In his novel, “The Mystery of Capital,” Hernando DeSoto dissects the steps that a country must take in order to make a capitalist economy effective. He argues that in order for a capitalist economy to be prosperous, the people must learn how to increase the value of their current capital and commodities through property rights. Specifically, he believes that capitalism’s success in the western regions depends heavily on formal documentation of property, which translates into physical capital and future wealth. Capital refers to both the physical asset as well as the opportunity to increase its value. Therefore, in order for a capitalist economy to work and create wealth, it must fulfill both obligations: to provide property and the ability to increase in value. Overall, how we are able to monetize our assets plays a major role in the success of a capitalist economy.
To get the most value out of a given asset, we must look at it as it is and as it could be. For example, water was originally for human hydration and consumption, but upon further experimentation, scientists found that water can be used as a source of energy to power generators in hydroelectric dams and to move ships a body of water.
De Soto sees a positive future for the poor, but believes that the potential can only be realized when they earn their property rights. What is holding them back the most is “access to the property mechanisms that could legally fix the economic potential of their assets so they could be used to produce, secure or guarantee greater value in the extended market” (De Soto, 48). He cited six ways in which formal property rights have affected the Western region. This plan increased capital for future generations, fixed the overall economic potential of property, held people accountable for their economic decisions, and increased the value of existing assets, all under one capitalist system.
De Soto believes that fixing the economic potential of property will create a standard interpretation of a particular asset’s social and economic value. This will all the property to be considered an investment or collateral. DeSoto believes that the ability to use existing assets as leverage is important because it is the basis for producing a surplus value. According to DeSoto, “money does not earn money. You need a property right before you can make money” (De Soto 64).
Somewhere like the U.S., homeowners may take advantage of this by taking out a loan against their house (their asset) as capital to start a business of their own. They ultimately have increased financial flexibility and wealth because they own property and their property has value. This process does have tendencies to adversely affect the economy when borrowers and investors fail to understand effective capitalism. When homeowners borrow against their property, they are living beyond their means and this can result in ultimate bankruptcy.
In Peru, DeSoto implemented his theory through a ‘capitalization process’ which provides opportunities for those below the poverty line. His plan works include them and provide them with rights. By taking advantage of the current assets of this socioeconomic group, De Soto planned to effectively redistribute the wealth amongst the group in a way that didn’t threaten the wealthy but stimulate the poor. In the end, this process bridged the political gap and stimulated the entire economy globally.
Section 2
According to Michael Schuman of the Bloomberg View, 20th Century China under the rule of Xi is credited as being a “clash of civilization and values, but one of political and economic systems … [and a] viable counter-model to the presumption of western liberal democracy and capitalism.”
In his book, “The Party,” Richard McGregor discusses capitalism as it exists within communist China. Capitalism is what builds new businesses. Capitalism and new business development instilled and inspired a feeling of freedom amongst the people of China. The newly implemented free market presented the people with an opportunity to add value to their existing assets and therefore increase their individual wealth. McGregor discusses the effects of the capitalistic reforms on the Chinese economy as they occurred over a five-year period. Capitalism supported farmers as they transitioned from restrictive communes to prosperous mini-businesses. Additionally, McGregor addressed that during this period, capitalism was long-term solution to poverty in China.
But in contrast, there were aspects of China’s economy that were non-capitalistic such as government controls, trade restrictions, and financial impositions. McGregor elaborates that the government essentially owns everything, which led to “the multiple forms of state ownership, by ministries, enterprises, the military and government entities, plus the murkey and entangled rights to different assets and revenue streams on top of that, made it all but impossible to trade and extract value from any public goods,” (McGregor 39).
The government restrictions prevented public and free trade. The communist economy only allowed free trade to rural households when they produced a surplus beyond the state demanded quota. Under these strict circumstances, the rural households achieved periods of great wealth and prosperity. The non-capitalistic economy suffered when loans were issued to individuals but could not be paid back. This debt threatened the entire Chinese economy.
Communist China has the “property rights” aspect of capitalism, but it is different because in China, the property is primarily owned and controlled by the government.
Section 3
What China is currently experiencing is a crossroads between communism and capitalism. Under Xi’s rule, I believe the capitalist system will be prosperous in China, but not as it relates to Milton Friedman’s theory. Friedman’s thesis held that prosperity in the capitalist system would ideally do away with dictatorship and therefore grant individual freedom within China. Friedman’s thesis is effective in a place like the U.S. where capitalism is now standard; but not in a place like communist China, which in many ways resists capitalism.
Xi should use the capitalist system to encourage free trade. But for this to be successful, national and overseas trade operations would need to be extremely well organized and good communication would have to exist. Although free trade would employ many capitalist concepts, like property rights, it would still exist within a dictatorship, because the government/dictator ultimately has complete control.
Some societal consequences of capitalistic free trade include derogatory behaviors like greed. This behavior could lead to a large financial gap between the rich and poor, which would have negative effects on the economy as a whole. Communist China needs to regulate the free trade in a productive and respectful way that encourages prosperity and profit.
Currently, the only public “property rights” that exist in China are conditional. As I mentioned in section two, rural households are allowed to trade freely when they produced more than the state demands. While this scenario creates more income and wealth for rural households, the profit is essentially contained within this group. McGregor discusses how private enterprise has been the driving force in China’s growth, therefore Xi and the Chinese government should take advantage of capitalism’s positive influence on their country as they move forward.
With these theories in mind, capitalism will not only help communist China grow financially, but it will also work to encourage individual freedom and end dictatorship.
Conclusion
In conclusion, I believe that there is a lot of merit in a well-implemented capitalist economy. However, it seems to produce more greed and financial gaps than a healthy society should have. I think a socialist-capitalist blend economy would encourage democracy as well as financial prosperity in a communal manner. Healthy competition is an important aspect of capitalism, but under a socialist economy, social ownership and collaboration could create more profit for organizations involved.
I agree with McGregor’s thesis that capitalism SHOULD grant individuals with freedom and do away with dictatorship. This dictatorship has built the framework of China’s government. For this reason, capitalism can only have limited success in China.
Finally, De Soto’s theory that “property rights” are the “something else” that a capitalist economy needs to thrive is an idea that is present across all countries. In order to capitalize on current assets, there needs to be a formal documentation process in place which establishes concrete ownership. Resources should be made available to the lower social classes as well, so that they have the opportunity to formally claim their existing property rights.
References
McGregor, Richard. The Party: the Secret World of China's Communist Rulers. Harper Perennial, 2012.
Schuman, Michael. “Can China's Communists Really Be Good Capitalists?” Bloomberg.com, Bloomberg, 1 Oct. 2017, www.bloomberg.com/view/articles/2017-10-02/can-china-s-communists-really-be-good-capitalists.
Soto, Hernando de. The Mystery of Capital. Basic Books, 2006.