The Mystery of Capital
The Mystery of Capital

The Mystery of Capital

Negotiating among themselves, they worked to protect their rights and increase the value of their property until the government could step in to validate their claims. (Location 2141)

Extralegality was—as it is today in the Third World—rife. (Location 2142)

One reason for the easy acceptance of miners’ district regulations was that these were often drafted on the basis of principles, ideas, and procedures not much different from those of existing official law. (Location 2153)

During the 1850s, Congress made no effort to take over the Western mineral resources. (Location 2168)

was too preoccupied with the slavery issue and the threat of secession by the Southern states. (Location 2169)

One thing, however, is clear: The lack of congressional action only added credibility to the social contract that the miners themselves had not only devised but also made work.144 (Location 2171)

to prove a vein which by miner’s law, might be indefinitely subdivided according to its richness.” (Location 2177)

In 1866, Congress for the first time declared the nation’s mineral lands officially open for exploration to U.S. citizens—eighteen years after hundreds of thousands of miners had first begun to prospect for gold in federal lands in California. (Location 2181)

In passing the law, Congress went so far as to commend the American genius for creating extralegal arrangements: (Location 2189)

This was an explicit recognition that value added to assets was something the law needed to encourage and protect. On May 10, (Location 2197)

This was also true for housing: In 1862, when Congress passed the celebrated “Homestead Act” that gave 160 free acres to any settler willing to live on the land for five years and develop it, it was only sanctioning what settlers had already done by themselves. (Location 2211)

The recognition and integration of extralegal property rights was a key element in the United States becoming the most important market economy and producer of capital in the world. (Location 2222)

That “momentous” something was a revolution in rights to property rights. (Location 2226)

The Americans, not always eagerly or consciously, gradually legitimized extralegal property norms and arrangements created by the poorest (Location 2226)

Although American officials probably did not either intend or realize it, when they constructed national laws such as the preemption and mining acts they were creating the representational forms that integrated all this loose and isolated property data into a new formal property system. (Location 2231)

The official law has not been able to keep up with popular initiative, and government has lost control. (Location 2235)

“When the miner left his shack and went to work, he employed the latest in industrial technology. When the farmer stepped outside his sod shanty, (Location 2236)

And their governments have also begun to give them preemption rights. (Location 2239)

into a formal legal system that allows them to use it to create capital. (Location 2241)

Americans built a new concept of property, “one that emphasized its dynamic aspects, associating it with economic growth,” (Location 2242)

American property changed from being a means of preserving an old economic order to being, instead, a powerful tool for creating a new one. (Location 2244)

American politicians expressed the revolutionary idea that legal institutions can survive only if they respond to social needs. (Location 2248)

Americans and the extralegal arrangements they created, while rejecting those English common law doctrines that had little relevance to problems unique to the United States. In the long and arduous process of integrating extralegal property rights, American legislators and jurists created a new system much more conducive to a productive and dynamic (Location 2250)

Efforts to create a property revolution elsewhere in the Third World and former communist countries will face their own unique requirements, obstacles, and opportunities. (Location 2259)

How can a legal system aspire to legitimacy if it cuts out 80 percent of its people? (Location 2262)

We must find the real social contracts on property, integrate them into the official law, (Location 2264)

The problem is that most citizens cannot gain access to (Location 2272)

Their only alternative, as we saw in Chapter 2, is to retreat with their assets into the extralegal sector where they can live and do business—but without ever being able to convert their assets into capital. (Location 2273)

these countries’ underground economies, in which typically 50 to 80 percent of the people operate, in terms of tax evasion is partially incorrect at best. (Location 2289)

because it is a tax haven but because existing law, however elegantly written, does not address their needs or aspirations. (Location 2291)

We also cut dramatically the costs of the red tape to enroll businesses. This is not to say that people do not care about their tax bill. But extralegal manufacturers and shopkeepers—who operate on razor-thin profit margins, (Location 2296)

Contrary to popular wisdom, operating in the underground is hardly cost-free. (Location 2300)

Because they are not incorporated, extralegal entrepreneurs cannot lure investors by selling shares; they cannot secure low-interest formal credit because they do not even have legal addresses. (Location 2302)

The only “insurance” available to them is that provided by their neighbors and the protection that local bullies or mafias are willing to sell them. (Location 2304)

they are forced to split and compartmentalize their production facilities between many locations, (Location 2306)

In Peru, 15 percent of gross income from manufacturing in the extralegal sector is paid out in bribes, ranging from “free samples” and special “gifts” of merchandise to outright cash. (Location 2307)

Europeans and Americans managed to record all their real estate assets decades before computers and geographical information systems were invented. (Location 2314)

What keeps most people in developing and former communist nations from using modern formal property to create capital is a bad legal and administrative system. (Location 2322)

It is law that detaches and fixes the economic potential of assets as a value separate from the material assets themselves and allows humans to discover and realize that potential. (Location 2339)

many other disciplines are of course necessary: Economists have to get the costs and numbers right; urban planners and agronomists must assign priorities; mappers, surveyors, and computer experts are indispensable to make the information systems work. But ultimately, an integrated national social contract will be concretized only in laws. All other disciplines play only a supporting role. (Location 2350)

