Taking It to the Bank

From raw materials (sometimes literally junk), artists create things of beauty and meaning, not to mention value well beyond the worth of the materials. In making the transition from a deficit-based model to asset-based thinking and asset-based community-building practices, I've found it rewarding and informative to reflect on the fact that artists have always been the ultimate asset-based thinkers and practitioners.

In The Mystery of Capital, Hernando DeSoto reflects,

Does the “developing world” of community-based nonprofit cultural organizations sit on a mountain of assets that are far greater than we had previously imagined? If we understood these assets, codified them and developed the right tools to leverage them, could we unleash vast wells of hidden resources to further the human and social development of our communities?

On the surface, The Mystery of Capital has nothing to do with art and culture. In fact, DeSoto adamantly denies — with little success, in my reading — that culture, in its broad sense, has anything to do with why capitalism is more successful in some parts of the world than in others.

The Peruvian researcher and theorist DeSoto provides a radical theory to understand what enables capitalism to work and, conversely, what prevents it from working. And he supplies an economic-development approach that he hopes will make what he considers the “inevitable” spread of this economic system more equitable.

“Charitable organizations have so emphasized the miseries and helplessness of the world's poor that no one has properly documented their capacity for accumulating assets,” he writes.

Through his Lima-based Institute for Liberty and Democracy, DeSoto has done just that. He conducted exhaustive research in dozens of countries around the globe, examining the property holdings of the poor and the status of legal property structures. In addition he explored the business-licensing procedures in various countries to ascertain what portion of their economies was outside “legal” frameworks — and why.

What he found was vast land holdings that are unrecorded or unrecognized by governments, and extensive underground economies and unlicensed enterprises.

DeSoto's central assertion is that in developing and post-communist countries, where capitalism isn't taking hold as some would like, there is an enormous well of untapped, or what he calls “dead,” capital. More importantly, he contends that if these dead assets were legitimized through a credible legal system, they could be put to work to leverage investment and spread entrepren-eurism through the grassroots. He argues that it is not lending policies, foreign aid, cultural differences, levels of education, or other “soft” differences that make capitalism more successful in some places than in others.

Growing ranks of economists and social theorists disagree with DeSoto on the significance of culture in enabling both capitalism and democracy to effectively function. Max Weber in The Protestant Ethic and The Spirit of Capitalism, 1904, established the basis for this thinking, and more recently Francis Fukuyama in Trust, 1995, and Samuel P. Huntington and Lawrence E. Harrision in Culture Matters, 2000, provide convincing arguments around the central role of culture — or “values, attitudes, beliefs, orientations and underlying assumptions” — in the success of economies, democratic governments, and large organizations.
Rather, Desoto argues, it is the legal systems — or lack thereof — that can concretize property ownership so that it is “fungible” (a term referring to the ability to exchange goods, services, or other valuables into another form — most commonly, money). These systems, he contends, enable the value of real-estate holdings (or other intangibles that have value, such as intellectual property) to be leveraged to finance enterprises small and large. DeSoto's analysis has profound meaning for the poor looking to leverage their resources.

Parallels for the Cultural Sector

In making his case, DeSoto — perhaps inadvertently — sheds light on how the nonprofit sector in the US operates, especially the world of undercapitalized, small and medium-sized organizations. Some of his descriptions of “Third World” economies, with the simple substitution of the word “nonprofit” in place of “Third World,” serve as insightful descriptions of deficit-based thinking and the resulting inability of these economies to be entrepreneurial or act strategically.

To those of us in the nonprofit sector, what may be more useful than his economic-development analysis is the concept of dead capital or dead assets (I would prefer he use “dormant”), and his way of identifying assets and having the right “technologies” to leverage them.

DeSoto writes, “As Aristotle discovered 2,300 years ago, what you can do with things increases infinitely when you focus your thinking on their potential.”

With his call to mobilize the hidden assets in the “Third World,” I felt the need for a parallel call to re-examine the dormant capital of the nonprofit cultural sector in the U.S. — a sector perennially challenged by a short supply of financial resources. Unlike the “Third World,” the nonprofit sector's dormant resources may not be as much in the form of land or other real property, but instead may be in human relationships, trust, community identity, connection to place, creativity, intellectual property, or any number of other intangible assets. What DeSoto supplies is incentive for us to look deeper and to find, formalize, and leverage previously invisible assets.

I recall hearing a General Mills marketing executive describe the substantial value of what she called the “real estate” on the back of a cereal box. What other product container, she asked, do people stare at while they eat a meal? General Mills acts very strategically in how it leases and extracts both financial and promotional value from this “real estate.” Some strategies go well beyond simply advertising products. They include the promotion of education and social causes — ways of thinking and constructing a “culture” — that ultimately encourage the consumption of cereal and related products.

