Mystery of CapitalCRev
2/18/08
11:13 AM
Page i
The Mystery of Capital
and the Construction of
Social Reality
Mystery of CapitalCRev
2/18/08
11:13 AM
Page ii
Mystery of CapitalCRev
2/18/08
11:13 AM
Page iii
The Mystery of Capital
and the Construction of
Social Reality
Edited by
Barry Smith
David Mark
Isaac Ehrlich
OPEN COURT
Chicago and La Salle, Illinois
Mystery of CapitalCRev
2/18/08
11:13 AM
Page iv
To order books from Open Court, call toll-free 1-800-815-2280,
or visit our website at www.opencourtbooks.com.
Open Court Publishing Company is a division of Carus Publishing Company.
Copyright © 2008 by Carus Publishing Company
First printing 2008
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior written
permission of the publisher, Open Court Publishing Company, a division of Carus
Publishing Company, 315 Fifth Street, P.O. Box 300, Peru, Illinois 61354-0300.
Printed and bound in the United States of America.
Library of Congress Cataloging-in-Publication Data
Bird, Graham, 1930The revolutionary Kant : a commentary on the Critique of pure reason /
Graham Bird.
p. cm.
Includes bibliographical references and index.
ISBN-13: 978-0-8126-9590-8 (trade pbk. : alk. paper)
ISBN-10: 0-8126-9590-9 (trade pbk. : alk. paper)
1. Kant, Immanuel, 1724-1804. 2. Kant, Immanuel, 1724-1804. Kritik der
reinen Vernunft. I. Title.
B2798.B57 2006
121—dc22
2005036614
Mystery of CapitalCRev
2/18/08
11:13 AM
Page v
Contents
Introduction
xi
1. What I Do, and How Philosophy Has
Helped Me
Hernando de Soto
00
2. Social Ontology and Political Power
John Searle
00
3. Searle and de Soto: The New Ontology of the
Social World
Barry Smith
00
4. The Construction of Social Reality: Searle, de Soto,
and Disney
Jeremy Shearmur
00
5. How Philosophy and Science May Interact:
A Case Study of Works by John Searle and
Hernando de Soto
Ingvar Johansson
00
6. Language and Institutions in Searle’s The
Constructionof Social Reality
Iosef Moural
00
v
Mystery of CapitalCRev
2/18/08
11:13 AM
Page vi
Contents
vi
7. The Mystery of Human Capital as Engine of
Growth, or Why the U.S. became the Economic
Superpower in the Twentieth Century
Isaac Ehrlich
00
8. Allocation and Misallocation of Human Capital:
Some Lessons from Japan and Russia
Serguey Braguinsky
00
9. On the Essential Nature of Human Capital
Gloria Zúñiga y Postigo
00
10. Property Law for Development Policy and
Institutional Theory: Problems of Structure,
Choice, and Change
Errol Meidinger
00
11. The Institutionalization of Real Property
Rights: The Case of Denmark
Erik Stubkjær
00
12. A Case for Simple Laws
Andrew U. Frank
00
Postscript by Carlos Alejandro Cabrera Del Valle
00
13. Sovereigns, Squatters, and Property Rights:
From Guano Islands to the Moon
David R. Koepsell
00
14. The Property Rights Prescription and Urban
Migrant vs. Rural Customary Land Tenure in
the Developing World
Jon D. Unruh
00
15. Geographic Regions as Brute Facts, Social Facts,
and Institutional Facts
Daniel R. Montello
00
Mystery of CapitalCRev
2/18/08
11:13 AM
Page vii
Contents
vii
16. Collective Intentionality, Documentation, and
Real Estate
Dan Fitzpatrick
00
17. Real Institutions, and Really Legitimate
Institutions
Eric Palmer
00
Contributors
00
Index
00
Mystery of CapitalCRev
2/18/08
11:13 AM
Page viii
Mystery of CapitalCRev
2/18/08
11:13 AM
Page ix
Introduction
I
n his book The Construction of Social Reality, John Searle has advanced
a new way of understanding human society and its institutions: What
holds a human society together? What factors lead to the collapse of a
society? What are the roles of power, belief, and trust in sustaining social
institutions?
Hernando de Soto’s bestselling book The Mystery of Capital has contributed to refocusing the attention of development economists and policy
makers on the role of property rights in economic development. The
somewhat provocative subtitle of de Soto’s book is: Why Capitalism
Triumphs in the West and Fails Everywhere Else. His thesis is simple. The
poor in developing countries often have many assets—homes, informal
businesses, plots of land. What they lack is formal property rights to these
assets. This deficiency diminishes their potential worth as financial assets
(for example, by blocking their use as collateral for borrowing) or even as
real assets (for example, by preventing utilities such as gas and electricity
from being legally connected to them.)
Another asset that the poor in developing countries almost universally
lack is human capital including, but not limited to, formal schooling and
continuing technological advance. Any solution to the “mystery of capital”
thus must address how this intangible, but critical, human asset is produced and accumulated.
The main goal of this book is to discuss the ideas on social ontology
proposed by Searle and de Soto, and to further explore the implications of
their views, and those of other contributors to this volume, for the understanding of economic growth and development, and the philosophy of
social institutions. While de Soto’s Mystery of Capital was in part influenced by Searle’s ideas on social ontology, and while a number of important interconnections between Searle’s and de Soto’s work can be seen,
these interconnections have not hitherto been subjected to analysis.
ix
Mystery of CapitalCRev
x
2/18/08
11:13 AM
Page x
Introduction
Contributions to this book also expand de Soto’s approach to “capitalization” of tangible assets to include the capitalization of intangible assets
such as information and knowledge, or human capital, which are identified
as the long-term engine of growth in the fast-growing endogenousgrowth-and-development literature in economics.
The prime focus of the volume is: how can philosophers learn from
economists, and how can economists learn from philosophers, in understanding what works and what does not work in human societies? De
Soto and Searle have themselves provided chapters presenting definitive
accounts of their recent thinking on these topics. In the remaining chapters, experts on ontology, information science, land registration, geography, and endogenous growth and development present their views,
commenting primarily on the work of de Soto and Searle but also offering their own original contributions to the new social ontology and
endogenous economic growth paradigm, which are currently being
established.
A Huge Invisible Ontology
Searle begins The Construction of Social Reality with the following simple
scene: “I go into a café in Paris and sit in a chair at a table. The waiter
comes and I utter a fragment of a French sentence. I say, ‘un demi, Munich,
à pression, s’il vous plaît.’ The waiter brings the beer and I drink it. I leave
some money on the table and leave” (Searle 1995, 3). He then points out
that the scene described is more complex than at first appears: “the waiter
did not actually own the beer he gave me, but he is employed by the restaurant which owned it. The restaurant is required to post a list of the prices of
all the boissons, and even if I never see such a list, I am required to pay only
the listed price. The owner of the restaurant is licensed by the French government to operate it. As such, he is subject to a thousand rules and regulations I know nothing about. I am entitled to be there in the first place only
because I am a citizen of the United States, the bearer of a valid passport,
and I have entered France legally” (1995, 3). The task Searle then sets for
himself is to describe this “huge invisible ontology,” which is to say, to give
an analysis of those special powers, functions, acts, events, states, properties, and relations—picked out in italics in the above—which do not belong
to the realm of brute physical reality but rather to the realm of institutions.
Searle’s idea, very roughly, is that by acting collectively in accordance with
rules of a special kind—which he calls “constitutive rules”—we are able to
impose rights, duties, obligations and various other sorts of what he calls
“status functions” and “deontic powers” on our fellow human beings and
on the reality around us.
Mystery of CapitalCRev
xi
2/18/08
11:13 AM
Page xi
Introduction
Status functions are functions—such as those of customs officials (with
their rubber stamps)—which the human beings involved could not perform exclusively in virtue of their physical properties. Consider the way in
which a line of yellow paint can perform the function of a barrier because
it has been collectively assigned the status of a boundary marker by human
beings. The yellow paint is unable to perform this function by virtue of its
physical properties. It performs the function only because we collectively
accept it as having a certain status. Money, too, does not perform its function by virtue of the physical properties of paper, ink, or metal, but rather
in virtue of the fact that we, collectively, grant the latter a certain status and
therewith also certain functions and powers.
Powers can be positive, as when John is awarded a license to practice
medicine, or negative, as when Mary has her license to drive taken away for
speeding or when Sally is obliged to pay her taxes. Powers can be substantive, as when Margaret is elected Prime Minister, or attenuated, as when
Elton is granted the honorary title of Knight Bachelor, Commander of the
British Empire. Chess is war in attenuated form, and it seems that very
many of the accoutrements of culture have the character of attenuated
powers along the lines described by Searle.
Searle’s theory of collective intentionality, of status functions, and of
deontic powers is a brilliant contribution to the ontology of social reality. As he puts it: “[There is a] continuous line that goes from molecules
and mountains to screwdrivers, levers, and beautiful sunsets, and then to
legislatures, money, and nation-states. The central span on the bridge
from physics to society is collective intentionality, and the decisive movement on that bridge in the creation of social reality is the collective intentional imposition of function on entities that cannot perform these
functions without that imposition” (Searle 1995, 41). Searle’s account of
the way in which so much of what we value in civilization requires the
creation and the constant monitoring and adjusting of the institutional
power relations which arise through collectively imposed status functions
is certainly the most impressive theory of the ontology of social reality we
currently have. His account of how the higher levels of institutional reality are created via iteration of the imposition of status functions, and also
of how whole systems of such iterated structures (for example the systems
of marriage and property) can interact in multifariously spreading networks, opens up the way for a new type of philosophical understanding
of human social organization.
The account presented in The Construction of Social Reality is not without its problems, however. These turn primarily on the role of records and
representations in the ontology of social reality. One important class of
social entities is illustrated by what we loosely think of as the money in our
bank accounts as this is recorded in the bank’s computers. In The
Mystery of CapitalCRev
2/18/08
11:13 AM
xii
Page xii
Introduction
Construction of Social Reality we find the following passage: “all sorts of
things can be money, but there has to be some physical realization, some
brute fact—even if it is only a bit of paper or a blip on a computer disk—
on which we can impose our institutional form of status function. Thus
there are no institutional facts without brute facts” (Searle 1995, 56). In
reformulating his views on this matter Searle has since been led to recognize a new dimension in the scaffolding of institutional reality, the dimension of representations. The blips in the bank’s computers merely represent
money, just as the deeds to your property merely record or register the existence of your property right. The deed is not identical with your property
right and nor does it count as your property right. An IOU note, similarly,
records the existence of a debt; it does not count as the debt. The very hub
and nucleus of institutional reality is indeed, on Searle’s account, constituted by entities which do not coincide with any part of physical reality.
The Mystery of Capital
Such entities are especially prominent in the higher reaches of institutional
reality, and especially in the domain of economic phenomena, where we
often take advantage of their abstract status in order to manipulate them
in quasi-mathematical ways. Thus we pool and securitize loans, we depreciate and collateralize and amortize assets, we consolidate and apportion
debts, we annuitize savings—and these examples make it clear that the
entities involved must be of great consequence for any theory of institutional reality.
That this is so is made abundantly clear not least by Hernando de
Soto’s The Mystery of Capital, which realizes what Searle refers to as the
“fascinating project” of working out the role of the different sorts of representations of institutional facts. As de Soto shows, it is the “invisible
infrastructure of asset management’ upon which the astonishing fecundity
of Western capitalism rests, and this invisible infrastructure consists precisely of representations, for example of the property records and titles
which capture what is economically meaningful about the corresponding
assets—representations which in some cases serve to determine the nature
and extent of the assets themselves.
Capital itself, in de Soto’s eyes, belongs precisely to the family of those
freestanding Y terms that exist in virtue of our representations: “Capital is
born by representing in writing—in a title, a security, a contract, and other
such records—the most economically and socially useful qualities [associated with a given asset]. The moment you focus your attention on the title
of a house, for example, and not on the house itself, you have automatically stepped from the material world into the conceptual universe where
Mystery of CapitalCRev
xiii
2/18/08
11:13 AM
Page xiii
Introduction
capital lives” (de Soto 2000, 49–50). As those who live in underdeveloped
regions of the world well know, it is not physical dwellings that serve as
security in credit transactions, but rather the equity that is associated therewith. The latter certainly depends for its existence upon the underlying
physical object; but there is no part of physical reality which counts as the
equity in your house. Rather, as de Soto emphasizes, this equity is something abstract that is represented in a legal record or title in such a way that
it can be used to provide security to lenders in the form of liens, mortgages, easements, or other covenants in ways which give rise to new types
of institutions such as title and property insurance, mortgage securitization, bankruptcy liquidation, and so forth.
While a corporation is not a physical entity, if a corporation is to exist
then many physical things must exist, many physical actions must occur,
and many physical patterns of activity must be exemplified. Thus there
must be notarized articles of incorporation (a physical document), which
have been properly filled out and filed. There must be officers (human
beings) and an address (a certain physical place), and many of the associated actions (such as for example the payment of a filing fee) are themselves
such as to involve the results of the imposition of status functions upon
physical phenomena at lower levels. Records and representations themselves are entities which belong to the domain of institutional reality that
is at the heart of the new ontology of the social world.
In the broadest possible terms, records, titles, representations, and
other formal institutions are no more and no less than self-policing social
contracts. But such social contracts themselves are products of a complicated evolutionary process, with probably the most important driving force
coming from new ideas, and this is what endogenous growth theory identifies as “human capital”—a complementary theme of this book. Hence,
the biggest “mystery of capital,” still awaiting its resolution, is to try to
understand how all the remarkable features of capitalism, including its
institutional reality, come about and motivate the continuous formation of
knowledge that drives economic development and productivity growth.
Background to the Book
This book was shaped by a two-day workshop held in Amherst, New York
(a suburb of Buffalo), April 12–14, 2003. The main goals of the workshop
and of the book were to discuss the far-reaching implications of Hernando
de Soto’s book The Mystery of Capital and John Searle’s book The
Construction of Social Reality. Several other speakers were invited as well,
and an open call for participants was published that provided some additional speakers. Grants from the National Science Foundation’s Geography
Mystery of CapitalCRev
xiv
2/18/08
11:13 AM
Page xiv
Introduction
and Regional Science program and the Conferences in the Disciplines program of the State University of New York allowed us to invite more than a
dozen speakers to Buffalo, where seventeen papers were presented. The
workshop also featured some panel discussions and other activities, and
about seventy-five people attended.
After the meeting, participants were invited to submit a paper on the
conference theme for possible inclusion in the book. Some speakers chose
not to propose their presentations for the book, but a few nonspeakers
from the workshop audience sent in manuscripts. Each chapter was peerreviewed by three reviewers. We tried to obtain reviews from two of the
other workshop participants, one from the author’s discipline and one
from some other field. We also obtained a review from at least one person
who had not attended the workshop. Several submissions were not
included in the book, and those whose chapters are included in this book
can feel justifiably proud of their contributions.
The editors wish to express their gratitude to many people and organizations that helped make the workshop and this book possible. First of all
we thank John Searle, Hernando de Soto, and the other speakers and
workshop participants for their involvement. Funding from the U.S.
National Science Foundation (grant BCS-0242145) and the State
University of New York also were critical to the success of the workshop.
Linda Doerfler, Diane Holfelner, and Patricia Shyhalla of the National
Center for Geographic Information and Analysis provided administrative
support for the meeting, aided by Andrew Spear, Anneliese Vance, and
other Buffalo graduate students. We also thank all the individuals who
peer-reviewed the chapters to ensure a high level of quality in this book,
and David Steele of Open Court for his patience and his support of the
project.
About the Editors and Featured Authors
Barry Smith is Julian Park Professor of Philosophy at SUNY Buffalo, and
a SUNY Distinguished Professor. His current research focus is formal
ontology and information science, with special reference to medical and
geospatial applications, and also to applications in the legal and economic
spheres surrounding the institutions of land and landed property. He is
Director of the National Center for Ontological Research and one of the
Lead Scientists of the National Center for Biomedical Ontology, a part of
the Roadmap of the National Institutes of Health. He is the editor of The
Monist: An International Journal of General Philosophical Inquiry and the
author of some four hundred scientific publications. He is also philosophical advisor to the Institute for Liberty and Democracy in Lima, Peru.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page xv
Introduction
xv
Isaac Ehrlich is SUNY Distinguished Professor, Melvin H. Baker
Professor of American Enterprise, and Chair of the Economics
Department at SUNY Buffalo. He is editor-in-chief of the newly established Journal of Human Capital published by the University of Chicago
Press. His research covers applications of economic theory to law and economics, human capital and health economics, uncertainty and insurance,
advertising and information, and economic growth and development. He
is the author of highly cited articles in major journals and collections.
David Mark is SUNY Distinguished Professor of Geography at SUNY
Buffalo and Director of the Buffalo site of the National Center for
Geographic Information and Analysis. Mark’s research interests focus on
many aspects of geographic information science, notably geospatial ontology, spatial cognition, culture, and language, history of geographic information systems, human-computer interaction, and computer mapping.
Mark has written or coauthored over two-hundred publications.
John Searle is Mills Professor of Philosophy and Cognitive Science,
University of California at Berkeley. He is one of the leading philosophers
in the United States today. He came to prominence in the 1960s with the
publication of Speech Acts, a book that has influenced not only philosophers, but also linguists and literary and cultural theorists. Searle has played
an important role in debates on artificial intelligence with his notorious
“Chinese Room Argument.”
Hernando de Soto is President of the Institute for Liberty and
Democracy, Lima, Peru. He serves or has served as an advisor to more than
one hundred governments throughout the world on policies designed to
encourage economic development through legal and institutional reform.
The Chapters
The first chapter, “What I Do, and How Philosophy Has Helped Me,”
consists of a transcript of Hernando de Soto’s lecture at the opening of the
workshop. A minimum of editing has been done, to preserve the lively lecturing style of this articulate author. The second chapter, “Social Ontology
and Political Power,” is John Searle’s application of his metaphysical ideas
to the political domain. These ideas have been developed over many years
and applied to a variety of topics from speech acts and obligations to social
reality and the nature of mind.
