Reddit reviews The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else

This is a pretty huge question. I believe it was Robert Lucas who said: "Once you start thinking about why some countries are rich, and others poor, it's hard to think about anything else." Or something alone those lines. I'll do my best to give a few exemplars from which you may be able to induce larger issues, but this issue is too big for a Reddit comment of any size, I think.

Before I start, when dealing with big questions of society and economics, you are naturally going to get competing theories and competing ideas about history. Howard Zinn, for example, had a very different view on why the United States has been prosperous (through vicious extermination of indigenous peoples, oppression of lower-classes and immigrants, vampire-like exploitation of natural resources, benefiting from the results of wars, etc.) than someone like Victor Davis Hanson does (commitment to republicanism, enforcement of private property rights, Protestant work-ethic/tradition, citizen-soldier ethic, etc.). The same, of course, is true of historians of Canada.

One thing we can do as historians is examine the different circumstances that countries and societies had leading up to their current state, and see where the divergences occurred.

For me, a most interesting and illustrative comparison is that between the U.S. and Argentina. Leading up to and during the 1920s and 1930s, Argentina's economy and society were, in many ways, similarly successful to that of the U.S. Even up until the 1950s, Argentina was one of the 15 richest economies in the world.

However, at some point, things changed in Argentina, and the two countries went radically different ways in terms of prosperity. This continues to this day. That's a broad issue that I don't want to gloss over, and probably suited to its own thread, but some things we can see for sure:

• Argentina's formerly stable government went down to a coup d'etat in 1930 that ousted the elected President and set the country down a path of instability in government, heavy-handed caudillismo, and increasing reduction of the middle class. The United States, although in the midst of the depression, the Dust Bowl, and other terrible events, suffered from no such coup d'etat. Although President Roosevelt attempted a variety of theretofore unheard of government expansion schemes (including his infamous "court packing scheme"), the government maintained its influence and respect, and indeed, Roosevelt was beloved for his ability to instill confidence in government and continuity thereof in the people, despite harsh times.
  
  
• Militarism and stratocracy slowly replaced Argentina's former electoral system, most famously beginning with the election of Juan Peron and his successors. The United States, though warned about its growing "military-industrial complex" by President Dwight Eisenhower, saw its republican form of government remain strong
  
  
• Argentina's government shifted from a focus on economic liberalism (what we would today call free-market capitalism) toward nationalization of industries and social-welfare programs under Peron. Peron strove for and nearly achieved so-called "full employment," but this was mostly by creating government jobs, which, along with his other programs, put a massive strain on the treasury and created a huge debt. The U.S. at this time was recovering from World War II, and going into a period, in the early 1950's, of unprecedented economic prosperity, spurred on by a commitment to free-market ideals and a staunch opposition to nationalization of business in the U.S. (and in places where the U.S. had a lot of business interests, like Cuba).
  
  
• Following Peron's exile to Spain, Argentina suffered from increasingly unstable government, a series of coups d'etat, and a huge amount of oppression of the people at the hands of the military. The U.S. maintained a largely stable government, and although civil rights unrest and the Vietnam War rocked the public consciousness, the government and its institutions maintained their basic function and character throughout this period.
  
  
• Violence between the right-wing parties and left-wing underground in Argentina continued to worsen, making it relatively difficult to start and maintain a business, or to keep the fruits of one's labors without being extorted by one side or the other. The right-wing government became increasingly isolationist and paranoid, and increasingly looked-down upon by foreign countries, making international trade relatively harder, and concentrating power and wealth in an increasingly small group of political elites. In the U.S., it remained relatively easy to start a business and trade within and outside of the country (especially with Canada) was easy, helping expand U.S. products and services into foreign markets.
  
  I won't keep going, but these are a few key examples. There are many more, and each country or area has its own. It's very difficult to compare all of Latin America with the U.S./Canada in a quick way. I might recommend a couple of books:
  
  
• The Mystery of Capital by a South American historian and economist with the unlikely name of Hernando de Soto is interesting, although by no means exhaustive.
  
