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As he makes his case, I found lights going on and many things we see in our world making sense. I am a trained finance type. Much of the strife, poverty and underground markets are simply because the legal system doesn't keep up with the society realities.I could not put this book down; by the end of chapter 2 I was hooked. But this book has revealed an aspect of the relationship between the legal system, the concepts of private property and the black market (or "extralegal" market as the author puts it) that I have never seen explained. First, De Soto has truly done his homework.not just bookwork, by being a student of history, but has spent years and years doing research in numerous countries to provide emperical information to backup his conclusions. I have recommended this to many of my friends just so that they can gain a better understanding of the blessings we have in the US (but most do not even know about) but also see why there are struggles in other countries. Please read this book.
Then, I got in contact with the owner. It is a challenging and realistic book. Now, consider what happens in a country in the Third World. The house was not yet finished. It is likely they will have to steal the electricity and will not have water supply.
The local authorities have no problem to contact us. When we agreed on the price, he issued a legal contract. My wife and I had to wait for a few months prior going there. They don't lack assets, imaginations, companies, good ideas. In my case, I saw an offer in a picture.
After reading it, I am convinced that changing the Third World poverty is not impossible and not necessary in a very far future. The local administration will not have notice about the new neighbours in town. With time, they will make their home stronger with more solid materials. After some time and changes in the local office, water, telephone and electricity suppliers, we receive all the correspondence and the service, as well taxes, requirements, etc.
First they have to discover an empty spot of land, and that is not easy in the overcrowded cities. What they miss is legal protection. Consider what happens when you are to buy a house in a Western country. If the newcomers are to produce any document to protect their new house, they will do it relying on their neighbours and probably mafias. De Soto books is about these differences. If governments only assured legal protection to their citizens, is very plausible they become rich people soon. It is probable they will have to defend it from other potential occupiers. This is a book for people who thinks things are not necessarily to be like they are.
By accepting it he sold to me the house, and I bought it. This is a book for non conformist people. Then they have to occupy it physically, as there is no known owner to whom buy it. Then, they collect what they can and try to build something as a house. They have all of that.
The reason has been to give a deeper understanding of the theoretical foundations that Desoto's argument lay upon, which will assist us in our further analysis of the similarities between the credit and bank crises and underdevelopment. Penguin Classics; 1999 (1776). More importantly for this work, it leads us to another area that is lacking in the neoclassical tradition - an analysis of the role of the modern firm, as opposed to exchange, in fostering economic growth. Desoto believes the credit and banking crises in the United States and the underdevelopment in the third world are similar through both a derivation from the theory of transaction costs - undefined property rights - and a starting assumption that exchange is the driver of economic growth. Desoto has recently attempted to expand this notion to explain the financial crises in the United States.In the United States the underlying problem is that the assets on the banks' balance sheets have strayed away from an objectified valuation through property, which the market for derivatives was allowed to operate outside of: ".if Treasury Secretary Timothy Geithner hopes to prevent a repeat of this global economic crisis, his rescue plan must recognize that the real problem is not the bad loans, but the debasement of the paper they are printed on." (Wall Street Journal March 25th, 2009 (Page A13), Desoto).Ultimately, what is documented on paper no longer represents what is going on in reality and, at a fundamental level, what is lacking is information. Essentially, this idea, in the context used, may be considered as a special case of an earlier developed theory of transaction costs (Ronald Coase).
The lack of a functioning property system is the fundamental reason for underdevelopment and reoccurring crises. ***This review is quite long. While he correctly identifies that a major impediment to growth in the third world is the inability of different regions to be unified, he spoils his argument by claiming that the solution rests solely with the establishment of a property rights system. Its second form serves to objectify the first. If, then, the division of labor is intensified through commodity production, and commodity production is a result of the dominance of the capitalist mode of production over exchange, it follows that the extent of the division of labor is reliant upon the sophistication of capitalist production - or, more specifically, the maturation of the agent of capitalist production; the firm. Let us begin with Adam Smith's identification of the division of labor, the basis of productive efficiency in market economies, as being a function of the volume of exchange.