In chapter 3, “Searle and de Soto: The New Ontology of the Social
World,” Barry Smith notes that the Western philosophical tradition has
been an especially influential component of political philosophy. The classics in the field, from Plato’s Republic through Rawls’s Theory of Justice
have an importance in our general culture that exceeds even most other
Mystery of CapitalCRev
xvi
2/18/08
11:13 AM
Page xvi
Introduction
philosophical classics. The subjects discussed in these works include
descriptions of the ideal society, the nature of justice, the sources of sovereignty, the origins of political obligation, and the requirements for effective political leadership. In spite of its impressive achievements, our
tradition of political philosophy is in various ways unsatisfying and perhaps
not the best expression of Western philosophy. The problem is not that it
gives wrong answers to the questions it asks, but rather it that it does not
ask the questions that need to be asked in the first place Prior to answering such questions as “What is a just society?” and “What is the proper
exercise of political power?” Smith argues that we should answer the more
fundamental questions: “What is a society in the first place?” and “What
sort of power is political power?” This chapter attempts to answer these
questions by exploring the relations between the general ontology of social
reality and the specific form of social reality that is political power. It shows
why all political power, though exercised from above, comes from below
and why, even though the individual is the source of all political power
through his or her ability to engage in collective intentionality, the individual still typically feels powerless. Finally it shows why political powers
are in large part linguistically constituted and why a monopoly on armed
violence is an essential presupposition of government.
In chapter 4, “The Construction of Social Reality: Searle, de Soto, and
Disney,” Jeremy Shearmur, after an initial, and somewhat critical, discussion of John Searle’s approach to the understanding of social reality, considers an issue at the center of Hernando de Soto’s work: the
transformation of land into property. After some issues connected with the
specifics of de Soto’s approach are discussed—in particular, the role that he
gives to government, and the problems to which this may give rise—the
chapter turns to its central theme. This is that, in addition to seeing the significance of the transition from land to property in terms of its ability to
underpin other economic activities, it is also important in relation to property as a space within which ideas may be tried out This theme is explored,
on the one hand, by way of considering the kind of regulatory regime that
would be needed to make such experimentation possible; for example, the
specification of the limitations upon experimentation in terms of a functional definition of externalities that must be imposed. But it also considers what such arrangements might look like in more practical terms, by way
of discussing the Disney town of Celebration, Florida, and some lessons
that may be learned from it.
Ingvar Johansson, in chapter 5, “How Philosophy and Science May
Interact: A Case Study of Works by John Searle and Hernando de Soto”
takes issue with philosophers who consider philosophy to be an enterprise
wholly independent of the sciences and with scientists who regard their
research as completely independent from philosophical problems and pre-
Mystery of CapitalCRev
2/18/08
11:13 AM
Page xvii
Introduction
xvii
suppositions. Rather, philosophy and science are and ought to be overlapping and interacting areas. Such an interaction can take many forms. For
instance, scientists can learn some very abstract, but nonetheless vitally
important, distinctions from philosophy, whereas philosophers can find
flaws in their own abstract views by taking seriously the discoveries of science. Both directions of this interchange are highlighted through the
examination of de Soto’s analysis of capital and of Searle’s philosophy.
Johansson makes four major claims. First, de Soto says that Searle is one of
the philosophers who helped him to unveil “The Mystery of Capital.”
Johansson, using Searle’s philosophy, summarizes this mystery in the claim
“Property rights are invisible and can be created ex nihilo.” Second, while
mentioning Searle, de Soto mentions Foucault in the same breath.
However, according to Johansson, de Soto has looked only at the similarities between Searle and Foucault. If he had been interested in the differences as well, he would have found that only Searle gives support to the
robust materialism that impregnates de Soto’s books. Third, de Soto has
tried to convince several governments in developing countries that they
should start to create a situation in which, with support from poor people,
they could say: “We hereby declare this new modern system of property
rights as valid.” According to Searle’s old speech act analysis of declarations, a person making a declaration does not publicly express any intentional state, and the declaration itself contains its own conditions of
satisfaction. Even though something tells in favor of such an analysis of
“routine declarations,” it cannot possibly be true of what might be called
a “Searle–de Soto declaration.” Fourth, notwithstanding its groundbreaking character, Searle’s book The Construction of Social Reality has a remarkable feature. It presents an ontology of social reality, but it does not
mention human desires. However, an analysis of what conditions of satisfaction there can be for a “Searle–de Soto declaration” shows that Searle’s
ontology can easily be amended. An ontology of desires can be added to
the old structure. Searle’s book should not be regarded as presenting a
complete ontology of social reality but as laying the ground for such an
edifice.
Chapter 6, “Language and Institutions in Searle’s The Construction of
Social Reality” by Josef Moural, focuses on an argument Searle makes in
chapter 3 of The Construction of Social Reality. Here Searle endeavors to
explain and justify his claim that language is essentially constitutive of institutional reality. Unlike other components of his theory of institutions, such
as collective intentionality, deontic power, and constitutive rules, this
claim, Moural argues, has not been subjected to critical discussion yet.
However, there are a number of difficulties connected with this part of
Searle’s theory. Moural summarizes Searle’s main argument for the necessary presence of a linguistic element in institutional reality and then points
Mystery of CapitalCRev
xviii
2/18/08
11:13 AM
Page xviii
Introduction
out at what seem to be weak spots of the argument. He argues for the relevance of the argument at stake within the overall architecture of Searle’s
theory, and provides an alternative view of what is going on in chapter 3
of Construction of Social Reality, including a modified version of Searle’s
main argument.
In chapter 7, “The Mystery of Human Capital as Engine of Growth, or
Why the U.S. became the Economic Superpower in the Twentieth
Century,” Isaac Ehrlich, examines an idea common to much of the “new”
economic growth and development literature: that persistent, self-sustaining growth in real per-capita income is attributable to “human capital,” He
finds this concept wrapped up in three layers of mystery. First, since it is
not a tangible asset, how do we account for human capital empirically?
Second, what dictates its formation over time? Third, how is such formation transformed into growth in real production?
Ehrlich aims to unwrap this apparent mystery through an exposition of
a general-equilibrium model of economic development where human capital is the critical engine of growth, its accumulation is enhanced by
parental and public investments in children’s education, and underlying
“exogenous” institutional and policy variables are ultimately responsible
for both human capital formation and long-term growth. The model is
developed in the context of a competitive market economy in which
human capital, measured imperfectly by indicators of schooling and training, is competitively rewarded and efficiently allocated to productive activities. The model also recognizes, however, the role of externalities affecting
the accessibility and financing costs of schooling, the efficiency of the economy’s labor and product markets, and the spillover effects emanating from
workers possessing higher education and skill on the productivity of other
workers. The way these externalities are “internalized” may vary, however,
as a function of the institutional and legal framework governing the market economy, and as a consequence of accommodating economic and educational public policies, especially insofar as higher education is concerned.
Such variations may ultimately explain differential growth patterns across
different countries. A more specific objective of the presentation is to illustrate the power of the “human capital hypothesis” to explain observed differences in long-term growth dynamics across different countries, the case
in point being the emergence of the U.S. as the world economic superpower.
Serguey Braguinsky addresses the codification of property rights to
land and other tangible assets and their conversion into productively
employed capital in chapter 8, “Allocation and Misallocation of Human
Capital: Some Lessons from Japan and Russia.” The engine of growth in
the capitalist economy and the main source of the wealth of nations is productively employed human capital. Hence, creating an environment in
Mystery of CapitalCRev
2/18/08
11:13 AM
Page xix
Introduction
xix
which human assets can be accumulated and converted into productively
employed human capital is an extremely important task. Braguinsky examines three key elements that must be present in an economy for successful
development along those lines and draws some lessons from the experience
of Russia and Japan.
First, he argues, adequate supply of human assets (potential human
capital) must be forthcoming. Supply of human capital will largely be governed by the prospect of future return as balanced against costs of acquiring it. It is plausible to assume increasing returns to high (tertiary and
graduate) education in the environment where most capital can be
employed in productive activity so that a bustling free enterprise economy
goes a long way to stimulate the accumulation of human capital of potentially most productive type. Second, incentives to employ this human capital in productive, innovative uses must be stronger than incentives to
employ it in strategic rent-seeking or other nonproductive activities. If the
institutional system primarily rewards promotion within the ranks of a hierarchy, and/or directly unproductive rend seeking, such a system is likely to
reduce both the level of wealth accumulated in an economy and, in most
cases, also its growth rate. Third, the institutional framework must allow a
smooth reallocation of resources to entrepreneurs possessing high human
capital and potentially beneficial innovative ideas. Productive innovations
generate high social and private returns when innovators can come into
possession of a sufficient amount of resources to implement their ideas.
Borrowing against human capital can jump-start economic growth and
make the codification of property rights to tangible assets as well as the creation of democratic institutions also much easier.
In chapter 9, “On the Essential Nature of Human Capital,” Gloria
Zúñiga y Postigo endeavors to unravel the nature of human capital by
relaxing the assumption that human capital exists in persons. What would
it mean for human capital not to exist in persons? Her impetus for this
unusual approach was triggered by the term dead capital, coined by
Hernando de Soto in his book The Mystery of Capital, which embraces
entities such as landed property without title or without any other recognized legal document that representing the property rights associated
therewith.
Consider that land, which is physical, has the potential to serve as a
constituent object of capital, and that this potentiality is not just apprehendable but also must be apprehended by at least one person who is willing to carry out the transformation of the land as a means of production
of some consumption good, for instance, by building a factory upon it, or
by turning it into a resort. Nonetheless, if the potentiality of any parcel of
land whose character as a constituent of capital is thwarted by its legal status—or, more precisely, its lack of legal identity as property belonging to
Mystery of CapitalCRev
xx
2/18/08
11:13 AM
Page xx
Introduction
one or more persons—then the parcel of land acquires the character of
dead capital. There is indeed no other way more precisely to describe the
nature of such a social object—an object that could be productive, an
object that is apprehendable as a means for production, but whose productivity is not merely wasted but destroyed by an institutional state of
affairs that prevents its realization as a capital good. The institutional state
of affairs that de Soto blames for this economic tragedy is one in which
legal titles for landed property are either not formalized or, if they exist,
they are not part of a uniform system of legal representation of landed
property.
In chapter 10, “Property Law for Development Policy and Institutional
Theory: Problems of Structure, Choice, and Change,” Errol Meidinger
brings de Soto’s prescription and Searle’s ontology into a closer conversation with contemporary American property law. He focuses on four topics.
First, he briefly describes the complex structure of modern American property interests, which are more variable and broadly distributed through
space and time than the concept of “ownership” may be seen to imply.
Resources typically are subject to multiple public and private rights, such
as easements, servitudes, and rights to be free of public and private nuisances, as well as frequently divided rights to possess, manage, and derive
income. Moreover, many of the interests are only partially defined, and are
subject to sometimes surprising elaborations over time. Second, despite its
great flexibility and variability, modern American property law does not in
practice facilitate or incorporate all of the arrangements that rights holders
attempt to implement in structuring their relationships. Rather, it limits
available property interests to a set number of categories, and often forces
putatively new interests into preexisting forms. Third, far from simply
absorbing conflicting property systems, the American property system has
in fact made difficult and questionable normative choices about which systems to respect and which to reject. The first and still festering one was to
override Native American property systems with European ones. Finally,
definitions of property rights in national legal systems are increasingly subject to powerful transnational influences. The North American Free Trade
Act, for example, has been used to impose a definition of property on
Mexico contrary to preexisting Mexican law. Meidinger concludes that
while the de Soto and Searle perspectives offer some benefits to property
scholarship, they will have to be extended considerably to come to grips
with the features of modern property rights.
In chapter 11, “The Institutionalization of Real Property Rights: The
Case of Denmark,” Erik Stubkjær observes that the existence of economic
discrepancy between North and South and the growing hegemony of liberal capitalism since the end of the cold war have combined to bring about
a renewed interest in the issue of individual property rights. He asks the
Mystery of CapitalCRev
2/18/08
11:13 AM
Page xxi
Introduction
xxi
question, how can we put this magic into operation in countries standing
in need of economic development? However, attempts so far have demonstrated it to be an almost impossible task. One approach that has been suggested is that of gaining a better understanding of how real property rights
came into being in “the West,” and then applying the knowledge gained
from these investigations to the needs of currently developing countries.
This chapter aims to contribute to such an approach by providing an
account of the institutionalization of real property rights in Denmark. By
the time of the Reformation (1536) a governmental bureaucracy was
already in operation; one that was reinforced by subsequent Lutheran sovereigns. Religion and the ideas of the Enlightenment co-operated in
Denmark to foster development, especially in terms of liberating the peasants from their dependent economic position. Land ownership was gradually extended from a privilege afforded only to royalty and the nobility to
peasants and ultimately to workers as well. While mortgaging played a role
in this development, its greatest significance occurred only after the 1960s.
Real property is a phenomenon addressed by a number of disciplines:
Law, economics, geodetic surveying, and even history, linguistics, and philosophy. Real property is also a dynamic phenomenon. The short-term
dynamics are dealt with by lawyers, notaries, and chartered surveyors, as
well as by staff in the courts, in government, and in the financial sector.
The century-long dynamics are dealt with by historians and institutional
economists, among others. Stubkjær draws on findings from a number of
these disciplines, and his multidisciplinary approach provides the basis for
a discussion of factors of economic development offered by Douglass C.
North (1990), a discussion pointing to the various societal costs of creating associations in Catholic and Protestant regions.
Andrew U. Frank begins chapter 12, “A Case for Simple Laws,” with
de Soto’s thesis that the poor of the world would prefer capitalism if they
could obtain it at a reasonable price. De Soto points out that poor countries typically lack the institutions to convert their wealth into working capital. Legal institutions are in place in nearly all countries: there are laws
defining ownership in land, land registration, and mortgages. These laws
are just not used, and Frank’s purpose is to explain why. He finds that the
simple and general impediment to use the legal institutions to create capital is cost. There is a high nonmonetary cost for the person to learn about
the institutions and the procedures to follow, and there is a high monetary
cost to obtain the professional advice and assistance to follow them.
Registration of land is most often made more difficult than strictly necessary. The simple procedure of land registration is so much burdened by
these connections to make them essentially impractical. The corresponding
institutions—especially the banks—are not ready to convert the abstract
capital created by the legal institution in real working capital. They are not
Mystery of CapitalCRev
xxii
2/18/08
11:13 AM
Page xxii
Introduction
prepared to grant mortgages because they do not have the experience that
their investments are secure. Thus, courts are necessary to enforce legal
institutions. Our analysis and simulation of Searle’s socially constructed
legal realities demonstrate that they depend on the possibility of enforcement. Such procedures are very difficult, time consuming, and costly for
the bank. Frank sees a single issue here: The laws have become too complicated, and the effect of complicated laws is high cost..
Frank suggests that the export of the elaborate law systems of developed countries is counter-productive: the related institutions (courts,
banks, etc.) cannot cope with the complexity and fine distinctions. We have
forgotten how our legal system evolved from simple principles before it
arrived at today’s complexity. Research to identify the simple core of a legal
system is necessary. The historical development of legal institutions from
simple rules to the complex constructions we have today can inspire such
research, and Frank believes that such “simple laws” could also benefit the
developed countries, where complexity of law has probably passed the
optimal point. Carlos Alejandro Cabrera Del Valle provides a postscript to
this chapter.
Chapter 13, “Sovereigns, Squatters, and Property Rights: From Guano
Islands to the Moon by David R. Koepsell, considers legal systems that
establish property rights over land to be government-created monopolies
similar to such devices as patents. Essentially, they are extensions by the
government of monopolistic control over a parcel beyond that which
might be able to be established by mere acts or indicia of ownership such
as fence-building, planting, or improving. Hernando de Soto’s book, The
Mystery of Capital nicely summarizes the developments and refinement of
the U.S. real-property regime. Of particular interest is the recognition,
unique in the U.S., of squatting as a legal means of establishing priority of
ownership over a parcel.
Squatting, which was not a valid means of acquiring ownership in traditional English common law, or in most code-law systems, was rampant
during the colonization of the United States. In fact, hundreds of thousands of acres of land were improved by squatters, necessitating the eventual recognition of their property rights by colonial, and later, state legal
systems. Such recognition was more efficient than the alternative—evicting
those squatters in favor of registered “title” owners. Arguably, squatting
itself, which involves the occupation of a parcel concomitant with indicia
of ownership, is more economically efficient than conferring ownership
benefits by title in certain circumstances.
Adolf Reinach, in his Apriori Foundations of the Civil Law, argues that
certain legal rules are “grounded” in what Searle would call “brute facts”
whereas others are not. Koepsell contends that intellectual property
patents are not grounded in any brute fact, but are merely creatures of the
Mystery of CapitalCRev
2/18/08
11:13 AM
Page xxiii
Introduction
xxiii
positive law that can be altered at will with no ramifications for a larger
sense of Justice. Based upon de Soto’s research into the effect of legitimizing squatting rights, these sorts of rights are in fact “grounded” in the
brute facts of occupation, and thus more closely approach justice than
mere title ownership. Notably, Koepsell uses the example of the Guano
Islands Act, an odd example that reveals how sovereigns may take possession of lands by fiat, and not only legitimizes but also promotes squatting
by entrepreneurs. He also brings up the U.S. refusal to sign onto the international Moon treaty under the U.N. Thus, the Moon stands in the same
position as guano islands, and may legally become the subject of future
analogues to this act, promoting economic efficiency and entrepreneurial
activities beyond our planet.
Chapter 14, “The Property Rights Prescription and Urban Migrant
versus Rural Customary Land Tenure in the Developing World” by Jon D.