  
• Why the West Has Won by Victor Davis Hanson gives Hanson's view on why Western countries have succeeded so often in warfare, and by extension, why these economic and political policies have been so instrumental in keeping the West successful.
  
  
• Why Nations Fail by Acemoglu and Robinson is an interesting, if somewhat monomaniacal, look at theories on why certain political institutions are critical to national success, and uses examples of the U.S. and Canada quite a bit.
  
  
• Finally, Modern Times by Paul Johnson, is, in my view, one of the very best histories of the twentieth century, and while not necessarily addressing your question in specific, it does tackle a lot of the historical issues that led up the current situation, and it's a great read.

1. That is the most important question in economic history, perhaps the only important question in economic history, and the answer is: we still don't have a good account of the Industrial Revolution. It's something of a Holy Grail for economic historians.
   
   
2. Oh boy.
   
   Let me preface by saying that if you have the time, you should read several Big History type books, preferably when you're in your early 20s. At that stage you're old enough to appreciate them, but not so far into your economics studies that you've forgotten how to ask questions bigger than "what is the value of a coefficient in an IV regression?" I'm going to be critical of these books, but that doesn't mean they are not worthwhile.
   
   So as for the main books and their explanations,
   
   

• I don't give a whole lot of weight to culture, in part because it's such a slippery concept. So Landes is out.
  
  
• Geography just doesn't provide the right lever, in the right times, or the right places, so Diamond is out qua income per capita or the IR.
  
  
• Up until about two years ago I would have argued that de Soto's book, which emphasizes economic and financial institutions, has the highest concentration of true and useful claims among Big History / Big Development books. However the AEJ symposium on microfinance was discouraging and threw a lot of cold water on the financial institutions hypothesis. This is high praise for those papers; the results were disappointing enough and credible enough to move my prior in a big way.
  
  
• Political institutions don't quite do the work you need them to during the Industrial Revolution. And it's not clear whether political institutions cause growth or vice-versa; Acemoglu has two books on this, each arguing in the other direction (WNF and EODD). I also have reservations about the empirical work that underlies many of the claims in WNF. However, the stories are just so damn good, and they advocate for policies that we otherwise want to see implemented anyway, so it remains the Big History de jour.
  
  Mokyr and Clark have books that look specifically at the Industrial Revolution that are good, but Mokyr's is too dense for a popular audience and Clark's basic explanation for the IR is not really credible.

This kind of inefficiency is one of the reasons why capitalism seems to raise living standards in some parts of the world, and not in others

The book by Peruvian economist Hernando De Soto is one of the best explanations of the subject.

You may find Banker to the Poor enlightening. Muhammand Yunus received the noble prize for his work on micro-lending.

Also, along the same lines of issues with capital in the developing world, The Mystery of Capitalism make the cse that the lack of rule of law in South America destroys peoples ability to leverage themselves.

Money doesn't solve problems by itself, it takes intelligent application of the money to solve the real problems. There are several examples of successful investment that have made life better. Take a look at Progresa in Mexico which was very successful.

Your thought experiment about homesteading is in essence sound. However, if you create an edge case island question, you are always going to get an edge case island answer. What else do you expect?

Let’s take your thought experiment further. What if ten thousand strangers strand on the island and Bill doesn’t want them on it? Under anarcho-capitalism, he has the full right to drive them off the island and, in essence, leave them to drown in the ocean. So in this sense, property rights are more precious than human life under anarcho-capitalism; “property rights über alles,” as they say.

But of course, communism won’t work any wonders here either, since the ten thousand people will quickly use up all of the island’s resources and die in a matter of weeks (or longer if they start eating each other).

Again, an edge case question is going to result in an edge case answer. What else do you expect?