Speculators were eager to buy mortgage backed securities due to, once again, a gamble on the idea that housing prices would continue to rise. To ignore the firm, or supplant it with a rosy picture of competition between many individual buyers and sellers, is to ignore the whole progress of a century. The implication of this is that exchange - the driver of economic growth - is not able to function. Dutch finance, with markets in futures, options, government bonds, and the like - even future markets for certain types of fish -, experienced many speculative bubbles. "The Wealth of Nations". As he saw it, when people regularly engage in trade they are inclined to specialize; "The certainty of being able to exchange all that surplus part of the produce of his own labour,which is over and above his own consumption, for such parts of the produce of other men'slabour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possessfor that particular species of business." (Smith, Adam. Financial crises are but one form of crisis in capitalist production. In fact, Desoto does not stray at all from the theoretical foundations that his theory is based upon, nor does he provide any addition to it - he simply generalizes it, in that not only do prices convey information which foster exchange, which then fosters economic growth - as Hayek argued - but property rights are the foundation of exchange - an idea already well established by Coase.
Indeed, these two occurrences may well reinforce one another - flows of capital into certain sectors drive price up; rising price attracts investment which serves to drive prices even higher; increasing price of an asset enters into risk calculation; loans are made based on calculated risk; an increasing magnitude of (asset specific) loans further appreciates an assets prices; higher prices attract investment; ect. Though Smith did not use this term, he was apt in describing how commercial civilizations, or, as he says, the first "civilized" nations, arose in regions that had fewer spatial barriers than others,"The nations that.appear to have been first civilized, were those that dwelt round the coastof the Mediterranean Sea. In developing nations people are not included in a property system that binds together different regions and territories and, because their norms and rules do not extent outside of certain isolated areas, they are confronted with a situation wherein neither can trust the other to behave in accordance with the terms of an exchange - exchanges that would happen do not. Information and Search costs are the costs associated with acquiring knowledge about a good (or service) or seeking a good (or service); Bargaining costs are the costs associated with the process of exchange between parties; and Enforcement costs are the costs associated with ensuring that both parties abide by rules of an agreement of contract. Once an asset becomes transformed into an exchange value it begins to live two lives - theoretically linked and practically separated. Information conveyed through prices in the capitalist system, as noted above, are not determined simply by the meeting of supply and demand curves reflective of consumer choice, but through more dynamic features of capitalist production such as the rate of profit. Exchange cannot, as envisioned by Smith and further developed through the neoclassical tradition, be the sole driver of growth. When this trust in representations of assets begins to fade, so too does the frequency and willingness of people in a commercial society to interact through exchange:"As trust in property paper breaks down it sets off a chain reaction, paralyzing credit and investment, which shrinks transactions and leads to a catastrophic drop in employment and in the value of everyone's property." (Wall Street Journal March 25th, 2009 (Page A13), Desoto).
Penguin Classics; 1999 (1776). He also proceeded to identify another concept of importance for this work - namely that the division of labor is always a function of the extent of the market;"As it is the power of exchange that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market." (Smith, Adam. At the core of the theory of transaction costs is the idea that there exists a cost in using the market mechanism; these costs can work to lower (or destroy) the chances that a transaction may occur between two parties. The perpetual state of underdevelopment in the third world can be viewed as a constant crisis, in that not only is there conflict between real and representative worth of tangible assets, causing temporary seizures in information, but there is no property structure to convey this information in place to begin with. Exchange that involves monetary notes for goods (or services), or goods (or services) for monetary notes, is but one part of this relationship.
due to huge losses from excessive speculation in the stock of the Dutch East India Company in 1772. What propels the expanse of the market. However, as history tells us, capitalist production is also prone to crises - crises, as Marx said, that would become more and more severe in proportion to extent of the market. "The Wealth of Nations". Capital, as was the case in Desoto's analysis of underdevelopment in the third world, is not able to be attained because of the mistrust in objectified valuation of representative forms of assets.
