Hernando de Soto’s book The Mystery of Capital published in 2001 has had a significant impact on the world of development economics. He makes a strong case that a major cause of the differing economic outcomes between developed and developing economies is the availability and enforcement of property rights. Without people having clear property rights, their status as assets is always in doubt and they can’t be leveraged for further economic use (such as using a house as collateral for a loan to start a business). He suggests this has caused a global loss of economic activity of around $20 trillion that could have lifted the poor out of poverty.

He notes that too often the West pumps aid into developing countries, or exports businesses to tap into demand, without really appreciating the lack of fundamentals and the byzantine bureaucracy that stifles people trying to do things within broken legal systems. In his native Peru, applying for permission to build a house takes 207 administrative steps involving 52 government departments - taking around seven years to complete. Ownership of the land requires an additional 728 steps.

De Soto describes six ways in which a well-functioning property system in Western countries operates, which turns assets into capital.

1. Representation. The systems represent real assets abstractly, identifying and describing their “economic and social potential”. So this could be the description of a house, its location and square footage, or a description of the weight and health of a pig. This has the tremendous advantage of for example, allowing people to buy and sell pigs without the vendors having to bring their pigs along with them.

2. System. These representations are put into a common system, so that it’s possible to see all of them in one place. Again, a catalogue of pigs is much easier to manage than a truck full of them.

3. Accountability. These representations are no longer the domain of the individual and their neighbours and friends who would previously have to be asked about the provenance of the house (or pig). A new body has responsibility for being accountable and this removes the pressure on neighbours and business model for mafia.

4. Fungibility. The asset can now be sliced and diced in much more convenient ways. If a father wanted to leave property to his heirs, he no longer needs to physically divide up his farm into smaller and smaller lots, he can create as many parcels of land of whatever size he likes. They can also be remixed and combined in novel ways, Lego-like.

5. Communications. A property rights system connects things to people, replacing anonymity with identity and accountability. Systems in the past where able to protect property rights, what modern property rights systems have done is to allow easy transparency about and communications between a newly networked group of stakeholders.

6. Protection. Property rights are protected by the apparatus of the State, supported by a variety of private sector players all keen to ensure that property rights are both kept and enforced.

These six dimensions articulate ways in which well functioning Western systems have been able to create property rights that turn assets into capital. This has clear applicability to blockchain, and in 2017 he teamed up with Overstock founder and outspoken entrepreneur Patrick Byrne to work on blockchain projects to bring more property rights to the masses.

In future posts I’ll be looking more closely at how the ability to enforce property rights on digital goods, not just physical ones, is an exciting development emerging in Web3.