During grad school a couple of years ago for a class focused on microfinance we read The Other Path by Hernando de Soto, the famous Peruvian economist. I really enjoyed the book. But for some inexplicable reason, I didn’t get around to reading his most famous work, The Mystery of Capital until just now.
In The Other Path – written in 1989 as a provocative alternative to Sendero Luminoso (or “The Shining Path”), the Maoist guerrilla movement which claimed to defend the poor while using terrorist tactics – he writes about the huge portion of the population of Peru that is “extralegal,” operating businesses outside the law simply because the law, mired in bureaucracy, has made it so difficult for businesses to operate legally. He contends – rightly, I think – that to understand the plight of the poor in Peru and possible solutions to their poverty, one needs to pay attention to the hidden joys and sorrows of the booming extralegal sector. Only then, he says, will poverty alleviation be possible. And only then will capitalism be its tool.
The Mystery of Capital was written in 2000 and it expands upon his earlier ideas, applying them more generally to developing contexts in general. De Soto is a capitalist, but you might be forgiven for calling him a reluctant one. In an excellent New York Times Magazine feature in 2001, Matthew Miller wrote, “de Soto reached the conclusion that the left was great on social justice but didn’t know a thing about economics.” While clearly no fan of Communism, de Soto explains the dilemma for capitalists concerned with addressing poverty:
[T]he Marxist tool kit is better geared to explain class conflict than capitalist thinking, which has no comparable analysis or even a serious strategy for reaching the poor in the extralegal sector. Capitalists generally have no systemic explanation of how the people in the underclass got where they are and how the system could be changed to raise them up.
He admits that capitalism has often been used to “exploit and conquer” the vulnerable, but warns:
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 [like capitalism] 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.
In conclusion, de Soto writes with wisdom, pragmatism and hope:
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.