The word “capital” comes from Medieval Latin where it was used in reference to numbers of livestock. From its origins, this term has been used to refer to physical property (i. e. the actual number of livestock) and the ability of this property to produce surplus value (i. e. more livestock through reproduction). The great classical economist Adam Smith emphasized that capital was the potential of assets to be converted to increase production.
This theory of the necessity to transform an abstract concept (potential) into something tangible and fixed has been echoed by other classical economists, notably Simonde de Sismondi, Jean Baptiste Say, and Marx. Today, however, people tend to think of capital as money and ignore the component of potential that has been, historically, important to its definition. In order to recognize the potential in our assets, we must imagine how they could be used. In Western nations, formal property systems simultaneously protect property ownership and establish the economic potential of assets.
These systems describe and organize the most useful characteristics of our assets, and the entire process is governed by laws. Furthermore, every single asset is accounted for by this system, and every asset belongs to someone. It is in this system that property is turned into capital. De Soto examined Western formal property systems from an extralegal perspective and found that these systems have six effects that make the generation of capital possible. The first effect is that these systems fix the potential of assets. The most useful qualities of these assets are represented in writing (titles, securities, contracts).
This act requires people to think about property in a different way. A house is no longer just wood or bricks that provide shelter; rather it becomes something that is economically and socially useful. This written documentation also provides a paper trail so that the property owners can secure loans, invest, and be located for the purposes of debt collection or legal proceedings. The second effect of the property system is that diverse types of information are integrated into one representational system. Western nations have integrated all of the information related to property ownership a single, accessible legal system.
This integration allows people to discover the economic and/or social qualities of an asset without having to see the actual asset. The third effect of the formal property system is that people became accountable for their own assets. In the West, people who owe money can be identified and located, and they can be subject to legal proceedings. Any infraction against the law is recorded and can jeopardize a citizen’s future because he or she is no longer seen as trustworthy. Outside of Western nations, people cannot make contracts with unknown parties and cannot secure credit because there is no global system of accountability.
The fourth effect of the property system is that, because it separates the potential of an asset from its physicality, assets become fungible (exchangeable). Assets can be compared to similar assets, assets can be combined with other assets, and assets can be divided. All of this can be accomplished in theory, without changing the physical structure of an asset. Because these assets are described on paper, owners can create hypothetical situations to explore how best to put their assets to work.
Citizens of Third World countries, however, must continue to think of their assets as physical property that cannot be divided, combined, or transformed. The fifth effect of the property system is that owners are connected by a network of easily identifiable individuals. This network allows for the rapid flow of information about assets. Because of this network, public utility companies in Western nations deliver to buildings because the buildings’ owners are easy to locate for payment, and the risks associated with credit and debt are more easily managed because of credit records.
This network also allows individuals to conduct business in both the public and private sector and facilitates the assembling of assets into highly valuable combinations. The final effect of the property system is that property records and transactions are protected. In Western nations, record keepers see to the accuracy and accessibility of the written documentation of assets. Other private services, whose actions are governed by law, record different types of transactions. The emphasis in these nations is on protecting the security of transactions; while in Third World and former communist nations, the emphasis is on protecting ownership.
This difference leads to the fact that in the West, citizens can securely move numerous assets with a small number of transactions. In order for capitalism to succeed outside of the West, legal property systems must be established. Only a small few citizens of Third World and former communist nations have the resources to conduct business within the legal property system. These select few citizens are living in a metaphorical bell jar, cut off from the majority of people living in these countries.