The most provocative metaphor DeSoto uses is that of a beautiful mountain lake, which he describes in economic terms as having little intrinsic value. “It's just a lake,” he says. When the comprehension of gravity combined with the technology of water wheels or turbines transform it into a mighty economic engine it is of enormous value. I think many would challenge DeSoto's contention that it was “just a lake,” but he makes his point.

“...the value of things can be increased by reducing the costs of knowing them and transacting with them,” DeSoto writes, crediting this concept to Nobel Laureate Ronald Coase.

While the legal formalization process begins with real estate, it inevitably moves to other forms of intangible property.

“Property is not the assets themselves but a consensus between people as to how those assets should be held, used and exchanged,” he writes. “Capital results from the ability of the West to use property systems to represent their resources in a virtual context. Only there can minds meet to identify and realize the meaning of assets for humankind.”

If pork-belly futures (which don't sound too pleasant or even possible to trade by hand) can be traded in huge quantities by computers and can generate massive surpluses, then why can't something like creative potential or cultural equity be likewise traded based on its proven worth? Mark Stern (at the University of Pennsylvania) with The Social Impact of the Arts, Diane Grams and Michael Warr in Chicago with, Leveraging Assets: How Small Budget Arts Activities Benefit Neighborhoods, and other researchers have demonstrated that arts organizations have the capacity to increase property values, stabilize neighborhoods, and decrease many negative social conditions. Labor economists Ann Markusen and David King at the University of Minnesota, in The Artistic Dividend: The Arts' Hidden Contributions to Regional Development (see review) have demonstrated that artists' creative presence bring an “artistic dividend” to a region's economy. Do we now need a Michael Milken to commodify, monetize, and leverage these intangible assets?

While DeSoto confines his analysis primarily to real estate and somewhat to licensed enterprises, the most rapidly expanding portion of the U.S. economy can be attributed to intellectual property, including entertainment, computer software, trademarks, and copyrights. At the same time, city and economic development leaders are discovering the value of identity and image in lifting their fortunes. While these more elusive “properties” have proven to be a challenge to protect and maintain, especially in the developing world, the West's capacity to assign ownership and value to abstract “products” seems insatiable.

Will the nonprofit cultural sector continue to act like a “Third World” economy — egged on by philanthropies that focus attention on its deficiencies — and not learn to make use of the value of its own “real estate?”

Uncovering the Wealth of the Poor

The central proposition in The Mystery of Capital is that much of the developing world is unknowingly sitting on a mountain of wealth. This wealth, DeSoto says, could be unleashed, or “monetized,” if the legal frameworks existed to secure the ownership of land that is currently recognized (albeit tenuously) in a web of informal or “extra-legal” localized understandings.

DeSoto points out that in the U.S., for example, up to 70 percent of the credit new businesses receive comes from formal titles being used as collateral for mortgages. “Extralegality,” or the widespread acceptance of informal understandings of ownership, he contends, diminishes the incentives for secure investment that are provided by legal ownership.

“The enterprises of the poor,” he writes (and here again, the word “nonprofits” could be substituted for “poor”), “are very much like corporations that cannot issue shares or bonds to obtain new investment and finance. Without representations, their assets are dead capital.”

DeSoto calculates the total value of real estate held but not legally owned by the poor in developing and former communist nations is at least $9.3 trillion. This is twice the value of the total circulating U.S. money supply or nearly as much as the total value of all the companies listed on the main stock exchanges of the world's twenty most developed countries. In contrast, it's more than twenty times the total direct foreign investment into all developing and former communist countries in the ten years after 1989. It's forty-six times as much as all the World Bank loans of the past three decades, or it's ninety-three times as much as all development assistance from all advanced countries to the “Third World” in the same thirty years.

If you've bought or sold real estate in the U.S., you may have scoffed at the number of documents to be signed and the myriad annoying fees that need to be paid.

In contrast, through exhaustive fieldwork, DeSoto ascer-tained that in Egypt to acquire and legally register a lot on state-owned desert required at least seventy-seven bur-eaucratic procedures at thirty-one public and private agencies. As a result, he reports 4.7 million Egyptians have chosen to build their dwellings illegally.

In Haiti a citizen who wishes to settle legally on government land first must lease it for five years before being permitted to buy it. To obtain the lease requires sixty-five bureaucratic steps, taking on average more than two years. To buy the land will take another 111 bureaucratic hurdles and twelve more years. The total time to gain lawful land in Haiti is nineteen years. In the Philippines, it requires 168 steps and thirteen to twenty-five years.

Such complex steps make it clear that working within the system in these places is beyond the majority of the population's means. As a result, underground economies and informal systems have become the predominant form of exchange.

