The Mystery of Capital

In previous articles, we discussed the concept of property and how the measure and nature of property rights have been developed over the last two centuries. This article examines a key aspect of the mystery of capital and how it is generated i.e. the concept of clearly defined property rights and records of ownership.

Extensive research has been done in this topic by the renowned economist, Edward De Soto who found that the reason why the West forged ahead over the East is mainly because of the existence of clear-cut titles to property in the west as opposed to hazy and ambiguous ones in the east. What this means is that having clear titles and rights over property enables the holder or the possessor of the land to mortgage his or her land to raise capital whereas if one does not have a clear title to a property, there is no way he or she can approach the banks or the financial institutions for funding.

Among the measures that propelled the west to success is this critical component, which is why this aspect has been defined as the mystery that unlocks capital.

Capitalism and Property Rights

Capitalism thrives when property rights are existent and well defined and this is the reason why the west succeeded until now. However, the ongoing recession in the US and Europe has made it clear that even in the developed countries of the west, there is the recurring problem of ambiguous ownership as evidenced in the way the mortgages on the homes sold in the US were without clear and accurate records.

In other words, most of the homes sold in the west over the last decade or so were not properly recorded and the phenomenon of robot signing of the records meant that the west is falling prey to the same malaise that has afflicted the east. This can be traced to a degeneration of institutions altogether that is happening all over the world.

In case of India, the reason why so many people find it hard to raise loans using their land or homes as collateral is because they lack clear and verifiable records of ownership and titles. This leads to the locking up of capital, which can be unlocked, only if one has records of ownership and clear and unambiguous titles.

Productive use, exchange, and Raising of Capital

The third aspect of the mystery of capital is that having clear records of ownership and titles enables the productive use of the land, which means that one can setup a factory or a business on the land with additional investment. Of course, even when this is not the case, many people setup these businesses anyway.

However, the point here is that in such cases, it is the fact that these establishments exist in the informal or the grey area and hence, they lead to the process of being outside of the system instead of within it. This leads to wastage of productive assets and locking up of capital, which can be gainfully employed if the assets are in the formal realm instead of in the informal sector.

The other aspect of the mystery of capital is that transfer and exchange of land and homes can be done in case the conditions described so far are met. If these conditions are not met, the land can be used neither as collateral nor for commercial exchange leading to further atrophy of the asset. In this way, capital becomes dead investment and white elephants.

Closing Thoughts

Finally, in recent years, there has been a movement in Asia to digitize the land records and make the process involved more transparent. This is a step in the right direction and hopefully, in countries like China and India, this would lead to a better and productive use of the assets.

Indeed, there is no mystery once the land and the assets are duly recorded and accounted for.