I’m mostly interested in how the theory actually works in practice in our real world. In our real world, China is moving from tens of millions of people starving on the fields under communism to the largest middle class in human history, after people simply having received a little bit of pseudo-property rights over the land they live on and cultivate.

In his book The Mystery of Capital, the economist Hernando De Soto correctly points out that the problem in the world is not that there is too much property. The problem, on the contrary, is that there is too little property. Countless people currently live on and cultivate land that is owned by the state. These people would, almost instantaneously, become wealthier if their property rights were recognized. They would instantly become landowning capitalists who can sell their land to someone else or start selling their produce on domestic and worldwide markets.

The question is this: Which do we care more about, our real world or a hypothetical island world?

>Intellectual property is an important way for authors to be compensated for their work and if you think you will enjoy it, I recommend buying it.
>
>But some times you may want to preview a book before purchasing it and that's what "libraries" are for.

The Mystery of Capital by Hernando De Soto

He argues that it's the west's recordkeeping that helps make it wealthy.

The Mystery of Capitalism does a good job explaining how the shadow economy in Latin America has hindered growth. The gist is that the lack of property rights in the shadow economy limits the ability of people to enter into entrepreneurial activities because they can't pledge their homes as collateral for a loan, essentially making their real property dead capital. The author's wiki page explains in some more depth if you are interested.

Note though that bitcoins don't share the same property right concern as above except with respect to limiting government taxation.

Interesting AMA thus far. I'm a former Peace Corps volunteer in Central Africa, and I worked pretty extensively in aid elsewhere on the continent afterwards. Never been to Malawi, but I'm familiar with a lot of the issues there, as they're typical of many countries in that region.

First off, good for you - getting off your duff and going into the world to throw yourself at a problem you see. I'm glad you're doing this. That said, I'd like to offer some advice, both from someone who cares about global poverty a lot, and as one who's worked in the field and wants to save you some headaches. There's a lot of issues with "orphanages" in developing countries. I suggest you read all the articles here - the gist being that in a cultural context you don't understand, meddling with children and families is fraught with peril.

Before you get yourself into something you don't understand yet, please listen to these concerns:
You've moved into a completely alien society with a culture you don't really understand and language you don't speak. You're on a tourist visa, for god's sake! That's not okay! It sounds like you've inserted yourself into a number of situations - economic transactions, the "briefcase orphanage" scam - that you just do not fully grasp yet, and by doing so you could be putting yourself in danger. You may think you understand a lot more about these things than you do. The longer you live there - give it a year or two at least - the more you will see how little you actually understood when you first got there (that is, now), and how little you actually understand then. Societies are complex that way.

Think of the opposite - an African from some tiny village somewhere who came to live in, say, downtown Manhattan, and how long it would take him or her to actually grasp the finer points of our culture and society. And that's assuming they already speak English. Until you can converse intelligently in Chichewa, you're really just guessing about what's going on around you based on what the very few who can speak English are willing/know how to say to you.

The broad generalizations you're making here - China is ruining Africa; Africa depends on food aid, otherwise everyone would starve; the tobacco trade is bad and destructive - are tell-tale signs of a shocked, fairly naive white person who has just arrived, and who has not yet taken the time to learn deeply about development, global poverty, and African history and economics. Read about the history of Malawi and what the Banda regime was like (reference for redditors interested here. Read Jeff Sachs, and then for the love of god read Bill Easterly, since he's got his head screwed on a little tighter. Read de Soto, and Ayittey and Collier. There is a whole constellation of development and aid blogs out there, all of which you will find instructive. The bottom line being - there are best practices and lessons to be learned out there, because lots of people have done what you're doing and are doing it now. This business you're up to in Malawi should not be about you. It's about them. And when you begin working in aid, it's very important you remember that, because frankly, a lot of folks forget it.

So, finally, my question: what's your endgame? That is, what goal are you trying to accomplish?

