The Five Mysteries of Capital - Essay Example

?The Five Mysteries of Capital Capitalism is the only force which exists in the world today. However, capitalism has caused a lot of misery in the countries outside the western hemisphere. Although, the Americans generally ignore misery in the outside world caused by capitalism, wariness of capitalism is apparent now even in the American continent itself. Now the Western business is jittery that failure of the third world to implement capitalism will lead to recession in the west because in today’s world, both the east and the west depend on each other inextricably. The response of the Western leaders to this imminent danger of the failure of capitalism is both inadequate and irrelevant. Global capitalism has been tried before in the world and it has failed. However, when the reforms proposed by the West prove ineffective, it tends to blame the East for its innate weaknesses like insufficient entrepreneurial skills. The matter of the fact is the entrepreneurial skills of the Third World and the ex-communist countries are quite similar to those of their Western counterparts. If the people in the third world do not suffer from certain fundamental deficiency in cultural or genetic heritage, then what could be the reason behind the fact that the capitalism is successful only in the West? An answer to this puzzling question is the failure of the Third World and the ex-communist countries to produce capital. The poor people in the developing world are not wanting in the assets that make capital successful. They in fact hold these assets in defective form: the ownership rights are not fully documented, the terms of the businesses are not defined and the industries are not located at suitable places the cumulative result of which is that these assets cannot be turned into capital. In the West, the property is fully documented which can be used as a capital for producing surplus value in various forms such as mortgage and securities. Because of the absence of this representational process, the third world countries are undercapitalized. The third world despite assimilating a lot of western cultural traits has failed to follow the example of the West in this crucial area of producing sufficient capital. This is the mystery of capital. The fundamental difference between the western nations and the Third World and the ex-communist countries is that only the former have the knowledge of converting capital from places which the other countries cannot. This absence of the conversion process in the Third World is compounded by the failure on the part of the West to understand the origin of the capital. This book is an effort to trace the history of capital and learn right lessons from it to help poor countries overcome their problems which have nothing to do with deficiencies in culture and genetic heritage. This fact has been made clear by the fact that the regions which are culturally as diverse as Russia and Latin America share the same problems because of building capitalism without capital. The Third World today faces the same challenges such as lack of enforcement of property rights, poor law and order situation and biased business and trade regulations which were faced by US in its early history and other Western countries only a couple of centuries before. There are at least five questions which need to be answered to understand why the role of capital despite being the most important component of Western development is not adequately understood: first, how much saving has been done by the poorest sectors of society in the west; second, what is the nature of capital and what is its role in the creation of wealth; third, why have the governments not been able to put the “dead Capital” in the hands of the poor people to some profitable use; four, why have the lessons not been learnt from the history of successful capitalist countries and five, why the adoption of the Western legal system in the third world has not delivered. The Mystery of Missing Information In the Third World, the documentation of property is sketchy and the rules related to contract and property rights are ill-defined and poorly enforced, still a significant majority despite being obviously poor possesses much more assets than is generally imagined. What is missing here is the institutions which give life to capital. The history of 19th century America faced the same situation which the Third World and the ex-communist countries face today. The increasing number of immigrants began to illegally occupy the lands which usually led to innumerable rounds of pitched battles with the officials sent to reclaim the government property. Before 1950, the development level of the most of the Third World countries was similar to that of 18th century Europe. After 1950, rapid changes took place in the Third World which had precedents in the history of Europe when Europe was undergoing a transition with the invention of new machines leading to unemployment in the agricultural sector and a consequent drive for urbanization and greater life span etc. The large influx of rural population to the cities made legal housing or participation in legal economic activities well-nigh impossible because of the limited capacity of the cities. A number of Third World and the ex-communist countries face similar situation today. The bureaucratic hurdles compound the problems by actively encouraging illegal actions. A few drastic examples will elaborate this: in Peru, it generally takes six years and eleven months requiring 207 administrative steps in 52 government offices to build a house on state owned land. In Philippine, it takes from 13 to 25 years on the average to purchase a dwelling that one has built on state or privately owned urban land. It takes an average of 19 years in Haiti to obtain a land legally. In every Third World country, staying legal is as agonizing an ordeal as becoming legal. Undercapitalized sectors ranging from the cottage industries to highly sophisticated manufacturing units continue to operate throughout the Third World and the Ex-Communist countries often using public utilities with the help of conniving officials. At times, these sectors encroach on legal activities such as transport and health services. Russia, despite remaining a dominant world power, had the patterns of land ownership characteristic of the Third World only four years after the fall of communism in 1989 with ill-defined laws related to the use, possession and alienation of land. In a situation where the illegality is the norm, the challenge for national and international governments is to help these undercapitalized sectors integrate into the mainstream business activities. The author and his team tried to measure the value of the possession of the people left out of the capitalized economy in five cities – Cairo, Lima, Manila, Mexico City and Port-au-Prince - and chose real estate as the most reliable proxy of assets. In order to circumvent the legal obstacles, the methods used by such people are as diverse as building shanties on government owned lands, forming agricultural cooperative to buy estates from old owners and converting them into housing and industrial projects., transferring property without informing the registry office and building houses on lands meant for industrial use among others. The total worth of the real estate illegally held by the people in the Third World and ex-communist countries is estimated to be worth $9.3 trillion which is as much as the total value of all the companies listed on the main stock exchanges of the world’s twenty most developed countries. The real challenge for the leaders of the Third World