A good legal property system is a medium that allows us to understand each other, make connections, and synthesize knowledge about our assets to enhance our productivity. It is a way to represent reality that lets us transcend the limitations of our senses. Well-crafted property representations enable us to pinpoint the economic potential of resources so as to enhance what we can do with them. They are not “mere paper”: they are mediating devices that give us useful knowledge about things that are not manifestly present.
Property records point our knowledge about things toward an end, to borrow from Thomas Aquinas, “just as the arrow is moved by the archer.”12 By representing economic aspects of the things we own and assembling them into categories that our minds can quickly grasp, property documents reduce the costs of dealing with assets and increase their value commensurately. This notion, that the value of things can be increased by reducing the costs of knowing them and transacting with them, is one of Nobel laureate Ronald Coase’s major contributions. In his treatise “The Nature of the Firm,” Coase established that the costs of carrying out transactions can be substantially reduced within the controlled and coordinated context of a firm.13 In this sense, property systems are like Coase’s firm—controlled environments to reduce transaction costs.
The capacity of property to reveal the capital that is latent in the assets we accumulate is born out of the best intellectual tradition of controlling our environment in order to prosper. For thousands of years our wisest men have been telling us that life has different degrees of reality, many of them invisible, and that it is only by constructing representational devices that we will be able to access them. In Plato’s famous analogy, we are likened to prisoners chained in a cave with our backs to the entrance so that all we can know of the world are the shadows cast on the wall in front of us. The truth that this illustration consecrates is that many things that guide our destiny are not self-evident. That is why civilization has worked hard to fashion representational systems to access and grasp the part of our reality that is virtual and to represent it in terms we can understand.
As Margaret Boden puts it, “Some of the most important human creations have been new representational systems. These include formal notations, such as Arabic numerals (not forgetting zero), chemical formulae, or the staves, minims, and crotchets used by musicians. [Computer] programming languages are a more recent example.”14 Representational systems such as mathematics and integrated property help us manipulate and order the complexities of the world in a manner that we can all understand and that allows us to communicate regarding issues that we could not otherwise handle. They are what the philosopher Daniel Dennett has called “prosthetic extensions of the mind.”15 Through representations we bring key aspects of the world into being so as to change the way we think about it. The philosopher John Searle has noted that by human agreement we can assign “a new status to some phenomenon, where that status has an accompanying function that cannot be performed solely in virtue of the intrinsic physical features of the phenomenon in question.”16 This seems to me very close to what legal property does: It assigns to assets, by social contract, in a conceptual universe, a status that allows them to perform functions that generate capital.
This notion that we organize reality in a conceptual universe is at the center of philosophy worldwide. The French philosopher Michel Foucault labeled it the région médiane that provides a system of switches (codes fondamentaux) that constitutes the secret network where society establishes the ever-expanding range of its potential (les conditions de possibilité).17 I see formal property as a kind of switchyard that allows us to extend the potential of the assets that we accumulate further and further, each time increasing capital. I have also benefited from Karl Popper’s notion of World 3—a separate reality from World 1 of physical objects and World 2 of mental states—where the products of our minds take on an autonomous existence that affects the way we deal with physical reality.18 And it is to this conceptual world that formal property takes us—a world where the West organizes knowledge about assets and extracts from them the potential to generate capital.
And so formal property is this extraordinary thing, much bigger than simple ownership. Unlike tigers and wolves, who bare their teeth to protect their territory, man, physically a much weaker animal, has used his mind to create a legal environment—property—to protect his territory. Without anyone fully realizing it, the representational system the West created to settle territorial claims took on a life of its own, providing the knowledge base and rules necessary to fix and realize capital.
The Enemies of Representations
Ironically, the enemies of capitalism have always seemed more aware of the virtual origin of capital than capitalists themselves. It is this virtual aspect of capitalism that they find so insidious and dangerous. Capitalism, charges Viviane Forrester in her best-seller L’Horreur économique, “has invaded physical as well as virtual space…. It has confiscated and hidden wealth like never before, it has taken it out of the reach of people by hiding it in the form of symbols. Symbols have become the subjects of abstract exchanges that take place nowhere else than in their virtual world.”19 Consciously or unconsciously, Forrester is part of a long tradition of being uncomfortable with economic representations of virtual reality—those “metaphysical subtleties” that Marx thought were nevertheless necessary to understand and accumulate wealth.20
This fear of the virtuality of capital is understandable. Every time civilization comes up with a novel way of using representations to manage the physical world, people become suspicious. When Marco Polo returned from China, he shocked Europeans with the news that the Chinese used not metal but paper money, which people quickly denounced as alchemy. The European world resisted representative money into the nineteenth century. The latest forms of derivative money—electronic money, wire transfers, and the now omnipresent credit card—also took time to be accepted. As representations of value become less ponderous and more virtual, people are understandably skeptical. New forms of property derivatives (such as mortgage-backed securities) may help form additional capital, but they also make understanding economic life more complex. And so people are inclined to be more comfortable with the image of the noble perspiring workers of Soviet and Latin American murals, toiling in the fields or operating their machines, than with capitalists wheeling and dealing titles, shares, and bonds in the virtual reality of their computers. It is as if working with representations dirties your hands more than working with dirt and grease.
