Capital is a Mystery to Alexandria Ocasio-CortezTags Capital and Interest Theory
We all know that Alexandria Ocasio-Cortez is dominating the political news with her demands for socializing the economy. Bob Murphy has explained that her Green New Deal “makes no sense on economic grounds” and even for Keynesians it “ would be nonsensical to implement such a program today.” Given the inanity of the Green New Deal, I would like to propose a course of study for Ocasio-Cortez.
While Ocasio-Cortez has a degree in economics, she apparently never learned the lessons stressed by Hernando de Soto in his The Mystery of Capital. The country would be better off if AOC and politicians of all stripes understood and took to heart de Soto’s warnings.
“People who have adapted every other Western invention, from the paper clip to the nuclear reactor, have not been able to produce sufficient capital to make their domestic capitalism work.” This, according to de Soto, is the mystery of capital.
De Soto argues that “capital, the most essential component of Western economic advance, is the one that has received the least attention” and shows that the major barrier to the production of capital is the lack of private property rights in struggling countries. Socialism, particularly the extreme proposals from Ocasio-Cortez, undermine and in some cases completely eliminate private property. De Soto provides us with a mainly historical argument showing that adopting socialist proposals will destroy the capital producing engine that powers the U.S. economy.
Westerners, de Soto points out, take this capital producing “mechanism so completely for granted that they have lost all awareness of its existence.”
De Soto’s fear is that if we don’t understand the importance of private property in producing the capital necessary for our increasing standards of living then “the West might damage the source of its own strength. Being clear about the source of capital will also prepare the West to protect itself and the rest of the world as soon as the prosperity of the moment yields to the crisis that is sure to come.”
The Green New Deal could be such a crisis.
In his book, after explaining five mysteries of capital: The Mystery of Missing Information, The Mystery of Capital, The Mystery of Political Awareness, The Missing Lessons of U.S. History, and the Mystery of Legal Failure: Why Property Law Does Not Work, de Soto again emphasizes the importance of private property rights and concludes that the problem in underdeveloped countries is that “most people cannot participate in an expanded market because they do not have access to a legal property rights system that represents their assets in a manner that makes them widely transferable and fungible, that allows them to be encumbered and permits their owners to be held accountable.”
De Soto also adopts a Misesian view of the importance of the capitalist entrepreneur in economic development, citing “the arduous achievements of those small entrepreneurs who have triumphed over every imaginable obstacle to create the greater part of the wealth of their society.” These “heroic entrepreneurs” according to de Soto are “are not the problem. They are the solution” to global poverty.
De Soto warns us that if we forget the importance of having a system of property rights that generates privately held capital then we will destroy the capitalist basis of our economy.
We should take de Soto’s warning to heart. We must remember our history. We must provide an intellectual defense of private property and make the case against government depredations of our property that are proposed by AOC and her fellow travelers.
Finally, I would like to add that I am not completely endorsing de Soto’s book. Those of us who are accustomed to Ludwig von Mises’ analysis of the importance of capital and his systematic defense of private property will find, I suspect, that de Soto does not fully understand the role of savings in generating capital and does not go far enough in his defense of private property rights.
In just a few pages, Mises, in his “The Economic Role of Saving and Capital Goods”1 demolishes the socialist criticisms of private capital. Mises explains that “What distinguishes contemporary life in the countries of Western civilization from condition as they prevailed in earlier ages… is the amount of capital accumulated.” And “What elevates the wage rates paid to the American workers above the rates paid in foreign countries is the fact that investment of capital per worker is higher in this country than abroad.” Mises concludes that the way to benefit workers is to refrain from imposing government policies that obstruct saving and capital accumulation.
De Soto focuses on the lack of capital in poorer countries. On this issue, I recommend Mises’ “The Plight of the Underdeveloped Nations.”2 Here, Mises provides us with an excellent analysis of the institutional problems in less developed countries. The countries are underdeveloped because “they had been slow in developing those ideological and institutional conditions which are the indispensable prerequisite of large scale capital accumulation.” What should underdeveloped nations do to “eradicate penury”? “They must resort to laissez faire; they must remove all obstacles fettering the spirit of enterprise and stunting domestic capital accumulation and the inflow of capital from abroad.”
If Ocasio Cortez and other socialists understood the lessons of de Soto and Mises they might be reluctant to support policies that destroy the basis of a thriving economy, private property rights and capital accumulation.