Unruh, is concerned with legal difficulties surrounding the economic
potential of the undocumented property held by the poor in developing
countries. Such property, occupied but not formally owned, is thought to
amount to considerable capital and therefore hold much potential.
However, those who occupy lands are frequently unable to prove ownership. This legal problem concerns the disconnection between formal law
and the customary law that governs how the world’s poor intersect with
property. The former allows assets to be fungible and used by individuals.
The latter has evolved under a different tenurial logic, where it is issues of
the maintenance and security of community connection to land in oftenrisky environments which are of concern.
With different conceptual foundations, customary law and formal law
in developing countries have little intersection. In this they are contrasted
with the “on the ground” activities that migrants have employed and that
merge more successfully with formal law. Migrants can come to share a
similar tenurial logic reflected in state law, in some cases because the state
facilitates settlement. As a result, formal and informal institutions can be
mutually supportive. It would be a significantly long process to move from
property tied to community, lineage, and geography to something based
on the individual and able to take advantage of aspects of capital as we
presently understand the opportunities. What will be needed in the end,
Unruh argues, are not just attempts at formalizing aspects of customary
law, but also a change in concepts dear to formal law, such as the integrity
of the document and the static nature of rules.
In chapter 15, “Geographic Regions as Brute Facts, Social Facts, and
Institutional Facts,” Dan Montello discusses the ontology of geographic
regions?spatially extended pieces of (near) earth surface that share some
aspect of similarity, including but not limited to spatial proximity or “locational similarity.” He reviews a taxonomy of geographic regions based on
Mystery of CapitalCRev
xxiv
2/18/08
11:13 AM
Page xxiv
Introduction
the information and procedures used to identify the regions; this taxonomy
incorporates and expands upon traditional conceptualizations of regions by
academic geographers. The taxonomy consists of four types of geographic
regions: administrative, thematic, functional, and cognitive. An important
ontological issue in any discussion of regions concerns the nature of their
boundaries. Perhaps most interesting about region boundaries in this
sense is their vagueness. Montello discusses several causes for boundary
vagueness and specifically considers Smith’s distinction between fiat and
bona fide boundaries. He next considers a mapping of the region taxonomy onto Searle’s conceptual distinctions among brute facts, social facts,
and institutional facts. Administrative regions are unique in their status as
institutional facts. However, several previous discussions of the ontology
of regions have proposed that administrative regions are also uniquely
independent of physical reality. Contrary to this, all geographic regions are
best understood as social facts tied semiotically to a physical earth. They are
simultaneously part of a real world and expressions of human attempts to
understand reality as meaningful. Insisting that regions are either brute
facts or social facts creates paradoxes. Mind-body interactionism avoids
these paradoxes.
Dan Fitzpatrick, in chapter 16, “Collective Intentionality, Documentation, and Real Estate,” raises issues concerning the alleged primacy of intentionality over behavior that is discernible in Searle’s account. He argues that,
with certain background conditions in place, writing plays a crucial role in
such transactions and that the signing of documentation is tantamount to
engaging in a real estate transaction, and that the role that intentionality
(both collective and individual) plays in Searle’s account of social institutions, as it is applied to formal property systems, needs to be revised and
expanded. He makes three main points. First, he draws an important distinction between a generalized form of collective intentionality, whereby
the whole population or significant groups collectively accept or agree on
some general social or institutional facts, and a more specific form of collective intentionality whereby individuals or groups accept or agree on
some specific instances of institutional facts. In formal legal systems there
is usually some sort of general collective acceptance by the population of
certain aspects of the law. But with respect to particular instances of property ownership in formal property systems, the question regarding who
owns what is not settled by the collective beliefs or acceptance by those
acquainted with a particular property. But in extralegal scenarios, collective intentionality is crucial; as de Soto points out, in such scenarios local
communities have to rely on “strong, clear and detailed understandings
among themselves of who owns what today.” While Searle’s account of
social institutions is applicable to such extralegal scenarios, it is not applicable to transactions in formal property systems. Second, it is not clear
Mystery of CapitalCRev
2/18/08
11:13 AM
Page xxv
Introduction
xxv
whether, in formal property systems, collective intentionality plays any
further role in specific real estate transactions beyond that required in the
use of language and the generalized acceptance of the law by the transacting parties. Fitzpatrick argues for a revision of the role of collective
intentionality with respect to such transactions. Third, in the case of real
estate transactions, contra Searle, intentions should not be taken to be of
utmost importance over and above behavior, such as the signing/uttering
of documents and making marks on a page. Signed documentation is
often taken to be indicative of the intentions of whoever signed it. In cases
involving real estate transactions, if courts were to allow intentionality to
trump documentation (or other behavioral evidence), then such transactions could not be legally enforced. In formal property systems, signed
documents form the cornerstone of the real estate transaction for another
reason; they are the links in the provenance of properties with respect to
ownership. This latter point is in keeping with de Soto’s empirical finding,
namely, that extralegal property systems either lack or have blurry ”chains
of title.”
Eric Palmer, in chapter 17, “Real Institutions, and Really Legitimate
Institutions,” develops a thesis regarding the manner through which social
institutions such as property come to be, and a second thesis regarding
how these institutions ought to be legitimated. The first thesis is that the
construction of social institutions can be understood clearly only if that
topic is distinguished from the topic of their normative status. The second
is that the normative status of such institutions can be understood properly
only if their legitimacy is distinguished from the legitimacy of government.
Each of these theses is in need of explication largely because of the cultural
influence of an erroneous reading of social contract theory concerning the
origins of the state. Thomas Hobbes mentions a “covenant” of each with
all, and the process of generating this covenant is often envisioned as a first
meeting of individuals that ultimately generates the state; but such a meeting is not clearly suggested by Hobbes, or by Locke, and it is a meeting
that, so far as we know from history, has never taken place. The error yields
a pair of myths that are prevalent in current political rhetoric. The first
myth is that legitimate political institutions are ultimately grounded in the
free choices of existing people, the fundamental “selves” that we have or
that we are, prior to politics. The second is that government, as the original exit from the state of nature, is the mother of all other legitimate political institutions. The work of the Institute for Liberty and Democracy
provides evidence regarding the extralegal reality and robustness of business entities. Hernando de Soto’s writing also makes the case that we
should not expect, nor even desire, that institutions related to property and
business develop simply and solely through the auspices of legislation and
the interpretation of legislation in courts.
Mystery of CapitalCRev
xxvi
2/18/08
11:13 AM
Page xxvi
Introduction
To more clearly answer the question, “What makes an institution real,
and what else makes it legitimate?” we must begin by distinguishing
between its constitutive social reality and its political or moral legitimacy.
Legitimacy concerns ends, motives and purposes, and historical events are
only accidental, or are symptomatic of legitimacy: by themselves, they will
always provide a faulty analysis of legitimacy.
R E F E R E N C E S
de Soto, Hernando. 2000. The Mystery of Capital. New York: Basic Books.
Searle, John. 1995. The Construction of Social Reality. New York: Free Press.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 1
What I Do, and How
Philosophy Has Helped Me
1
Hernando de Soto
I
am delighted to be here principally because it is a multi-disciplinary
event and I strongly believe that this is extremely important. Professor
Barry Smith said, “No particular discipline has a monopoly of the truth
about human experience, and it’s very important to bring them together.”
I am even more delighted, of course, to be here in the presence of
Professor John Searle, for whom I have enormous admiration. I very much
admire his field of work and his work, which has helped us very much in
understanding what this world is about.
Now, I am not a scholar, but the reason that in my book The Mystery of
Capital I refer to work being done in philosophy, work being done by John
Searle, is because I do think it is important to try to come together again.
I think it is important to try to come together again because I think that to
a great degree we humans have lost our way. I think we’ve got our new
world in front of us, and I think that we’ve had difficulty discerning that it
is a new world, especially in my part of this planet. I come from a developing country, which like many former Soviet Union countries, is trying to
make the transition to a market economy and to a democratic system.
We have all been on that road since just after the fall of the Berlin
Wall, and we have not being very successful about making this transition.
The reason that it is so important to give attention to our problems is
that we are now coming to realize that we comprise five billion of the
world’s six billion people. Our problems are connected to everything, to
terrorism and to wealth. As distances become shorter between different
countries, there is no one way that some people can be happy and others
not happy.
This chapter consists of a transcript of de Soto’s lecture at the opening of the workshop. A
minimum of editing has been done, to preserve the lively lecturing style of this articulate
author.—Eds
1
Mystery of CapitalCRev
2
2/18/08
11:13 AM
Page 2
Hernando de Soto
Now, supposedly, after the fall of the Berlin Wall we were all on the
right road. The market economy would come and if it functioned, and we
did all of the things that we were supposed to do, then we too would
become developed countries. The International Monetary Fund gave us all
the old recipes: You have to stabilize your currency. You need to have standards in terms of being able to value things. So we did that. You have to
control your budget deficits, and we did that. You also have to unburden
the load of the state, government, so that it can govern instead of manage
enterprises that it is not up to doing, and so forth.
Well, if someone had asked Latin Americans for a view of history, they
would have said, “We’ve tried this before and it didn’t work.” Since our
independence from Spain—since the 1820s to today—we Spanish-speaking Latin Americans have tried to follow what today are called IMF recipes
five times. They are not new. These recipes came along with what Adam
Smith recommended as good governance. Since the fall of Spain in Latin
America, we privatized things. The railways went to the British and some
of the mines went to the French and to the Germans. We also lowered our
tariffs to practically zero. We stabilized our currencies. And five times,
none of this worked and new socialist and authoritarian governments came
into power. Therefore, this is the sixth time around for us. From Russia to
Peru, we started doing all those things, but it has not really worked that
well. People have been unhappy, people have been marching, people have
been talking against the market economy, and the question again is, “what
went wrong?” Something there is missing.
I talked to a friend of mine, Francis Fukuyama, whom you have
undoubtedly heard of, and he said, “The issue is trust. You see, in the end
a market economy is essentially based on trust.” He is right. This was
explained not only by Adam Smith, but also by Karl Marx. Essentially what
this is all about, and what the industrial revolution, to a great extent, had
behind it was a division of labor. People became more specialized, and as
they became more specialized, they became more productive. That is what
Adam Smith had in mind when he explained what would happen if someone just specialized—that’s what division of labor means—in just making
pins. If you have a pin factory and just dedicate yourself to making pins,
you can be so much more productive than if you dedicate yourself to raising your family, raising your animals, plowing your field, building your
house, taking care of the sick people; if you focus on something, you’re
going to be much more productive. However, that productivity depends
on the capacity to exchange.
Now that, of course—and here comes Francis Fukuyama—involves
trust. You need to trade your pins for somebody else’s food and gadgets,
and that leads to an increase in people’s interdependence and, of course,
the need for trust. It is only once trust has been established—by means of
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 3
What I Do, and How Philosophy Has Helped Me
3
legal representations—that you can start creating a prosperous market
economy. If you are able to exchange on a wide scale, then you can specialize because it does not matter if you are just making pins.
Some people have said, “Well, there are certain cultures in the world
that trust each other more and there are some that trust each other less, so
maybe this is cultural.” A group of American scientists recently surveyed
the issue of trust in a variety of countries by asking citizens, “Do you trust
the other people in your society?” The results bear out Fukuyama’s suspicions. Up to 65 percent of Europeans, led by the Scandinavians, say, “Yes,
I do trust other people in my country.” In the United States, the total is a
little bit lower, about 52 percent; but it is still a respectable figure. In
Brazil, however, a mere 8 percent admitted to trusting their countrymen;
in Peru it was 5 percent, and in Argentina 4 percent. Maybe Anglo-Saxons
and people in the West just trust each other more, and Latin Americans,
Indians, Middle Eastern peoples, Africans just don’t trust each other so
much. So, I was very happy when I was invited here to Buffalo, to a country where people trust one another, and I said, finally someone is going to
listen to me and believe what I say. Or at least 52 percent of you.
When I went through customs, and immigration, they asked me,
“Would you identify yourself, please.” I said to myself, “This man will
trust me.” I said to him, “Of course I can identify myself. I am Hernando
de Soto, and I am the son of Alberto Soto from Arequipa, Peru. My
mother Rosa is from Moquegua, and I was born in 1941.” He said,
“Please, just show me your passport.” I gave him my passport, and, as he
read it, I realized that he finally trusted me—not because of my sterling
family background or my good looks, but because of that standardized
printed document that provides authorized information about my identity and citizenship based on rules that allow me to travel around the
world. He had a standardized document and he had everything he needed
to know about me. He said, “Thank you very much,” and I entered the
country.
Actually, before coming here to Buffalo, I went to Washington DC.
Now, I have been going to the same hotel in Washington, called the
Washington Suites, for the last fifteen years. Everybody knows me there.
The receptionist said, “Good to see you again, Mr. de Soto.”
I said, “Herb, terrific to see you, too.”
“Tell me. How are you going to pay this time?”
“Promptly, as I always have.”
“Could I see your credit card?” he asked.
“Ah”, I thought to myself, “here we go again. He does not really
believe me. All these years I thought Herb trusted me, he has really been
trusting a representation of my wealth that is embodied in a legally recognized document that I carry around with me called a credit card.”
Mystery of CapitalCRev
4
2/18/08
11:13 AM
Page 4
Hernando de Soto
Interesting. All of this trust is not really trust through knowledge by
acquaintance. In fact, my capacity to pay per se didn’t work.”
That made me think of one other great philosopher, Bertrand Russell.
He pointed out that there were two kinds of knowledge in the world:
“knowledge by acquaintance” (what I was trying to convey to the man at
Immigration) and “knowledge by description” (how he came to trust me).
In other words, my identity and anything that was worth saying about me
for traveling purposes was in my passport, a legal document that identified
me. Therefore, identity is not in me; it is something about me, created by
law. Our identity is external to our physical selves. People in Anglo-Saxon
cultures trust knowledge by description, and that supports what Bertrand
Russell used to say, that is where real objective knowledge comes from, by
description. Most of the things that you actually know are by description.
I felt that, maybe, what was missing in developing countries were better
descriptions, better representations.
I have come here, for example, with my watch. I promise you, this is
my watch. My wife knows this is my watch. In fact, I have various witnesses
that could say that this is my watch. However, nowhere, no matter how
you look at it, does it say that this is Hernando’s watch. In effect, there is
nothing on the watch that tells you who owns it; it could be anybody’s.
What actually is important is that somewhere at home I have a piece of
paper that says I bought the watch, and that I actually own it. That paper
that defines the watch as property actually defines the meaning of the
watch in the world of commerce, in the world of a market economy. The
property of the watch and the functions we can attribute to it are not contained in the physical object itself. Moreover, it is really that paper that says
whether I can sell the watch, pledge it, or use it as collateral. These are the
kinds of things that Professor Searle will tell us about afterwards—that we
impose functions on things, things that are not obvious. Things that are
not very clear, all of a sudden begin to have commercial meaning through
the world of property. The question then is, how many of the things that
we have in the Third World have commercial meaning, have market meaning, can actually go into the market?
When Americans, for example, decide that they are going to sell ten
thousand head of cattle on the Chicago Mercantile Exchange, they do not
do it the way they did two hundred years ago, when they took the cows all
the way to Chicago and said, “Here they are.” One could look at each cow
in the eye and say, “This is a good cow” or “This is a bad cow,” No,
nobody does that. People just take in pieces of property paper that tell you
much more about the steer than you can get by looking each cow in the
eye. The paper tells you about their economic relevance. You know how
many there are, their state of health, their weight, and their value. It is
really the paper that inserts them into the market, because if it were about
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 5
What I Do, and How Philosophy Has Helped Me
5
physical objects themselves, then market economies as we know them
today would be very different.
Similarly, when you go to the London Metal Exchange, there are no
forklifts moving copper blister from one side of the room to the other as
people trade. People exchange bills of property paper that tell you much
more about what you want to know regarding the copper blister than if
you examine the copper blister yourself. These pieces of paper represent
the assets and their property, but they are not the assets themselves. It is
these pieces of paper then that allow you at the same time to impose functions on the copper.
We tried something in Mexico with President Fox that helps to show
the importance of these papers. The exercise was to look at a Mexican
neighborhood and think of this same street in Denver. There isn’t much
difference. You have buildings here, some of them used for shelter, others
for business, and yet others for factories. It is pretty much like Denver. The
difference, however, is that all of those buildings in Denver are carrying
out functions that are invisible, functions that the Mexican buildings are
not carrying out. The buildings in Denver can be mortgaged or pledged,
or can act as a point of reference, as a point of collection of taxes or bills.
I can “read” about a hundred things about them thanks to a property system, thanks to their being inscribed within the law where obligations are
defined, where accountability can actually be exercised. All of these things
indicate that, in effect, a building in Denver is a lot more productive
because it will also generate credit.
Getting back to the watch, a stolen watch looks exactly like my watch.
There is nothing on it that says whether Hernando can pledge it, rent it,
transfer it, buy it, or sell it, or whether he can export it, import it, or cut
it up in segments to issue shares. All of that has nothing to do with the
watch itself. The economic significance of the watch, however, really has to
do with how we think about the watch. Its economic significance comes
from our minds and the way this knowledge has been gathered and represented in society through law. It is through descriptive documents governed by law that say who I am, that identify me in the market, and identify
me in commercial society. They are the ones that actually establish whether
I can pay or not and they establish what I do or do not own.
In other words, property, like my identification or my reputation, is
essentially a man-made construct. It has nothing to do with the physical
world. These documents, which are created by law, indicate whether we
can be trusted, whether we can be identified, and whether our possessions
belong to us, as well as specify what we can do with these possessions and
how we can leverage them. All of the good things that make a market
economy in a country work are not physical things. Rather, they are constructs about physical things. There would seem to be two worlds: the
Mystery of CapitalCRev
6
2/18/08
11:13 AM
Page 6
Hernando de Soto
world of watches, of physical things; and the world of man-made constructs, of representations, which come through law and which allow us to
communicate among ourselves about physical things, myself and the
watch.
