Essay on the Role of Property Rights in Creation of Capital

Capital is the ‘lifeblood’ of any economy. According to (De Soto 5), the American economy is thriving because they have been able to harness the power of capital. Boosting the productivity of their workforce helps sustain wealth creation. Apart from ‘what is capital?’, this article looks at how to build it, and how to make use of it to encourage national growth. I look at how property rights contribute to the creation of capital for the American economy; and the measures which the country has put in place to benefit over time. Finally, this article considers why many nations have been unable to convert the assets they already possess into a form of capital. this article tries to find out if capitalism is feasible to other countries as it was to the West; if at all

De Soto 5, describes capital as a force which must be produced to drive economic growth and increase personal income of a country’s citizens; as well as the national income. More national income means a state can re-invest its profits in sectors of its economy which can further strengthen its economic situation. Unlike in developing economies, Americans register their possessions to get official property documents. They register land parcels, buildings, physical equipment, and any store of inventories or other (in)tangible property. Official documents represent registered assets. These assets can then be used as security to get credit or leverage for capital.

The representation of assets in the form of property documents allows them to connect to the rest of the economy. In addition to using assets as collateral for credit, registered assets are useful in tracking the credit-worthiness of owners, as well as tax remittance and debt collection. Proper conceptualization and implementation of these processes enable a country to establish reliable and universal pools of resources for the socio-economic development of its citizens. The documentation and acknowledgment of assets to represent value allow investors to use them as a share against investment and therefore act as available capital.

The process of capital creation through documentation of property rights has been practiced and perfected in western economies for a long time during the history of these economies. Unfortunately, for all who are concerned, the creators of proprietary rights systems did not think to document the underlying principles nor the related mechanisms and processes of capital formation. According to (De Soto 8), being assigned the property rights of an asset does not transform the asset into usable capital or any of its equivalents. (De Soto 8) Observes that within the mechanisms of the rights to own property in America, there is a legal infrastructure that is not officially acknowledged to exist. This system within the system helps the West to create capital from assets and labor.

The next step is considering why nations outside the categorization of the West have been unable to transform their property rights systems into capital. It isn’t the first time trying to implement capitalism. In Latin America, for example, there were four times since 1820 (De Soto 3). Constant failure to benefit from this system of the economy may be one of the reasons the rest of the world has been unable to enjoy capitalism. Market economy policies in developing and former communist economies have caused political instability, unemployment, and corruption. The real problem, however, is that the resources which they have cannot be used to secure loans and credit; nor is their economic value translated into capital. In the United States, there is a ‘representational process,’ a ‘mechanism,’ an ‘implicit legal infrastructure’ that complements the right to own property. This system allows the user to make their assets, or labor into tangible capital (De Soto 8).

De Soto 5, asserts that most countries which are considered poor are not, and they have assets which they could document as properties and use as capital. He gives the example of mortgage-backed loans which can be used as collateral for capital when they sell in secondary markets. The failure of developing economies to have methodologies in place to generate capital from assets causes them to be undercapitalized. When a firm is undercapitalized, the valuation of its income and assets is not represented accurately by the securities it issues. Citizens and their countries own assets in the form of resources, but they are unregistered, and there isn’t any set process to turn them into tangible capital.

Moreover, their citizens run unregistered businesses. The liability of such enterprises is usually undefined, opening a loophole for debts to affect their personal assets. Potential investment opportunities become hard to identify by investors and potential financiers.

In my opinion, De Soto presents an effective argument. His introduction describes capital and gives some of its characteristics: it exists in a variety of raw forms like assets, resources in nature, as well as labor. Equity is the currency of any market economy, the fuel of any economic engine, and the raw material for profits. Like all raw materials, it requires a process t extract. This process is complemented by other methods (supporting processes) which allow the converted assets to be used as collateral for credit or to represent part of an investment. Taking the above into consideration, I agree that well-crafted property rights, supported by effective processes, are an integral part of development. One can turn their asset or skill, like music into a record whose proprietary right he/she owns (capital). Such capital can then is invested in return for profit.

Work Cited

De Soto, Hernando. The mystery of capital: Why capitalism triumphs in the West and fails everywhere else. Basic Civitas Books, 2000.