Is 'The world's most important living economist' wrong?

Bill Gates calls Hernando Del Soto 'the world's most important living economist'. He seems to have the mantra - the elixir of the 'mystery of capital' - that can turn the fortunes of the developing countries around. But while his insights are being celebrated, it is worth looking closer into his ideas.

Mr Soto's idea is actually quite simple: That property rights create access to capital. His point is that the developed countries are developed because their citizens have definite and secure property rights, which opens up access to capital, and therefore, enterprise and road to better life. In contrast, the property rights in developing countries are opaque, non-realisable and enmeshed in bureaucratic tangles. Therefore, the capital formation in these countries is weaker - and therein lies the roots of inequality.

This is an insight with intuitive logic and easy appeal. It is easy to prove empirically too: Mr Del Soto's work is full of fascinating enumeration of bureaucratic hassles that slum dwellers and street entrepreneurs face in Mumbai and Manama. The thesis itself, though, is old - that linkage of private property and capital formation has been around in economic literature quite some time - and the spirit of the argument is very decidedly liberal, that good institutions is the key to development. Quite obviously, he is 'the world's most important living economist' for Bill Gates!

But is really the secure property rights the solution to inequality and lack of development? Mr Del Soto's arguments are, as expected, free of any historical logic: That there is a mysterious correspondence between the former Imperial nations and today's G7 (or G8 as it was) is inconvenient to the overall liberal mantra of 'let institutions be'! While the petty bureaucrats in developing country slums are easy punching bags, they are there as a residue of the state's effort to create and maintain private property, not to obstruct it. Just that 'private property' in Mumbai usually means the rights for someone else other than the ones Mr Del Soto has in mind.

And, therein lies the problem in the world's most important economic argument: private property, particularly in land, is neither easy to establish nor it was historically justifiable. Indeed, Mr Del Soto's history only starts after the enclosure's in England and Indian wars in United States, but that convenient line-drawing around events that violated the spirit of property (even in the Lockean sense) rather than established it can only go so far. The private property on land was, in many places, tied to colonial expansion: Establishing private property, English style, was very much part of a civilising mission, and Mr Del Soto is only carrying that tradition forward.

But even if we just ignore inconvenient historical facts and just focus on the future - as Messrs Del Soto and Gates would definitely want us to do - would private property be the answer to the lack of development? One way, it would surely be, as, by a curious sleight of hand, private capital formation is equated with development, just like an earlier generation, the colonial one, took consciousness of private property and civilisation as synonymous. This is what gets reflected in the GDP and therefore, Mr Del Soto's formulation may be self-fulfilling. It is important, therefore, to question the other part of the prophecy he pedals - that better property rights would create opportunity, lower inequality and better lives.

It is important to point out that we only dismiss certain kinds of political doctrines as 'utopia' and not others. Since the doctrine above has been blessed by all the important people who can see the future (such as Mr Gates), such wide-ranging claims should not be treated as one, but rather as a 'vision'. But this vision - as I can see with my 'developing country' heritage - assumes that the creation of private property is a value-free process: It is just a matter of implementing electronic databases and biometric solutions, and all will be reset to a sort of happy equilibrium. In that world, the powerful, who would be totally benevolently use their control of government systems, ownership of legal, technical and financial machinery and their very powers over the same computer systems and its processes, to give up their rights and let the poor people have it. That those electronic deeds, perhaps blockchained somewhere, would set off another Vendémiare, an all-new turn of civilisation that Mr Del Soto promises.

Before such a prospect encourages anyone in Mumbai or Kolkata, it is worth looking at another historical moment: The end of the Eighteenth century, in the early years of British supremacy, when a similar experiment was done. The Governor General in Council, and the Parliament led by Pitt the Younger, fresh from the debacles of Yorktown, introduced private property in land in India. That was supposed to restore and improve Indian agriculture, create a benevolent class of landlords and create overall prosperity and moral well-being. We all know what happened next. But, then, some theories die really really hard.


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