I ask because you're presumably not going to live in Malawi for the rest of your life, so you must eventually (1) get this new orphanage sustainably funded and (2) find competent/honest people to run it. That's very, very difficult. Are you applying for grants? Hoping you'll find a church somewhere in America that wants to take on permanent responsibility for funding this? The Malawian government?

As a follow-up to Why Nations Fail I'd recommend The Mystery of Capital by Hernando de Soto. He argues capitalism hasn't actually reached the poor in developing countries. They haven't had access to capital markets, titles, deeds, etc and it disincentivizes capital or labor improvements. If they could easily prove ownership over their assets they could leverage them to invest in improving their productivity (A poor family using their house as collateral to send their kids to school for example). Right now many families don't even have deeds over the houses they live in.

Actually, the development of private property rights is strongly, strongly, strongly, strongly, strongly, strongly, strongly, strongly associated with improvement of quality of life for the poor. I have yet to see any data suggesting there is any credible alternative to the market if your interest is a healthy and wealthy society.

On inequality I think Piketty and Piketty and Saez are probably about right, but there isn't that much variation across societies where "ownership of assets" varies. I'm prepared to argue that North Korea might stand as the world's most unequal society however (perhaps asymptotically so?), even though we lack for real data on the subject.

If your interest is in reducing inequality, you should probably be thinking more about taxing the stuff that the rich earn rather than eliminating the social construct of the rich owning stuff.

A lot of good ones have already been said but here are a few less famous ones...

A Farewell to Alms

The Mystery of Capital

The White Tiger: A Novel

Still, it's not that simple.
It's interesting how we measure wealth, and how much those 36% actually own that does not appear in such measures, because of how ownership works (or doesn't) in most of the world.

In particular, you could say that the line dividing worlds (first & third) can be drawn where property rights (and supporting legal system) exist and where they don't.

Read Hernando de Soto to see what I mean!

It can be demonstrated that there are trillions of dollars of 'wealth' just from land ownership alone that does not appear in any wealth measures, because the corresponding countries do not have formal, legal ways to define and transfer ownership! This inability to tap into that wealth is a major barrier to investment, business expansion etc.

America is sinking, and solutions are going to be new ideas and whatever works. The Democrats throw money at the problems and hope it sticks, and the Republicans want the return of share cropping.

some brief excerpts

>U.S. households without bank accounts grew by 821,000 from 2009 to 2011, pushing the so-called unbanked population to 8.2 percent of the nation’s total, according to the FDIC’s National Survey of Unbanked and Underbanked Households.
>
>The result is that about 17 million adults manage their finances without checking or savings accounts at insured institutions, many of them relying instead on non-banks such as payday lenders and check-cashing stores.

further on in the article

>Unbanked households vary significantly by ethnicity, according to the 2011 report. Black households were 21.4 percent unbanked, and Hispanics registered a 20.1 percent rate, while American Indians were at 14.5 percent. White and Asian households were at 4 percent and 2.7 percent, respectively.

One issue is how poor communities often have bad relations with law enforcement, yet the crime rates are highest in those communities (example North Minneapolis). My suspicion is that the economies are tied to lack the benefits of the rule of law. Also social programs are probably at fault, allowing the problems to be veiled as well as creating dependency rather than incentive.

some books on related subjects

The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else

Broke, USA: From Pawnshops to Poverty, Inc.

Have you read Hernando de Soto? It has a few chapters on the history of squatting in the United States, and if you believe him, it was totally illegal and also totally tolerated because of political considerations.

The comment does exist, and hasn't been moderated. Reddit's servers may be having an issue.

Here's the reply again:

"This is really somewhat hilarious. You're dismissing the plurality view of the academic field because I "haven't posted evidence of it" (even though the research we're discussing actually supports that conclusion, if you read the paper), and it hurts your feelings.