Second, very small but powerful vested interests—mostly represented by the countries’ best commercial lawyers—are likely to oppose change unless they are convinced otherwise. (Location 2357)

Third, creating an integrated system is not about drafting laws and regulations that look good on paper but rather about designing norms that are rooted in people’s beliefs and are thus more likely to be obeyed and enforced. (Location 2359)

Governments must also convince influential leftists, who in many countries are close to the grass roots, that enabling their constituencies to produce capital is the best way to help them. (Location 2363)

Without formal property, no matter how many assets they accumulate or how hard they work, most people will not be able to prosper in a capitalist society. They will continue to remain beyond the radar of policymakers, out of the reach of official records, and thus economically invisible. (Location 2367)

Extralegal property arrangements are dispersed among dozens, sometimes hundreds, of communities; rights and other information are known only to insiders or neighbors. (Location 2386)

Discovering “the people’s law” is how Western nations built their formal property systems. (Location 2401)

To integrate all forms of property into a unified system, governments must find out how and why the local conventions work and how strong they actually are. (Location 2403)

Common standards in one body of law are necessary to create a modern market economy. (Location 2418)

However, as successful as those nations have been, they were not always conscious of what they were doing and left behind no clear blueprint. (Location 2427)

After all, the right of universal access to property is now recognized by nearly every national constitution in the world and by many international conventions. (Location 2439)

resistance against sharing formal property rights, access to property is today considered part and parcel of the fundamental rights of humankind. (Location 2442)

That is why most developing and former communist nations today recognize the principle of universal access to property rights as a political necessity as well as an implicit ingredient of their macroeconomic and market reform programs. (Location 2451)

The indigenous people got statutes that generally confirmed that their assets were legally theirs. What they did not get were the mechanisms that would have allowed them to fix the economic rights over their assets in representations protected by law. (Location 2457)

In Peru (and many other countries outside the West), most legal procedures to create formal property are not geared to process extralegal proofs of ownership that lack any visible chain of title—which, of course, (Location 2459)

population. By the late 1960s and early 1970s, the remaining majority were still vulnerable and unhappy and, consequently, a potentially volatile class, especially with the sudden emergence of strong and well-organized leftist movements. (Location 2476)

What the government had not taken into account was that when people finally acquire property, they have their own ideas about how to use and exchange (Location 2482)

Government programs to give property to the poor have failed over the past 150 years whether they followed the bias of the right (private property rights through mandatory law) or of the left (protecting poor people’s land in government-run collectives). (Location 2485)

the law has privatized or collectivized them but simply because it does not address what they want. (Location 2488)

in 1994 I put together a special research team to find out if in the last thirty years international financial institutions had reported carrying out any successful and massive “formalization” program in the Third World—one where all assets were properly represented and integrated into one system so as to produce capital. (Location 2498)

An extraordinary number of them had been prematurely aborted because of poor results (“lots of new maps and computers, but few new formal owners,” (Location 2504)

We certainly found no evidence that assets were being transformed into capital. (Location 2506)

Throughout recent history, developing and former communist countries have not lacked political will, budgets, international manifestos, or mandatory law drawn up with the explicit purpose of giving rights over assets to the majority of citizens. (Location 2522)

formed a consensus about the ownership of assets and the rules that govern their use and exchange. (Location 2532)

They have managed much better than formal law to build on the actual consensus between people about how their assets ought to be governed. (Location 2533)

Efforts to reform property rights fail because officials in charge of drafting new legal rules do not realize that most of their citizens have firmly established their own rules by social contract. (Location 2536)

The only systematic way to integrate these social contracts into a formal property system is by building a legal and political structure, a bridge, if you will, so well anchored in people’s own extralegal arrangements that they will gladly walk across it to enter this new, all-encompassing formal social contract. (Location 2545)

The systematization of the laws that underpin modern property rights systems was possible only because authorities allowed preexisting extralegal relationships among groups on the ground sometimes to supersede official laws: (Location 2562)

People no longer needed to rely on burdensome parochial politicking to protect their rights to assets. (Location 2572)

They could now control their assets. Even better, with adequate representations in hand, they could focus on their assets’ economic potential. (Location 2574)

Like their Western predecessors, the undercapitalized sectors in the Third World and former communist countries have spontaneously generated their own varieties of property rules. (Location 2603)

Once rights to land have been created extralegally, those involved create institutions to administer the social contract they have built: Informal business and residential organizations meet regularly, make decisions, obtain and supervise infrastructure investment, follow administrative procedure, and issue credentials. (Location 2622)

law but because they have no alternative for protecting their property and earning a living. (Location 2636)

they are also “law-abiding,” although the laws they abide by are not the government’s. (Location 2639)

After years of study in many countries, I have become convinced that most extralegal social contracts about property are basically similar to national social contracts in Western nations. (Location 2653)

when he increased the fungibility of property by abolishing, among other things, the practice of entail (not being able to transfer property outside the family). (Location 2762)

