The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Hernando de Soto

The world renowned economist, Hernando De Soto, set out to discover how countries in the West achieved capitalistic success and why countries in the East and elsewhere seemed to struggle with adopting capitalism in his compelling book, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. In the book, De Soto argues that Western nations have long understood the practice of capital accumulation and assembling assets, while other nations have for centuries lacked the “legal foundation” upon which to construct an economic foundation built on financial capital- a foundation and set of rules appropriately called the “mystery of capital.”

In De Soto’s book, he explains that the “mystery of capital” refers to the set of laws and institutions that have enabled Western countries to acquire and manage wealth which other nations have been unable or unwilling to incorporate or even comprehend. The “mystery of capital” is made up of three parts: the system of documentations, procedures, and regulations used to prove ownership of property; the availability of financial systems such as banks and capital markets; and the legal infrastructure of courts, government offices, and an independent judiciary.

Without these components in place, parts of the global economy remain disconnected and exist in a so-called “black hole of capitalism”, as De Soto coins it. It is estimated that two-thirds of the world’s wealth and five-sixths of the human population exist in these disconnected areas where the “mystery of capital” is unknown. He goes on to say that current attempts to promote development, democracy, or free markets have all been missing this key element, which makes them largely ineffective.

In The Mystery of Capital, De Soto outlines the implications of missing laws and regulations to the economic development of non-Western nations. He explains how the lack of legal infrastructure serves to be a major barrier to the process of capital formation and discourages productive investment while simultaneously creating unproductive investments. He also explores why so many countries fail to capitalize on the potential of the global economy by not creating the basic legal frameworks needed to foster growth and development.

In a sense, he frames the discussion as one of cultural differences, saying that the values of individual countries greatly affect the development or failure of Capitalism within them. He emphasizes that something as simple as a new law about land tenure can be enough to motivate an individual to build a business or even an entire industry.

In the end, De Soto does not intend to impose one set of laws over another; rather, he suggests that an understanding of the “mystery of capital” and its implications should be available to all countries in the West and beyond, so that their societies can reap the benefits of capitalism without the risk of permanent economic stagnation. With this knowledge, De Soto argues, nations around the world can harness the dynamism of property rights, get the legal systems right, and foster the creative force of enterprise.

The Mystery of Capital is a fascinating and informative book that is sure to leave its readers with a greater appreciation of the importance of the “mystery of capital” in order to create a successful form of capitalism and promote economic growth and development. De Soto’s eloquent and compelling argument serves to enlighten readers on why some countries have succeeded in harnessing the “mystery of capital” and others have not, and what needs to be done in order for all nations to acquire the necessary tools for economic stability and growth.