Re: MD The Quality of Capitalism?

From: Sam Norton (
Date: Sat Dec 11 2004 - 23:16:27 GMT

  • Next message: Mark Steven Heyman: "MD Understanding Quality And Power"

    Hi Mark, anyone interested.

    A few book references first; if you read these you'll get most of the background to my
    understanding. Most important: Hernando de Soto's "The Mystery of Capital", which I think is simply
    essential to any informed debate on this topic, and which I'll be drawing on explicitly below.
    Second, David Landes' "The Wealth and Poverty of Nations". Thirdly, Bjorn Lomborg's 'The Skeptical
    Environmentalist", especially Part 2 on Human Welfare. There are others, but they are the ones I
    rely on most.

    I'd like to use De Soto to sketch out a framework for looking at the Quality of Capitalism. De Soto
    employs an analogy early on in his book: think of a lake. It could be looked at by a naturalist, and
    the beauty appreciated. It could be looked at by a sportsman, and the possibilities for recreation
    considered. If it is looked at by an engineer or a physicist, however, then the potential for
    installing a dam might be examined. That is, in the body of water that is the lake there is a
    _potential_ for energy which is currently being ignored. By the application of certain technology
    and machinery (e.g. a dam with turbines etc) that potential energy can be turned into something
    usable, and various possibilities flow from that. The potential energy is 'fixed' into a certain
    form, e.g. electric current, and then activities can be developed which derive from that fixed form.
    De Soto's point is that capitalism is the equivalent of the dam. In other words, capitalism is that
    application of human ingenuity which releases the potential that would otherwise be locked up, and
    which generates new fixed forms of energy which can be used in other ways.

    So what is 'capital'? De Soto argues that although it is often confused with money (cash), this is a
    mistake. He writes, "What I take from [Adam Smith] is that capital is not the accumulated stock of
    assets but the potential it holds to deploy new production". In other words, to refer to the earlier
    image, capital is not the water, it is the possibility of electricity. Money is the facilitator of
    transactions, but "is not itself the progenitor of additional production". So money, or, more
    widely, any form of wealth or asset (land, housing, machinery, whatever), none of these are
    'capital' in the sense which De Soto is describing.

    The essential point is that for any of these assets to become capital, they must be 'fixed' by a
    legal process of property rights, and it is this legal process which is the heart of capitalism. It
    is this legal process which is the equivalent of the dam on the lake, which allows for the potential
    energy locked up in that body of water to be accessed and deployed in various creative ways. So,
    whatever assets there may be, unless there is a conversion process, it is not possible to speak of
    'capital', nor is it possible to speak of capitalism.

    Now the key step in the argument, and the natural link in with the MoQ, comes when De Soto is
    describing 'the codes of conduct that govern the use and transfer of assets', in other words, the
    formal property systems that have developed in the West. He writes, "Formal property records and
    titles thus represent our shared concept of what is economically meaningful about any asset. They
    capture and organise all the relevant information required to conceptualize the potential value of
    an asset and so allow us to control it. Property is the realm where we identify and explore assets,
    combine them and link them to other assets. The formal property system is capital's hydroelectric
    plant. This is the place where capital is born."

    De Soto goes on to identify six ways in which this legal process enables capitalism to function:
    1. The economic potential of any asset is 'fixed' by the abstraction involved (as described above);
    2. Various elements of dispersed information are integrated into a single, formal, representational
    3. It makes individual people accountable to an impersonal process of adjudication, rather than
    local and customary relationships;
    4. Crucially, the abstractions are fungible, that is, "unlike physical assets, representations are
    easily combined, divided, mobilised and used to stimulate business deals". The process of
    abstraction allows all sorts of creativity to apply;
    5. It enabled a network of individual actors to relate within a reliable and transparent framework,
    which "radically improved the flow of communications about assets and their potential [and] enhanced
    the status of their owners, who became economic agents able to transform assets within a broader
    6. Finally, and crucially, it gave a strong and clear protection to the transactions carried out
    within the system, thereby enabling trust and the proliferation of business.

    We can discuss the above in more detail over time, but what I want to emphasise is the way in which
    De Soto's characterisation of capitalism parallels Pirsig's description of different levels. That
    is, what De Soto is describing is an intellectual level phenomenon, i.e. the abstraction (symbolic
    representation) of physical, biological or social assets, and the way in which they have 'gone off
    on purposes of their own', generating vast new static patterns of Quality. (Note that this analysis
    disagrees with Pirsig's own account of capitalism.)

    De Soto's main point, in fact, is that the problem in Third World countries is not the presence of
    capitalism, but the absence, in other words, that those countries are still operating at the social
    level, and it is the absence of the intellectual level phenomenon of capitalism (i.e. the abstract
    representations of economic assets) which is hindering their economic development. De Soto's book is
    an extended argument as to how and why this is the case.

    Now, the foregoing is the conceptual analysis of 'capitalism', and to summarise, it is my view that
    capitalism is the intellectual level representation and organisation of economic assets in such a
    way that new forms of Quality can come into existence. The question might then be - is this the best
    or the only intellectual level organisation of economic assets?

    Leaving aside the question of open-ness to DQ, and associated questions of human rights and liberty
    etc, (on which Pirsig is reasonably clear IMHO) it seems to be the case that the existence of
    capitalism has benefited the residents of those nations depending upon it, and it can also be shown
    to have benefited the population of the world as a whole. The following thoughts (from Lomborg) seem
    - global GDP per capita, from a base of approximately $400 in pre-history to 1800 is presently
    around $6000;
    - global poverty has diminished: "In the past 50 years poverty has fallen more than in the previous
    500" (UN report of 1997) - still much to do, but the situation in developing countries is much
    better than it was;
    - inequality "peaked in the 1960's [due to historical factors], has been decreasing since then, and
    is likely to continue to decrease dramatically for the coming century";
    - the proportion of people starving in the world has fallen from 35 percent in 1970 to 18 percent
    today, and is expected to fall to 12 percent by 2010.

    Lomborg's conclusion is that 'Things are not everywhere good [he's mainly concerned with Africa] but
    they are better than they used to be". As he puts it, "All in all, pretty incredible progress."

    I've wanted, with the above, to provide more of a conceptual background for our discussion, rather
    than dive immediately into comparative statistics and moral debates about globalisation etc. I'm
    sure we can come on to those in our forthcoming posts. But I'll give the last word here to De Soto
    again, because I agree with it completely:

    "I am not a diehard capitalist. I do not view capitalism as a credo. Much more important to me are
    freedom, compassion for the poor, respect for the social contract and equal opportunity. But for the
    moment, to achieve those goals, capitalism is the only game in town. It is the only system we know
    that provides us with the tools required to create massive surplus value. When capital is a success
    story not only in the West but everywhere, we can move beyond the limits of the physical world and
    use our minds to soar into the future."


    MOQ.ORG -
    Mail Archives:
    Aug '98 - Oct '02 -
    Nov '02 Onward -
    MD Queries -

    To unsubscribe from moq_discuss follow the instructions at:

    This archive was generated by hypermail 2.1.5 : Sat Dec 11 2004 - 23:36:32 GMT