The question then arises as to how value can become objectified in price if value is rooted in subjectivism - what mechanism allows for the measurement of the subjective. Holding exchange to be the driver of economic growth, and 2. Market mechanisms, such as price (Hayek), gather such information and allow for the exchange relationship to materialize. Therefore, the origin of the crises is not to be found in examining the market, but in an examination of the legal framework under which the market functioned.
Moody's and S&P, fraudulently or not, rated the sub-prime derivatives triple A. Though I do not propose an alternative, I believe that by ignoring the historical development of the division of labor, and instead adopting an approach that exists only in the abstract, Desoto's argument is substantially weakened. We have also shown exchange to be a relationship that may exist in many forms, such as interaction through the buying or selling of goods or through the lending or borrowing of capital. Price, or exchange value, on the other hand, is objectified value.
As more of the Earth's productive forces become tied to the health of the economy, the scope and span of crises multiplies. England experienced severe financial disorder during the periods of the industrial revolution at home, when speculators on railroad, cotton spindles, and other developing technologies of the time became caught in a frenzy of `irrational exuberance', and then again as the industrial revolution spread to foreign countries - and along with it British capital. When transaction costs are too high, an exchange that may (or in neoclassical contract curve modeling, any willing exchange would) increase the welfare of both parties involved will not be completed. In 1494 the Medici bank of Florence (of the Italian City States) failed because of excessive lending to princes and sovereigns in Bruges, Lyons, and London - lending which could not be as easily repaid as the bankers had believed. Social relations become normalized as technological progress, directed by profit seeking to reduce space in time (or, lower transaction costs if you will), allows for ever faster communication and social awareness. Further, individual producers and consumers owning the means of production do not spontaneously form the division of labor through market information, be it determined in any way, but through the cohesive organization of the firm. The crisis of 1763 marked a turning point in Dutch finance, as Dutch banks began being used less and less as intermediaries of exchange between countries.
If you do not feel the need to read it all, skipping to the last paragraphs will suffice for those who have a firm grasp of the origins of neoclassical economic and 'transaction cost' theory. The most notable of the Dutch boom and busts occurred with the failures of the houses of Arend Joseph and the Deneufvilles in 1763, when commodity speculation and lending to Germany did not unfold as planned, and the failure of Clifford & Co. IIIDesoto also takes an ahistorical and simplistic view of crises. Most importantly, we have shown that property allows an asset to live a dual life - one of exchange value and one of use value. When the transaction costs (information specific) are far too high for exchange to occur, exchange will not occur and everyone will be worse off. Without capital the difficulty of any entrepreneurial endeavor rapidly increases, it becomes increasingly difficult to start businesses.
There is no mechanism with which people can gather and convey information regarding their assets, and no mechanism to establish trust between parties located in different regions. The main problem with the theoretical foundation that underpins Desoto's view is its misrepresentation of the defining characteristics of exchange under the capitalist mode of production. President Roosevelt, at the beginning of his presidency and the height of the Great Depression, facing a liquidity problem, threatened all gold hoarders that their names would be publicized if they did not release their hordes - The paradox of thrift has nothing to do with assets not being documented. In the present financial crisis, banks made loans to people based on risk-calculating models reliant on increasing home prices under terms which they could not afford to pay. Additionally, though an integral part of economic growth in capitalist production, the lack of a property system is a far shot from an explanation of the current financial crises in the United States and the history of financial crises - if anything, as will be argued, property regimes are the fundamental starting point for financial crises.If Desoto is right about anything, it is that property, one way or another, is an important part of capitalist economies. Desoto's starting point, therefore, is a special case of transaction cost theory in that it focuses on the first of three forms of transaction costs, Information and Search, in the realm of exchange. There is simply no way for problems like these to be solved by DeSoto's system of property documentation. Without information regarding the real worth of assets, trust in the carriers of objectified value, or the paper they are printed on, diminishes.