Like all representative systems—from written language to money and cyber symbols—property paper has been seen by many intellectuals as an instrument of deceit and oppression. Negative attitudes to representations have been powerful undercurrents in the formation of political ideas. The French philosopher Jacques Derrida recalls in De la Grammatologie how Jean Jacques Rousseau argued that writing was an important cause of human inequality. For Rousseau, those with the knowledge of writing could control written laws and official paper and, thus, the destiny of people. Claude Lévi-Strauss has also argued that “the primary function of written communication is to facilitate subjugation.”21
I am as aware as any anticapitalist of how representational systems, particularly those of capitalism, have been used to exploit and conquer, how they have left the many at the mercy of the few. I have discussed in this book how official paper has been used for outright domination. And yet the art and science of representation is one of the girders of modern society. No amount of ranting and raving against writing, electronic money, cyber symbols, and property paper will make them disappear. Instead we must make representational systems simpler and more transparent and work hard to help people understand them. Otherwise, legal apartheid will persist, and the tools to create wealth will remain in the hands of those who live inside the bell jar.
Is Succeeding at Capitalism a Cultural Thing?
Think of Bill Gates, the world’s most successful and wealthiest entre
preneur. Apart from his personal genius, how much of his success is due to his cultural background and his “Protestant ethic”? And how much is due to the legal property system of the United States?
How many software innovations could he have made without patents to protect them? How many deals and long-term projects could he have carried out without enforceable contracts? How many risks could he have taken at the beginning without limited liability systems and insurance policies? How much capital could he have accumulated without property records in which to fix and store that capital? How many resources could he have pooled without fungible property representations? How many other people would he have made millionaires without being able to distribute stock options? How many economies of scale could he have benefited from if he had to operate on the basis of dispersed cottage industries that could not be combined? How would he pass on the rights to his empire to his children and colleagues without hereditary succession?
I do not think Bill Gates or any entrepreneur in the West could be successful without property rights systems based on a strong, well-integrated social contract. I humbly suggest that before any brahmin who lives in a bell jar tries to convince us that succeeding at capitalism requires certain cultural traits, we should first try to see what happens when developing and former communist countries establish property rights systems that can create capital for everyone.
Throughout history people have confused the efficiency of the representational tools they have inherited to create surplus value with the inherent values of their culture. They forget that often what gives an edge to a particular group of people is the innovative use they make of a representational system developed by another culture. For example, Northerners had to copy the legal institutions of ancient Rome to organize themselves and learn the Greek alphabet and the Arabic number symbols and systems to convey information and calculate. And so, today, few are aware of the tremendous edge that formal property systems have given Western societies. As a result, many Westerners have been led to believe that what underpins their successful capitalism is the work ethic they have inherited or the existential anguish created by their religions—in spite of the fact that people all over the world all work hard when they can and that existential angst or overbearing mothers are not Calvinist or Jewish monopolies. (I am as anxious as any Calvinist in history, especially on Sunday evenings, and in the overbearing mother sweepstakes, I would put mine in Peru up against any woman in New York.) Therefore, a great part of the research agenda needed to explain why capitalism fails outside the West remains mired in a mass of unexamined and largely untestable assumptions labeled “culture,” whose main effect is to allow too many of those who live in the privileged enclaves of this world to enjoy feeling superior.