Now how important this is for developing and former Soviet Union
countries—we have worked with President Putin, who has the same problems that we have in Latin America—is becoming clearer after fourteen
years. We thought that they were somewhat different from us, but now
we’ve discovered that it isn’t so much the ethnicities, it’s just how difficult
it is to create the institutions of property in a country that hasn’t developed
automatically into a market economy. You have to deal with them differently, the road is not clear.
That road has to become clear if we are all to live under a system where
we can continue talking to each other.
So, one of the things my team does in Peru and in other countries, is
to help formalize extralegal property. What we have found throughout the
world is that it is not that people do not have any assets. They own cows,
donkeys, machinery, land, and buildings. They all own things. The question is how many of their assets are represented in such a way that they can
be introduced into the market. Another way of asking the question is: How
many of them have passports that allow them to travel in the expanded
market, and be able to realize a series of functions that are indispensable in
order for a market economy to work?
We formalize property in such a way that it can enter the market, and
we have a methodology, which consists of actually visiting the shantytowns
and the different record-keeping organizations, because, unlike the United
States, for instance, most developing and former Soviet Union countries
do not have up-to-date central property recording organizations. We literally go to the different places to find out what is happening on the ground.
After a while, we are able to figure out what is being governed by law, what
rights are being defended by law, what property rights are being carried
out according to law, what transactions are being carried out. The activities include analyzing the interaction of the extralegal sector with the rest
of society; identifying the extralegal norms that govern extralegal property
and enterprises; and identifying the principal institutional obstacles to
transforming informally held assets and businesses into more productive
formal property. When we finish this initial assessment, we go back to the
head of state and we tell him how big the extralegal sector of the country
is. In other words, we tell him how many assets he has that, in effect, can
or cannot travel in the national or global market.
I am going to give you the example of one country because I think it
is useful. I went through it with professor Searle some moons ago, about
two years ago in Paris. Here we have Cairo; we show the head of state all
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 7
What I Do, and How Philosophy Has Helped Me
7
of the information gathered by summarizing it on one piece of paper,
about size A3. It has about six drawings on it, which I will show you. It is
accompanied, of course, by four volumes, which includes maps of the some
of the principal cities of Egypt. They are similar to this one of Cairo.
President Mubarak, together with his council of ministers, looks at the
map as we are delivering our report, and says, “I recognize that city. That
is Cairo and I recognize it because of the way the Nile twists and turns, but
I would not have recognized it otherwise, because I do not recognize the
color coding. What does the color coding mean?” So I say “Well, what
we’ve discovered” (I’m talking about real estate, which is the most obvious of the assets in any country) “is that people do own their assets, but
they defend them or they are covered by arrangements among themselves
which are informal or extralegal, they’re not inside the law. In general,
there are nine different ways that people in Cairo organize their property.
Those nine color codes represent these different ways.”
“You don’t have to worry about this,” I quickly explain to President
Mubarak. “This was the same way it was, for example, in California back
in the 1850s. There were eight hundred different ways of holding property outside the law. When settlers came in to California, they set up their
own legal systems, eight hundred of them. They were each extralegal jurisdictions. They could understand each other within a community, but not
among the different communities, much less in the expanded market. The
same thing is happening here in Egypt, and, do not worry, the same thing
happens to us in Peru. But I would like to illustrate this better. Let us look
at what each of those color codes means in order to better understand all
of this.”
In other words, let’s get away from the property title, and let’s get
closer to the watch. We then show the Cabinet these nine different color
codes. The first one here represents buildings on agricultural land. And the
Agriculture Minister says, “But I understand exactly what you’re talking
about, because it’s not only illegal to build on agricultural land, since
Nasser’s time and the Constitution drawn up during that time, we have
determined that it’s not only illegal to build on agricultural land, it’s
unconstitutional. We only have one river, so, how can you build on agricultural land? You’re eating up the only parts of the country that can actually produce food.”
We say, “You’re absolutely right, it’s an outrage. Nevertheless, we have
quantified it, and we have found that in Egypt since the 1950s you have
built four million seven hundred thousand buildings on agricultural land,
all of which are not only not legal, but perfectly unconstitutional. Four
million seven hundred thousand buildings, at our evaluation of about
10,500 dollars per building. When you add up how much mortar, how
much bricks, how much iron, without the furniture, without the factory
Mystery of CapitalCRev
8
2/18/08
11:13 AM
Page 8
Hernando de Soto
that is hidden in the house (in 50 to 60 percent of them), you’ve got fifty
billion dollars of dead capital, things on which you cannot, to use Professor
Searle’s language, impose functions. You cannot use them as credit, you
cannot use them as a guarantee, you cannot use them as collateral, you cannot use them as some kind of token.
Then we indicate the ways in which Egyptians are spontaneously creating laws amongst themselves. For example, in the center picture, to which
of course the Minister of Housing jumps and says, “Wait a minute. You
have public housing there. The Egyptian government built them. How can
that public housing possibly be extralegal, since it was built by government?”
We say, “Well, you’re absolutely right to have your doubts, but it is
interesting to remember in that connection that this is in Nasser City, and
you remember that particular part of the city?”
“Of course I do, I recognize it, I was there, I was a young man at the
time”.
“Fine, but you will remember then that the buildings there had two
stories, these buildings have six stories. The Government built the first two
stories. The question is who built the other four.”
The reply is, of course, the extralegal sector. That is to say, all people
are by nature entrepreneurial. The people in Nasser City found that the
foundations were strong enough to carry another four floors and so they
built them. If you go back to the records of who owns what, those records
cannot tell you who lives on stories three, four, five, and six, because legally
they do not exist. However, many of those who were in stories one and
two have moved on because it was good business. No matter how you look
at your records—whether you are a banker trying to find somebody who
could use their building for collateral, or whether you are a policeman
looking for Osama Bin Laden—you do not know who’s there. Therefore,
the market does not work. The functions are not in place.
When you add all of that up, it turns out that 92 percent of the land
and buildings in Egypt are outside the legal system. It turns out that about
88 percent of the enterprises are outside the system.
When they hear these figures, everybody starts getting depressed. We
say, “Well, this isn’t really a problem. Even Mexico, which is a more
advanced country, has 80 percent of its economy outside the legal system.”
Therefore, the rule of law only applies to 20 percent of the population,
those people within the blue section here. The other interesting aspect of
all of this is what people have been able to do outside the law.
When you add together the value of all the buildings and small enterprises outside the law, it turns out that there is US$ 245 billion from a
replacement perspective. That is, if you had to replace it all, it would take
US$ 245 billion. Their market value might be over that. Now, how much
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 9
What I Do, and How Philosophy Has Helped Me
9
is US$ 245 billion in Egyptian terms? Well, it is fifty times the value of all
World Bank loans to Egypt since the Second World War. It is fifty-five
times the value of all direct foreign investment in Egypt since Napoleon
left two hundred and fifty years ago, including the financing of the Suez
Canal and the Aswan Dam. It is thirty times the size of the Cairo Stock
Exchange.
The issue, therefore, is not whether the Egyptians are entrepreneurial
or not—all people in the world are entrepreneurial. The problem is that all
of this wealth is created outside the market system. It is created outside of
a place where you can specialize, where the division of labor takes place on
a grand scale, in such a way that you can create additional wealth.
That tells you then something that is very important to us. I think that
one of the first philosophers I read was Gaston Bachelard, who was a structuralist, and he said, “the space in which one looks is very different from
the space in which one can see.” In other words, when you look at the
buildings and the machinery in developing and former Soviet Union countries, they look just like yours; but what’s missing are the things that you
can’t see and that relate to the legal infrastructure. The legal infrastructure
allows one to make things liquid. In fact, one of the ways that both Adam
Smith and Marx would put it is that when you accumulate a sufficient
number of goods and assets together, these things can be converted into
capital. It is Adam Smith who said that they could only be converted into
capital provided they were fixed in another subject that is not themselves.
Then they can become liquid and they can help you deploy new production. All assets and human activities have a hidden potential that when represented by law—which was not said by Adam Smith or Karl Marx—can
suddenly be brought out or released.
In that connection, in 1990, the government of Peru entrusted my
organization to help with the privatization of the Peruvian Telephone
Company, which at the time was technically owned by the people who
owned telephones but, in fact, was administrated by the State. The value
of the shares of the Peruvian Telephone Company were quoted in the
Lima stock exchange at about US$ 53 million, and our job was to go out
and sell the company. The kids at the institute went out and tried to sell it;
they showed the property title of the company, and nobody wanted to buy
it: not AT&T, BellSouth, or Telefónica of Spain. They did not like the title.
They did not like the representation, which was not standard. It was not
the kind of thing they understood.
At that moment, we found out that privatization was essentially a legal
exercise. We asked ourselves how we would go about creating a property
system around the telephone company that foreigners and investors would
understand—that they could look at, just as you look at pieces of paper
representing cows and not at the cows when they are brought into the
Mystery of CapitalCRev
10
2/18/08
11:13 AM
Page 10
Hernando de Soto
Chicago Mercantile Exchange, and understand it much better. Well, we
actually spent three years redesigning a property system only for telecommunications in Peru. Once the paper and the law was in place, we
Peruvians went out and solicited bids. The telephone company was sold to
Telefónica of Spain for US$ 2 billion. US$ 2 billion in comparison to what
it was worth just three years before—US$ 55 million! In other words, its
price had increased 37 times just because it was legally represented in a way
that it had a passport and could travel in the expanded market. That is how
we started defining capital.
We started defining capital as the value that things have, hidden in
themselves, and that once they are represented so that people can look at
them in different ways, use them for different functions, for different purposes, then the surplus value in them can be brought out. When you have
standardized, legal representations, you can spot and extract the hidden or
potential values of assets as well as interconnect them within the larger
market. What is important in many cases is not the buyer-product relationship, as de Saussure would say, “between the asset itself and the signifier”; what is important is the relationship between all aspects of
representation at the time, and how these come together. This is probably
why Adam Smith said that “the only way you can create capital is by creating a wagon-way through the air” between the banks and the assets. We
believe that that “wagon-way” Smith was talking about was actually the
law, property law, but it was not clear to people in those times. Marx did
not believe much in the law, so he could not carry it further. However,
what was interesting about those two philosophers of one hundred and
fifty years ago and two hundred and fifty years ago—Karl Marx and Adam
Smith—is that for them it was current and explainable. They did not have
to do much explaining to understand that value or the meaning of value is
not captured in physical things themselves, but is captured essentially in the
mind and understood collectively.
They had no problem using metaphysical terms. In fact, Marx himself
said, excuse me for getting religious and metaphysical, but this is what capital is about, and whoever controls capital, because it’s so difficult to
define, of course, has an enormous control over the rest of society. Which
is why it is so important that the assets and the means of production not
be put in the hands of only selfish people, and that is why, of course, he did
not like property. However, what he probably had not realized was that
property provided the passport that allowed one to bring out the hidden
potential and value that existed in all the assets and work that all people do.
Therefore, what we have been finding out is that, if you want to take
this 80 percent or 90 percent of the Mexican, Egyptian, Filipino, Haitian,
Russian, or Kazakh economy that is outside the system, you essentially
have to focus on law. You essentially have to focus on institutions.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 11
What I Do, and How Philosophy Has Helped Me
11
One of the reasons that I came here is that we economists and lawyers,
we have exhausted our capacity to convince. We have exhausted our capacity of seeing the big picture. That is why I got extremely confused when I
saw the vigorous way in which certain philosophers—which includes
Professor John Searle—were looking at these issues. They were looking at
these issues in ways that made a lot of sense to people like myself; that
bring it all together the way it was in the eighteenth and nineteenth century, and that we seem to have lost somewhere on the way.
Nevertheless, to us it is quite clear that credit is a result of property.
People give you money if you have something to lose against it. Credit
comes from the Latin crede “I believe in.” The only way that I can burden
something so that I can give you credit is with a property document. There
is no other way of doing it. The only way I will invest in you is if you give
me property against it, whether you call it a share, stock, or equity. The
only way that the assets I have in Peru allow me to pay my hotel bill in
Washington DC is that they are fungible. Fungibility is essentially transported in the form of property documents. The only way that all of this
works—and we can understand it—is that property systems integrate and
protect transactions and create networks. To us this is crucial. Yet, if you
look at the budgets of the World Bank and your aid agencies, there is
hardly any money for this. Everybody is dedicated to doing other things.
People do not finance things that they cannot see and that they do not
understand.
Moreover, lawyers do not supply these kinds of services. They did
before. In the eighteenth and nineteenth centuries, law was essentially
defined as a discipline that was designed to discover things. It has ceased
being defined as such, and it is rare to find a lawyer who has the big picture. If he or she does, of course, he is away in academia, he is not in practice, and he is not in government. Of course, I was very interested in
getting in touch with you, with the academic community, simply because
I believe we are in trouble. We have lost the direction in which we were
supposed to go, and we are now finding out that it is extremely dangerous
not to understand what is happening.
We believe that what is happening among developing countries is
something that Dawson called “exceptation,” that when you created property law, you created it at the beginning to protect pieces of land, but what
has in fact happened over time is that law has ended up serving another
purpose. Not only the purpose of protecting ownership, but doing something much more important than that, which is relating people in ways
that make commercial transactions possible, allowing you to place value on
things, allowing you to give meaning to things. Even though law was born
out of defining ownership, what it does is create the infrastructure for a
market economy, because it allows people to understand each other, make
Mystery of CapitalCRev
12
2/18/08
11:13 AM
Page 12
Hernando de Soto
transactions among each other, hold each other accountable, and, as
Francis Fukuyama would say, make them trust each other.
Therefore, the creation of law was very important. The trouble is that,
with the exception of certain philosophers, including those present here
today, the people who understood the big picture in the developed world
have died. It is generally much more interesting for us Latin Americans and
Russians to read dead Americans than to read live Americans, to read dead
Germans than to read live Germans. The dead Germans of a hundred and
fifty years ago were concerned about how you create value, how you create wealth. They were concerned about what the sense of order was, and
they understood metaphysics. They understood that certain truths could
not be revealed in another dimension that was not actually a philosophical
dimension, but that was good enough for them at the time. In fact, they
were certainly capable of going to war over it.
The importance of capital formation depends, really, on the capacity of
a nation’s property rights system to represent economic value. Of course,
this is something that all of you really know about. This is what Derrida
used to talk about, he said, “It’s in the mirror of language that we’re able
to understand each other,” or if you want, in the mirror of law. It is certainly not by looking at things physically, in the face. This is what Karl
Popper probably meant when he talked about “World One, World Two,
and World Three.” Popper said that there was a World Three, which consists of the objects that we have created out of human intelligence, and that
this was where we interconnected. That is where I find that property takes
place, where law takes place. This is, of course, the area where Michel
Foucault talked about le chant epistemologique or where the episteme is. It
is that area where people begin to connect; an area that is unexplored and
has not really been looked at very seriously, probably since the time that
the Soviet Union began turning Marxism from a philosophy into a communist ideology, and the fight moved away from thinking to the military
stuff, and people stopped looking at what was behind wealth. We are now
finding out that creating wealth is not simply a question of having wellwritten laws.
Laws have to actually be able to connect to real people, in reality. There
has always been a sense that what is missing in the world is good law, and
that what people should simply do is imitate what you people in the developed world are doing. That if we just did that everything would be fine.
Some people really believe this in Third World countries. I remember that
in 1960 some Peruvians decided to go to Switzerland because they had discovered that on average a Peruvian bus killed eleven more people than a
Swiss bus. They said, obviously the Swiss have much better traffic regulations than the Peruvians do. They went to Zurich, then they translated the
Zurich regulations for traffic from Swiss German into Spanish, and those
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 13
What I Do, and How Philosophy Has Helped Me
13
are the laws that are in place now. So the traffic laws in Lima are exactly
the same as those in Zurich, but we Peruvians are still killing eleven more
people than the Swiss, which indicates that when you create law it just
can’t be cut out from one country and then applied to every country.
When you create law, you have to connect it to reality. You have to connect it to people’s beliefs and people’s desires; otherwise, it just is not
going to work. One of the things that we at the ILD have found is that 90
percent of Egypt, 80 percent of Mexico, and 75 percent of the Philippines
is extralegal. When we go into the shantytowns and throughout the country, we start finding out that there are formal titles, but they apply to only
a small percentage of the population. In the case of Egypt, to 10 percent
of the population; all the rest have extralegal titles. When we showed these
extralegal titles to President Mubarak, his reply was, “Well, why are you
showing me titles? What’s special about those titles?”
“Well, what’s special about these titles, Mr. President, is that you didn’t issue them. They were issued by local organizations.” This means that
people, Muslim, Protestant, or Catholic, have already advanced. Maybe
Foucault would say they are already placed within a grid of possibility, un
horizon de possibilités, that has already centered the world round.
Moreover, if they do not get the titles from you, they are going to make
them themselves.
Of course, it is not that President Mubarak and other leaders do not
want to give people titles to their land and titles to whatever they own.
Rather, under the present circumstances, it is an extremely difficult thing
to do. For example, we tried to find out how much time it would take
somebody in Egypt to get title to a sand dune that was outside the agricultural sector. We found out that it would take some seventy-seven
bureaucratic steps, and it would take eight hours a day over seventeen years
to get through those seventy-seven steps.
When the Egyptians got very depressed about this figure, we said,
“Don’t worry, in Peru it takes twenty-one years!” What happens is that
you cannot take a legal system from one country and just pass it to another
one, because there is no such thing as a rule vacuum in any developing
country. There are rules in all countries. The first thing that people do is
create rules. What you have to make sure of when you bring in modernity
is to find out what the grassroots rules are.