They made sure they were armed with astutely aimed legislation that permitted government to create popularly supported, bloodless revolutions that could not be halted. (Location 2766)

We discovered that to become legal took more than three hundred days, working six hours a day. The cost: thirty-two times the monthly minimum wage. (Location 2795)

Our objective was to prove to the politicians that there was a hidden national consensus for reform and that formalizing the assets of the poor was politically a winning strategy. (Location 2805)

As soon as the poor become accountable under formal law, they will be able to afford low-cost housing and thus escape from the topsy-turvy world of the extralegal sector. (Location 2844)

When poor people have confidence that their land and businesses are legally theirs, their respect for other people’s property increases. (Location 2860)

Owning formal property also tends to discourage unruly behavior. When people are forced to divide their property into smaller and smaller parcels, the heirs of their heirs, crowded off the family land, are more likely to squat elsewhere. (Location 2866)

Any government eager to pursue an integrated property system must therefore (Location 2929)

draw up a careful strategy for dealing with the legal profession. (Location 2930)

In every country I have visited, I have found groups of government lawyers very familiar with the extralegal sector, striving daily to find harmony between the formal system and the extralegal arrangements. (Location 2936)

Developing and former communist countries are forever spending hundreds of millions of dollars on mapping and computerized record-keeping technology to modernize their property systems—and they still cannot integrate their extralegal sectors. (Location 2948)

Even the technicians are concerned that they may be too mesmerized by the amazing new technologies. One of Canada’s foremost experts in land and information systems has expressed concern that some governments continue to view mapping as the cornerstone of property: (Location 2952)

Property creation programs will continue to fail as long as governments think that creating property requires only getting acquainted with physical things—that once they have photographed, surveyed, measured, and computerized the inventories of their physical assets, they have all the information required to issue property titles. (Location 2960)

Property is about invisible things, whereas maps are resemblances of physical things on the ground. (Location 2969)

Until the obstacles to using formal property systems are removed and the extralegal arrangements have been replaced by the law, people have little incentive to supply the information necessary to keep maps and databases updated and reliable. (Location 2973)

they will join the system when its economic benefits are obvious to them and when they are certain their rights will continue to be protected. (Location 2975)

The all-encompassing social contract on property is already firmly in place. When the database systems, geographical information systems, remote sensing, global positioning systems, and all the wonderful information technology tools became available during the past thirty years, they fit neatly into a well-integrated information and legal infrastructure. (Location 2986)

Property creation is not at all like a privatization program, which involves selling only a dozen or so bundles of assets a year. The goal of property reform is to award property rights for millions of assets to millions of people in a short time. This means that at least half the job is about communications. (Location 3001)

Creating a property system that is accessible to all is primarily a political job because it has to be kept on track by people who understand that the final goal of a property system is not drafting elegant statutes, connecting shiny computers, or printing multicolored maps. The goal of formal property is to put capital in the hands of the whole nation. (Location 3008)

they are quite aware that they still linger at the periphery of the capitalist game. (Location 3023)

That kind of globalization has existed before. In the nineteenth century, Europe’s ruling royals were literally one big family, related by blood and in constant contact about politics and commerce with their cousins in England, France, Holland, Spain, and Russia. (Location 3024)

Nevertheless, only twenty-five of the world’s two hundred countries produce capital in sufficient quantity to benefit fully from the division of labor in expanded (Location 3040)

Only capital provides the means to support specialization and the production and exchange of assets in the expanded market. It is capital that is the source of increasing productivity and therefore the wealth of nations. (Location 3042)

have the capacity to represent assets and potential and, therefore, the ability to produce and use capital efficiently. Capitalism is viewed outside the West with increasing hostility, as an apartheid regime most cannot enter. There is a growing sense, even among some elites, that if they have to depend solely and forever on the kindness of outside capital, they will never be productive players in the global capitalist game. (Location 3045)

But today they look astonishingly similar: strong underground economies, glaring inequality, pervasive mafias, political instability, capital flight, and flagrant disregard for law. (Location 3050)

make them generate capital because the law keeps them out of the formal property system. (Location 3059)

Meanwhile, the promoters of capitalism, still arrogant on their victory over communism, have yet to understand that their macroeconomic reforms are not enough. We must not forget that globalization is occurring because developing and former communist nations are opening up their once protected economies, stabilizing their currencies, and drafting regulatory frameworks to enhance international trade and private investment. All of this is good. (Location 3065)

In Plato’s famous analogy, we are likened to prisoners chained in a cave with our backs to the entrance so that all we can know of the world are the shadows cast on the wall in front of us. The truth that this illustration consecrates is that many things that guide our destiny are not self-evident. That is why civilization has worked hard to fashion representational systems to access and grasp the part of our reality that is virtual and to represent it in terms we can understand. (Location 3212)

This fear of the virtuality of capital is understandable. Every time civilization comes up with a novel way of using representations to manage the physical world, people become suspicious. (Location 3246)

New forms of property derivatives (such as mortgage-backed securities) may help form additional capital, but they also make understanding economic life more complex. (Location 3250)