Ask the Expert: Tom Palmer

Lech Wilkiewicz from Texas State University asks:

"For Dr. Tom Palmer: I recently read "The Mystery of Capital", by Hernando do Soto, which argued that capitalism has not flourished in countries outside of the West because of a lack of a legal infrastructure that allows poorer citizens to obtain, utilize, transfer, etc. the capital that they own. I would like to know if you agree with this argument. Also, if that is the case, what steps can we take to alleviate this problem without continuing to directly fund the governments of poorer countries who are in many cases corrupt and do not effect a meaningful change in their policies?"

Tom Palmer answers:

I do agree with de Soto's observation, although I would add that what matters is not whether "capitalism" flourishes, but whether people do. And they manifestly do not flourish where they lack the security of property that de Soto describes in "The Mystery of Capital."

The really hard problem -- one the necessity of which de Soto so clearly demonstrates -- is figuring out how to create a sustainable infrastructure of law that can provide the "Three D's" of property rights: that they are Definable, Defensible, and Divestible, that is, that they can be clearly defined legally, defended in law, and transformed at relatively low cost to others. Without those attributes, mere possession of assets cannot be transferred into the complex capital structure that makes possible the mobilization of capital that facilitates the transition from widespread poverty to general prosperity.

We have learned that attempts to impose "property registries" from above are not successful if they are not accompanied by legal reforms that allow people to transfer titles easily and at relatively low cost. If the legal institutions are unfair, skewed to the benefit of elites, inefficient, and costly, the official title system will soon diverge from the real system of property rights on the ground, meaning that the legal titles will not be useful in securing mortgages, to take one important example, and thus cannot transform mere possession -- "dead capital" -- into full property -- "living capital."

Foreign aid to assist governments in creating property systems has not been very successful. What is needed is a system of law that grows from the bottom up, in which the formal law recognizes the legal reality created by the people concerned. Figuring out how to nurture such a system -- or studying cases in which such systems have emerged and deriving lessons from them -- is one of the most important intellectual challenges faced by advocates of liberty. It is not only the key to a successful college paper, masters thesis, or doctoral dissertation; it is an intellectual and a moral challenge worthy of the greatest effort.

In addition to de Soto's work, a student of the problem could profit by looking at some of the following literature:

General works --

Bethell, Tom, The Noblest Triumph: Property and Prosperity through the Ages (New York: St. Martin's Press, 1998)

More specialized studies --

Alston, Lee J., Gary D. Libecap, and Robert Schneider, "The Determinants and Impact of Property Rights: Land Titles on the Brazilian Frontier," Journal of Law, Economics, and Organization, Vol. 12, No. 2 (1996)

Anderson, Terry L. and P. J. Hill, "The Evolution of Property Rights: A Study of the American West," Journal of Law and Economics, Vol. XVIII, No. 1 (April 1975)

Anderson, Terry L. and Randy T. Simmons, eds., The Political Economy of Customs and Culture: Informal Solutions to the Commons Problem, (Lanham, Md.: Rowman and Littlefield, 1993)

Bailey, Margin J., "Approximate Optimality of Aboriginal Property Rights," Journal of Law and Economics, Vol. XXXV (April 1992)

Barzel, Yoran, Economic Analysis of Property Rights (Cambridge: Cambridge University Press, 1989)

Benson, Bruce L., "The Spontaneous Evolution of Commercial Law," Southern Economic Journal, Vol 55 (January 1989)

Bouckaert, Boudewijn, "What is Property?," Harvard Journal of Law and Public Policy, Vol. 13, No. 3 (Summer 1990)

Demsetz, Harold, "Toward a Theory of Property Rights," American Economic Review, Vol. 57 (May 1967)

Ellickson, Robert C., Order Without Law: How Neighbors Settle Disputes (Cambridge: Cambridge University Press, 1991)

----"Property in Land," Yale Law Journal, Vol. 102, No. 6 (April 1993)

Epstein, Richard, "Possession as the Root of Title," University of Georgia Law Review, Vol. 13, No. 4 (Summer 1979)

Honoré, Tony, "Ownership," Tony Honoré, Making Law Bind: Essays Legal and Philosophical (Oxford: Oxford University Press, 1987)

Libecap, Gary D., "Economic Variables and the Development of the Law: The Case of Wetern Mineral Rights," Journal of Economic History, Vol. XXXVIII, No. 2 (June 1978)

----"Distributional Issues in Contracting for Property Rights," Journal of Institutional and Theoretical Economics 145 (1989)

Maine, Henry Sumner, Ancient Law (1861; Gloucester, Mass.: Peter Smith, 1970)

Postema, Gerald, "Coordination and Convention at the Foundations of Law," Journal of Legal Studies, Vol. 11, No. 1 (January 1982)

Rose, Carol, "Possession as the Origin of Property," University of Chicago Law Review 52 (1985)

Runolfsson, Birgir, "Fencing the Oceans: A Rights-Based Approach to Privatizing Fisheries," Regulation, Vol. 20, No. 3 (Summer 1997)

Schmidtz, David, "The Institution of Property," Ellen Frankel Paul, Fred D. Miller, Jr. and Jeffrey Paul, eds., Property Rights (Cambridge: Cambridge University Press, 1994)

Sugden, Robert, The Economics of Rights, Co-operation, and Welfare (Oxford: Basil Blackwell, 1986)

~Dr. Tom Palmer