and the Ex-Communist countries is therefore only to realize how to transform these assets into capital so that the problem of poverty could be effectively addressed. The Mystery of Capital Why the huge resources of the Third World and the ex-communist countries to the tune of $9.3 have failed to produce value beyond their present state is because the world has failed to realize that the conversion of physical assets into production of capital involves a complex procedure. In the West, this process by which the economic potential of the asset is tapped to induce surplus value out of it in the expanded market was initiated with the establishment of formal property system which captured and organized all the relevant information required to represent the potential value of an asset. The formal property system produced at least six effects in the West which made the production of capital from assets possible. Much of the problems of the poor in the developing world can therefore be traced to their inability to benefit from these six effects. The first effect of the formal property system is the fixing of the economic potential of assets. When certain useful qualities about the asset such as using it for the purposes of gaining credit, mortgage and securing the interests of other parties etc. as opposed to the physical qualities of the asset are represented in the writing, capital is born. The formal property system thus creates accountability within the framework of a set of rules and regulations and enforcement mechanism. The second effect of the formal property system is the integration of dispersed information into one system. An integrated data base about the property in the West ensures that the information is standardized and universally available and owners can use their assets optimally by benefitting from the large network of people. In contrast, in the developing countries with parallel legal systems run by disparate organizations, the information is sketchy. Consequently, the owners have limited set of choices about what then can do with their property and their choices are shaped by the imagination of a small network of relatives and close associates. The third effect of the formal property system is making people accountable. Integrating the property into one formal property law makes the owners accountable. Linked with the formal system, individuals are easily identifiable and any improper action on their part results in fines, penalties, downgraded credit rating and jeopardized reputation as trustworthy party to banks, companies etc. The fourth effect of the formal property system is making assets fungible. When assets are integrated into a formal system, their similarities and differences are easily observable. Similarly, the measurement, combination and division of such assets are easily done. The fifth effect of the formal property system is that it has converted the citizens of the West into a network of individually identifiable and accountable business agents. With an improved flow of communication about assets, the owners have become economic agents able to convert assets within a broader network. The sixth effect of the formal property system is the protection of transactions by tracking the property records in time and space. The public and private agencies record useful information about assets and alert anyone eager to use them about things that restrict or enhance its realization. In a situation where the majority of people of the developing world have been marginalized from the formal property system, the assets of a small minority are integrated, fungible, networked and protected which has resulted in a capitalistic apartheid which is expected to become worse unless the majority of the population is integrated into a unified formal property system. The Mystery of Political Awareness There have been remarkable demographic changes in the Third World and the ex-communist countries in the recent past and an equally telling failure of the legal system to deliver. The astonishing growth in the size of big cities of these countries is accompanied by an equally astonishing growth in the underground market in these cities. The governments in these countries have responded to the emergence of illegal activities in a variety of ways. At times the governments take such drastic steps as demolishing shanties and sometimes they choose conciliatory approach and build schools and pavement for squatters, initiates micro-financing programs, regulates transport systems and try to improve law and order situation. These demographic changes suggest that a great industrial revolution is underway in the Third World and the ex-communist countries, which is much broader in scope than the European industrial revolution and making its presence felt in much less time. The migrants in the developing countries are free to deal only with people they intimately know. The legal system, instead of integrating everyone into circle of the mainstream economic activities, prevents the migrants from negotiating with strangers leading to poor specialization and low productivity in constricted markets of small size. In sharp contrast to these closed groups in the developing countries, the integrated legal property system in the West encouraged the creation of a larger network where the potential to create capital increased substantially. Faced with these legal strictures, the migrants therefore invent a variety of extralegal arrangements to function in the economy in small groups. The fundamental problem of the developing nations is the failure to recognize that most of the disorder in these nations is the result of these drastic changes that hold the promise of radically changing the societies. There are at least two reasons for failure to recognize this problem. First is the inability to see that the surge in world’s extralegal populations has generated a new class of entrepreneurs with their own legal arrangement. The second reason is the inability to realize that the problems faced by the developing world now were also faced by the West during its industrial revolution. One of the reasons why the coming of the industrial revolution in the Third World and the ex-communist countries was not visible was because a sizable economic activity was not legally registered or titled. The sheer number of individuals migrating towards the cities because of a variety of reasons has created a number of opportunities for them and contributed to the onset of the industrial revolution. However, in the cities, these migrants have to face discriminatory laws aimed at denying them formal property rights over real estate. So they have been forced to establish their own extralegal systems. The second reason is the inability to realize that the problems faced by the developing world now were also faced by the West during its industrial revolution. The industrial revolution in Europe has been found to be linked with mass migration towards cities, longer life span and large income differentials in rural and urban areas. In the absence of legal avenues, the European migrants started extralegal activities which over time swamped the legal activities. The governments were forced to make concessions and the lynchpin of their new strategy was to design the law in order to serve the needs of the common people especially their expectations of the property rights. If the authorities in the Third World and the ex-communist countries similarly accept the extralegal migrants as an instrument for a major redistribution of power and adapt their legal systems so as to serve the extralegal population, they will be able to convert their assets into capital. Read More