Over the last fifty years since the Second World War, a great part of the
world—which was only recognized by National Geographic magazine and
the Discovery channel—has moved from the hinterland, where it was
observed by anthropologists, to the center of our cities. Wherever you go
in the developing world, the population of the cities has increased. The
Haitian capital Port-au-Prince has grown fifteen times in the last thirty-five
years; Guayaquil in Ecuador eleven times; Algiers fourteen times. All of
Mystery of CapitalCRev
14
2/18/08
11:13 AM
Page 14
Hernando de Soto
these people, who had other forms of arrangement in the hinterlands, are
now trying to join the mainstream market economy. It is the Industrial
Revolution, again, 150 years after it ended in Britain. It is their turn, and
they are finding that the law is not accommodating them.
So, the challenge today, again, is to start questioning whether the legal
system and structures that we actually have in the developing and former
Soviet nations are adequate for a market economy. It is not enough to get
a formula from the United States and put it into place, as in the case of the
Zurich traffic law transferred to Lima.
Rules have to start out from the people. You have to find out what people already believe in. When you do, you build from that. You can then systematize their beliefs and practices; you can bring in the new things.
Wherever we go, even in Haiti, in the poorest country in the American
hemisphere, we have not found a single shack that is not titled and titled
by the people themselves. Another interesting thing is that this happens
not only in Haiti, but also and in all the developing and former Soviet
countries. This is of course what happened to a great degree in Japan.
I come from Peru. From 1990 to 2000, we had a president of Japanese
origin; his name is Fujimori. His family, the Fujimoris, was one of one million five hundred thousand families that migrated from Japan to Peru and
Brazil, which were open to Asian migration, in the nineteen thirties and
the forties. The question that I started asking myself when I went back to
live in Peru, was why did Fujimori come to Peru, why did the de Sotos not
go to Japan? The reply to that was that our GNP per capita in Peru was 20
percent higher than in Japan. Japan is a tiny country. It was a mighty military empire, but a tiny country. Brazil’s GNP per capita was 40 percent
higher than that of Japan. Now that Fujimori has decided to go back to
Japan, he has found a Japan that is nine times wealthier than Peru. The
question is, what did they do? How did they all of a sudden become a more
productive country and more prosperous than us?
Since by looking at the history books we were not able to get a good
answer, and we felt it might have had to do with the legal system, concretely, the property system, we got some money from Europe to go to
Japan. We asked ourselves, what happened between 1945 and 1950 during McArthur’s occupation? McArthur had really given a very simple edict,
which was “destroy the feudal system, because I want to create a property
system.” He did not do much more than that. It was about a three-page
edict that was very carefully thought out. He had been planning the invasion of Japan from 1942 on in Honolulu. When McArthur arrived in Japan
in 1945, he worked with a few American intellectuals there. One of the
outstanding ones was Wolf Ladejinsky from the United States Department
of Agriculture. These men saw that the primary challenge before them was
to ensure that Japan did not attempt military expansion again. The peas-
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 15
What I Do, and How Philosophy Has Helped Me
15
ants were continuously revolting against the military system and that was
one of the reasons why Japan went out to expand in Asia. After assessing
the situation, they concluded that since the feudal class had financed the
military, the best way to prevent another military expansion would be to
eliminate the feudal class. The best way to go about this was to take all the
feudal land, convert it into private property, and give to it the people.
There was another important reason for wanting to take this path of
giving the land to the people who worked on it: Mao Zedong, in neighboring China. Mao had started moving down from Manchuria to China,
defeating his traditional foe Chiang Kai-shek. What he was doing on the
way was creating property systems. Not private systems, of course, but
rather collective ones, which was still a lot closer to people than simply having a feudal lord own everything.
He told the Japanese, well, there must be something underneath your
feudal system upon which you can build a property system. The feudal
lords were essentially interested in collecting rent and in collecting taxes.
However, underneath them, the Smiths and the de Sotos had owned their
plots of land for hundreds of years. And we Smiths and de Sotos bought
and sold the land to each other, rented them to each other, and gave each
other loans against the others collateral.
Well, we at the ILD thought we had a good idea of what had happened,
but we had to make sure. When my colleagues and I went to Japan, the
International House of Japan brought together the seven remaining octogenarians who had managed the nation’s property reform between 1945
and 1950. After two weeks, we confirmed that the Japanese had built their
property rights system from the bottom up—by codifying and standardizing grassroots social contracts that people understood and believed in.
Once we had found out what they had, we asked the seven octogenarians their opinion of what we had be doing in Peru and El Salvador; that
is, if what we were doing there was the correct way to go about things. We
explained that we thought that this was essentially a political endeavor
because it has to do with a change of institutions. They agreed. It turns out
that they had used posters to get their message across to the people. Now
people use jingles and TV spots, but in those days, they had posters. We
managed to obtain one hundred of the posters they used. It took six
months, but we got a hundred posters. Actually, we were not given the
posters. We had to photograph them. In the Japan of 1946, what the
Japanese found out, the people doing the reform, is that underneath the
feudal system, farmers and people living in the cities were organized in
associations called Burakus. The first poster shows the informal village or
neighborhood associations that knew who owned what, and they knew
what the rules of the game were. There were 10,900 Burakus in Japan at
that time, and the authorities legalized them and converted them into land
Mystery of CapitalCRev
16
2/18/08
11:13 AM
Page 16
Hernando de Soto
commissions. The second thing they did was elect representatives who
were then able at this level to tell the prefectures of Japan what the rules
of the game were. Then the government took all of this information and
created a common denominator. They basically created a systematized system of law, not based on some academic or governmental speculation
about what the law should be, but on the basis of a process of discovery of
what the law was—understanding that what they had to do was codify, systematize, and professionalize it.
The second poster shows the laws instituted during the Meiji restoration being torn up. In the 1890s, with the Meiji restoration, the Japanese
incorporated samples of German property law, the Grundbuch system, to
consolidate their own property system. Of course, what the Grundbuch
system had done was defend the property or the assets of the feudal lords.
That was not good enough so they tore it up. In the next level, we see how
in each hamlet and in each neighborhood it was quickly found out who
owned what. And in the last, we see the new law written up. It was essentially an antipoverty program. So, Japan passed from a feudal system to a
property system that that has allowed the country to become much more
prosperous than any of the systems in Latin America have allowed.
Now the reason that I think we were able to discover this was largely
due to Friedrich von Hayek’s work. When we started seeing in our own
country, Peru, how the poor were effectively organized, there was of
course a tendency among our lawyers and our jurists to say “cute, but not
the real stuff.” Friedrich von Hayek made what we are doing possible
because he distinguished between legal orders. He talked about the fact
that there existed a deliberate legal order, which he called Praxis (from the
Greek) and another legal order that was grown from the bottom up called
Cosmos—spontaneously generated rules. If you actually look at the rules
of the West that allow Westerners to handle enormous complexities like a
market economy, they are, by and large, the products of spontaneous generation. That taught us respect for what is spontaneous. It taught us
respect for symbols and systems of meaning that come from below. We discovered then that our rule for developing countries was not substituting
something for what already existed, but rather making what already existed
more sophisticated, because what does exist does have rules.
That is why today, what we essentially do is put in place a procedure
that allows people to transform their assets (dead capital) into live capital.
In other words, we have a procedure where we actually pick up the symbols and the rules of the game from every Third World country we go to,
and, gradually building from that, we systematize it into the rule of law. We
are trying to do in five years what Westerners did in three hundred, four
hundred years, because there is no reason for it to take so long today. If
the Japanese could do it, and we Peruvians used to be wealthier than they
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 17
What I Do, and How Philosophy Has Helped Me
17
were, then we can do it, too. Not only did the Japanese make the transition, but the Koreans and the Taiwanese did, too.
So, we Third-Worlders can learn from your mistakes, and we can learn
from your successes, especially considering that the systems of law that we
have in developing and former Soviet countries are not based on common
law, but rather on the civil code. The civil code can be deliberately
changed. It was deliberately changed in Germany, in Switzerland, and in
France in the nineteenth century. That is why we love to read all these dead
people, because they made these changes. They were doing in the nineteenth century what we have to do in the twenty-first century.
The time has come to recollect this and that the process is essentially
an exercise in history, an exercise—to a great degree—in philosophy.
As I said before, I am very happy to be here among you and to be here
with Professor John Searle. Once I had finished writing my book—and I
had reflected very much on Professor Searle’s own writing and everything
relating to intentionality—I went to visit him. I tracked him down in Paris.
I said to him, “You know, I have a feeling we are both working for the
same thing.” My concern, of course, is not philosophy per se; my concern
is poor people. But, I understand that, somehow or other, the source or
the energy that we need to look at these things in the West are the philosophers who basically understand where the meaning of things are. That, and
I quote a few of your phrases, “there are things that exist only because we
believe them to exist.” There are people who believe certain things in all
developing and former Soviet countries, but nobody’s paying attention to
them. We are only paying attention to the few, which is not what nineteenth-century Western politicians did.
We have tried to construct socially a legal system looking at what you
did in the nineteenth century. And it has to do very much with the sharing of intentional states, which is what you talk about, collective intentionality. This is your work, of course. In addition, it is the work of Franz
Brentano, Daniel C. Dennett, and to a great degree, of Popper, and it is
extremely relevant. To many, it seems that academia is over there, and reality is here.
But not to us at the ILD. I happen to be a member of various groups
working for G7 proposals that are trying to design the new international
order, since the exiting one has obviously failed. Every time I get the
opportunity, I say that it is time that we take a lead from academia where
some people seem to be on the right track. It is time that we come
together to look at solutions that have actually worked throughout time,
among other things because they are intellectually solid.
Thank you very much.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 18
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 19
Social Ontology and
Political Power
2
John R. Searle
The Western philosophical tradition has an especially influential compo-
nent of political philosophy. The classics in the field, from Plato’s Republic
through Rawls’s Theory of Justice, have an importance in our general culture that exceeds even most other philosophical classics. The subjects discussed in these works include descriptions of the ideal society, the nature
of justice, the sources of sovereignty, the origins of political obligation, and
the requirements for effective political leadership. One could even argue
that the most influential single strand in the Western philosophical tradition is its political philosophy. This branch of philosophy has an extra interest because it has had at various times an influence on actual political
events. The Constitution of the United States, to take a spectacular example, is the expression of the philosophical views of a number of
Enlightenment thinkers, some of whom were among the framers of the
Constitution itself.
In spite of its impressive achievements, I have always found our tradition of political philosophy in various ways unsatisfying. I do not think
it is the best expression of Western philosophy. The problem with the tradition is not that it gives wrong answers to the questions it asks, but
rather it seems to me it does not always ask the questions that need to be
asked in the first place. Prior to answering such questions as “What is a
just society?” and “What is the proper exercise of political power?” it
seems to me we should answer the more fundamental questions: “What
The material in this chapter was presented in various universities as lectures and conference papers in addition to the Buffalo conference. Some versions have been published in
several different languages. The most recent publication is in John R. Searle, Freedom
and Neurobiology (New York: Columbia University press, 2007). I am grateful to Bruce
Cain, Felix Oppenheim, and Dagmar Searle for comments on earlier versions of this
chapter.
19
Mystery of CapitalCRev
2/18/08
20
11:13 AM
Page 20
John Searle
is a society in the first place?” and “What sort of power is political power
anyhow?”
In this chapter I do not attempt to make a contribution to the continuing discussion in the Western philosophical tradition, but rather I shall
attempt to answer a different set of questions. My aim is to explore some
of the relations between the general ontology of social reality, and the specific form of social reality that is political power.
1. Social Ontology
I want to begin the discussion by summarizing some of the elements of a
theory I expounded in The Construction of Social Reality (1995). I say
almost nothing about politics in that book, but I believe that if we take that
book together with my later book, Rationality in Action (2001), there is
an implicit political theory contained in these analyses, and in this chapter
I want to make that theory explicit, if only in an abbreviated form. I also
want to do it in a way that will make fully explicit the role of language and
collective intentionality in the constitution of social reality and correspondingly in the constitution of political power.
This project is a part of a much larger project in contemporary philosophy. The most important question in contemporary philosophy is this: how,
and to what extent, can we reconcile a certain conception that we have of
ourselves as conscious, mindful, free, social and political agents in a world
that consists entirely of mindless, meaningless particles in fields of force?
How, and to what extent, can we get a coherent account of the totality of
the world that will reconcile what we believe about ourselves with what we
know for a fact from physics, chemistry, and biology? The question I tried
to answer in The Construction of Social Reality was about how there can be
a social and institutional reality in a world consisting of physical particles.
This chapter extends that question to the question “How can there be political reality in a world consisting of physical particles?”
To begin, we need to make clear a distinction on which the whole
analysis rests, that between those features of reality that are observer- (or
intentionality-) independent and those that are observer- (or intentionality-) dependent. A feature is observer-dependent if its very existence
depends on the attitudes, thoughts, and intentionality of observers, users,
creators, designers, buyers, sellers, and conscious intentional agents generally. Otherwise it is observer- or intentionality-independent. Examples of
observer-dependent features include money, property, marriage, and language. Examples of observer-independent features of the world include
force, mass, gravitational attraction, the chemical bond, and photosynthesis. A rough test for whether a feature is observer-independent is whether
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 21
Social Ontology and Political Power
21
it could have existed if there had never been any conscious agents in the
world. Without conscious agents there would still be force, mass, and the
chemical bond, but there would not be money, property, marriage, or language. This test is only rough, because, of course, consciousness and intentionality themselves are observer-independent even though they are the
source of all observer-dependent features of the world.
To say that a feature is observer-dependent does not necessarily imply
that we cannot have objective knowledge of that feature. For example, the
piece of paper in my hand is American money, and as such is observerdependent: It is only money because we think it is money. But it is an
objective fact that this is a ten-dollar bill. It is not, for example, just a matter of my subjective opinion that it is money.
This example shows that in addition to the distinction between
observer-dependent and observer-independent features of the world we
need a distinction between epistemic objectivity and subjectivity, on the
one hand, and ontological objectivity and subjectivity, on the other.
Epistemic objectivity and subjectivity are features of claims. A claim is epistemically objective if its truth or falsity can be established independently of
the feeling, attitudes, preferences, and so on of the makers and interpreters
of the claim. Thus the claim that Van Gogh was born in Holland is epistemically objective. The claim that Van Gogh was a better painter than
Manet is, as they say, a matter of opinion. It is epistemically subjective. On
the other hand, ontological subjectivity and objectivity are features of reality. Pains, tickles, and itches are ontologically subjective because their existence depends on being experienced by a human or animal subject.
Mountains, planets, and molecules are ontologically objective because
their existence is not dependent on subjective experiences.
The point of these distinctions for the present discussion is this: almost
all of political reality is observer-relative. For example, something is an
election, a parliament, a president, or a revolution only if people have certain attitudes toward the phenomenon in question. And all such phenomena thereby have an element of ontological subjectivity. The subjective
attitudes of the people involved are constitutive elements of the observerdependent phenomena. But ontological subjectivity does not by itself
imply epistemic subjectivity. One can have a domain such as politics or economics whose entities are ontologically subjective, but one can still make
epistemically objective claims about elements in that domain. For example,
the United States presidency is an observer-relative phenomenon, hence
ontologically subjective. But it is an epistemically objective fact that
George W. Bush is now president.
With these distinctions in mind, let us turn to social and political reality. Aristotle famously said that man is a social animal. But the same expression in the Politics, “Zoon politikon” is sometimes translated as “political
Mystery of CapitalCRev
22
2/18/08
11:13 AM
Page 22
John Searle
animal”: “Man is a political animal.” Quite apart from Aristotelian scholarship, that ambiguity should be interesting to us. There are lots of social
animals, but man is the only political animal. So one way to put our question is to ask: “What has to be added to the fact that we are social animals
to get the fact that we are political animals? And more generally, what has
to be added to social reality to get to the special case of political reality?”
Let us start with social facts.
The capacity for social cooperation is a biologically based capacity
shared by humans and many other species. It is the capacity for collective
intentionality, and collective intentionality is just the phenomenon of
shared forms of intentionality in human or animal cooperation. So, for
example, collective intentionality exists when a group of animals cooperates in hunting their prey, or two people are having a conversation, or a
group of people are trying to organize a revolution. Collective intentionality exists both in the form of cooperative behavior and in consciously
shared attitudes such as shared desires, beliefs, and intentions. Whenever
two or more agents share a belief, desire, intention, or other intentional
state, and where they are aware of so sharing, the agents in question have
collective intentionality. It is a familiar point, often made by sociological
theorists, that collective intentionality is the foundation of society. This
point is made in different ways by Durkheim, Simmel, and Weber. Though
they did not have the jargon I am using, and did not have a theory of
intentionality, I think they were making this point, using the nineteenthcentury vocabulary that was available to them. The question that—as far as
I know—they did not address, and that I am addressing now, is: How do
you get from social facts to institutional facts?
Collective intentionality is all that is necessary for the creation of simple forms of social reality and social facts. Indeed, I define a social fact as
any fact involving the collective intentionality of two or more human or
animal agents. But it is a long way from simple collective intentionality to
money, property, marriage, or government, and consequently it is a long
way from being a social animal to being an institutional or a political animal. What specifically has to be added to collective intentionality to get the
forms of institutional reality that are characteristic of human beings, and in
particular characteristic of human political reality? It seems to me that
exactly two further elements are necessary: First, the imposition of function and, second, certain sorts of rules that I call “constitutive rules.” It is
this combination, in addition to collective intentionality, that is the foundation of what we think of as specifically human society.
