The title of this discussion is copied from an article by Peruvian economist Hernando de Soto that appeared in Business Week. de Soto is famous in some circles, infamous in others, for arguing for the importance of clearly defined property rights in promoting economic development. In this article, he attributes the global financial crisis to a collapse of the legal/cultural framework of property rights on which "economic facts" have historically been based, a collapse that allowed the replacement of well-defined and regulated markets by unregulated shadow markets, leading to the destruction of the full faith and credit, i.e., trust, on which predictable financial transactions depend. The article ends with these paragraphs.

"We are now staring at a legal and political challenge. A legal challenge because American and European governments allowed economic activity to cross the line from the rule-bound system of property rights, where facts can be established, into an anarchic legal space, where arbitrary interests can trump facts and paper swirls out of control. The rule of law is much more than a dull body of norms: It is a huge, thriving information and management system that filters and processes local data until it is transformed into facts organized in a way that allows us to infer if they hang together and make sense.

"Mainly, though, it's a political challenge. Politicians must raise the financial crisis to commanding heights, where the entrenched institutional problems of a failing order can be addressed. Markets were never intended to be anarchic: It has always been government's role to police standards, weights and measures, and records, and not condone legalized sleight of hand in the shadows of the informal economy. To understand and repair one of mankind's greatest achievements—the creation of economic facts through public memory—is the stuff of nation-builders."

I post this here because I am particularly interested in Keith Hart's take on this argument, though I am, of course, eager to hear what others say as well. 

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The argument about property and public memory is one I took from John Locke in The Memory Bank. I am not one of those who routinely disparage De Soto. In fact, I have learned a lot from his work. It is important to distinguish his current policy recipe -- to extend property rights into what are now grey areas of ownership so that the poor can raise capital on it -- from his analysis in two important books, The Other Path (1989) and The Mystery of Capital (2000). In the first he claimed that an entrepreneurial peasantry was flocking to Peru's cities only to be tied up in obstructive red tape which a narrow elite inherited from Spanish colonial mercantilism, forcing them into the informal economy. The second is more interesting. Here De Soto claims that developing countries are held back by an international bureaucracy favouring the rich countries (banks for example) which imposes rules of participation in the economy that keep most people out, especially the world's 4 bn poorest. Countries like the US could not have developed themselves if they had observed such a monolithic formal property regime in the 19th century when they grew fastest. Instead they relied then on hybrid institutional forms that permitted a variety of formal and informal systems to exist side by side, such as wildcat banking, vigilantism, gangs and so on.

De Soto argues that the poor have wealth in the form of land and housing, but they can't realise its value as collateral. One solution to this would be for the legal forms of property to be made more plural and financial bureaucracies lent on to bend the rules in a more flexible direction. There is an ongoing public argument in South Africa, which I know quite well, about how banking might be made more inclusive. This can be done by getting the banks to change their rules or by encouraging self-organized alternatives like rotating credit associations. In either case the nature of economic 'facts' becomes more blurred or fragmented.

As it happens I am writing a series of papers myself at the moment in which I pick another culprit for the financial crisis. I argue that the dominant economic form for the last century or more has been "national capitalism",  the attempt to regulate markets, money and accumulation through central bureaucracies in the name of national citizens, with its signature symbol being a monopoly national currency. I claim that money has escaped from this system, since the US went off the gold standard in 1971, into a distributed global network of issuers that includes many other institutions than just governments and banks. Moreover, the four functions of money (exchange, payment, store and standard) which were temporarily united in national currencies have been breaking up into more specialized instruments for decades now. This represents a crisis for political regulation of money at a more inclusive than national level. No policies that assume national control, as in the 1930s, will work this time. The conclusion is that appropriate moves by the political classes that got us into this mess are unlikely short of widespread economic and political breakdown of the sort associated with world war.

So I confess to being unimpressed by De Soto's recipe. It doesn't address his own historical analysis in a subtle enough way and it fails to consider the sort of political evolution necessary to bring finance under control (see Inside Job throughout).

Thanks, Keith. Very enlightening. de Soto is, I confess, one of those authors I have read about but not read, so your summary of his arguments is gratefully received. 


I wonder what others here think of de Soto.

I read The Mystery of Capital because Manila was one of the surveyed  third world examples.  It is interesting to connect the lack of property rights to poverty, but I don't think the connection is that strong when it comes to urban poor.  The squatters in Manila, for example, have properties in rural areas.  They come to manila because of the financial allure of the city. There are government programs that try to relocate the squatters back to rural areas, but it seems they don't work. What is at play here is the notion of imagined capital, both as a center of commerce and a source of wealth.  To a rural resident, a mention of Manila evokes economic opportunities.  I know a few slum dwellers who would rather stay in slums and rummage garbage in cities than go back to their towns disgraced and with unfulfilled dreams.  Poverty, indeed, has a cultural dimension.


I wonder if  De Soto's ideas of property rights, economic facts, and public memories were heavily influenced by the economic and political practices of the Peruvian Indians.  I find his ideas very relevant in the economic marginalization of the indigenous peoples in the Philippines who are still fighting for ancestral domain, human rights,and self-determination.   I tried to know before why I did not see among squatters what I saw among indigenous groups.  It was a complex project in Urban Anthropology that I gave up.  It was clear to me though that the sense of community in slums was bound by poverty and ideology influenced by leftist groups, Marxist intellectuals, and union workers not by public memory, sociocultural facts, and historical experience.  Squatters come from different towns with different cultures, worldviews, and realities. Their only shared social experience is poverty.   I still wonder if poverty is a culture in itself.  It seems it is.                 

Isn't the critical fact here that no one wants the squatters' homes in the country, and rag-picking in the city is no way to acquire the capital required to secure a loan to go to school, start a business or take other steps toward upward mobility?
Given Keith's gloomy conclusion that politicians are unlikely to take the necessary steps to restore national currency, short of a major crisis such as a world war, perhaps we should put our energies into designing all sorts of alternative currencies, based on real resources...  Perhaps universities would be a good place to start - all those extra bits of work academics are expected to do without being paid for could be rewarded in an alternative currency, either local to that uni or common to all UK unis...  I recently heard that people only get paid a piffling amount to read and examine PhDs...  maybe that would be a good place to start...  people could then use their acquired tokens in exchange for more research leave...
I think with Keith's opinion that much of the problem has come from the institutional change that made capital highly mobile. It was especially clear in the cases of Iceland and Ireland - conditions were such much capital was diverted there without the countries really having other economic activities besides finance to justify that accumulation, and then proceeded to disapear as soon as it became clear things were going wrong. In a way, the situation has not been too different from what Karl Polanyi described in The Great Transformation - and yes, that one ended up in two world wars.



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