Why does capitalism triumph in the West but fails everywhere else? It’s all to do with the protection of private property…
In his landmark 2000 book, The Mystery of Capital, Peruvian economist Hernando De Soto tackles the vexing question posed by his subtitle: Why Capitalism Triumphs in the West and Fails Everywhere Else.
The answer, De Soto maintains in a carefully constructed argument, lies not with a scarcity of natural resources, nor the legacy of colonialism, nor some innate inferiority, nor even type of government. It is that the entrepreneurial spirit flourishes in places where private property is strongly protected by law, and languishes where it is not.
Although De Soto buttresses his conclusion in a very modern way, with lots of charts and graphs, it would have come as no surprise to the founders of the American republic. So keen were they on the individual’s right to private property that they wrote specific protections into the Bill of Rights, not once but three times (Amendments 3, 4 and 5), then for good measure threw in the open-ended Amendments 9 and 10, which essentially guarantee our right to live our lives as we please, subject only to a few reasonable restrictions.
The Constitution of Eminent Domain: The Growth of Government
It’s a good thing the founders can’t see us now. The past seventy-five years have seen the growth of government from a relatively small entity charged with defending the borders, adjudicating disputes, and delivering the mail, to a bloated nightmare creature whose tentacles reach into every corner of our existence. Liberal administrations and Congresses have come and gone, as have conservative ones. It has made no difference. Everyone in government, it would appear, is primarily dedicated to making it bigger.
The toll on the Constitution has been heavy. Largely because of the misguided War on Drugs, Fourth Amendment prohibitions regarding search and seizure have, essentially, ceased to exist, while asset forfeiture statutes have made a mockery of the Fifth Amendment’s due process clause. And the courts have gone along, siding almost always with the government against the individual, allowing the Bill of Rights to be gutted.
Soon, yet another extension of government power is to be tested before the Supreme Court, and its decision will have far-reaching implications for property rights. The case is Susette Kelo v. City of New London, and at issue is the meaning of the final clause of the Fifth Amendment: "nor shall private property be taken for public use without just compensation."
The Constitution and Eminent Domain: "Economic Development"
In 2000, Ms. Kelo, along with everyone else in the Fort Trumbull section of New London, CT, suddenly found their entire neighborhood condemned in the name of "economic development." This was not the kind of "blighted" urban landscape that governments routinely seize through eminent domain in order to bulldoze them. It was rather an area of older homes and small businesses that happened to occupy some prime riverfront real estate near a newly constructed Pfizer pharmaceutical plant.
The city – thinking that hotels, expensive offices and more upscale residences would help with job creation and (probably more important) generate greater tax revenues –attempted to help itself to the land, with the intention of transferring control to the private, though non-profit, New London Development Corporation (heavily backed by Pfizer). The NLDC would, in turn, lease back the property at a buck a year to private, for-profit developers.
Affected homeowners, asserting that this governmental action hardly qualifies as taking private property for "public use," filed suit to stop it. The case reached the Connecticut Supreme Court, which ruled 4-3 in favor of the city. Final appeal was made to the U. S. Supreme Court, which agreed to hear arguments during its next session.
The stakes are high. As the Property Rights Foundation of America points out in an amicus curiae brief filed in this case, the Connecticut Court’s decision "gives government carte blanche to take private property from one person and transfer it to another person, limited only by the government’s willingness or ability to proclaim that its intent is to promote economic development."
Whether the Supreme Court will see fit to overturn the Connecticut ruling remains to be seen. Given its usual bias in favor of government and business, one might think the chances are slim. However, the Justices may take into account recent rulings by both the Michigan and Illinois Supreme Courts that decided similar cases in favor of the plaintiffs. Said the Illinois Court as it invalidated a taking of private land to create additional parking for a racetrack: "To constitute a public use, something more than a mere benefit to the public must flow from the contemplated improvement."
Seems like a sound principle to us
For The Daily Reckoning
February 05, 2005
P.S. Your nefarious Daily Reckoning editor, Addison Wiggin, once attended a lecture by De Soto. He arrived late, and ended up operating De Soto’s overhead projector!
Doug Hornig is the author of nine books whose work has also appeared in Business Week, Playboy and more. He is a regular contributor to "What We Now Know" – the FREE weekly e-letter from Casey Research covering trends in geopolitics, the economy, investments, health and technology.
When we left you yesterday, dear reader, we were answering a question no one had asked.
The answer concerns, we warn you, not the value of the dollar tomorrow, nor of Google stock next week, but of the price of the former eventually…and the latter not at all. Still, there are many pieces to this puzzle. We examine one today and hope to get a better picture of whole thing.
We add an additional preface: we note that the mail we receive from readers is running 10 to 1 against us, following last Friday’s meditation on Mr. Bush as an evangelical democrat. More on that below, too.
Since the fall of the Berlin Wall nearly everyone seems to agree that central planning is bad for an economy. The central planners, as any Economics 101 student can tell you, do a poorer job of delivering the goods than the ‘invisible hand’ of Mr. Market.
