My son studies business economics at Wheaton College. The kind of math he does is a bit past my level. So are some of the books he reads. During the Christmas vacation at his grandparent’s home I had a cold and finding sleep was hard. Having read the newspaper front to back and back again and feeling not in the least intellectually curious I grabbed one of his books called The Mystery of Capital. I expected to drop it after a few paragraphs but instead found myself engrossed for the better part of the night. Fear not, what follows here is not a book review. I did not expect this book to have anything to do with real estate; much less, make me think differently about what I do now for a living: helping people buy and sell homes. What I was reading made so much sense that I wondered why I had not read it before. The case the author presented was so clear and the facts so overwhelming I wondered why his findings weren’t as common knowledge as, let’s say, gravity.
Private Property Ownership: Engine of Economy
Without private ownership of property our way of life in the USA would not be possible. Without having documented proof of property ownership entrepreneurship would be a non starter. Over 80 percent of all businesses in this country are started because the entrepreneur puts up the equity of his home as collateral. The home is much more than a place to stay; it’s productive capital. The owner’s title is only a representation of the home but this abstract is actually more important than the tangible property.
Squatters Owned Squat
We should not take the obvious for granted. About 160 years ago there were about 800 separate jurisdictions in the post-gold-rush California, each jurisdiction with its own rules and limited reach. Outside the jurisdiction the property did not “exist”. It was worthless. The earlier squatters who occupied land that wasn’t their’s “owned” property but they did so outside the formal legal system. Only slowly were the laws of the land changed to reflect the reality, thus creating legal ownership. Most significant in that regard were the Preemption Act of 1841 and the Homestead Act of 1862.
To paraphrase the author of the book, Hernando De Soto: Western nations recognized social contracts created outside the law as the legitimate source of formal law and absorbed the contracts into the system. Law created popular property forming capital that drove economic growth.
$9.3 Trillion of Dead Capital
So the “Mystery” in the Mystery of Capitalism is legalized and codified ownership of private property. The author uses the discussion of the evolution of private property in the USA to make a much bigger point: unless the former states of the Soviet Union, the countries of South America and the Middle East and the entire Third World move to make “illegal” ownership “legal,” much of the capital of these countries is dead capital. De Soto estimates that about $9.3 trillion of property is owned this way: outside the legal system. A rice farmer, who works a piece of land where his family lives can’t grow the farm or buy another piece of land without proof of ownership. Likewise, the woman who runs the vegetable stand that’s part of her primitive habitat can’t use the property as collateral for getting a loan to buy books for her children.
When I consider that it took generations to overcome such conditions in this country making the private ownership of property a cornerstone of our political and economic system, I can say with pride that I am playing a significant role in a process that is essential to our way of life.
© 2007, Gerhard N. Ade
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