The Property Theories of Bethell, Pipes and de Soto:
Similarities and Differences in Emphasis to the Approach of
Heinsohn, Stadermann and Steiger*
Thomas G. Betz
“If capitalism had a mind, it would be located in the legal property system.”
(de Soto 2000, 57)
The approaches of Pipes, de Soto and Bethell are of remarkable similarity to Heinsohn, Stadermann and Steiger’s “property theory of the economy“. It must be taken into account that the former have been developed independently from the latter even if influenced by each other. The authors agree that the institution of property is a necessary prerequisite for a genuine economy as well as for liberty. Their approaches all reject the orthodoxy of economic theory and in the first place neoclassical theory, which is blinded by its barter exchange paradigm and the “neutrality of money”.
But they differ in their emphasis; Pipes is especially concerned with property as a pre-condition of liberty, but de Soto and Bethell discuss the relation between property and liberty as well. Bethell and Pipes concentrate on the history of property. Heinsohn and Steiger emphasize the interrelation of property, interest and money.
De Soto’s and Heinsohn and Steiger’s interpretations of the problems of developing and transitional economies are of especially outstanding similarity. The creation of money without a national property rights system, one that actually applies to all members of the society, is incapable of promoting growth and development.
“The basic elements of economy are not understood to this very day. There is still no scientific discipline deserving of the name ‘economic theory’” (Heinsohn/Steiger 1996, 15). This is a quotation from the foreword of Eigentum, Zins und Geld (“Property, interest and money”). Its authors are Gunnar Heinsohn, professor and director of the Institute for Xenophobia and Genocide Research, born in 1943, and Otto Steiger, professor of economics, born in 1938; both at Bremen University. They claim to be attempting to found an economic theory deserving of the name, the “property theory of the economy”: the focus of the research is therefore on the legal institution of property. Only after the creation of property as a legal institution could it be encumbered – as collateral in a contract between a creditor and a debtor. Therefore the necessary prerequisite for the maintenance of the physical use of the possession of a resource (a peasant’s piece of land, for example) and simultaneously the setting free of potential for demand and investment via the creation of credit without prior savings and – above all – without foregoing consumption, is met. But these potentials are responsible for the dynamics and the prosperity of a modern economy. Within the scope of this procedure our modern “credit money” comes into existence as well, standing in the center of the economic world. Economies that cannot meet the corresponding prerequisites show neither comparable economic performance nor stable money.
In their Allgemeine Theorie der Wirtschaft (“General Theory of Economy”), Volume I (published in 2001), Hans-Joachim Stadermann – professor of economics at the University of Applied Economic Sciences in Berlin, born in 1942 – and Otto Steiger discover in a neglected, but important theorist of the era of mercantilism, a precursor of the property theory of the economy. In the year 1767 James Steuart published his Inquiry into the Principles of Political Oeconomy. As a leading participant of the Jacobite rebellion, which was suppressed in 1745, he had spent 20 years in exile in France. These circumstances, together with the triumphant advance of Adam Smith, may be responsible for the fact that his original insights regarding “paper money” have remained unknown to a great extent. Steuart analyses the economy of a free nation after the liquidation of feudal government. He realizes that this development establishes a totally new system of economy. Commerce and trade arise from civil liberties, leading to wealth and credit. “Like none of his contemporaries, Steuart understands that the feudal system was based on violence towards non-free workers, while the new labor of the free is stimulating the entrepreneurial spirit and producing demand caused by money and credit on the basis of requirements for new goods” (Stadermann/Steiger 2001, 47). Steuart’s metaphor of “converting land into paper money” already contains the central idea of the modern property theory of the economy: Proprietor A likes to consume goods of producer B, but does not have (precious metal or bullion backed) coins to pay for them. Therefore he issues promissory notes to the total value of the goods he wants, which are secured by his land property, and gives it to B as payment. Now B can start producing the goods for A, while A keeps utilizing his property, (in Steuarts example his land). Obviously Steuart already foresaw the new possibility of investment without prior savings, in opposition to the classical and neoclassical schools which later developed. “Which operation being over, the land and the industry remained as before, ready to produce a new. Here then is the effect of credit or symbolic money; and here I ask, whether or not the notes of hand given by (A) to (B), so not contain as real a value, as if he had given gold or silver?” (Steuart 1767, reprint 1993, as quoted by Stadermann/Steiger 2001, 60)
His contemporary Adam Smith, however, proceeds on the assumption that a creditor has to stand aside from the benefit of his resources as soon as he places it at someone’s disposal. In Stadermann and Steiger’s view, Adam Smith is hereby responsible for a misunderstanding in economics which continues up to this very day. They refer to Keynes, who was finally able to show that it is not savings which are the precondition for investment but the other way around: Investments are a precondition of increasing income and thereby of savings. But from the perspective of the property theory of the economy, even Keynes was unable to discover the actual foundations of investment.