Fine, here are some citations. Since you don't even know what "literature" means, I'll leave out things behind paywalls:

Why Nations Fail by Daron Acemoglu and James Robinson

Can Foreign Aid Buy Growth? by William Easterly

The Elusive Quest for Growth by William Easterly

Institutions as the Fundamental Cause of Long-Run Growth by Daron Acemoglu, Simon Johnson, and James Robinson

Coffee and Power by Jeffrey M. Paige

The Mystery of Capital by Hernando de Soto

The Anti-Politics Machine by James Ferguson

Social Cohesion, Institutions, and Growth by William Easterly, Jozef Ritzen, and Michael Woolcock

African Economies and the Politics of Permanent Crisis by Nicolas Van de Walle

Development as Freedom by Amartya Sen

Doing Bad by Doing Good by Christopher Coyne

From Subsistence to Exchange by Peter Bauer"

As a note, several of these are ones that one of the mods posts when asked about good books on development.

Another good resource on informal economies and the importance of spreading property rights, check out: "The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else."

http://www.amazon.com/Mystery-Capital-Capitalism-Triumphs-Everywhere/dp/0465016154

This is a great read on the subject.

Exactly. However I think they may be complementary, in which case i'd add
Why nations fail and The mystery of Capital - Enough there to give you a more informed understanding of why things are as they are.

Look up the book The Mysteries of Capital. There are whole chapters talking about land ownership, deeds, land rushes, etc.. Fascinating book -- not Jewish, but great to understand how we take for granted the clear title to land in the US

Ownership of property benefits everyone. Without it private trade doesn't work, ambitious people can't build capital, and everyone loses. I haven't read it yet but I'm told The Mystery of Capital (link below) gives a very good description of how important property rights are to helping the poor.

https://www.amazon.com/Mystery-Capital-Capitalism-Triumphs-Everywhere/dp/0465016154

In large part it is due to the Public Land Records System in the US. In the US we can buy and sell land with confidence and use it to gain wealth through appreciation of land values, taking out equity loans to invest in other things and it also supports our local governments through taxes that provide services. If you want to read more, check out The Mystery of Capital https://www.amazon.com/Mystery-Capital-Capitalism-Triumphs-Everywhere/dp/0465016154

Currency supply inflation via fungible assets as collateral is what fuels growth. This has been proven by economists. If you want an introduction to this concept, read this book.

I appreciate the well-thought-out response - and I happen to not disagree with a lot of what you're saying here.

Self-interest is a force, like any other. Like electricity, it can be put to both constructive and destructive uses...

It's also a given; Life would not exist without it. Your appetite is your body, applying self-interest to keep you alive.

Self-interest can co-exist with morals, just as group-interest can co-exist with a lack of morality. Neither guarantees the other.

Capitalism, used today, is somewhat of a blanket term which does nothing to distinguish between constructive uses of this force, and destructive ones.

The Founders undoubtedly acted in their self-interest, as did everyone who went to work today - is there no difference between someone who helped others for a paycheck, and someone who swindled others for one?

Carroll Quigley's Evolution Of Civilizations makes a rather compelling case that societies don't last very long when they cease to differentiate between the two. Hence the terms instruments and institutions.

Brief summary (not mine):

>Among his conclusions, Quigley wrote about the importance of social instruments, which he defined as organizations that are effectively serving the end for which they were established. When an instrument stops serving that goal it has become an institution, requiring a response — reform or circumvention, or reaction — which leads to either a new or reformed instrument, or decay.

To respond to your point...

>The people driving this change are wealthy capitalists, and the people doing most of the world are third-world labourers, why praise the wealth capitalists and ignore everyone else?

I won't tell you the third world hasn't been exploited by institutions; It has. Instruments have provided them with cell phones and other technology that they otherwise wouldn't have. Eventually, it may provide them with much more.

The developing world stands to be one of the largest benefactors of cryptocurrency. It is estimated that the poor in these countries "informally" own $9.3 Trillion in property that cannot be "legally" theirs; Their governments don't permit them to own it. If decentralized finance enables them to circumvent this, their quality of life would improve immensely.