Mr. Alan Greenspan, the best-known economist who ever lived, paid homage the other day to the second best known economist who ever lived – Adam Smith. He too acknowledged Smith’s great insight: that the information contained in freely moving prices helped millions of independent producers and consumers make decisions that turned out to be in the best interests of everyone. But while praising Mr. Smith and free markets generally, Mr. Greenspan forgot to mention the one market with which he is most closely associated, the credit market. There, buyers and sellers are allowed a large degree of freedom. But at the short end of the credit market, both are shackled to a rate that is determined not by the open market, but by Mr. Greenspan’s Open Market Committee.
This led to our question: what is good for the goose of lumber markets, stock markets, grain markets, laptop computer markets and almost every other market under Heaven must be good enough for the gander of the credit market, no?
The answer is not one of logic, but of convenience. There are times – indeed most of the time – when political leaders prefer easier credit terms than buyers and sellers determine on their own. In setting its key rate, the Open Market Committee is likely to set a rate much more to the politicians’ liking the one offered by Mr. Market. A lower rate, that is.
This artificially low rate gives the illusion that there is more money available than there really is. Hardly anyone ever complains. Consumers feel they have more money to spend than they really have. Producers sense a demand that really isn’t there. Undeserving politicians get reelected. And conniving central bankers are reappointed.
The ‘information content’ of the Fed’s low rate misleads everyone. Happily, they proceed on the long, slow process of ruining themselves, unaware that they are responding to a fraud. Only much later does the deception become a problem.
Friedrich Hayek explains:
"The continuous injection of additional amounts of money at points of the economic system where it creates a temporary demand, which must cease when the increase of money stops or slows down, together with the expectation of a continuing rise in prices, draws labor and other resources into employments which can last only so long as the increase of the quantity of money continues at the same rate – or perhaps even only so long as it continues to accelerate at a given rate. What this policy has produced is not so much a level of employment that could not have been brought about in other ways, as a distribution of employment which cannot be indefinitely maintained and which after some time can be maintained only by a rate of inflation which would rapidly lead to a disorganization of all economic activity."
The way it works is simple: an economy is geared to produce for real demand. Or it is misled by artificially low interest rates to produce for a level of demand that doesn’t really exist. The deceit can go on for a very long time. But, eventually, some form of adjustment must take place – usually a recession restores order by reducing both production and consumption. If it goes on for too long, or to too great an extent, as it did for a brief period in Germany in the late ’20s, economic activity becomes disorganized.
The U.S. economy faced a major recession in 2001 and had a minor one. The necessary slump was held off by a dramatic resort to central planning. Alan Greenspan cut lending rates. George W. Bush boosted spending. The resultant shock of renewed, ersatz demand not only postponed the recession, it pushed consumers, investors and businessmen to make even more egregious errors. Investors bought stock with low earnings yields. Consumers went further into debt. Government liabilities rose. The trade deficit grew larger. Even on the other side of the globe, foreign businessmen geared up to meet the phony new demand; China has enjoyed a capital spending boom as excessive as any the world has ever seen.
All of those bad decisions need to be corrected, one way or another. What remains to be seen is how. Will they be corrected in a painful ordinary way – with an economic slump, maybe a very long one? Or, in a painful extraordinary one, a disorganization of all economic activity? As always, we wait to find out.
More news, from our man on Wall St:
Eric Fry, from a corner office on the 26th floor…
"…The Chinese are actively negotiating to secure long-term supplies of crude oil from countries as geographically and politically diverse as Canada, Saudi Arabia, Iran and Russia. Indeed, the Chinese and the Russians have embraced one another in a kind of petro-political bear hug…"
Bill Bonner, with more views from London:
*** Old Joe Granville "sees doom for the Dow," says the headline. He fears a crash. He’s been right before. Maybe he’ll be right again.
*** George W. Bush has pledged to cut the deficit in half. At least from the press reports, we couldn’t make sense of the math. The proposed cuts only equal about 1% of the deficit.
In order to really cut the deficit he’d have to cut the ‘non-discretionary’ entitlement programs such as Social Security and Medicare. It would take a president with real courage to do that.
*** James Boric, our resident penny stock sleuth, is watching $17 billion dollars go down the tube…from the comfort of his hotel room…
"Lying in bed this morning, I clicked onto the Bloomberg channel. One of their reporters was explaining how venture capitalists put $17 billion into the market in 2004, up from $10 billion in 2003. 2005 should be even better, he said."
"Many of those VC dollars end up in the small cap market. It’s a bad omen. Speculative money has a habit of flowing towards the worst companies…companies that show little in the way of sales and earnings growth. Their stocks may have done well, but I wouldn’t buy them."
"Don’t get me wrong. While I wouldn’t recommend a short-term investment in a Russell 2000 ETF or index fund, I’m still finding tons of little companies with valuations so low, I sometimes wonder how Buffett missed them…"
*** Many readers are upset with us. They think they see something vaguely elitist or even European in our remarks. Many say we should stop criticizing the Bush administration…or at least propose a better solution.
"Stop being so negative," is a familiar theme.
