The Mystery of Capital: Third World Development as an Information Problem

Sorry for the long delay in posting, but I’ve been busy finishing Hernado Desato’s The Mystery of Capital, a fascinating exploration of why capitalism has thrived in the West, and failed utterly most everywhere else. I plowed through the book at the exclusion of almost everything else, so writing suffered.

On the surface, Desato’s argument seems fairly simple. His basic premise is that members of most developing nations don’t have a robust enough property regime to let them prosper. However, Desato isn’t your typical property rights advocate, pushing a wholy Western view of property in the rule of law. Instead, he’s more concerned with taking the ownership and property structures that already exist, informally in the slums of Hati, or the shanty towns of Johannsburg, and making them a part of the existing legal framework. His goal is to free up what he sees as a mound of “dead capital” contained in the copious amounts of real estate held extralegally by the world’s poor.

What does Desato mean by “dead capital”? This is where the subtely and complexity of Desato’s argument comes in. As he explains it, capital is more than just money in the bank. Instead, it’s a certain kind of value that naturally arises when a real tangible asset is represented in a specific way that highlights the most important economic properties of the asset. These representations are things like house deeds, or company balances sheets, or land title. Desato argues that when we create these virtual representations of property, it makes it much easier to manipulate these assets, and use them in transactions or collateral for loans. Each peice of property takes on a double life, one life in the paper world, and one in the real, getting dual use and essentially doubling it’s value.

Desato talks about the specific advandtadges of paper property like fungibility (the ability to combine assets together) or easy divsion of assets into shares, but for the puprose of this post, an analogy is probably best. Think of paper property as being the equivalent of an IMDB page for a movie. At IMDB you can get plot summaries, actors lists, ratings, release dates, etc. Now imagine that none of these things existed. That movies didn’t even have titles and the only way to find out anything about a movie was to watch. How hard would it be to pick out what to watch on a Saturday night?

Desato argues that this is the existence for most property in the world. Literally trillions of dollars of assets are held in total by the world’s poor, but because there’s no title, nationwide ownership database, no deeds, no one knows about it. The poor can’t use their house as colleteral for a loan to start a business, can’t sell shares in their business to raise money, can’t identify new plots of useful land or property to buy with that money, and then can’t loan the money out to someone else to raise interest. Huge swaths of property are left out of the double life that property plays in the Western world.

What’s so interesting about this theory, is that it means that the problem of economic development is primarily an informational problem. By that I mean it isn’t a problem of cultural values discouraging work, a problem of a greedy tyrannous elite, a problem of an unskilled workforce that needs training on modern technology. Instead it’s a problem of collecting the information that is already out there, information about who owns what, what the most important economic indicators of an asset are, and putting them in a place where everyone has access. In short, that capitalism requires a property information management system.

If the line “collecting the informaiton that is already out there” sounds like something out of the crowdsourcing playbook, it’s really not that surprising. Although Desato doesn’t use the term, he suggests some techniques that are certainly kin to crowdsourcing. In discussing how to develop a framework for property where there is not one already, he suggests a bottom up approach, instead of a top down, arguing that the exact nature of a property regime should start with the ownership arrangements that naturally bubble up in small communities. He even suggests that policy makers should get out on the street and “listen to the barking of the dogs” since these animals usually know exactly where their masters’ property begins and ends.

However, I don’t think this similarity is necessarily because crowdsourcing is the solution to creating the legal structure necessary for capitalism in the third world. I think instead, the similarity stems from the fact that crowdsourcing is one of the developing approaches to a new type of problem, the informational problem. I don’t want to get into this in detail now, because I’m already over 700 words and I plan to devote an entire post to these ideas, but I think that most problems we face in the modern world are not about acquiring new information, or developing new technologies. Most problems are about “collecting the information that’s already out there” in a way that it can be quickly and easily utilized. Our big challenge for the next few decades will be developing and refining the techniques to solve this new kind of problem.

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