The Secret of Capital

Author: Hernando de Soto
Publisher:
Publish Date: 2005-05-01
Features: Why has capitalism achieved extraordinary success in the West—America, Europe, and Japan—while stagnating elsewhere? Why do most people in Third World countries and certain socialist nations lack protection under the legal system? The author and his research team, through empirical studies, tell us that the prosperity of the West lies in their understanding of the secrets of capital and the establishment of ownership mechanisms that transform assets into capital. The book The Mystery of Capital by the renowned Peruvian economist Hernando de Soto argues that capital is not accumulated assets but the potential embedded in assets to carry out new production. In other words, assets do not automatically become capital; they only transform into capital when used in the production process and satisfy the capitalists' desire for surplus value. To transform assets into capital, a conversion process is necessary—a suitable ownership mechanism must be created to unleash the potential of assets and transform them into tangible forms that can be clearly recognized, understood, and utilized.
The author, de Soto, demonstrates in this book the six functions of the ownership system:
1. It can determine the economic potential of assets. Just as the potential energy of a lake at the top of a mountain can be confirmed and then converted into kinetic energy, the potential value of a house or a brick can be released and transformed into active capital through clear ownership statements. Formal ownership statements can serve as a starting point for obtaining the interests of other groups and establishing a system of responsibilities by providing information, references, regulations, and enforcement mechanisms.
2. It can integrate scattered information into a system. The success of capitalism in the West and its failure in other parts of the world is because most assets in Western countries have been integrated into a formal system of property rights statements.
3. It can establish a system of responsibilities. The formal ownership system in developed countries transforms asset owners into individuals who can take responsibility, so people no longer need to rely on neighborhood relationships or local agreements to protect their rights to assets. Asset owners are freed from restrictive local regulations and enter a more comprehensive legal system, enabling them to take responsibility nationwide.
4. It enables assets to be interchangeable. One of the important tasks of the formal ownership system in the West is to make assets easier to obtain, thereby enabling them to be used to create surplus value. Under the formal ownership system, every asset is like an ice cube—the ownership system allows people to melt it into water or process it into steam, which can drive the blades of a turbine engine or provide power for a ship—but its essence as water remains unchanged.
5. It can establish a network of relationships. A legitimate ownership system is the West's true internet—it is a living entity that grows with every transaction and identifies new economic potential and additional functions from evolving statements. The formal ownership system makes assets interchangeable, linking asset owners to assets, assets to addresses, ownership status to enforcement mechanisms, and making it easy to obtain the full information of asset owners.
6. The formal ownership system in Western countries functions like a network. One important reason for this is that ownership records can always be found and protected regardless of changes in time and space. These records ensure that assets are expressed in the appropriate form, accurately and precisely, and can be updated and easily accessed.
Since the formal ownership system has so many benefits, how can we reach the "other shore"? De Soto believes that the most effective way is to respect existing institutional innovations that authorities may deem illegal—integrating and promoting what are actually efficient "unreasonable regulations" into the formal legal system. The development of New China, especially since the reform and opening-up, also demonstrates that recognizing the realities of productive forces and respecting the choices of the working people can boost productivity. In recent years, the policies, regulations, and guidelines issued by the central committee have fundamentally affirmed the innovations of the grassroots people—individual and private economies, shareholding cooperatives, capital markets, and labor markets are all examples. It is precisely because of the correct policies of the Party and the state that our society and economy have developed healthily today.