Monday, June 18, 2012

Hernando do Soto on Capital as Energy

From The Mystery of Capital:
Capital, like energy, is a dormant value. Bringing it to life requires us to go beyond looking at our assets as they are to actively thinking about them as they could be. it requires a process for fixing an asset's economic potential into a form that can be used to initiate production.
De Soto's larger point is that capital in developing countries is locked into its current form because the institutional structures block individuals from using their capital more productively. Without a good legal system and property rights enforcement, all the capital in the world can't help in development: it remains stuck in unusable forms.

The revolutionary potential of this perspective is that it shows poor countries aren't poor because they're lacking things, but poor because they can't make those things as useful as it would be under fully developed institutions. Heady stuff indeed.

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