Diego Ramos
Prof. Ng
Econ. 160
05 December 2018
Term Paper, Fall 2018
In Hernando de Soto’s, “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else”, Desoto argues on formal property serving as a pillar to a capitalistic economy that produces wealth. An effectively functioning market demands an institutional structure that serves as a representational process to an individual’s assets. This representational process adequately documents the rights to property; makes them official. Property that has been officially documented, is capable of being integrated onto the market. Once on the market, capital can finally be extracted and processed from properties, thus, producing wealth (p. 21).
“A representational process injects life into assets and makes them generate capital” (p. 20). Assets that are formally represented live a parallel life that produces additional value. “A formal property representation such as a title is not reproduction of the house, like a photograph, but a representation of our concepts about the house” (p. 63). These qualities that cannot be seen have potential for producing value, they are economically and socially meaningful qualities. In a capitalistic economy, for example, most formal property can serve as equity exchanged for investment, collateral for a loan, as an address for collecting taxes, rates, and debts, to identify where individuals reside, or as a place to receive public utility services (p. 63). Property that is official, or in other words, legal, possess the ability to produce additional value over and above its visible assets.
Formal property systems produce six effects that allow citizens of capitalistic economy to produce wealth (p. 68). The first one similar to what I previously discussed, the legal property system is “the staircase that took nations from the universe of assets in their natural state to the conceptual universe of capital where assets can be viewed in their full productive potential” (p. 71). In a formal system, assets are able to create a realm; wealth is generated out of this conceptual realm.
The second effect, a formal rights property system integrates dispersed information into one formal representation system (p. 71). This integration allows citizens to view descriptions of social and economic qualities of any vacant asset without having look at the asset itself. Citizens can take action on opportunities that create surplus value (p. 74). The asset’s potential has become easier to harness, enhancing the production of wealth in a capitalist economy.
The third effect, a formal rights property system creates accountability and invites commitment, tools that are useful in the production of wealth. Citizens were now involved in an integrated legal system that imposes constraints, spawns rules, and provides authority (p. 76). People are able to see not only the potential rewards of using assets but the potential dangers; it makes people accountable. Formal property. Authorities are able to get involved in the presence of legal infractions and dishonored contracts; citizens are deeply encouraged to honor contracts, respect titles, and obey the law (p. 75). Accountability then leads to commitment. Contracts are created fairly easy, all it requires are sets of agreements. When contracts are made, citizens are driven to commit themselves to whatever the pledge is such as mortgage, a lien, or any form of security that protects the other contracting party (p.77). In a formal system, individuals craft tools that aid the creation of wealth.
The fourth effect, a legal property system universalizes assets and suits them for practically any transaction. Assets with representation can easily be divided, combined, mobilized, and most importantly to create business deals (p. 79). A single factory can be held by countless investors; one can assess how to exploit a particular piece of real estate most profitably (p. 78). The property system allows assets to be looked at beyond its rigid and physical state, additional value is created out of the universalization. In a capitalist economy, fungible assets are key in the production of wealth.
The fifth effect, a property system forms a complex network through which people can craft their assets into more valuable engagements. Citizens are able “to form ties with both the government and the private sector, and so to obtain additional goods and services” (p. 81). Resources change hands no matter the distance which allows investments to be assembled anywhere (p. 82). Formal property provides a complex web where individuals can form arrangements with others that ultimately results with an increased production of wealth.
The sixth effect, formal property facilities safe and secure transactions, out of this trust, people can unfold the asset’s potential. “Titles, deeds, securities, and contracts that describe the economically significant aspects of assets are continually tracked and protected as they travel through time and space” (p. 82). Agencies can provide the necessary files that are necessary to pursue business endeavors, these agencies also ensure that assets are adequately and accurately represented (p. 83). Formal systems provide agencies that secure the creation of wealth, without these agencies it would be almost impossible to accomplish anything. For example, In Peru it takes 728 steps to obtain a legal title for a piece of land (p. 33). On the other hand, agencies make all of this a breeze and do all the book keeping, they are necessary scorekeepers. For added security, agencies are overseen by the government to ensure prosperity. Agencies of a property system grant secure transactions on a massive scale and thus helps us preform actions to
In a capitalist economy a legal property system is an avenue that permits us to understand each other, make connections, and synthesize knowledge about our assets to increase our production of wealth (p. 264). Formal property brings everyone into one social contract where they can succeed together (p. 263). It assigns to assets, by social contract, in a conceptual universe, a status that allows them to perform functions that generate wealth (p. 266). In a capitalist economy wealth is created out of the use of property systems, these systems represent resources in a virtual context. People are able to work with one another to make the most out of their resources and create surplus value. A legal property system provides the knowledge base and rules that are the necessary incentives to engage in entrepreneurial investments that accumulate wealth. This process drives economic development and prosperity. Warren Buffet would not have been able to build his real-estate empire without a property rights system based on a strong, well-integrated social contract (p. 270).
Is Communist China a capitalist economy? To what extent does Communist China have that something else.
Communist China’s economy over the past decades has shifted from a solely command economy to one that now features capitalistic elements but is plagued by communistic features.
The communistic features are keys in order to keep the Chinese Communist Party’s enduring power afloat. “China’s ‘number one core interest is to maintain its fundamental system and state security’. State sovereignty, territorial integrity and economic development, the priorities of any state, all are subordinate to the need to keep the Party in power” (p. 14) “the Party has made sure it keeps a lock-hold on the state and three pillars of its survival strategy: control of personnel, propaganda and the People’s Liberation Army” (p. 15). The Chinese Communist Party’s supremacy lives through the communistic values that remain through their economy, as a result most assets belong to state, deteriorating a legal property system.
The party authorizes a limited legal property system in efforts to lay boundaries on the private sector (p. 55). A fully functioning formal property system would undoubtedly produce wealth. Wealthy private sectors have the potential of creating political rivals, the Chinese Communist Party’s worst nightmare. Furthermore, it would impede their propaganda. “The Party’s distrust of the private sector was never about money nor the flagrant contradiction between individual wealth and the official Marxist and Maoist pantheons. All parties to this on-and-off-again, three-decade-long courtship agreed on the need to turn a profit. The real issue for the Party was the threat that the foreign and local private sector might become a political rival” (p. 204). The thought of a wealthy potentially nonconforming private sector is the sole reason the Party of China enforces boundaries on a legal system.
In a capitalist economy, resources are mutually exchanged and possessed from person to person, in the Chinese Party’s economy, all resources are possessed by the state. Control over these sectors is pivotal in order to maintain its power. “In China, the following big sectors are either 100 per cent or majority controlled by the state: oil, petrochemicals, mining, banks, insurance, telcos, steel, aluminium, electricity, aviation, airports, railways, ports, highways, autos, health care, education and the civil service” (p. 206). By holding these resources hostage, the Chinese Communist Party allows very limited entrepreneurial activity and is a key factor in maintain its power. Only allowing investments that accommodate their political views. “After more than three decades of market reforms, Chinese companies still come in all manner of guises and trade under an array of different business registrations to accommodate prevailing political pressures” (p. 209). Communist China’s economy is similar to a capitalistic economy to a certain extent, control over these sectors is a requirement for their enduring political power.
The corrupt party’s communist economy is identical to a capitalist’s, thanks to Deng Xiaoping economic redesign that instilled capitalistic features. The capitalistic features have been determinantal to the country’s prosperity ever since. What distinguishes a capitalist economy is the ownership of major sectors, and the welcoming of the private one. The Chinese Communist Party is an opaque organization with systematic corruption that has secured enduring power through its economy. This results in a diminutive private sector, ultimately impeding a legal property system.