Let us go through these features in order. Human beings use all sorts
of objects to perform functions that can be performed by virtue of the
physical features of the objects. At the most primitive level, we use sticks
for levers and stumps to sit on. At a more advanced level we create objects
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 23
Social Ontology and Political Power
23
so that they can perform particular functions. So early humans have chiseled stones to use them to cut with. At a more advanced level we manufacture knives to use for cutting, and chairs to sit on. Some animals are
capable of very simple forms of the imposition of function. Famously,
KŒhler?s apes were able to use a stick and a box in order to bring down
bananas that were otherwise out of reach. And the famous Japanese
macaque monkey Imo learned how to use seawater to wash sweet potatoes
and thus improve their flavor by removing dirt and adding salt. But, in
general, the use of objects with imposed functions is very limited among
animals. Once animals have the capacity for collective intentionality and for
the imposition of function, it is an easy step to combine the two. If one of
us can use a stump to sit on, several of us can use a log as a bench or a big
stick as a lever operated by us together. When we consider human capacities specifically we discover a truly remarkable phenomenon. Human
beings have the capacity to impose functions on objects, which, unlike
sticks, levers, boxes, and salt water, cannot perform the function solely in
virtue of their physical structure, but only in virtue of a certain form of the
collective acceptance of the objects as having a certain sort of status. With
that status comes a function that can only be performed in virtue of the
collective acceptance or recognition by the community that the object has
that status, and that the status carries the function with it. Perhaps the simplest and the most obvious example of this is money. The bits of paper are
able to perform their function not in virtue of their physical structure, but
in virtue of the fact that we have a certain set of attitudes toward them. We
acknowledge that they have a certain status, we count them as money, and
consequently they are able to perform their function in virtue of our acceptance or recognition of them as having that status. I propose to call such
functions “status functions.”
How is it possible that there can be such things as status functions? In
order to explain this possibility, I have to introduce a third notion, in addition to the already explained notions of collective intentionality and the
assignment of function. The third notion is that of the constitutive rule. In
order to explain it, I need to note the distinction between what I call brute
facts and institutional facts. Brute facts can exist without human institutions; institutional facts require human institutions for their very existence.
An example of a brute fact is that this stone is larger than that stone, or
that the Earth is 93 million miles from the sun. An example of institutional
facts is that I am a citizen of the United States and that this is a twentydollar bill. And how are institutional facts possible? Institutional facts
require human institutions. To explain such institutions we need to make
a distinction between two kinds of rules, which, years ago, I baptized as
“regulative rules” and “constitutive rules.” Regulative rules regulate
antecedently existing forms of behavior. A rule such as “drive on the right
Mystery of CapitalCRev
24
2/18/08
11:13 AM
Page 24
John Searle
hand side of the road” regulates driving, for example. But constitutive
rules not only regulate, they also create the very possibility, or define, new
forms of behavior. An obvious example is the rules of chess. Chess rules do
not just regulate the playing of chess, but rather, playing chess is constituted by acting according to the rules in a certain sort of way. Constitutive
rules typically have the form: “X counts as Y,” or “X counts as Y in context C.” Such-and-such counts as a legal move of a knight in chess, such
and such a position counts as checkmate, such-and-such a person that
meets certain qualifications counts as president of the United States, and
so on.
The key element in the move from the brute to the institutional, and
correspondingly the move from assigned physical functions to status functions, is the move expressed in the constitutive rule. It is the move whereby
we count something as having a certain status, and with that status, a certain function. So the key element that gets us from the sheer animal imposition of function and collective intentionality to the imposition of status
functions is our ability to follow a set of rules, procedures, or practices,
whereby we count certain things as having a certain status. Such-and-such
a person who satisfies certain conditions counts as our president, such-andsuch a type of object counts as money in our society, and, most important
of all, as we shall see, such-and-such a sequence of sounds or marks counts
as a sentence, and, indeed, counts as a speech act in our language. It is this
feature, the distinctly human feature, to count certain things as having a
status that they do not have intrinsically, and then to grant, with that status, a set of functions, which can only be performed in virtue of the collective acceptance of the status and the corresponding function, that
creates the very possibility of institutional facts. Institutional facts are constituted by the existence of status functions.
At this point in the analysis a philosophical paradox arises. It has the
form of a traditional paradox concerning the origin of obligations. Here
is how it goes. If the existence of institutional facts requires constitutive
rules, then where do the constitutive rules come from? It looks like their
existence might itself be an institutional fact, and if so we would plunge
into an infinite regress or circularity. Either way the analysis would collapse. The traditional form in which this paradox arises has to do with the
obligation to keep promises. If the origin of the obligation to keep a
promise comes from the fact that everybody has made a promise to the
effect that they will keep their promises, then the analysis is obviously circular. If, on the other hand, that is not the origin of the obligation to keep
a promise, then it looks like we have no analysis of where the obligation
to keep a promise comes from. I hope it is clear that the form of the paradox for constitutive rules has the same logical form as the traditional puzzle about the nature of promises. For promises the puzzle is: How can the
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 25
Social Ontology and Political Power
25
obligation of promises come into existence without a prior promise to
abide by promises? For institutional facts the puzzle is: How can the constitutive rules that underlie institutional facts exist without some institution
consisting of constitutive rules within which we can create constitutive
rules?
In the case of the logical form of constitutive rules the problem can be
stated without putting it in the form of a paradox. Even if the existence of
the constitutive rule is not itself an institutional fact, at least it is an
observer-relative fact. And that already makes it dependent on the consciousness and intentionality of agents, and one wants to know, what
exactly is the structure of that consciousness and intentionality? How rich
an apparatus is necessary in order to have the appropriate mental contents?
Here, I believe, is the solution to the paradox. Human beings have the
capacity to impose status functions on objects. The imposition of those status functions can be represented in the form, “X counts as Y in C.” In
primitive cases you do not require an established procedure or rule in order
to do this; consequently, for the simplest kind of cases of the imposition of
status functions, a general procedure in the form of a constitutive rule is
not yet required. Consider the following sort of example. Let us suppose
that a primitive tribe just regards a certain person as their chief or leader.
We may suppose that they do this without being fully conscious of what
they are doing, and even without having the vocabulary of “chief” or
“leader.” For example, suppose they do not make decisions without first
consulting him, his voice carries a special weight in the decision-making
process, people look to him to adjudicate conflict situations, members of
the tribe obey his orders, he leads the tribe in battle, and so on. All of those
features constitute his being a leader, and leadership is a case of an imposed
status function on an entity that does not have that function solely in virtue
of its physical structure. They accord to him a status, and with that status
a function. He now counts as their leader.
When the practice of imposing a status function becomes regularized
and established, then it becomes a constitutive rule. If the tribe makes it a
matter of policy that he is the leader because he has such and such features
and that any successor as leader must have these features, then they have
established a constitutive rule of leadership. It is especially important that
there should be publicly available constitutive rules, because the nature of
status functions requires that they be collectively recognized in order to do
their work, and the collective recognition requires that there be some
antecedently accepted procedure in accordance with which the institutional facts can be acknowledged. Language is the obvious case of this.
That is, we have procedures by which we make statements, ask questions,
and give promises. And these are made possible in a way that is communicable to other people, only because of publicly recognized constitutive
Mystery of CapitalCRev
26
2/18/08
11:13 AM
Page 26
John Searle
rules. But constitutive rules do not require other constitutive rules for their
existence, at least not to the point of an infinite regress. So the solution to
our initial puzzle is to grant that a regularized practice can become a constitutive rule, but there does not always have to be a constitutive rule in
order that a status function be imposed in the simplest sorts of cases.
Two things to notice about status functions. First, they are always matters of positive and negative powers. The person who possesses money or
property or is married has powers, rights, and obligations that he or she
would not otherwise have. Notice that these powers are of a peculiar kind
because they are not like, for example, electrical power or the power that
one person might have over another because of brute physical force.
Indeed it seems to me a kind of pun to call both the power of my car
engine and the power of George W. Bush as president “powers” because
they are totally different. The power of my car engine is brute power. But
the powers that are constitutive of institutional facts are always matters of
rights, duties, obligations, commitments, authorizations, requirements,
permissions, and privileges. Notice that such powers only exist as long as
they are acknowledged, recognized, or otherwise accepted. I propose to
call all such powers deontic powers. Institutional facts are always matters of
deontic powers.
The second feature to notice is that where status functions are concerned, language and symbolism have not only the function to describe the
phenomena but also are partly constitutive of the very phenomena
described. How can that be? After all, when I say that George W. Bush is
president, that is a simple statement of fact, like the statement that it is
raining. Why is language more constitutive of the fact in the case where the
fact is that George W. Bush is president, than it is in the fact that it is raining? In order to understand this we have to understand the nature of the
move from X to Y whereby we count something as having a certain status
that it does not have intrinsically, but has only relative to our attitudes. The
reason that language is constitutive of institutional facts, in a way that it is
not constitutive of brute facts, or other sorts of social facts, or intentional
facts in general, is that the move from X to Y in the formula X counts as Y
in C can only exist insofar as it is represented as existing. There is no physical feature present in the Y term that was not present in the X term. Rather
the Y term just is the X term represented in a certain way. The ten-dollar
bill is a piece of paper, the president is a man. Their new statuses exist only
insofar as they are represented as existing. But in order that they should be
represented as existing there must be some device for representing them.
And that device is some system of representation, or at the minimum some
symbolic device, whereby we represent the X phenomenon as having the Y
status. In order that Bush be president, people must be able to think that
he is president, but in order that they be able to think that he is president,
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 27
Social Ontology and Political Power
27
they have to have some means for thinking that, and that means has to be
linguistic or symbolic.
But what about language itself? Isn’t language itself an institutional
fact, and would it not thereby require some means of representing its institutional status? Language is the basic social institution, not only in the
sense that language is required for the existence of other social institutions,
but also that linguistic elements are, so to speak, self-identifying as linguistic. The child has an innate capacity to acquire the language to which
it is exposed in infancy. The linguistic elements are self-identifying as linguistic precisely because we are brought up in a culture where we treat
them as linguistic, and we have an innate capacity so to treat them. But in
that way, money, property, marriage, government, and presidents of the
United States are not self-identifying as such. We have to have some device
for identifying them and that device is symbolic or linguistic.
It is often said, and indeed I have said it myself, that the primary function of language is to communicate, that we use language to communicate
with other people, and in a limiting case, to communicate with ourselves
in our thinking. But language plays an extra role, which I did not see when
I wrote Speech Acts (1969), and that is that language is partly constitutive
of all institutional reality. In order that something can be money, property,
marriage, or government, people have to have appropriate thoughts about
it. But in order that they have these appropriate thoughts, they have to
have the devices for thinking those thoughts, and those are essentially symbolic or linguistic devices.
So far I have gone, rather rapidly, through a summary of the basic ideas
that I need in order to explore the nature of political power in its relation
to language. In a sense our enterprise is Aristotelian, in that we are seeking progressively more refined differentia, to get from the genus of social
facts to progressively more refined specifications, that will give us the
species of political reality. We are now on the verge of being able to do that,
though, of course, we need to remind ourselves that we are not following
the essentialism that characterized Aristotle’s approach.
2. The Paradox of Political Power: Government
and Violence
So far the account is fairly neutral about the distinctions between different
sorts of institutional structures, and it might seem from such an account
that there is nothing special about government, that it is just one institutional structure among others, along with families, marriages, churches,
universities, and so forth. But there is a sense in which in most organized
societies, the government is the ultimate institutional structure. Of course
Mystery of CapitalCRev
28
2/18/08
11:13 AM
Page 28
John Searle
the power of governments varies enormously from liberal democracies to
totalitarian states; but, all the same, governments have the power to regulate other institutional structures such as family, education, money, the
economy generally, private property, and even the church. Again, governments tend to be the most highly accepted system of status functions,
rivaled by the family and the church. Indeed, one of the most stunning cultural developments of the past few centuries was the rise of the nation-state
as the ultimate focus of collective loyalty in a society. People have, for
example, been willing to fight and die for the United States, or Germany,
or France, or Japan, in a way that they would not be willing to fight and
die for Kansas City or Vitry-le-Francois.
How do governments, so to speak, get away with it? That is, how does
the government manage as a system of status function superior to others
status functions? One of the keys, perhaps the most important key, is that
typically governments have a monopoly on organized violence.
Furthermore, because they have a monopoly on the police and the armed
forces, they in effect have control of a territory in a way that corporations,
churches, and ski clubs do not control a territory. The combination of control of the land plus a monopoly on organized violence guarantees government the ultimate power role within competing systems of status
functions. The paradox of government could be put as follows: governmental power is a system of status functions and thus rests on collective
acceptance, but the collective acceptance, though not itself based on violence, can continue to function only if there is a permanent threat of violence in the form of the military and the police. Though military and police
powers are different from political power, there is no such thing as government, no such thing as political power without police power and military power (more about this later).
The sense in which the government is the ultimate system of status
functions is the sense that old-time political philosophers were trying to
get at when they talked about sovereignty. I think the notion of sovereignty is relatively confused because it implies transitivity. But most systems
of sovereignty, at least in democratic societies, are not transitive. In a dictatorship, if A has power over B and B has power over C, then A has power
over C, but that is not really true in a democracy. In the United States,
there is a complex series of interlocking constitutional arrangements
between the three branches of government and between them and the citizenry. So the traditional notion of sovereignty may not be as useful as the
traditional political philosophers had hoped. Nonetheless, I think we will
need a notion of the ultimate status-function power in order to explain
government.
Because I do not have a lot of space I am going to summarize some of
the essential points about political power as a set of numbered propositions.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 29
Social Ontology and Political Power
29
1. All political power is a matter of status functions, and for that reason
all political power is deontic power.
Deontic powers are rights, duties, obligations, authorizations, permissions, privileges, authority, and the like. The power of the local party
bosses and the village council as well as the power of such grander figures
as presidents, prime ministers, Congress, and the Supreme Court are all
derived from the possession by these entities of recognized status functions. And these status functions assign deontic powers. Political power
thus differs from military power, police power, or the brute physical power
that the strong have over the weak. An army that occupies a foreign country has power over its citizens but such power is based on brute physical
force. Among the invaders there is a recognized system of status functions
and thus there can be political relations within the army, but the relation
of the occupiers to the occupied is not political unless the occupied come
to accept and recognize the validity of the status functions. To the extent
that the victims accept the orders of the occupiers without accepting the
validity of the status functions they act from fear and prudence. They act
on reasons which are desire-dependent.
I realize, of course, that all of these different forms of power—political,
military, police, economic, and so on—interact and overlap in all sorts of
ways. I do not suppose for a moment that there is a sharp dividing line,
and I am not much concerned with the ordinary use of the word “political” as it is distinct from “economic” or “military.” The point I am making, however, is that there is a different logical structure to the ontology
where the power is deontic from the cases where it is, for example, based
on brute force or self-interest.
The form of motivation that goes with a system of accepted status functions is essential to our concept of the political and I will say more about
it shortly. Historically, the awareness of its centrality was the underlying
intuition that motivated the old Social Contract theorists. They thought
that there is no way that we could have a system of political obligations,
and indeed, no way we could have a political society, without something
like a promise, an original promise, that would create the deontic system
necessary to maintain political reality.
2. Because all political power is a matter of status functions, all political
power, though exercised from above, comes from below.
Because the system of status functions requires collective acceptance or
recognition, all genuine political power comes from the bottom up. This
is as much true in dictatorships as it is in democracies. Hitler and Stalin,
for example, were both constantly obsessed by the need for security. They
could never take the system of status functions as having been accepted, as
a given part of reality. It had to be constantly maintained by a system of
Mystery of CapitalCRev
30
2/18/08
11:13 AM
Page 30
John Searle
rewards and punishments and by terror. In the case of recent totalitarian
systems, such as Mussolini’s fascism, Hitler’s Nazi Germany, and Soviet
communism, the intermediate level of status functions was that of the
Party. The dictator is able to control the populace by way of having the
unswerving loyalty of an elite group, the party members, and they in turn
control the other institutions of a society, including such systems of status
functions as the bureaucracy, the police, and the military. In Stalin’s Soviet
Union in particular, anyone suspected of disloyalty was subject to imprisonment or death. I would argue indeed that Lenin’s great contribution to
institutional practice was the invention of the revolutionary party, which
was supposed to overthrow the existing system of status functions and on
its overthrow, immediately seize power in a systematic and disciplined way.
The single most stunning political event of the second half of the twentieth century was the collapse of communism. It collapsed when the structure of collective intentionality was no longer able to maintain the system
of status functions. On a smaller scale a similar collapse of status functions
occurred with the abandonment of Apartheid in South Africa. In both
cases, as far as I can tell, the key element in the collapse of the system of
status functions was the withdrawal of acceptance on the part of large numbers of the people involved, especially the elites.
3. Even though the individual is the source of all political power by his or
her ability to engage in collective intentionality, all the same, the individual
typically feels powerless.
The individual typically feels that the powers that be are not in any way
dependent on him or her. This is why it is so important for revolutionaries
to introduce some kind of collective intentionality: class consciousness,
identification with the proletariat, student solidarity, consciousness raising
among women, or some such. Because the entire structure rests on collective intentionality its destruction can be attained by creating an alternative
and inconsistent form of collective intentionality
I have so far been emphasizing the role of status functions and consequently of deontic powers in the constitution of social and political reality. But that naturally forces a question on us: How does it work? How
does all this stuff about status functions and deontic powers work when it
comes to voting in an election or paying income taxes? How does it work
in such a way as to provide motivations for actual human behavior? It is a
unique characteristic of human beings that they can create and act on
desire-independent reasons for action. As far as we know, not even the
higher primates have this ability. This I believe is one of the keys to understanding political ontology. Human beings have the capacity to be motivated by desire-independent reasons for action. And this leads to point
number 4.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 31
Social Ontology and Political Power
31
4. The system of political status functions works at least in part because
recognized deontic powers provide desire-independent reasons for action.
Typically we think of desire-independent reasons for action as intentionally created by the agent, and promising is simply the most famous case
of this. But one of the keys to understanding political ontology and political power is to see that the entire system of status functions is a system of
providing desire-independent reasons for action. The recognition by the
agent, that is to say by the citizen of a political community, of a status function as valid gives the agent a desire-independent reason for doing something. Without this there is no such thing as organized political and
institutional reality.
