The Mystery of Capital by Hernando de Soto

I have a confession to make. I am deep into crypto, or as those deeply convinced of the potential of crypto technology. Or as they say in the cryptosphere, I have been crypto-pilled. While I avoid scams, I genuinely believe in this technology’s potential to democratize the financial system and level the playing field for everyone when it comes to earning returns. I’m not here to advocate for crypto technologies (that’s for another blog I hope to start one day), but to explain why I picked up The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Hernando de Soto. My interest in democratizing finance through crypto led me to explore foundational economic principles, and this book proved fascinating.

De Soto’s main thesis is that capitalism thrives only where legal property systems make assets “visible” and usable. He argues that only when a large-scale, established formal property system is in place can people truly leverage their assets—using them as collateral, selling shares, or turning them into investment capital. The author also contends that the West, so accustomed to this formal property system, has forgotten how to implement one effectively and thus struggles to teach other countries how to become modern capitalist societies.

De Soto outlines five “mysteries” that obstruct economic development:

• The Mystery of Missing Information
• The Mystery of Capital
• The Mystery of Political Awareness
• The Missing Lessons of U.S. History
• The Mystery of Legal Failure

The mystery of missing information describes how assets in many parts of the world are hidden from the formal economy. De Soto argues that capitalism isn’t just a cultural phenomenon but a fundamental human behavior. Economies will naturally emerge wherever there are goods or services to trade. However, without an abstract legal framework to represent these commodities or products, these economies remain localized and disconnected from the broader economic world where capitalism can flourish. For example, without a legal title, how can someone prove ownership of their land or leverage improvements for investment?

Discussing the mystery of capital, De Soto explains how significant amounts of hidden capital remain unusable. He argues that wealth is transformed into productive capital through formal property rights. Without these rights, assets cannot be easily leveraged or used as collateral, hindering their potential productivity and limiting the owners’ ability to benefit from improvements.

The mystery of political awareness discusses the frequent disconnect between the political class and the realities on the ground at the local level. Political elites often create property rights frameworks that don’t align with traditional local systems, making them inherently incompatible with people’s way of life. De Soto emphasizes the importance of politicians listening to local communities to understand existing property rights and create systems that work for everyone.

De Soto delves into the lessons from U.S. history, highlighting the process of creating the legal framework that underpins American capitalism. As an American, I found his perspective insightful, as it’s easy to take our mature legal system for granted. He reminds us that the U.S. had its own “wild west” and territories that needed to be integrated into the existing structure, often requiring the adoption of existing local systems to gain political support. De Soto offers valuable historical context that I truly appreciated.

This leads to his “mystery” of legal failure—why top-down reforms often fail. De Soto argues that top-down approaches often don’t resonate with the people they are intended to serve, leading them to opt out of the formal system altogether. When theoretical approaches don’t align with practical realities, incentives become misaligned. This, to me, underscores why capitalism has generally thrived under democracies, where there is at least the potential for greater alignment between policy and the needs of the people. Many can relate to the frustration of top-down initiatives that seem out of touch and fail to understand how things actually work, ultimately alienating people and driving them away from the intended system.

I wouldn’t recommend this book for the casual reader. It’s best suited for those with an interest in finance, economics, and global development. I found many valuable takeaways from this book, and I hope I’ve conveyed some of them here. Are there other economics books that you think might challenge or expand my perspective? Let me know in the comments below.