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The Five Mysteries of Capital

In Chapter 1, de Soto begins by providing evidence of capitalism’s failure in non-Western countries while it flourishes in the West. He cites the example of Colombia, which faces a civil war between militias and drug traffickers, as one example of this failure. Western countries are concerned that if capitalism fails in the Third World nations, the richer economies will be faced with recession.

In light of growing concerns about the effect of capitalism’s failure in the poorer parts of the world, American and European leaders have advised leaders of these poorer nations to stabilize their currencies, ignore rioting by hungry citizens, and wait for the return of foreign investment. De Soto contends that this advice is not satisfactory and runs counter to historical trends which have already seen efforts at global capitalization fail. Capitalism’s previous failures in Third World countries have prompted numerous explanations, all unsatisfactory in de Soto’s view.

Some have blamed citizens of these countries for not implementing capitalism correctly. Others have blamed cultural differences for capitalism’s lack of success. De Soto contends that capitalism’s failure results not from these two phenomena, but rather from the fact that Third World countries are not able to produce capital in the sense that it is defined in the West. De Soto and his research team found that poor people in Asia, the Middle East, and Latin America have amassed a great amount of wealth by saving. However, these assets are not documented in the way they would be in Europe or the United States.

Because the assets (such as houses, land, businesses, and industries) are not documented, they can not be turned into capital. De Soto contends that this lack of documentation has previously gone unremarked because people in the West take the process of documentation for granted. It is so fully ingrained in the structure of the economy and the way the business is handled that no one seems to realize that it exists. De Soto demonstrates that the problem of property ownership existed in the United States during George Washington’s time. He draws a parallel between this historical problem and the current problems faced by Third World countries.

In his view, the failure to implement capitalism in poorer countries stems not from cultural or genetic deficiencies but from a lack of development similar to that faced by the United States in the eighteenth century. At the end of the chapter, De Soto introduces the five mysteries of capital that will be the focus of the remainder of the book: missing information due to lack of documentation, the nature of capital, political awareness, lessons that can be learned from the past, and the relationship of property law to capitalism. In each of the remaining chapters, the author will solve one of the mysteries of capitalism.

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