What we are trying to explain is the difference between humans and
other social animals. The first step in explaining the difference is to identify institutional reality. Institutional reality is a system of status functions,
and those status functions always involve deontic powers. For example, the
person who occupies an office near mine in Berkeley is the Chair of the
Philosophy Department. But the status function of being Chair of the
Department imposes rights and obligations that the occupant did not otherwise have. In such ways there is an essential connection between status
function and deontic power. But, and this is the next key step, the recognition of a status function by a conscious agent, such as me, can give me
reasons for acting, which are independent of my immediate desires. If my
Chairman asks me to serve on a committee then, if I recognize his position
as Chairman, I have a reason for doing so, even if committees are boring
and there are no penalties for my refusal.
More generally, if I have an obligation, for example, to meet someone
by 9:00 a.m., I have a reason to do so, even if in the morning I do not feel
like it, and the fact that the obligation requires it gives me a reason to want
to do it. Thus, in the case of human society, unlike animal societies, reasons can motivate desires, instead of all reasons having to start with desires.
The most obvious example of this is promising. I promise something to
you and thus create a desire-independent reason for doing it. But it is
important to see that where political reality is concerned, we do not need
to make or create desire-independent reasons for action explicitly, as when
we make promises or undertake various other commitments. The simple
recognition of a set of institutional facts as valid, as binding on us, creates
desire-independent reasons for action. To take an important contemporary
example, many Americans do not want George W. Bush as president, and
some of them even think he got the status function in an illegitimate fashion. But the important thing for the structure of deontic power in the
United States is that with very few exceptions they continue to recognize
his deontic powers and thus they will recognize that they have reasons for
doing things that they would not otherwise have a desire to do.
Mystery of CapitalCRev
32
2/18/08
11:13 AM
Page 32
John Searle
It is a consequence of what I am saying that, if I am right, not all political motivation is self-interested or prudential. You can see this by contrasting political and economic motivation. The logical relations between
political and economic power are extremely complex: both the economic
and the political systems are systems of status functions. The political system consists of the machinery of government, together with the attendant
apparatus of political parties, interest groups, and the like. The economic
system consists of the economic apparatus for creating, distributing, and
sustaining the distribution of wealth. Though the logical structures are
similar, the systems of rational motivations are interestingly different.
Economic power is mostly a matter of being able to offer economic
awards, incentives, and penalties. The rich have more power than the poor
because the poor want what the rich can pay them and thus will do what
the rich want. Political power is often like that, but not always. It is like
that when the political leaders can exercise power only as long as they offer
greater rewards. This has lead to any number of confused theories that try
to treat political relations as having the same logical structure as economic
relations. But such desire-based reasons for action, even when they are in
a deontic system, are not deontological. The important point to emphasize
is that the essence of political power is deontic power.
5. It is a consequence of the analysis so far that there is a distinction
between political power and political leadership.
Roughly speaking, power is the ability to make people do something
whether they want to do it or not. Leadership is the ability to make them
want to do something they would not otherwise have wanted to do. Thus
different people occupying the same position of political power with the
same official status functions may differ in their effectiveness because one
is an effective leader and the other is not. They have the same official position of deontic power, but different effective positions of deontic power.
Thus both Roosevelt and Carter had the same official deontic powers—
both were presidents of the United States and leaders of the Democratic
Party—but Roosevelt was far more effective because he maintained deontic powers in excess of his constitutionally assigned powers. The ability to
do that is part of what constitutes political leadership. Furthermore, the
effective leader can continue to exercise power and to maintain an informal
status function even when he or she is out of office.
6. Because political powers are matters of status functions they are, in
large part, linguistically constituted.
I have said that political power is in general deontic power. It is a matter of rights, duties, obligations, authorizations, permissions, and the like.
Such powers have a special ontology. The fact that George W. Bush is president has a different logical structure altogether from the fact that it is rain-
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 33
Social Ontology and Political Power
33
ing. The fact that it is raining consists of water drops falling out of the sky,
together with facts about their meteorological history, but the fact that
George W. Bush is president is not in that way a natural phenomenon.
That fact is constituted by an extremely complex set of explicitly verbal
phenomena. There is no way that fact can exist without language. The
essential component in that fact is that people regard him and accept him
as president, and consequently accept a whole system of deontic powers
that goes with that original acceptance. Status functions can only exist as
long as they are represented as existing, and for them to be represented as
existing, there needs to be some means of representation, and those are
typically linguistic. Where political status functions are concerned it is
almost invariably linguistic. It is important to emphasize that the content
of the representation need not match the actual content of the logical
structure of the deontic power. For example, in order for Bush to be president people do not have to think, “We have imposed on him a status function according to the formula X counts as Y in C,” even though that is
exactly what they have done. But they do have to be able to think something. For example, they typically think, “He is president” and such
thoughts are sufficient to maintain the status function.
7. In order for a society to have a political reality in the contemporary
sense, it needs several other distinguishing features: First, a distinction between
the public and the private sphere with the political as part of the public sphere;
second, the existence of nonviolent group conflicts; and third, the group conflicts must be over social goods within a structure of deontology.
I said I would suggest some of the differentia that distinguish political
facts from other sorts of social and institutional facts. But, with the important exception of the point about violence, the ontology I have given so far
might fit nonpolitical structures such as religions or organized sports. They
too involve collective forms of status function and consequently collective
forms of deontic powers. What is special about the concept of the political
within these sorts of systems of deontic powers?
I am not endorsing any kind of essentialism, and the concept of the
political is clearly a family resemblance concept. There is no set of necessary and sufficient conditions that define the essence of the political. But
there are, I believe, a number of typical distinguishing features. First, our
concept of the political requires, I believe, a distinction between the public and private spheres, with politics as the paradigm public activity.
Second, the concept of the political requires a concept of group conflict.
But not just any group conflict is political. Organized sports involve
group conflict, but they are not typically political. The essence of political
conflict is that it is a conflict over social goods, and many of these social
goods include deontic powers. So, for example, the right to abortion is a
Mystery of CapitalCRev
2/18/08
34
11:13 AM
Page 34
John Searle
political issue because it involves a deontic power, the legal right of women
to have their fetuses killed.
8. A monopoly on armed violence is an essential presupposition of
government.
As I suggested earlier, the paradox of the political is this: in order that
the political system can function there has to be an acceptance or recognition of a set of status functions by a sufficient number of members of the
group sharing collective intentionality. But, in general, in the political system that set of status functions can only work if it is backed by the threat
of armed violence. This feature distinguishes governments from churches,
universities, ski clubs, and marching bands. The reason that the government can sustain itself as the ultimate system of status functions is that it
maintains a constant threat of physical force. The miracle, so to speak, of
democratic societies is that the system of status functions that constitutes
the government has been able to exercise a control through deontic powers over the systems of status functions that constitute the military and the
police. In societies where that collective acceptance ceases to work , as for
example in the German Democratic Republic in 1989, the government, as
they say, collapses.
3. Conclusion
One way to get at the aim of this chapter is to say that it is an attempt to
describe those features of human political reality that distinguish it from
other sorts of collective animal behavior. The answer that I have proposed
to this question proceeds by a number of steps. Humans are distinct from
other animals in that they have a capacity to create not merely a social but
an institutional reality. This institutional reality is, above all, a system of
deontic powers. These deontic powers provide human agents with the fundamental key for organized human society: the capacity to create and act
on desire independent reasons for action.
Some of the distinguishing features of the political, within the system
of desire independent reasons for action, are that the concept of the political requires that a distinction between the public and the private spheres,
with the political as the preeminent public sphere; it requires the existence
of group conflicts settled by nonviolent means, and it requires that the
group conflict be over social goods. And the whole system has to be
backed by a credible threat of armed violence. Governmental power is not
the same as police power and military power, but with few exceptions, if
no police and no army, then no government.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 35
Searle and de Soto:
The New Ontology of the
Social World
3
Barry Smith
1. A Game of Chess
What is a game of chess? This simple question has, in the simplest case, a
simple answer:
A game of chess is a sequence of deliberate moves of certain distinctively shaped pieces across a distinctively patterned board made
by two opposing players who alternate in making their moves in
accordance with certain well-defined rules of which the players are
aware.
In short: a game of chess is a sequence of events of a certain patterned sort.
Each move in the game is associated with a certain intention on the
part of the responsible player, and these intentions—above all the intention
to win, and not just to move pieces in accordance with the rules—are indispensable to the game. But they are not parts of the game, any more than
the thoughts in the minds of staff officers behind the lines are parts of the
battle raging at the front.
We can write down the moves made by each player and so keep a
record of the game. But this record is not a part of the game either. Indeed
it may come into existence only long after the game has been concluded.
Like the thoughts in the minds of the players, and like published histories
of military engagements, it belongs rather to what we shall call the domain
of records and representations.
This paper was written under the auspices of the Wolfgang Paul Program of the Alexander
von Humboldt Foundation. Thanks are due to Leo Zaibert and Ingvar Johansson for valuable comments.
35
Mystery of CapitalCRev
36
2/18/08
11:13 AM
Page 36
Barry Smith
Chess reality then consists of two complementary dimensions: the
dimension of the game itself, which consists of moves of pieces on a board;
and the dimension of thoughts, ideas, intentions, and deliberations. The
latter is an indispensable accompaniment of the game, but it is not a part
thereof.
The above, however, describes only the simple case. Suppose, instead,
that two people play a game of blind chess. Here there are no pieces, no
board, and no moves; rather there are just players, their intentions, and the
announcements of these intentions in an alternating rhythm that enables
each intention to be registered by the opposing player. What is the game
itself, in this case? Is it the passage of messages back and forth? I will argue
that it is not, but rather that these messages, like the intentions, are again
a part of the domain of records and representations.
To see why this is so, consider a game of normal chess that is being
played on a giant chessboard in which the players send messages to surrogates who are called upon to move the pieces. These messages, again, are
not a part of the game, any more than the messages sent from headquarters to the troops on the battlefield are part of the battle. Certainly in both
cases the messages, like the intentions which underlie them, have an important causal connection to the game itself. But the events and processes that
cause an endurant entity to exist is not a part of that entity—at least not
on standard views of the relation between cause and effect.
And the same applies also in the case of blind chess: only here, the
giant chessboard is absent. What we have instead are images of a chessboard in the minds of the players. But these images, too, cannot constitute the game of chess—for they are present also when board and pieces
truly do exist.
A parallel problem arises in the case of a game of internet chess. Here
the player’s intentions are conveyed by movements of electrons along
wires, with resulting changes in computer memory and monitor displays.
Here again, the signs conveyed, and the associated blips inside computers,
belong to the domain of records and representations.
But if not a sequence of messages, or images, then what, in the case of
blind chess or internet chess, is the game itself? Some might be tempted to
suggest that the game itself in such cases is some sort of conceptual entity.
But concepts, too, belong on the side of representations; entities such as
chess games, chessboards, and chess pieces belong to the side of what concepts represent. (And the fact that the dichotomy between representations
and objects is not absolute—there are, for example, paintings which fall
under both headings—does not affect our argument here.)
A thesis to the effect that a game of blind chess is a conceptual entity
faces the further problem that concepts as normally conceived are timeless
entities. Chess games, however, including blind chess games, are tied
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 37
Searle and de Soto: The New Ontology of the Social World
37
essentially to time. In fact, they have a double temporal structure, in that
they occur in a specific time interval and they unfold themselves within this
interval in a specific order of before-and-after of successive moves (the
same order which is captured in the spatial form of above-and-below in the
written record).1
An alternative answer to our question might consist in the claim that,
when we play blind chess, then there is no game at all. It is merely as if such
an entity exists—as in the cinema it is merely as if the represented events
were actually taking place in the theater. The players in a game of blind
chess are, according to this account, just pretending to play chess, as a
pianist may pretend to play the piano by touching the keys but without
actually depressing them. This amounts to a doctrine of fictionalism: it
asserts that talk about entities of given sorts is only putatively about such
entities. When talking about a game of blind chess, just as when we talk
about the absence of a pulse, or about the average Spaniard, we are using
the corresponding words as mere façons de parler about something else.
But this fictionalist alternative, too, is to be rejected. For we can indeed
imagine that two people do in fact pretend to play a game of blind chess;
but then, on the reading in question, we would have to say that they were
in such circumstances in fact pretending to be pretending.
The correct answer to our question is rather the following. A game of
blind chess is what we shall call a quasi-abstract pattern, something that is:
(i) like abstract entities such as numbers or forms, in that it is both nonphysical and nonpsychological; but at the same time, (ii) through its association with specific players and a specific occasion, tied to time and history.
A quasi-abstract pattern thus has two properties that are normally assumed
to be incompatible. On the one hand it has no physical parts, and is not
able to stand in physical relations of cause and effect. But on the other
hand it is a historical entity, which means that its existence is tied to a certain interval of time and to certain actions of specific players. Already Plato
would have regarded such a combination of properties as something
impossible. For Plato the forms are essentially nonhistorical, indeed atemporal; the objects participating in these forms are essentially bound to time
and change. To do justice to phenomena like the blind chess game, we
need to recognize that there are entities of a third sort, entities which are
both abstract (nonphysical) but yet historical (they are tied to time).
1. In this respect a game of chess is analogous to a reading of a work of literature, where
we can in fact distinguish three levels of temporal order: the level of the reading itself, as a
succession of events in real time; the level of the sentences succeeding each other in an
abstract temporal order that is reflected in the spatial order of the corresponding printed
marks on the page; and finally the level that is constituted by the plot of the work itself, that
is to say, by the fictional events which these sentences depict. See Ingarden 1973.
Mystery of CapitalCRev
38
2/18/08
11:13 AM
Page 38
Barry Smith
A normal game of chess includes the movements of the pieces as its
parts. It is part of physical reality. Interestingly, however, normal chess too
has a certain abstract character, since it contains these movements as granular parts. This means that certain parts of these movements, for example
the interactions of the molecules inside the pieces, are not themselves parts
of the game. Rather, they are traced over, in the same way in which, when
we look at an oil painting, we trace over the fine-grained structure of the
molecules of which the pigment is made.2 A game of blind chess, in contrast, is a wholly abstract entity. It has no physical parts of any sort.
The messages communicated by the players in the course of the game
are, like the game itself, ephemeral. They can be transformed, however,
into representations that have a lasting existence by being written down.
And we note in passing that on the basis of such records a new dimension
of chess reality can come into existence: the dimension of status. Chess
masters enjoy a special status not least because there exist records of the
games they have played. In virtue of the existence of such records, the
game has the chance to shape the lives of those involved in new and lasting ways.
2. Two Sorts of Social Reality
The ontology advanced by Searle in his The Construction of Social
Reality(1995) focuses primarily on the physical domain of the social
world—on dollar bills, presidents, and driving licenses, on promisings,
marryings, and buyings of beer.
The formula at the heart of this ontology is:
X counts as Y in context C.
This formula, which lies at the center of Searle’s thinking all the way from
his book Speech Acts to Construction, is satisfied first of all by objects—by
husbands, cathedrals, and the listes des prix posted in Paris bistros. In each
case there is some physical X term (a human being, a building, a piece of
printed cardboard), which counts as a social object of a certain kind in a
corresponding context. It is satisfied also by events—by votings and goalscorings and launchings of ships. In all such courses we have certain distinctively patterned parts of physical reality which in certain specific kinds
of contexts fall under certain specific kinds of descriptions. The corresponding objects and events, correspondingly, come to be ascribed certain
2. See Bittner and Smith 2003; Smith and Brogaard 2002.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 39
Searle and de Soto: The New Ontology of the Social World
39
properties or powers of nonphysical sorts. As falling under such descriptions the X term counts as a Y term of a certain sort. This account works
particularly well for the pieces in a game of chess. (Johansson 2005)
Unfortunately, however, there are entities in social reality—debts,
rights, obligations, bond derivatives (and games of blind chess), which do
not fit well with Searle’s formula. For here there is no physical X term to
which the corresponding properties or powers could be ascribed. They are,
rather, in the terminology introduced above, quasi-abstract patterns tied to
time and to specific bearers by the speech acts and associated thoughts and
intentions that brought them into being. A debt, for example, is in this
respect like a game of blind chess. It differs only in what we might think
of as its inner temporal structure and also in its possession of a deontic element: if you have incurred a debt, then this means that you are subject to
a certain obligation to repay in the future. A debt is tied to a specific initiating event and to specific initiating partners, but it is able thereafter to
float free and to enjoy an existence of its own. This existence is however in
normal cases an entirely humdrum affair which involves merely enduring
through time in a changeless fashion until, through one or other terminating event (such as being paid off or waived), it comes to an end.
Debts depend for their existence on representations, which may enjoy
a merely ephemeral existence in the form of memory traces, or which may
be transformed into enduring representations by being written down.
Note that on the basis of such records a new dimension of economic reality can come into existence: the dimension of formal debts. The latter enjoy
a special status as a result of the fact that they are registered and recorded
according to official procedures laid down in advance. As a result, such
debts can be bought and sold, bundled and unbundled, inherited,
bartered, negotiated away. And as we shall see, they thereby also have a
chance to shape the lives of those involved in new and lasting ways.
3. Constitutive Rules
As the rules of chess create the very possibility of our engaging in the type
of activity we call playing chess, so, Searle holds, constitutive rules in general, rules of the form X counts as Y in C, create and allow the forms of
behavior we call electing, promising, marrying, and buying beer.
Examples of the formula at work are:
X = moving an arm;
Y = commanding an infantry troop to stop advancing; knocking
over one’s king; refusing an offer; waving to a friend;
C = war; chess; business; everyday life.
Mystery of CapitalCRev
40
2/18/08
11:13 AM
Page 40
Barry Smith
As we can see, the movement of an arm can mean different things in different contexts. This variety reflects the many different sorts of things we
do together. We participate in meetings, attend concerts, compete in football games, sell stock, pay taxes, and engage in a huge variety of other types
of cooperative behavior, which involve the bringing into existence of what
Searle calls social facts through the application of constitutive rules.