Heinsohn, Steiger and Stadermann’s comprehensive criticism puts special emphasis on mainstream neoclassical theory and its barter exchange paradigm, which also applies to the classical school (including Marxism), to Keynesianism, to Monetarism and to other schools. The barter paradigm is a determinant premise of orthodoxy in economics, maintaining that all economic actions can be reduced to exchanges of goods, whereby the good money simply plays the role of an efficient mediator and therefore is considered as “neutral”. Accordingly, the mainstream is convinced of the fact that the genesis of mankind itself as well as of its economic activities shows the phenomenon of exchange before the phenomenon of money comes into existence. Heinsohn and Steiger in Eigentum, Zins und Geld, vehemently attack this fundamental basic of neoclassical theory by extensively referring to knowledge and insights of historians and anthropologists, coming to the conclusion that:
“Baffling to scholars inspired by neoclassical theory, it must be stated, that after searching in tribal and feudal societies for more than a century, a so called pre-monetarian exchange of equivalents in the history of mankind simply cannot be proved. Rather, the pre-monetarian exchange of equivalents is shown to be some kind of economic folklore” (Heinsohn/Steiger 1996, 81). …. “Serious ethnological research never had anything to do with the prevarications of neoclassical theory; the latter merely turned a deaf ear to the former” (Ibid., 102). …. “Thus we claim to pursue economic theory, whereas the positions considering themselves as theory just put faulty assumptions into historical terms” (Ibid., 27).
However, the simultaneous appearance of the phenomena of property, interest and money as well as of economic growth and prosperity can be proved without difficulty. But the property theory of the economy does not just leave it at the diagnoses of a correlation, it also elaborates a causal context. Mankind, according to Heinsohn and Steiger, knows three distinctive systems of material reproduction. These three types are:
(i) The customary or tribal society.
(ii) The command or feudal society.
(iii) The property-based society as a system of free individuals.
Customary, tribal and command or feudal societies do not advance above the mere control of resources in order to facilitate material reproduction, because they do not entail property but only possession. Possession rights are restricted to the physical use of resources. In a property-based society possession rights exist in addition to property rights. The law protecting these rights is valid for each and every member of the property-based society and enforced by independent courts. Only the property-based society finds a genuine economic use of resources. The transition from a possession to a property-based society is typically caused by revolutions or by deliberate reforms of governments.
As well as in post-feudal Rome, the post-feudal Greek city-states in antiquity and the modern nation states – also post-feudal – are being recognized as property-based societies. A relapse to feudal conditions is possible, as has been shown by the temporarily “socialist” states of the Eastern bloc, which Heinsohn and Steiger subsume as feudal states without hesitation. But: “Only the elimination of a manorial access to goods enforces economization as a consequence of property” (Heinsohn/Steiger 1996, 18). How can the superior and obvious economic dynamic of property-based societies be explained? What is the economic part of property?
In order to clarify this, property has to be marked off unequivocally and precisely from possession. “Possession always means rights to the disposal of and hereby the physical utilization of definite goods and or resources and is independent from the existence of property” (Ibid., 89). The tribal and command societies of antiquity as well as those of modern times know what possession means, but not property with its full “freedom of disposition, which has its most important elements in burdening, encumbrance and selling” (Ibid., 89). Therefore, one can say that over time the title property has been added to the idea of possession rights, or even that the title property implies possession, but possession does not necessarily imply property.
This freedom of disposition enables a property owner to set up a contract between himself, the debtor, and another property owner, the creditor, in such a way that the creditor burdens his property by issuing claim certificates against his property – meaning money – and giving them to the debtor, while the latter – the other way around – pledges his property to the creditor as collateral. Therefore money is created in and uno actu with a credit contract, but it is not in itself credit. As mentioned above, in terms of economic activities now the physical use of the possession of a resource can be added to the potential for demand and investment, set free via the creation of credit without prior savings and – above all – without prior relinquishment of consumption. “Property starts something going between the creditor and the debtor that gives rise to economization” (Ibid., 94).
