Property rights are necessary for the economic development of nations, a finalist for the 2002 Nobel Prize in economics said last week at a lecture at the University of North Carolina at Chapel Hill.
Hernando de Soto, a Peruvian economist, spoke about the importance of property rights in pulling developing nations out of poverty. De Soto, who authored The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, and The Other Path, talked about his belief in the free market and property rights to fight poverty.
The lecture was sponsored by the Frank Porter Graham Memorial lecture series, an annual event that features a variety of speakers, covering the themes of poverty, freedom of speech, and student involvement as a catalyst for change.
According to de Soto, without the clear assignment of property rights, backed by a credible legal system, no developing nation would be able to accumulate capital, or acquire wealth. De Soto arrived at this conclusion by noting that everything around us has the potential to be owned by someone. Only through ownership is an individual able to establish the collateral necessary to gain credit. Credit, in turn, is then used to gain capital and wealth, he said.
But, it is the “legal system,” de Soto said, “that allows individuals to capture the values around you.” This “capturing” of values is the legal assignment and enforcement of ownership. Without the guarantee that someone has ownership over a material value, no individual would be willing to induce an economic exchange with anyone else, thereby preventing the growth of an economy.
“Capital or surplus value will not happen unless a country has a property system to support it” because, there is “no way to organize yourself internally so that you can be credible,” de Soto said.
In other words, if someone has no way to prove to the world that he indeed possesses wealth that can be placed as collateral for any capital venture, he will never be able to gain capital. In the Western mindset, this all seems to be common sense as well as common practice.
De Soto used the following analogy: If someone wants an apple, he goes to the grocery store, picks up an apple, proceeds to the checkout, tenders his check-card — because, of course, he don’t carry cash anymore — and buys the apple. What allows the exchange to occur? Trust, backed by property rights and a credible legal system, de Soto said.
For starters, the shopper doesn’t steal the apple because he fears legal repercussions, de Soto said. Instead, he buys the apple, trusting that the apple has been properly cared for. Then, when he pays for the apple with his check-card, the store, after checking to make sure the shopper is indeed the card holder, trusts that the shopper has the necessary funds to pay for the apple, even though he is “paying” for the apple with a piece of plastic that only has exchangeable value for him.
The whole exchange process was made possible because there is a belief that the representation of the thing – the “safeness” and “nutritional value” of the apple, and the monetary funds behind the check card — are backed by the thing itself, not just physically within the object, but also by the owner of the object. If the apple poisons the shopper, it is the grocery store or someone in the chain of produce production who is at fault. If the shopper’s check-card bounces, then he is at fault. Property rights assign ownership, and the legal system assures the connection between the item owned and the owner, thereby pinpointing responsibility, do Soto said.
“Yet,” de Soto said, “in five-sixths of the world, this legal system is not in place.”
Instead, there exists “extra-legal” sectors, or black markets, that arise to replace the lack of legal fortitude necessary for legitimate economic growth. In the black markets, individuals have assigned property rights and have defined a mock-legal system to enforce exchanges. The fact that such sectors exist, de Soto said, clearly shows that the idea of property rights and the necessity for a standard organizational structure in which to foster these exchanges is a part of human nature and capital growth.
De Soto traced the emergence of property rights throughout history from the United States, to Germany, to Switzerland and Japan. The United States, as the most powerful and wealthy nation in the world, has a responsibility to remember how individuals grew their capital, de Soto said.
“You have to make an intellectual effort to remember what you did in order to not make the same mistakes again,” de Soto said.
What individuals should remember, de Soto said, is that in order to spread wealth to the impoverished, developing economies, Americans must assign property rights and create legal systems whereby people can utilize specialization, which, as Adam Smith said, ultimately leads to wealth. With the growth of wealth, comes a decline in poverty, which is sought by the developing nations.