These transaction costs may appear in the following forms (and their internally related sub-forms): Information and Search costs, Bargaining costs, and/or Enforcement costs. I will show why I believe it is insufficient and misleading in dealing with the subject matter. Therefore, as the transaction cost theory is a theory of exchange, the expanse of the market, from Smith, on to Coase, and then to Desoto, is a function of the volume of exchange. As we have seen throughout, growth being a dependant variable of exchange, which in turn is dependent upon other variables, in this case information, the crises in the United States is therefore a direct consequence of the failure of the reflection of the real worth of assets on their representative forms. However, before we continue, it is important to be aware that exchange is first and foremost used here as a relationship between parties. That sea, by far the greatest inlet that is known in the world, having no tides, nor consequently any waves except such as are caused by the wind only, was, by the smoothness of its surface, as well as by the multitude of its islands, and the proximity of its neighboring shores, extremely favorable to the infant navigation of the world." (Ibid, page 123).Ultimately, the whole of the theory of the expanse of the market may thus be explained within the framework of the transaction cost theory. Crises, therefore, are a conflict between what is documented on paper and the real assets they purport to represent - they occur when the paper ceases to represent the real asset.
Because of this there exists a much diminished shadow of the future (Axelrod), or the ratio of the weight placed on future actions to current actions, and forward looking contractual agreements are very difficult to carry out. Desoto's fundamental mistake is that he ignores the process by which assets become misrepresented - these markets are a natural evolution of a property based system without regulations and, under a private property system, this is what capitalism will lead to. The prerequisite for this form of crisis is, ironically, property. Smith's analysis, however, went beyond simply establishing that gains from trade exist in that labor can specialize with regards to its regularity. Identifying information problems that hinder exchange as the basis for the process of exchange being undermined.
Firms, through political influence or economies of scale, drive the expanse of the market by destroying spatial barriers to trade and running small scale production into the ground. And capitalist economies, be it through the firm or exchange, expand. IIWhile Desoto does identify a crucial problem in regards to the rampant underdevelopment plaguing the third world, the lack of a system that binds together different groupings or regions of people, I disagree both with the theoretical foundations in which his theory lies - exchange as the driver of growth -, and the explanation for the crisis in the United States and its attempted link to that of underdevelopment in the developing world.In neoclassical economics, exchange takes place between individuals maximizing their respective utilities, or their (respective) subjective valuation(s) of good(s). Old custom and ritual, ancient tradition and culture - it all comes under attack by the engine of economic expansion that defines this mode of production.
More importantly for Desoto, because there is no unified property system to objectify assets on paper, there is no method in which the assets of these people can be leveraged to raise capital - there is no way to transform a real asset into capital. Desoto's main link between the credit and banking crises in the United States and underdevelopment in the third world* is that, in both cases, the fundamental problem lies in the lack of a functioning system of objectified valuation; property. Otherwise, I will attempt to trace the origins of Desoto's argument here, as simply as I can, in order to critique it with an understanding. Therefore, as property is defined through law, these chronic conditions are rooted in legal failure. I Before expanding on Desoto's analysis and subsequently embarking on a critique, we will examine precisely what is meant by the notion that information can hinder or support exchange. This hinges upon the assumption that clear and concise information is the foundation of economic growth. Book I, Page 121).This then suggests the question- what does the extent of the market depend upon. Therefore, by treating production methods as fixed, we are unable to fully analyze what information is being conveyed.
The division of labor is a force imposed internally, within firms - not through any bargaining process, but through conscience planning. Prices, in this instance, will have a tendency to also represent an average of differential production methods - different technological application and different distributions of labor and capital - with the technical relations between capitals (firms) weighing heavily on the determinacy of price. From this starting point, we are now able to unpack the bulk of Desoto's argument. Their main driver, historically, has been speculative bubbles. These two assumptions lead to the logical conclusion that, as economic growth is contingent upon exchange, and inadequate information concerning the price of goods causes exchange to be halted, when exchange cannot be carried out, economic growth either falters or stops. If this foundation is put into question, new questions emerge as to the functionality of Desoto's prescriptions - for example, to what extent will it really empower the mass of people living in poverty in developing countries. This shaky foundations of the role of prices in conveying information of aggregated choice/knowledge may not apply in partial equilibrium analyses, however the importance of partial equilibrium as opposed to general equilibrium can also be brought into question by noting that, as technological progress allows for prices to reflect information from more regions at a faster pace, prices in most commercial areas will be more inclined to represent general equilibrium.