One day these cultural arguments will peel away as the hard evidence of the effects of good political institutions and property law sink in. In the meantime, as Foreign Affairs’ Fareed Zakaria has observed,
Culture is hot. By culture I don’t mean Wagner and Abstract Expressionism—they’ve always been hot—but rather culture as an explanation for social phenomena…. Cultural explanations persist because intellectuals like them. They make valuable the detailed knowledge of countries’ histories, which intellectuals have in great supply. They add an air of mystery and complexity to the study of societies…. But culture itself can be shaped and changed. Behind so many cultural attitudes, tastes, and preferences lie the political and economic forces that shaped them.22
This is not to say that culture does not count. All people in the world have specific preferences, skills, and patterns of behavior that can be regarded as cultural. The challenge is fathoming which of these traits are really the ingrained, unchangeable identity of a people and which are determined by economic and legal constraints. Is illegal squatting on real estate in Egypt and Peru the result of ancient, ineradicable nomadic traditions among the Arabs and the Quechuas’ back-and-forth custom of cultivating crops at different vertical levels of the Andes? Or does it happen because in both Egypt and Peru it takes more than fifteen years to obtain legal property rights to desert land? In my experience squatting is mainly due to the latter. When people have access to an orderly mechanism to settle land that reflects the social contract, they will take the legal route, and only a minority, like anywhere else, will insist on extralegal appropriation. Much behavior that is today attributed to cultural heritage is not the inevitable result of people’s ethnic or idiosyncratic traits but of their rational evaluation of the relative costs and benefits of entering the legal property system.
Legal property empowers individuals in any culture, and I doubt that property per se directly contradicts any major culture. Vietnamese, Cuban, and Indian migrants have clearly had few problems adapting to U.S. property law. If correctly conceived, property law can reach beyond cultures to increase trust between them and, at the same time, reduce the costs of bringing things and thoughts together.23 Legal property sets the exchange rates between different cultures and thus gives them a bedrock of economic commonalities from which to do business with each other.
The Only Game in Town
I am convinced that capitalism has lost its way in developing and former communist nations. It is not equitable. It is out of touch with those who should be its largest constituency, and instead of being a cause that promises opportunity for all, capitalism appears increasingly as the leitmotif of a self-serving guild of businessmen and their technocracies. I hope this book has conveyed my belief that this state of affairs is relatively easy to correct—provided that governments are willing to accept the following:
The situation and potential of the poor need to be better documented.
All people are capable of saving.
What the poor are missing are the legally integrated property systems that can convert their work and savings into capital.
Civil disobedience and the mafias of today are not marginal phenomena but the result of people marching by the billions from life organized on a small scale to life on a big scale.
In this context, the poor are not the problem but the solution.
Implementing a property system that creates capital is a political challenge because it involves getting in touch with people, grasping the social contract, and overhauling the legal system.
With its victory over communism, capitalism’s old agenda for economic progress is exhausted and requires a new set of commitments. It makes no sense continuing to call for open economies without facing the fact that the economic reforms underway open the doors only for small and globalized elites and leave out most of humanity. At present, capitalist globalization is concerned with interconnecting only the elites that live inside the bell jars. To lift the bell jars and do away with property apartheid will require going beyond the existing borders of both economics and law.
I am not a die-hard capitalist. I do not view capitalism as a credo. Much more important to me are freedom, compassion for the poor, respect for the social contract, and equal opportunity. But for the moment, to achieve those goals, capitalism is the only game in town. It is the only system we know that provides us with the tools required to create massive surplus value.
I love being from the Third World because it represents such a marvelous challenge—that of making a transition to a market-based capitalist system that respects people’s desires and beliefs. When capital is a success story not only in the West but everywhere, we can move beyond the limits of the physical world and use our minds to soar into the future.
Notes
CHAPTER 1
1. Gordon S. Wood, “Inventing American Capitalism,” New York Review of Books (June 9, 1994), p. 49.
CHAPTER 2
1. Donald J. Pisani, Water, Land, and Law in the West: The Limits of Public Policy, 1850–1920 (Lawrence: University Press of Kansas, 1996), p. 51.
2. Comments by the architect and urbanist Albert Mangonese in Conjonction, No. 119, February–March 1973, p. 11.
3. Leonard J
. Rolfes, Jr., “The Struggle for Private Land Rights in Russia”, Economic Reform Today, No. 1, 1996, p. 12.
CHAPTER 3
1. Adam Smith, The Wealth of Nations (London: Everyman’s Library, 1977), former Vol. 1, p. 242.
2. Ibid., p. 295.
3. Simonde de Sismondi, Nouveaux principes d’économic politique (Paris: Calmann-Lévy, 1827), pp. 81–82.
4. Jean Baptiste Say, Traité d’économie politique, (Paris: Deterville, 1819), Vol. 2, p. 429.
5. Karl Marx, Frederick Engels, Collected Works (New York: International Publishers, 1996), Vol. 35, p. 82.
6. Smith, The Wealth of Nations, former Vol. 1, p. 242.
7. Ibid., p. 286.
8. Herbert L. Dreyfus and Paul Rabinow, Michel Foucault: Beyond Structuralism and Hermeneutics (Chicago: Harvester, University of Chicago, 1982), p. 211.
9. George A. Miller and Philip N. Johnson-Laird, Language and Perception (Cambridge: Harvard University Press, 1976), p. 578.
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