The freedom of disposition described above is, therefore, some kind of immaterial surplus and is called “property premium”. In the case of a (credit) contract between two property owners, the property premium gets lost on both sides. However the debtor (keeping his possession and the physical utilization of his property) is forwarded – according to the contract – money and gains another freedom of disposition, i.e. “liquidity premium”. With this liquidity he is capable of settling debt and sales contracts, while the lost property premium of the creditor materializes as interest. The debtor is willing to pay the interest, because he is allowed to keep the use of the possession side of his property in addition to the liquidity premium he gained from the credit contract. In addition, “a debtor who has to transform the property premium of the creditor into interest, is being forced to repay more than he once received in the credit contract – while standing in competition with other debtors. Therefore the debtor has to make use of his borrowed advance payment in a very special way” (Ibid., 337). This way the debtor is actually forced into economizing resources. “However, overtime work reaches a natural limit because man cannot influence the absolute length of a day. But this limit in principle does not exist for the obtaining of profit out of more productive technologies, where the profits to be obtained are limited only by the property owner’s wealth of ideas and not by time” (Ibid., 343). …. “Technological progress is therefore the offspring of the permanent necessity for the reduction of property owners’ indebtedness” (Ibid., 352).
The sale of goods and services is necessary to gain money, providing a means of settling credit contracts. A sale therefore has nothing to do with a temporal or non temporal exchange of goods, mediated by money, as neoclassical theory would have it. The production of new commodities does not take place because of the utilization of resources, which someone left temporarily for somebody else’s use that is productive in itself as the orthodoxy maintains. Rather the explanation is that the debtor has pledged property and with the money he has gained out of the credit contract he is able to acquire resources and transform them into more property. “The transactions on the commodity market, therefore, form the necessary conclusion of an operation which has its origin in the property premium” (Ibid., 319). …. “Here world history is transformed into economic history, by mere legal action. Without any physical change, the most important source of wealth, the property premium, is created” (Ibid., 176). …. “But it is interest which forces the production of wealth and it is the encumbrance of property which makes the production of wealth possible” (Ibid., 363).
II. Tom Bethell
Tom Bethell, born in London 1936, studied economics and political science at Oxford, but went to the United States after graduating. Since the mid 1970s he has worked in Washington, D.C as a highly regarded journalist, covering politics, economy and society and he contributes to leading American periodicals. Since the mid 1990s he has been a visiting media fellow at the Hoover Institution of Stanford University. His book “The Noblest Triumph – Property and Prosperity through the ages” is the outcome of his research there.
Bethell distinguishes “three configurations of property rights: private, communal and state. Private property decentralizes ownership, conferring upon an individual or individuals the rights to use some good and to exclude others from doing so. It is understood that in a free society there will be thousands or millions of such owners. They can sell their property rights to others and retain the proceeds. With communal property, the rights to some good are shared in an undefined fashion, by a definite or an indefinite number of people” (Bethell 1998, 25). But he claims “when property is privatized, and the rule of law is established, in such a way that all including the rulers themselves are subject to the same law, economies will prosper and civilization will blossom” (Ibid., 3), as “private property, apparently, was the only arrangement that encouraged people to work hard” (Ibid., 15). Only very few nations in the world have been successful in setting up these foundations and correspondingly the same small number of nations have been successful in establishing prosperity and welfare for the majority of their population.
As Bethell sees it, with only very few exceptions (he explicitly mentions and cites Pipes and de Soto) science in general – but most importantly economics – does not understand the role and the importance of property. Because economists consider economics to be an independent discipline, they neglect property and the institutions connected to it, ignoring the fact that efficient economic activities are simply unthinkable without being founded in those institutions: “Something had been forgotten along the way” (Ibid., 12). Because they want to explain economic results against a background of economic data alone, they explain growth as a function of the accumulation of capital, thereby missing the fact that terms like capital only make sense in a system of secure property rights, enforceable contracts and independent justice. An important reason for this negligence is the fact that economists took the indispensable legal preconditions for genuine economic improvement for granted, as they usually came from countries where these preconditions had simply been met. Not just the economies, but also the economic schools of thought have typically developed in societies with secure rights and independent judiciaries.
