Mystifying the Concept of Capital: Hernando de Soto's Misdiagnosis of the Hindrance to Economic Development in the Third World

In: The independent review: journal of political economy, Volume 13, Issue 1, p. 57-79

Abstract

Argues that Hernando de Soto's explanation for poverty in Third World countries in, The Mystery of Capital (2000), is a misdiagnosis. His assertion that the inability of poor people to convert their "dead capital" into "live, functioning capital," is based on a misconception of "capital" & its sources. It is argued that the real problem is the inadequacy of domestic savings to finance investment rather than the lack of titles to property. Poor people in Third World countries do not have the assets to borrow funds for investment; therefore, de Soto's solution of a huge titling program represents a "wasteful diversion" from the need to promote economic prosperity. Issues discussed include confusion over the meaning of "capital;" de Soto's use of the term "dead capital;" & the limited role of property titles. Other claims made by de Soto that are factually incorrect or self-contradictory are pointed out along with the importance of correctly diagnosing the causes of poverty in Third World countries in order to enact effective policy. Tables, References. J. Lindroth