery of Capital (2003) by the Peruvian economist Hernando de Soto is a book that seeks to provide an explanation as to why the developing world is not as rich as the developed world and what can be done to change this. The books central thesis is that legalising land titles is a critical step in developing capitalism and one that the developed world has done successfully while the developing world has not. de Soto also makes the point that registering businesses and providing title for them is also critical for development.
The book is divided into 7 chapters. The first is on The Five Mysteries of Capital which are later expounded in the rest of the book. The Mysteries are: The Mystery of Missing Information, The Mystery of Capital, The Mystery of Political Awareness, The Missing Lessons of US History and The Mystery of Legal Failures. The fourth mystery is merely a missing person’s search and probably doesn’t need Poirot and an economist to solve. The book also has a conclusion.
In The Mystery of the Missing Information de Soto looks at how in the developing world there is a lot of wealth but the ownership of it is often undocumented. He points out that more than half the work force in many developing countries is not in the legal official economy. de Soto and his team went through and worked out how long it took to register a small business legally in Peru. He found that it would take 289 days of 6 hours to get the business registered. He goes on to show how even more land is not officially given a title. de Soto points out that the value of this property is that more than half the real estate in the developing world is not registered. This unregistered land cannot be used to borrow against so it is dead capital.
In The Mystery of Capital de Soto expands on the idea that capital is not just the physical objects but also having a legal title that enables the stuff to be borrowed against and to be capitalised. He goes through the steps needed to realise the immense value locked up in non-legal property in the developing world. In The Mystery of Political Awareness de Soto ponders why the legal systems of the West were able to use their capital. de Soto shows in the next chapter on The Missing Lessons of US History how in the US title was expanded to include the land settled extra-legally on the frontier. In the chapter on The Mystery of Legal Failure de Soto looks at how various reforms have failed to get small title holders into the system over time.
In conclusion de Soto synthesizes his ideas and says how he believes that setting up legal systems that legalise land ownership and allow businesses to easily register and pay tax can work to improve the developing world.
de Soto’s book presents a powerful idea that helps to explain the difference in wealth between the developing and the developed world. The book’s breakdown into mysteries and some of the hyperbole is a little much but de Soto’s main point that title legalisation and the legalisation of businesses would greatly benefit the developing world is hard to dispute.