Only in the early stages of industrialization was the importance of private rights for the development process well understood: Bethell cites the constitutional historian Henry Hallam, who in 1818 marveled the “long and uninterruptedly increasing prosperity of England” and concluded, that the key lay in “the spirit of its laws, from which, through various means, the characteristic independence and industriousness of our nation have been derived” as well as Alexis de Tocqueville, who also credited the legal system for the fact that in no other European country but England “national wealth is greater, private property is more extensive, more secure, more varied in character, society more settled and more wealthy” (Ibid., 75). In Bethell’s understanding the rise of individual rights not only coincided with the rise of capitalism in the 17th and 18th centuries, moreover the former can be seen as the “proximate cause” (Ibid., 170) of the latter.
The classical school of economics, and Adam Smith especially, did praise the right to private property, but an appropriate economic analysis of property and its scientific justification was missing, making it easy for socialist critics and for Karl Marx to criticize the mainstream theory of his days, classical economics. Also the neoclassical school later on looked upon the phenomenon of property rights as more or less superfluous; Keynesianism did not change anything in this area. The situation remained unchanged until the foundation of the “theory of property rights” or “new institutional economics”, to which Bethell pays tribute for its discovery of the importance of property rights for economic activity.
By using a number of economic and historical case studies Bethell shows that and how the institution of property can not only be invented but also abolished: The rise and the fall of property in ancient societies, its re-launch in modern times in post-feudal England, its short-lived existence in Russia before 1917, its introduction in post world war II Japan by the American occupation forces and the recent invention of semi-private property rules into mainland China. And he describes in detail the disastrous results of the abolition of private property in the socialist countries of the Second World, particularly in the Soviet Union and China, and discusses the devastating consequences of disregarding the concept of private property for the theory and politics of the developing countries of the Third World. Planning, redistribution and capital transfer have not only been unable to solve the problem of underdevelopment, but worse, these “remedies” have weakened what actually caused the rise, the prosperity and the welfare of the First World -- property!
By giving the example of the installation of individual meters in an apartment building Bethell shows, that the change into individual and private responsibility will introduce not only high economical efficiency (“An arrangement that systematically tends to reward the worst among us will not bring out the best in anyone”, Ibid., 161), but also justice: “It is precisely in situations where property rights are imprecisely defined or not defined at all that selfish acts are possible, because it is in those situations that the individual, in considering his own interest, has the opportunity to inflict his own costs on others. …. Private property institutionalizes justice” (Ibid., 161 f.). Altogether Bethell puts out four “great blessings” that are featured by “secure, decentralized, private ownership of goods. These are: liberty, justice, peace and prosperity” (Ibid., 9).
Richard Pipes, born in Cieszyn, Poland, 1923 emigrated with his parents to Italy and later on to the United States because of the German invasion in 1939. After studying history at Harvard University and completing his PhD he became a lecturer in 1950 and finally Beard Professor in 1958 in his discipline at Harvard. Due to his reputation as a profound specialist in Russian history in the 19th and 20th century he was appointed chief adviser of the National Security Council on Soviet and East European affairs under President Ronald Reagan. His most famous books are Russia under the Old Regime (1974), The Russian Revolution (1990) and Property and Freedom (1999).
Pipes makes a clear distinction between possession and property and hereby gets very close to Heinsohn and Steiger’s approach: “Possession refers to the physical control of assets, material or incorporeal, without formal title to them: it is ownership de facto not de jure. It is customarily justified by prolonged use and/or inheritance from one’s progenitors, what in English law is called ‘prescription’, and asserted by physical force and tacit community support. .… Property refers to the right of the owner, or owners formally acknowledged by public authority, both to exploit assets to the exclusion of everyone else and to dispose of them by sale or otherwise” (Pipes 1999, xv).
Regarding studies of property Pipes distinguishes between the concept of property and the institution of property and he finds that the research leads to very different results: “….there is an unusually wide disparity between what mankind thinks it wants and what, judging by its actions, it really prefers” (Ibid., 3). Utopians typically seek to bring to an end the supposed peculiarity of “mine” and “yours”, while theorists accepting private property look at it as a necessary evil. Pipes surveys the idea of property in the western world in antiquity, Middle Ages, modern times and the discussion by socialism, communism and anarchism. He finds that the institution (of property) in the 20th century was and still is threatened by the idea of it: He depicts fascism, national socialism and communism, but also the modern welfare state and pleads for the state to regulate “reluctantly, to the minimum extent necessary, always bearing in mind that the economic rights of its citizens (rights to property) are as essential as their civil rights (rights to equal treatment)….” (Ibid., 285).