One thing that we find remarkable is the meanness of some readers’ comments. We are so loveable and humble, we’re surprised we can offend so many, so much.
We admit we don’t have any way of knowing whether the world will be a better place following the vote in Iraq…or not. And our analysis of it is hardly ‘European’…(As for ‘elitism’…we have no clue how that fits into the discussion. Our gripe is actually directed at America’s neo-conservative intellectual elite.)
All we know is that 1400 Americans…and many thousands of Iraqis…have been killed. Many thousands more have been wounded…and hundreds of thousands have lost children, relatives, parents. Two hundred billion dollars have been spent. Hundreds of billions more will be spent before it is over.
‘Is it worth it?’ seems like an appropriate question.
"Yes," say the neo-conservatives. "No," say the Europeans. "Hallelujah," say the born-again evangelical democrats. But we take the position of the old moss-backed American conservatives: we don’t know…and we didn’t think it was our place to ask.
If you can make the world a better place by killing people in Baghdad and Fallujah, why not kill them in Tehran too? And why stop there? Why not take out a group in Paris…or Washington? Why not smother your mother-in-law or silence a rap star?
Traditional American conservatism was not a doctrine of world improvement, but a mood of skepticism towards all ‘isms’ and world improvers.
According to a new book by Kieron O’Hara, political conservatism is under girded by two important principles. The first is the ‘change principle,’ which holds that the benefits of an existing order must be presumed to surpass the "potential, abstract benefits that could be gained through applying a social theory."
That doesn’t mean you can’t innovate in a society, but the burden of proof should always be on the world improvers to clearly show that their proposed change really will make things better – something they can almost never do.
The second principle of old-time conservatism, says O’Hara, is the "knowledge principle," which is the political equivalent of Adam Smith’s observation about free markets: "the knowledge required to coordinate and direct a complex, dynamic society is clearly beyond any individual or bureaucratic machine." In short, central planning doesn’t work very well, neither in Washington nor in Baghdad. But we add our own little pseudo-formula to the ‘knowledge principle’ – phony knowledge increases the larger the enterprise and the farther you get from it, by the square of the distance and the cube of the scale.
We barely know how our own government in Washington functions and often suspect it acts against our own best interests. Trying to figure out how to make a government work in Baghdad is hardly a ‘conservative’ undertaking.
Born again evangelical democrats say they believe in ‘freedom.’ Old time conservatives are a little suspicious. "Just don’t try to tell me what to do," they say. They also believe in doing unto others what they would want done to them; they wouldn’t presume to tell others what to do either.
*** And now, the mail. The first is directed not at us, but at another reader, who wrote:
"First off, as an ex-pat Englishman trapped in the United States by a wife who hated Europe, I never cease to be amazed by the average American (including her). Perhaps it’s the school system, I don’t know, but notice that the New England Patriots are now ‘World Champions.’ Not content with the ‘World Series’ in baseball, it seems that everything that no one else plays in the world qualifies anAmerican team for the world title. I just think that it’s a way for this country to cling on to something ‘tangible,’ albeit a fantasy, as a way of saying that America is still number one. I think that it may also be a recognition that the country is going down the pan economically and they are inventing new and daft ways to cling on to the top spot.
"Just one more reason that the rest of the world finds them an odd bunch."
"Trapped in America, huh? What an awful place to be trapped…"
"It is only the country that attracts more immigrants than any other country in the world due to the quality of lifestyle and the opportunities available.
"And as far as our professional sports leagues…We’ll call them whatever the hell we want. When your pathetic people in your pathetic country can actually compete with us in any sport (or anything for that matter) than you will have the right to join in our ‘World Championships.’ I understand this is difficult for you guys…
"Oh, and by the way…Most of the world envies America. Those that think we are an "odd bunch" are simply jealous and frustrated or just upset about the UN scandal making them broke…
"Who are you to speak for the rest of the world? You freaks are about as odd as they come. We are a super power in every aspect of the word and most of you disrespectful ingrates wouldn’t be around if it were not for the United States. I understand that is difficult for you too.
"It takes real big men to write a negative e-mail everyday about another country to make a living. Do you guys hear yourselves? How do you look yourselves in the mirror everyday?
"This guy here is broke and pathetic and can’t make it in America. It’s pretty obvious. He sounds like you guys: hiding out in another country running his mouth because he is so weak…"
Great article on the Iraqi vote, however, please please please, help re-educate the American people that we live in a Constitutional Republic, not a Democracy! You guys are too sharp not to notice the difference!
*** Still another – spelling mistakes uncorrected:
"It is hardly ever that I respond to you or others who see fit to regale us poor illiterate mortals with their pearls to swine missives. I am lifted with the realization that in the company of erudites, I am, after all, in the company of those who with their eloquent pedantry, can illuminate my poor and miserable existance."
"In the instance of Iraq, pure and simple, you denegrate the democratic ideal for some ephemeric better ideal; which there seems to be abject failure, on your part, to illucidate, as is your want, for the unspoken better system.
"In other words, stop the goddamn whining and stipulate just what the hell should be done at this point!
"From one of your devoted, but dissallusioned followers."