The Mystery of Capital (Hernando de Soto)

This book revolutionizes our understanding of what capital is – and why, since the collapse of communism, capitalism has continued to fail the majority of mankind. Hernando de Soto and his research team went into the streets of developing and former communist nations to learn what real people are achieving inside and outside the underground economy. Their findings were dramatic. The data they collected demonstrated that the world’s poor have accumulated all the assets needed for successful capitalism. The value of their savings is immense – many times all the foreign aid and investment received since 1945.

Why then are these countries so underdeveloped? Why can’t they turn these assets into liquid capital, the kind of capital that generates new wealth? For de Soto, this is the “mystery of capital.” With elegance and clarity he produces an answer of dazzling originality. The Mystery of Capital reminds us that the present global crisis is the same kind of crisis that the advanced nations suffered during the Industrial Revolution, when they themselves were like Third World countries teeming with black markets, pervasive mafias, widespread poverty and flagrant disregard of the law.

The Western nations, he argues, created the key conversion process 150 years ago, and their economies began to soar into wealth without their ever realizing what they had done. De Soto explains how this unwitting process, hidden deep in thousands of pieces of property law throughout the West, came to be, how it works, and how today it can be deliberately set up in developing and former communist countries.

As Milton Friedman explains:

De Soto has demonstrated in practice that titling hitherto untitled assets is an extremely effective way to promote economic development of society as a whole.

Hernando de Soto is President of the Institute for Liberty and Democracy, headquartered in Peru and regarded by The Economist as the second most important think-tank in the world. He was named as one of the five Latin American innovators of the century by Time. As Personal Representative and Principal Advisor to the President of Peru, he initiated that country’s economic and political reforms. In particular, de Soto is credited with designing the administrative reform of Peru’s property system which has given titles to an estimated 1.2 million families and helped some 380,000 firms, which previously operated in the black market, to enter the formal economy. This latter task was accomplished through the elimination of bureaucratic “red-tape” and of restrictive registration, licensing and permit laws, which made the opening of new businesses very time-consuming and costly.

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