By analyzing the institution of property, Richard Pipes shows that the human longing for possession is a unique phenomenon among all living beings that is rooted in the instinct for self-preservation. But striving for possession in and by itself does not automatically lead to property. Property in the truest sense of the word has another prerequisite, namely the political authority of the state: “Before the state there is only possession….” (Pipes 1999, 117). Under the circumstances of this political authority, ownership can be guaranteed and property is turned into a right protected by the state, while at the same time it protects the individual from the state, limiting its power and in this way creating freedom. “The right to property in and of itself does not guarantee civil rights and liberties. But historically speaking, it has been the single most effective device for ensuring both, because it creates an autonomous sphere in which, by mutual consent, neither the state nor society can encroach: by drawing a line between the public and the private, it makes the owner co-sovereign, as it were” (Ibid., 281). Pipes refers to ancient Greece, where for the first time in world history private property in land came into existence as did democracy. Since the 17th century the idea of “inalienable rights” was of ever growing importance for political theory as well as practice of the West. It “grows out of the right to property, the most elementary of rights. One of its aspects is the principle that the sovereign rules but does not own and hence must not appropriate the belongings of his subjects….” (Ibid., 118).
Both property and freedom are prerequisites for the commercialization of natural resources and of manufactured goods. A system of mutually binding contracts arises; contracts that are protected and enforceable by law. Production, trade and capital can flourish. Therefore “property is an indispensable ingredient of both prosperity and freedom” (Ibid., 286).
With the two contrasting examples of England and Russia, Pipes demonstrates the relationship between property, law and liberty: in the case of England the law developed in such a way that the power of the king was limited, causing admiration in the rest of the world. Already in the 13th century property had been individualized. The protection of property rights improved as well as the enforcement of contracts arising out of property. A broad conception of property developed that encompassed the rights to life and freedom as well as material goods in the 17th century and became common wisdom in the entire English speaking world in the 18th century. That this was developing during the dawn of industrialization is no coincidence.
Pipes’ case study of Russia in the 19th and 20th centuries show that the (coming into) existence of a political authority is a necessity, but not the only prerequisite for the existence of property rights. Before the Emancipation Edict of Tsar Alexander II in 1861 the institution of private property was not really established in Russia, nor was it part of the general consciousness after its elimination in the wake of the Bolshevik Revolution. The expropriation of private property during and after 1917 led to a command type of society, characterized by the concentration of all economic resources in the hands of the State and by a lack of property and freedom, and of economic performance comparable to the West’s. Pipes recognizes that, “in the case of Russia, it is not the presence but the absence of property that is taken for granted” (Ibid., xi).
Hernando de Soto, born in 1941 in Arequipa, Peru, studied economics and political science in Lima, Peru and in Geneva, Switzerland and graduated from the “Institute Universitaires de Haute Ètudes Internationales” in Geneva in both disciplines. He worked as a consultant for the GATT as well as for the Swiss Bank Union and became chairman of the board of the organization of copper exporting countries (CIPEC) and of the “Universal Engineering Corporation” before he returned to Peru. After having been governor of the Peruvian central bank from 1979 to 1980 he settled down as an entrepreneur in the mining and construction industry, soon becoming aware of the tremendous role of business transactions outside the legal “formal sector”. Later on he found that these transactions account for two thirds of the entire Peruvian national income.
In 1980 he founded the “Instituto Libertad y Democracia” (ILD) in Lima and still serves as president of this organization today. Together with a staff of up to 400 employees he works on registering and “formalizing” – meaning legalizing – “informal” real estate, buildings and enterprises; in Peru as well as in many other transformation (even former communist) economies around the world. By 1996 it had been possible to formalize 290,000 businesses and 350,000 estates, both lacking registration and legal status; thereby creating 550,000 new jobs and a tax revenue surplus of 1.2 billion US-Dollars. In 1986 he published the most important results of his findings in the famous El Otro Sendero – La Revolución Informal, which was translated into English as The Other Path – The Invisible Revolution in the Third World in 1989. More recently, The Mystery of Capital – Why Capitalism Triumphs in the West and Fails Everywhere Else, containing the quintessence of 20 years of research, followed in 2000.
De Soto challenges the traditional explanations of underdevelopment, meaning both the orthodox as well as the heterodox development theories. While sharing the criticism of heterodoxy, i.e. that introducing a market economy will not fight poverty, he also opposes the thesis of the simple failure of capitalism in the developing world. For de Soto, it is the lack of reliable and appropriate formal rights – and in especially private property rights – for the population at large that is the underlying reason for such injustice, which is so rightly vehemently criticized.