Culture and Equity in Systems that Control Property Ownership

Contrary to many other contemporary thinkers — and without citing them — DeSoto explicitly denounces culture as playing a meaningful role in economic development, and yet some of the obstacles he discusses clearly have cultural underpinnings. As he does throughout the book, DeSoto chooses not to take up potential hazards or negative side effects that typically come with the transformation of property into commodity. He isn't being Pollyanna-ish, but to give him the benefit of the doubt, I figure he's choosing to focus on his theory which, frankly, I don't think would be any less relevant under a social or environmental justice critique. However, I would advocate that such critique be undertaken.

His analysis points to a prescription for developing countries to create formal property ownership structures that are consistent with the deep-seated informal customs in each nation. “Creating an integrated system is not about drafting laws and regulations that look good on paper,” he writes, “but rather about designing norms that are rooted in people's beliefs and are thus more likely to be obeyed and enforced.” In other words, ownership systems should be based on norms that are consistent with the local cultures and traditions. He cites the repeated failure of Western-trained lawyers who have tried to create laws for parts of the world with non-Western cultural norms. Here again DeSoto fails to recognize the significance of cultural differences in impeding the progress of capitalist expansion.

DeSoto writes, “Is illegal squatting on real estate in Egypt and Peru the result of ancient, ineradicable nomadic traditions among the Arabs and the Quechuas' back and forth custom of cultivating crops at different vertical levels of the Andes? Or does it happen because in both Egypt and Peru it takes more than fifteen years to obtain legal property rights to desert land? In my experience squatting is mainly due to the latter.”

I think here, too, DeSoto grossly miscalculates the power of culture. We do not know whether the lack of a simplified legal system is cause or effect in these cases, but I would wager that a legal system, no matter how attuned to local customs, will not change those millennia-old behavioral patterns in even a few generations. He fails to understand that people's relationship to land and to the earth is one with their culture.

DeSoto is fully aware that in Western nations, Japan and others, where legal systems make property fungible, the evolution of those systems took centuries and they had no road map or clear imperative as to why it was important to accomplish. Yet he suggests it can and should be undertaken with haste in the developing world.

Of course, DeSoto doesn't acknowledge that legal systems have generally been created to protect a small class — those who have wealth — and to oppress certain other classes. He's only seeing, or at least choosing to express, the positive side of legal structures.

Post-Marxism — Property as Equity?

In the transition to capitalism in post-communist and developing nations, a very small class of people who have managed to navigate or control market-based reforms have benefited, while the vast majority of the populations have not improved their economic status. Economic and social divisions have grown, breeding conditions for civil unrest.

“The number of flashy cars, luxurious homes and California-style shopping malls may have increased in most developing and former communist nations over the past decade, but so have the poor.” DeSoto points out:

While not entirely unsympathetic to the ideas of Karl Marx, DeSoto counters,

Property-ownership systems in Europe, North America, and other developed parts of the world evolved over hundreds of years, and in reviewing those histories, he points out that the “extra-legal” or informal structures that grew organically in these nations were eventually incorporated into the “legal” framework. In other words, informal and localized understandings of “ownership” existed over centuries, and central governments often tried and failed to replace them and enforce their own framework. An important point DeSoto makes is that success in creating uniform systems came when the central government decided to alter its rules in ways that recognized and integrated the informal systems.

“Countries that made legal efforts to integrate extralegal enterprise prospered more quickly than the countries that resisted change,” DeSoto writes. Perhaps there's a parallel lesson in this statement, too, for the arts or for the nonprofit sector, but I'll leave that discussion for another time.

DeSoto doesn't confess his ambivalence about the economic construct of capitalism until the very last page of the book:

These may be familiar sentiments to many working in the nonprofit and philanthropic sectors.

Do DeSoto's ideas about unlocking the hidden capital of the poor in the developing world hold much meaning for the underdeveloped “poor” of the West's cultural sector? I think they do, and I see regular evidence that creative and undercapitalized people working in communities across the US are tapping and leveraging hidden assets to do remarkable things.

A culture of deficiency, the lack of a formal system to make these hidden assets fungible, and underdeveloped “technologies” to leverage them stand in the way. Overcoming these barriers would create much more equitable patterns of cultural development in the West and the developing world alike.

The Mystery of Capital is a relatively easy read. DeSoto condenses a fairly complex concept into a short 288 pages. Testimonials for the book inside the cover by Margaret Thatcher and William F. Buckley Jr. almost prevented me from buying it. However, theirs were only two of more than three dozen endorsements; the publisher's point being that the large theories put forth in this handy little book are of value to thinkers on all parts of the political spectrum. I concur.