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The Mystery of Capital

The inability of the developing world and ex-communists countries to realize the actual economic value of their property has lead to the creation of ‘dead capital’. The West has been able to not only treat their property as a physical entity but also as a virtual one, both carrying different kinds of economic value. This has been done through a well established property representation system which has allowed for the creation of capital. Unfortunately, with the passage of time, the world has forgotten about this very critical prerequisite to a successful capitalist country.

The idea that property and other assets have far greater value than just the physical capacity of those assets is not a new concept and has in some ways been mentioned by both Adam Smith. According to Smith, in order for assets to be converted into capital and hold the ability to employ new production it is vital for them to be ‘realized’ in some manner. In other words, they must be processed and fixed into a tangible form. In the context of our discussion, this process is the adequate representation of assets and the subsequent ability of those assets to be traded or serve as collateral.

Although this process was originally set up for protecting property rights of owners it enabled people to engage in different kinds of economic activity with greater ease. Unfortunately, in the 3rd world, such systems have not matured enough to allow the smooth functioning of the economies. Their primitive functioning forced people to create an extralegal economy, making it even more difficult now for the poor to opt out and become part of the legitimate system at the risk of losing everything they have.

The formal property system of the West produces a variety of effects that enable people to generate higher capital. Firstly, the formal representation of the asset has enables it to develop as an economic entity and not just a physical entity, thus, enabling it to be traded, kept as collateral, used as an address for collecting debts and taxes and so on. Secondly, the amalgamation of different kinds of information and data at one central point and its integration into one structure has made it easier to classify assets and give them meaning without even having to see or touch them.

Thirdly, individuals have now been given more control over assets as they do not have to rely on archaic arrangements with neighbours or the community to engage in transactions and can act on their own to generate capital through loans, equity etc. Furthermore, formal property systems have also enabled the division of assets amongst a group of people on paper, without having to physically divide the asset itself.

This formalization has also enabled the development of networks of people, bringing together buyers, sellers, taxpayers and tax collectors, and legally attaching individuals to their property. Lastly, since property records are well documented and archived, it is easier to manage economic transactions on assets. Mortgage, insurance and other financial companies have actually formed to assist in value creation. All these institutions have to follow strict procedures while engaging in any kind of transactions, maintaining complete transparency and rigour.

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