De Soto distinguishes 6 main effects of the formation of private property out of simple – informal – possession:
1. Fixing the economic potential of assets
2. Integrating dispersed information into one system
3. Making people accountable
4. Making assets fungible
5. Networking people
6. Protecting transactions
For the overwhelming majority of people in the Third World who have no “formal” rights to resources, i.e. access to formal property rights being too expensive, the “informal economy”, meaning economic activity at the fringe or outside of formal law, is their only chance of survival. Only a tiny minority in developing countries, the ruling class, can afford to participate in the formal economy. Why is that so? The legal systems of these countries are implemented in such a way as to serve only the particular interests of big landowners and the (money) nobility. In de Soto’s view, there are parallels to the situation in Europe soon after the breakdown of feudalism, when the nobility and aristocracy were trying to save their privileges by discriminating against and regimenting citizens and peasants, who were demanding social progress.
By analyzing the economics of informal housing, informal trade and informal transport in Peru, de Soto shows that Peruvians in the informal sector by no means suffer from a lack of entrepreneurial spirit or competence or diligence or material resources, as common theories proclaim, but rather from a host of disadvantages which can be attributed to a lack of formal rights.
Informal – and from a “formal” viewpoint of course illegal – activities and businesses face stiff penalties when discovered. To avoid penalties they use strategies, which are – in one way or another – costly as well. “Informals” typically decide not to expand beyond a certain business size, but operate on a very small-scale level for fear of being discovered. They deliberately limit their operations and are therefore not able to achieve an efficient production scale. These businesses are undercapitalized, and not because of limited access to credit only. Again, it is the danger of being “discovered” by using capital goods like machinery and equipment, because this has to be purchased in the formal world and to be handled by workers, and also because it is large and makes noise.
Another strategy for avoiding “discovery” is corruption: According to the ILD 10% – 15% of the gross income of informal small-scale enterprises is paid out in bribes and commissions. Furthermore, the “informals” can neither officially advertise their goods and services, nor enter most of the markets, from which they are effectively barred. They cannot participate in stock markets or trade fairs and cannot make use of financial instruments such as shares, letters of credit and bills of exchange. The “informals”’ potential business partners – both formal and informal – incur increased costs (i.e. time) in gathering information about the partner and about the transaction itself. Long term planning is either impossible or makes no sense, because building and investment is generally hampered by the risk that these assets, their possessions, could be taken away from them – either by the government or by somebody else. The possibilities for reducing these risks via insurance policies are either non-existent or hard to come by and expensive. Basically the possessions of these businesses can only be protected by personal presence. Officially they cannot be sold, given away or inherited; at least such arrangements could not and would not be enforced by law. The creation of a juristic body, which would enable a more efficient organisation of resources, is not possible at all. The infrastructure is worse than it is in the formal sector. All this means nothing else but additional costs that businesses in the formal sector would not have to face.
The cost of credit – if accessible at all – is much higher than it is in the formal world. De Soto describes a situation in Lima where there is a “formal” interest rate of 4.9% compared to an “informal” interest rate of 22% (de Soto 1989, 156). The reason is clear: assets, as long as they are only possessions within the informal system, cannot be encumbered and used as collateral in a credit contract, and therefore cannot be activated as capital; and this is true for 80% of the population in the developing world. This is why de Soto calls these assets “dead capital”. This capital cannot be used for investments, cannot contribute to aggregate demand and therefore cannot fuel growth and development. The consequences for the entire economy are enormous. Technological progress is obviously undermined and ILD’s researchers estimate that the “informal” productivity is only one third of the “formals”’ productivity.
Can this “dead capital” be turned into “live capital”? Apart from technical use derived from the physical condition of the assets (a house can be used to live in), abstract property rights bound to these assets can be economically activated and protected by independent institutions. The property rights, covering sale as well as encumbrance, unfold the productive potential of the assets by turning them into “capital”, that is “not the accumulated stock of assets but the potential it holds to deploy new production” (de Soto 2000, 35). How can this be achieved? Since the “informals”’ resources “lack value as collateral for securing the interests of creditors, …. these assets must first be formalized so that ownership can be traced and validated, and exchanges can be governed by a legally recognizable set of rules” (de Soto 1997, I, 6). But simply replicating property laws might not be sufficient. De Soto is calling for political and economic reforms like those made by Thomas Jefferson in the US-state of Virginia at the end of the 18th century or by Stein and Hardenberg in Prussia at the beginning of the 19th century.