While exchange is an important process within the system as a whole, it takes place on a different dimension than the rosy picture painted by Smith - far from existing under the auspices of decentralization of competition and decision making among all involved, it exists in an environment characterized by an intensified subjection of society's productive forcers to hierarchical production through an organized division of labor and concentrated competition among capitals (firms). They are the vehicles for the expansion of the market and the arbiters of exchange in capitalist production.The division of labor, therefore, as it exists as a function of exchange, has required that exchange be carried out under a specific form of social reproduction - commodity production, or capitalist production. One might reach the conclusion, as DeSoto does, that the lack of clarity over the price of an asset is the catalyst of underdevelopment in developing nations by: 1. In each past instance, as presently, there seem to be two reoccurrences: speculative excess and faulty loans. The financial crisis in the United States fits quite well into the picture painted by this brief historical sketch. It is in this sense that exchange is the driver of growth: it enlarges the pool in which the division of labor exists. Misaligned incentives or informational asymmetries can also cause abuse within the legality of a property system. For Smith, and reflected once again into the neoclassical tradition, it was the minimization of transaction costs.
The idea that welfare is not enhanced and economic growth halts (or reverses) when exchange between people or parties does not occur has so far been handled only in one space, that is the space in which goods (or services) are traded in the market and objectified by monetary notes. Nor does it matter what is used as this medium, as the medium itself takes on a dual existence as a real object and a measure of all real objects - gold and seashells exist independently from an asset they represent the same as a piece of paper. Furthermore, in anticipation of the response, how can (supply and) demand determine an objectified price as an aggregate of individual decisions and knowledge (Hayek) if physical capital (machinery, equipment, ect) is not malleable - that is, in the real world, where it is not possible to change the forms of physical capital already fixed at will in accordance with demand. Book I, Page 117).Neoclassical economics has not changed to a great degree in regards to Smith's initial analysis - one of the first principles to be learnt in economics is that there exist gains from trade. Perhaps the most severe bubbles, however, were formed in foreign security markets - a boom in foreign securities from 1904 to 1913 took 50 percent of British savings and over 5 percent of national income abroad. Cars are well documented as property, but documentation of a car's identity and ownership still does not protect the system from lemons being introduced into the system.
There are already many good reviews to this book, so I will only suggest reading the following books in addition to this work on the vexing question of why Western countries have dominated the world during the last few centuries [the very way the question is posed is controversial].: 1) "Power and Plenty: Trade, War, and the World Economy in the Second Millennium" by Ronald Findlay and Kevin H. O'Rourke; 2)"The Great Divergence", by Kennetz Pomeranz; 3 - 4): "The world economy. A millennial perspective" (2001) plus "The world economy: Historical Statistics" (2003) by Angus Maddison (a combined edition of these two volumes appeared on December 2007); 5) "Why Europe Was First: Social Change and Economic Growth in Europe and East Asia, 1500-2050" by Erik Ringmar; and 6) "The Origins of Capitalism and the "Rise of the West"" by Eric H. Mielants.
De Soto, observing that "the single most important source of funds for new businesses in the United States is a mortgage on the entrepreneur's house", concludes that by providing real estate property titles to poor people, they will have access to the same type of funds from banks.He forgets two important facts:1) Banks take into consideration the credit worthiness of the entrepreneur asking for the loan. A poor person in a shanty town with a business idea of starting a fruit stand will not be considered credit worthy by any commercial bank.2) Banks take into consideration the real estate market liquidity when making a property-backed loan. If the real estate market is not liquid, the bank cannot liquidate the property in case of a loan default. I'm willing to bet that the real estate market in a shanty town is less than hot.We should always bear in mind that economics is hard.
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