In December, I visited Ethiopia to pick up my newly-adopted son (proud father link, if you’ll bear with me) and I was struck by the prevalence of commerce throughout the capital city, Addis Ababa. Ethiopia is known as a Third World country with widespread poverty; with a per-capita income of $780, there are few countries in the world poorer than it. But everywhere I looked there were entrepreneurs of every stripe selling goods, services, and capital goods. I struggled to understand this seeming paradox of highly-visible capitalism in one of the poorest nations.
To be sure, I could readily identify a slew of factors that were holding the country back. The infrastructure was terrible: 15% of the roads are paved (and “paved” is being generous in my experience); Internet access is dialup and expensive; and seemingly no one accepted credit cards in payment. The government, while not particularly onerous (11.6% of GDP), is bloated and meddlesome. Lastly, our adoption agency host regaled us with stories from Ethiopia’s 14-year affair with Communism under the Derg. They nationalized business and land, ravaging both and basically preparing the country to suffer mightily when a severe drought hit in the eighties. But each of these seemed inadequate to me, important but insufficient as an explanation.
Hernando de Soto’s book, The Mystery of Capital, was a revelation. Its distinction between the formal and informal economies helped me to see that the buzz of activity was self-limiting. By taking place outside of the legal framework—and thus beyond legal protections—capital formation in the market was stillborn. Enterprises cannot get too large lest they attract the attention of the government. They are hobbled because they cannot realize the economics of scale possible with growth.
Individuals too fare worse, according to de Soto, under regimes that make formalization difficult to impossible. Acquiring title to land requires navigating a byzantine network of regulations and red tape, so people “illegally” subdivide land or substitute their own proof of ownership documents in lieu of transferring title. Squatters put up entire subdivisions of rickety housing—they cannot afford to put up anything more permanent since they could be evicted at any time by the government—that doesn’t officially exist. This makes it difficult to obtain utilities, get insurance, or even provide directions. Without proof of legal possession, the primary vehicle for entrepreneurial lending, the mortgage, is closed off as well.
De Soto looks to the West for answers about how to orchestrate the move to formality, but notes that the civilized world has been “happy to take their system for producing capital entirely for granted and to leave its history undocumented.” In his search for the path to capitalism, legal scholars and bureaucrats he consulted could not help him understand how America had consolidated its myriad formal and informal property arrangements to get to where it is now.
That brought the point home for me. Everyone I spoke with in Ethiopia had asked me about America and whether it was just like the in the movies. They wanted to know about our economy and how much they could expect to make. I patiently answered their questions and tried to be as helpful as I could. Throughout the Third World, governments have tried to re-create the United States or reproduce the Asian “miracle” without success. Like the cargo cults of the postwar Pacific islands, they see the power of productivity and our great wealth primarily as a problem of mimicry. They don’t understand that there’s more going on than just the superficial transactions of a market economy.
The globalization crowd doesn’t either. They channel enormous quantities of money as foreign aid into these countries, including and especially Ethiopia, to set up the institutions and enact the programs that will bring on American capitalism with an indigenous face. But it never works (for reasons we’ll examine shortly), leaving the nations with the cruft and detritus of yet another failed government reform program. The United Nations crew goes off to construct new theories and the cycle repeats.
By our recent actions in re-embracing Keynesian economics, it’s becoming increasingly clear that most in American government are no better off than the Ethiopians or the global meddlers in getting why capitalism works and the foundation on which it rests. De Soto correctly notes that the United States used to look a lot like the Third World does today, with informal property arrangements and countless silos of title records. But even for him, having studied the mechanics of capitalism in considerable depth, the most productive social system ever conceived is just an implementation detail:
I am not a die-hard 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. (228)
Capitalism succeeds and arose because it is the only system based on the nature of man: that he must act in his self-interest if he is to survive and thrive. No legislation can change that: force a man to act against his self-interest and you are requiring him to act towards his own destruction. The institutions of capitalism reflect and enshrine this incontrovertible fact through the mechanism of individual rights—life, liberty, and property. Alloy them with requirements to “help the poor” or “equalize opportunity” and don’t be surprised when the planes never come and the food crates don’t materialize.