In The Mystery of Capital de Soto elaborates his views on the creation of contemporary money: “The connection between capital and modern money runs through property” (de Soto 2000, 55). He also explains that a recorded property title “ultimately provides the justification against which central banks issue money. To create credit and generate investment, what people encumber are not physical assets themselves, but their property representations […]: money presupposes property” (Ibid., 55-6). With this, de Soto explicitly refers to Heinsohn and Steiger.
At the end of The Other Path we find the following conclusion: “All the evidence suggests that the legal system may be the main explanation for the difference in development that exists between the industrialized countries and those, like our own, which are not industrialized” (de Soto 1989, 185). Consequently, in order to transform underdeveloped and transitional systems into modern moneyed economies, it is not enough to implement macroeconomic stabilization and adjustment programs, as orthodoxy insists.
V. Similarities, Differences and Conclusions
We can state: the approaches of Richard Pipes, Hernando de Soto and Thomas Bethell are of remarkable similarity to those of Heinsohn, Stadermann and Steiger. This is even more amazing if one remembers that Heinsohn, Stadermann and Steiger have developed their ideas independently from Bethell, Pipes and de Soto (only recently in his book The Mystery of Capital has de Soto realized the similarity of his approach to that of the Germans), although the approaches of Bethell, Pipes and de Soto are influenced by each other.
As mentioned above, Bethell names four “great blessings” of the private property system: liberty, justice, peace and prosperity. For Pipes, “property is an indispensable ingredient of both prosperity and freedom” (Pipes 1999, 286). The other authors also make clear not only that the institution of property is a necessary prerequisite for a genuine economy, but also that it is a necessary prerequisite for liberty, even if not all of them express it quite so explicitly. De Soto’s “Instituto Libertad y Democracia” is not called that for nothing. Bethell explicitly agrees with de Soto, pointing out differences between First and Third Worlds. The First World runs its economy on the foundation of property, while the continued absence of this concept is preventing sustainable economic activity from taking place in the Third World. But the other authors would not contradict this view; moreover: there is implicit agreement in the outlines of their writings. With the exception of Bethell all authors agree in distinguishing between property and possession. As shown, both Pipes and the German authors make definite and very clear distinctions between property and possession. De Soto uses the expressions “property” and “possession” as well, but focuses mainly on the distinction between “formal” and “informal”; which amounts to the same thing, as – at least in these circumstances – it is a “formal” difference in name only.
There are differences in emphasis: Pipes is especially concerned with property as a pre-condition for liberty. De Soto and Bethell discuss the relation between property and liberty as well, even if not with the same emphasis. One explanation for the differences in emphasis could be the different backgrounds of the authors: Only Heinsohn, Steiger and Stadermann are academic economists. De Soto studied economics, but has worked on an international scale for enterprises and institutions. Bethell studied economics as well, but he works as a journalist. Pipes is another academic, but a historian, not an economist. This is probably why Bethell and Pipes concentrate on the history of property itself, while Heinsohn and Steiger emphasize the interrelation of property, interest and money not just in their theoretical discussions, but also in their historical reflections.
De Soto’s and Heinsohn and Steiger’s perceptions of the need to formalize assets so that they can function as collateral, of the creation of money as well as their interpretations of the problems of developing and transitional economies are strikingly similar. They differ only in the way they have arrived at their results: the Germans proceed from the right of encumbrance as the foundation of economic activity to discuss the problem of its absence in the former Second and in the Third World; de Soto sets out from a lack of property in these societies and goes on to discuss what generates economic performance. Due to their professional background as academic economists, Heinsohn, Stadermann and Steiger focus on the connection between property, interest and money as well as on the creation of money – meaning both in a historical sense and in today’s credit contract – in more depth.
Bethell and Pipes pay tribute to the “theory of property rights” or “new institutional economics”, a comparably new approach in economics, represented by scholars like Alchian, Coase, Demsetz and North. In the view of this school the value of private property rights lies in ensuring of fruits of labour to the one individual who actually engages in enterprising. Due to these incentives and the resulting motivation a private property economy performs high output, high growth rates and sustainable economic development and may be called an efficient economic organization. The economic historian (and Nobel prize winner in 1993) Douglass North considers common property as a perpetual and comprehensive institution which also functions as a source of private property, which emerges out of common property by incremental changes caused by the underlying influence of an eternal economy on legal structures. But even if they do not explicitly contradict North, Bethell and Pipes show in their case studies that property tends to be created and eradicated by men at different times in history, initiated discontinuously by state powers. Bethell also explicitly questions the assumption of a one-way-direction of influence from the economy to the legal structure: “The truth is that the influence flows in both directions, but the former – the influence of law over economy – is by far the most important” (Bethell 1998, 26).
