One night, ten years ago on a Christmas vacation, I found it hard to fall asleep. I grabbed a book my son was reading: The Mystery of Capital. I expected to drop the book beside the bed after a few paragraphs. Instead, I kept reading for the better part of the night.

Real Property Leads to Real Wealth

I did not expect this book to have anything to do with real estate. However, what I was reading made me think differently about what I’ve been doing for the past fourteen years. The case the author presented was so clear and the facts so overwhelming that I wished his findings were common knowledge. I highly recommend this book.

No property owners, no entrepreneurs

Without private ownership of property, our way of life in the USA would not be possible. Without having documented proof of property ownership, entrepreneurship would be a non-starter. Over 80 percent of all businesses in this country are started because the entrepreneur puts up the equity of his home as collateral. The home is much more than a place to stay; it’s productive capital. A home owner’s title policy is only a representation of the home, but this abstract is actually more important than the tangible property.

We should not take the obvious for granted. About 160 years ago there were about 800 separate jurisdictions in the post-gold-rush California, each jurisdiction with its own rules and limited reach. Outside the jurisdiction, a property did not “exist.” It was worthless. The earlier squatters who occupied land that wasn’t theirs “owned” property, but they did so outside the formal legal system. Only slowly were the laws of the land changed to reflect the reality, thus creating legal ownership. Most significant in that regard were the Preemption Act of 1841 and the Homestead Act of 1862.

To paraphrase the author of the book, Hernando De Soto: Western nations recognized social contracts created outside the law as the legitimate source of formal law and absorbed the contracts into the system. Law created property as capital that drove economic growth.

Legal Ownership of Property Essential for Economic Growth.

The “Mystery” in the Mystery of Capital is the legalized and codified ownership of real estate. The author uses the discussion of the evolution of private property in the USA to make a much bigger point: unless the former states of the Soviet Union, the countries of South America and the Middle East and the entire Third World move to make “illegal” property ownership “legal,” much of the capital of these countries remains dead capital.

De Soto estimates that about $9.3 trillion of property is owned outside the legal system. A rice farmer, who works a piece of land where his family lives can’t grow the farm or buy another piece of land without proof of ownership. Likewise, the woman who runs the vegetable stand that’s part of her primitive habitat can’t use the property as collateral for getting a loan to buy books for her children.

It took generations to overcome such conditions in this country making the private ownership of property a cornerstone of our political and economic system. As a real estate agent, I am proud to be playing a significant role in a process that is essential to our way of life.

© 2015, Gerhard N. Ade, (Original post published in 2006)

 Happy New Year!