The outlined approaches legitimately reject orthodox economic theory, and specifically neoclassical economics, which is blinded by its barter exchange paradigm and the “neutrality of money”. But this applies also to the mentioned “theory of property rights” which is close to the “property theory of the economy” in name only. There is no doubt that the significance of the institution of property rights must be acknowledged as well as examined, especially in terms of the progress of economic science. But the focus on property rights as the center of the monetary economy is of even greater importance in comparison to the usual output of a discipline which is used to talking about outputs.
However, it is just as important to realize that without the establishment of property rights for the resources people already hold in the societies of the so-called “developing world”, orthodox development programs will be just as “successful” in the future as they have been in the past. The creation of money without a national system of property rights, one that actually applies to all members of society, is as incapable of promoting growth and development as the Third World’s debts in the currencies of the property societies of “the North” (i.e. “the West”) are. “Without formal property to extract their economic potential and convert it into a form that can be easily transported and controlled, the assets of developing and former communist countries are like water in a lake high in the Andes – an untapped stock of potential energy.” (de Soto 2000, 41).
Bethell, T. (1998), The Noblest Triumph: Property and Prosperity through the Ages, New York: St. Martin’s Press
Betz, T. (2002), Review of “Stadermann, H.-J. / Steiger, O.: Allgemeine Theorie der Wirtschaft. Volume I: Schulökonomik (2001)”, in: Zeitschrift für Sozialökonomie, September, pp. 31-34
Betz, T. (2003), Review of “Heinsohn, G. / Steiger, O.: Eigentum, Zins und Geld: Ungelöste Rätsel der Wirtschaftswissenschaft” (2nd, corrected edition of 2002), and “Heinsohn, G. / Steiger, O. Eigentumstheorie des Wirtschaftens versus Wirtschaftstheorie ohne Eigentum: Ergänzungsband zur Neuauflage von ‘Eigentum, Zins und Geld’ ” in: Zeitschrift für Sozialökonomie, March, pp. 27-30
Heinsohn, G. / Steiger, O. (1996) Eigentum, Zins und Geld: Ungelöste Rätsel der Wirtschaftswissenschaft, Reinbek bei Hamburg: Rowohlt; 2nd, corrected edition, Marburg: Metropolis, 2002; English edition, together with Heinsohn / Steiger (2002), Property, Interest and Money: Foundations of Economic Theory, London: Routledge, 2004 (forthcoming)
Heinsohn, G. / Steiger, O. (2000), “The Property Theory of Interest and Money”, in: J. Smithin (ed.), What is Money?, London: Routledge, pp. 67-100; reprinted, with corrections and additions, in: G. M. Hodgson (ed.), Recent Developments in Institutional Economics, Cheltenham, UK and Northampton, Mass.: Edward Elgar, pp. 484-517
Heinsohn, G. / Steiger, O. (2002), Eigentumstheorie des Wirtschaftens versus Wirtschaftstheorie ohne Eigentum: Ergänzungsband zur Neuauflage von ‘Eigentum, Zins und Geld’, Marburg: Metropolis
Pipes, R. (1999), Property and Freedom, New York: Alfred A. Knopf
Soto, H. de (1986), The Other Path: The Invisible Revolution in the Third World; translated from the Spanish original, New York et al.: Harper & Row, 1989
Soto, H. de (1997), Dead Capital and the Poor in Egypt, Cairo: The Egyptian Center for Economic Studies, vol. I
Soto, H. de (2000), The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, London et al.: Bantam Press
Stadermann, H.-J./Steiger, O. (2001), Allgemeine Theorie der Wirtschaft, Volume I: Schulökonomik, Tübingen: Mohr Siebeck
Steiger, O. (2003), Securing Core Principles for Protected Transactions in IDA Countries: Theoretical Foundation, Universität Bremen: Institut für Konjunktur- und Strukturforschung (IKSF), November
* Paper to be presented at the International Symposium Genuine Money, Good Securities and the Foundations of the Economy: A New Look at Property Rights, Universität Bremen: Institut für Konjunktur- und Strukturforschung (IKSF), 28-30 November 2003.