Human beings enjoy the capacity for what Searle calls collective intentionality. They are able to engage with others in cooperative behavior in
such a way which involves sui generis types of beliefs, desires, and intentions. Often these involve human beings collectively awarding status functions to physical parts of reality—which means: functions those parts of
reality could not perform in virtue of their physical properties alone: the
function of a traffic signal in compelling drivers to turn left or the function
of a railway ticket in allowing its bearer to travel on a certain train are in
this respect to be contrasted with the function of a screwdriver to insert
and extract screws; only in the case of the screwdriver does the exercise of
a function depend on specific physical properties of the object in question.
Note, though, that functions of all types share many ontological features
in common with debts and other quasi-abstract entities of the social world
(including those entities which Searle calls “social facts”). The function of
my heart (to pump blood) begins to exist at a certain point in time and
continues to exist unchangingly until the terminating event which is my
death. The function of the screwdriver, similarly, begins to exist at a certain
point in time (the point of first assembly) and continues to exist unchangingly until some terminating event when the screwdriver is broken or
destroyed. And the function of the dollar bill, similarly, begins to exist from
the point in time when it is issued to the later point in time when it is
destroyed or withdrawn from circulation.
In each case we can tell a complicated story about the functionings of
these functions (the processes, of pumping, inserting and extracting of
screws, of being used as medium of exchange). The functions themselves,
however, endure invariantly throughout such changes.3 It is presumably
this character of quasi-abstractness which explains Searle’s view that functions are in every case socially constructed (they are a matter of imposition
against the background of values that we take for granted (Searle 1995,
13–23). Note, however, that since Searle insists at the same time that he is
a realist about functions—admitting that we can “discover” functions in
nature (p. 15)—this means that he is to this extent already at this point
lending ontological credence to the reality of the quasi-abstract. (And we
note that similar remarks could be addressed also to both constitutive and
3. See Smith, Papakin, and Munn 2004.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 41
Searle and de Soto: The New Ontology of the Social World
41
regulative rules; these, too, satisfy all the conditions of quasi-abstract entities as these have been described in the foregoing. The game of chess
itself—as type rather than as the tokens we have been considering elsewhere in this essay—might then be subjected to a similar treatment.)
In the case of those functions which exist as a result of constitutive
rules, they characteristically mark the potentiality for consequences of a
specific sort, for example in the form of rewards, penalties, obligations, reasons to act. When, in the right context, I make an utterance of the form “I
promise to pay you a hundred dollars tomorrow,” then my utterance
counts as the making of a promise. This means that it has highly specific
consequences which include a mutually correlated claim and obligation
together with a certain tendency to act. These are deontic consequences
which go far beyond the realm of purely physical causality.
A certain entity (in this case, an utterance) has what Searle calls deontic powers in virtue of the fact that the participants involved (for example,
as speaker and as hearer) have imposed those powers on the entity in question. Such an imposition must rest always on a foundation of “brute facts,”
by which Searle means facts of natural science, facts which obtain independently of all human institutions, including language. In the final part
of Construction Searle rightly attacks those who hold that reality consists
of social facts all the way down, so that the facts of the natural sciences
would be no different in this respect from facts concerning politics or styles
in footwear. Certainly the sentences of natural science are parts of social
reality—but, as Searle shows, the same cannot be said, on pain of absurdity, of the facts which make these sentences true.
Unfortunately, however, Searle misinterprets the implications of his
own insight when he takes it to imply that social reality must in every case
be made up of physical parts. On almost every page of Construction Searle
either assumes, or states explicitly, or employs examples and arguments
which reinforce, the thesis that the X term in his formula must be a part of
physical reality. This is so even in those cases where there is some iteration
involved, so that the Y term resulting from the imposition of deontic powers on an initial X term itself serves as the X term in a new application of
the formula. For the X and Y (and Z . . .) terms within the scope of a given
instance of the formula are in any case identical: they differ only as to the
descriptions under which they fall in different contexts. All human institutions, from money and marriage to government, property, and inheritance
are, Searle repeatedly suggests, to be understood in terms of a reading of
the formula in which the ultimate X term is physical in nature.
This insistence that the X term must be part of physical reality (of the
realm of what, in Searle’s idiolect, are called “brute facts”) derives from
Searle’s standpoint as a naturalist, which is to say, as a defender of the view
according to which everything in reality is governed by the laws of physics
Mystery of CapitalCRev
42
2/18/08
11:13 AM
Page 42
Barry Smith
(and thus also by the laws of chemistry, biology, neurology, and so forth).
The challenge which Searle embraces in Construction is precisely that of
building an ontology that is both realist about social reality and naturalist
in just this sense.
“Realism,” here, means the opposite of fictionalism. It consists in the
doctrine that social reality exists, that entities such as claims, prices, financial transactions, elections, trials, and weddings are not mere fictions and
that our talk of such entities is not a mere collection of roundabout ways
of talking about other things.
4. The Ontology of Social Reality
Naturalism asserts that everything in reality is constituted by physical particles or fields of force or by the patterns of movement of such entities. For
a naturalist like Searle to be convinced of the existence of God would be
for him to have some physical evidence of this existence. In fact for a naturalist like Searle, not only the X term but also the Y term in every application of the counts as formula must be physical through and through—the
X and Y terms are after all in each case one and the same entity, merely
viewed as falling under two distinct descriptions.4 George W. is still George
W. even when he counts as president. Miss Anscombe is still Miss
Anscombe even when she counts as Mrs. Geach.
But what of those values of Y terms where no candidate X term drawn
from the realm of physical reality is available? How can Searle’s naturalism
allow a realist ontology of those parts of social reality which are constituted
by prices, licenses, debts, and taxes?
The assumption that X and Y terms are identical works well when the
Y term exists simultaneously with the X term, for example, when the issuing of sounds from John’s mouth counts as an utterance in English: the two
events are here quite reasonably conceived as identical parts of physical
reality, merely conceived under different descriptions. But an event of
promising might last several seconds while the deontic powers to which it
gives rise—the claims and obligations—might exist for several months. An
event in which Jane gives her watch to Joan might exist for only two seconds while the new relation of ownership that is founded in this event
might go on existing for many years thereafter. There is here no piece of
paper, no organism, no building, no movement of molecules to serve as
4. We are dealing in each case with different contexts, but the differences between these
contexts, for Searle—for example, differences in thought or speech patterns on the part of
those involved—would be physical through and through.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 43
Searle and de Soto: The New Ontology of the Social World
43
physical X term in the future. The watch itself cannot serve this purpose
(the watch itself does not count as the relation of ownership by which it
becomes tied to Joan) and the same applies, too, to other physical phenomena such as the relevant memory traces in Jane’s brain. The relation of
ownership is, rather, what we shall henceforth call a freestanding Y term—
it is a sui generis social object of a quasi-abstract sort. Certainly it depends
on physical bearers—in this case Joan and the watch. But these physical
bearers do not overlap with the relation of ownership itself, as is seen in the
fact that the latter has no physical parts.
Only in one or two isolated passages does Searle recognize the existence of entities of this sort. He points out that when I promise something
on Tuesday, the obligation continues to exist over Wednesday, Thursday,
Friday. This “is not just an odd feature of speech acts, it is characteristic of
the deontic structure of institutional reality. . . . think for example, of creating a corporation. Once the act of creation of the corporation is completed, the corporation exists. . . . It need have no physical realization, it
may be just a set of status functions” (Smith and Searle 2003, 305; italics
added). What Searle does not recognize is that such a set of status functions, even though it depends on physical reality, is not itself a part of physical reality. It is, precisely, a quasi-abstract pattern that is tied to history and
time in virtue of its relation to certain persons and events.
In the following passage, too, Searle accepts that freestanding Y terms
exist:
The whole point of institutional facts is that once created they continue to exist
as long as they are recognized. . . . You do not need the X term once you have
created the Y status function. . . . At least you do not need it for such abstract
entities as obligations, responsibilities, rights, duties, and other deontic phenomena, and these are, or so I maintain, the heart of the ontology of institutional reality. (Smith and Searle 2003, 305)
With this, Searle effectively abandons the naturalist horn of the
dilemma upon which he has thus far been impaled. In his official stance,
however (reproduced also in the comments from Searle appended below),
he continues to insist on the correctness of the naturalistic doctrine.
5. Towards Documents
Searle correctly emphasizes that the world cannot consist of social facts all
the way down with no brute reality to serve as their foundation. But he is
in error when he takes this to mean that social reality must be furnished
through and through by Y terms which coincide with parts of physical reality. Certainly Y terms cannot float entirely free of all phenomena whose
Mystery of CapitalCRev
44
2/18/08
11:13 AM
Page 44
Barry Smith
existence is not a matter of human agreement. But this anchorage need not
take the same (X counts as Y) form in every case. For there is a second and
no less important kind of anchorage, an anchorage in the realm of records
and representations.
Searle comes close to recognizing the importance of this second kind
of anchorage in a post-Construction passage in which he corrects his earlier
view according to which credit cards and blips in bank’s computers can
count as money (Smith and Searle 2003). Rather, as Searle now recognizes,
they are both more properly speaking different representations of money
(or more precisely, in the case of credit cards, they are representations of a
commitment on the part of a bank to meet liabilities incurred by the card
owner). Similarly, title deeds are not themselves property rights, but rather
representations of property rights. An IOU note merely records the existence of a debt; it does not count as the debt, and its destruction need not
in and of itself cause the debt to cease to exist. When Juan and Hank need
to fly together from Lima to Oakland, Juan lends escudos to Hank at the
beginning of the trip, which Hank then repays in dollars on arrival. But no
physical money changes hands until they reach their final destination.
Rather, in keeping track in their minds of who paid for what in the course
of the journey Juan and Hank move quasi-abstract money around in a
quasi-abstract space in a way that very much resembles the quasi-abstract
movements of quasi-abstract pieces that is a game of blind chess. And when
Hank uses his credit card to guarantee his hotel bill upon arrival in Lima,
then he and the owners of his hotel are playing what is very like a game of
internet chess with their respective banks’ computers.
6. The Mystery of Capital
In The Mystery of Capital (2000), Hernando de Soto expounds an ontology of social reality in which not physics but rather precisely the realm of
records and representations is awarded a central role. The subtitle of de
Soto’s book is: Why Capitalism Triumphs in the West and Fails Everywhere
Else and its thesis is summarized in the following sentence: “It is the ‘invisible infrastructure of asset management’ upon which the astonishing
fecundity of Western capitalism rests.” By “invisible infrastructure,” de
Soto means precisely the realm of those quasi-abstract structures which
exist not as parts of physical reality but rather in virtue of an anchorage in
the domain of records and representations.
Mystery covers, though in a different terminology, much of the ground
explored by Searle in his theory of collective intentionality and deontic
powers. Searle, too, as we have seen, accepts that there is a nonphysical side
to the ontology of social reality. But he does this only reluctantly. And in
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 45
Searle and de Soto: The New Ontology of the Social World
45
focusing on the realm of property records and titles, de Soto shows us how
what I have been calling freestanding Y terms work to add a new dimension of economic powers in addition to the deontic powers recognized by
Searle.
It is property, and formal property records, which lie at the heart of de
Soto’s analysis. Such records do more than sustain the corresponding
property relations in existence; they also bring into being a new phenomenon, called capital. They do this by capturing in concentrated form the
economically significant facts about the corresponding physical assets—
their economic powers—in ways which allow the latter to be parceled out
and manipulated in new sorts of ways. “The formal property system that
breaks down assets into capital is,” de Soto tells us, “extremely difficult to
visualize.” The nature of freestanding Y terms allows us to explain why this
is so: the system consists of quasi-abstract entities not carved out within
the realm of physics.
7. The Construction of Economic Reality
When Searle, in Construction, describes how we are able to impose special
rights, duties, and obligations on our fellow human beings by acting in
accordance with constitutive rules, he confesses that this seems to involve
“a kind of magic” (45). He then attempts to dispel the air of magic with
his notion of collective intentionality. De Soto, similarly, recognizes that
there is an air of mystery attached to the way in which capital is born out
of physical assets. He tackles the same problem with his account of the role
of records and representations.
As de Soto shows, “Capital is born by representing in writing—in a
title, a security, a contract, and other such records—the most economically
and socially useful qualities” of assets. “The moment you focus your attention on the title of a house, for example, and not on the house itself, you
have automatically stepped from the material world into the . . . universe
where capital lives” (2000, 50).
This is, be it noted, a nonphysical universe, a universe populated by
freestanding Y terms, where we can take advantage of the quasi-abstract
status of its denizens in order to manipulate them in quasi-mathematical
ways. We can create ever-new types of such entities by composition, division, and derivation. We can pool and collateralize assets; we can securitize
loans; we can consolidate debts. Shareholders can buy and sell property
rights in a factory without affecting the integrity of the physical asset.
Individuals and institutions in different countries can trade unlimited
quantities of these entities without the need for any physical items to be
shifted from one place to another and without the need to build any spe-
Mystery of CapitalCRev
46
2/18/08
11:13 AM
Page 46
Barry Smith
cial storage facilities to house them. Pension funds can exploit the mathematical divisibility of capital to bring about a state of affairs in which the
ownership of capital is no longer the privilege of the few.
Most importantly, for de Soto, the quasi-abstract nature of capital
allows it to serve as security in credit transactions by being moved about,
virtually, between different owners and lien- and mortgage-holders. It is
not land or buildings, but rather the associated equity—something represented in a legal record or title—which provides security to lenders for
liens, mortgages, easements, and other covenants. We add a codicil to a
title deed thereby certifying who has access to the property and under what
conditions. We present the title deed to a bank and thereby allow the
equity associated with the underlying asset to be set free for purposes of
investment in other things. In this way the records and representations
constituting the formal property system bring a new domain of quasiabstract reality into existence, whose growth is intimately associated with
those advances in human welfare which are associated with economic
development. Title deeds, stock certificates, mortgage contracts, and their
computerized counterparts are the reliable means to discover, with great
facility and on an ongoing basis, the most potentially productive qualities
of resources, and “As Aristotle discovered 2,300 years ago, what you can
do with things increases infinitely when you focus your thinking on their
potential” (de Soto 2000, 51). By unleashing the potential of physical
assets in the form of credit, thereby allowing new sorts of ventures and new
sorts of risk, and new sorts of sharing of risk, the development of the formal property system gave rise to that quantum leap in human welfare
which we associate with the success of Western capitalism.
The formal property system also fosters accountability and thereby promotes higher levels of trustworthiness among those who participate in its
development. For accountability means that those who abuse the system,
for example, those who do not pay back their loans, are diminished in their
ability to draw on its benefits in the future. Calling people to account for
their actions in this way has positive effects of a range of familiar sorts
(Klein 1997) and we can compare the dissemination of institutions of
credit checking, debt collecting, payment insurance, and the like with the
development of the formal accreditation systems for chess masters administered by the Fédération Internationale des Échecs. Both have spurred
those involved on to new heights of achievement.
From de Soto’s perspective, the modern world can be defined as a common system of enforceable formal property registrations. These registrations make knowledge functional by securing all the information and rules
governing accumulated wealth and its potentialities in one knowledge base
that makes people accountable across the entire property jurisdiction. This
single property system, through trade and the concomitant division of
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 47
Searle and de Soto: The New Ontology of the Social World
47
labor, makes possible the astonishing economic development that has been
the privilege above all of Western societies in the age of industrial civilization. To be part of the system means to be represented therein with the
help of such proxies as one’s name or social security number. With these
are associated in turn formal records (of domicile, creditworthiness, ownership) together with those informal estimations which exist in potential
investors’ and customers’ minds of the skills and reliability and resourcefulness of those with whom they have to deal. Because the bank knows
your address, and has the title to your property in its vaults, the bank trusts
you with resources to invest in new ways. You then have the means to try
out new ideas. And because you know that failure will bring real loss, you
have a real incentive to succeed with these ideas, and thus to acquire a reputation for reliability, honesty, and integrity. All these things contribute to
your own wealth and to the wealth of those around you, and the reason
that you can use credit cards when you travel from Oakland to Lima and
back is because of the records that tell the card-issuing authorities who
should and who should not be given credit.
8. The Realm of the Quasi-Abstract
De Soto errs, however, when, as in the following passage, he talks of freestanding Y terms as if they were mere concepts: “The proof that property
is pure concept comes when a house changes hands; nothing physically
changes.”5 For concepts, as we have already noted, belong with ideas and
intentions to the realm of representations. Property itself, by contrast,
belongs to the realm of that which is represented. More precisely, property
relations belong to the realm of the quasi-abstract and they are in this
respect comparable to symphonies, laws, and other quasi-abstract denizens
of the social world. That they exist on the side of the objects and not on
the side of the concepts in people’s heads can be seen from the fact that
concepts can exist even where there are no corresponding objects.
To be sure, concepts are important. Without concepts, and without
associated thoughts and intentions, the corresponding freestanding Y entities would not have been brought into existence. When we buy and sell,
however, we are interested not in concepts but in the objects themselves:
in equity and capital, and in all that goes together therewith—starting with
the simple trading, offering, and splitting of stock and moving on to the
unimaginably complex edifices of contemporary derivatives markets.
5. de Soto 2000, 50. In the passage already quoted above, de Soto talks of stepping
“from the material world into the conceptual universe where capital lives.”
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 48
Barry Smith
48
Formal property requires the existence of two distinct sorts of entities.
It requires on the one hand quasi-abstract freestanding Y terms, and on the
other hand records upon which the existence of the former depends.
Note—in case this is still not clear—that the latter are not X terms according to the letter of Searle’s formula. The pieces of paper in the bank vaults
do not count as the ownership rights that are documented therein. Rather,
they represent them. But the pieces of paper are like X terms at least in this:
they are physical entities which serve, through the workings of collective
intentionality, to provide the basis for the corresponding Y terms. The
pieces of paper can also serve to represent the associated objects and relations in another sense: they serve as their proxies—so that control over
paper deeds or titles implies a form of control, too, over the quasi-abstract
entities for which they stand.
We have seen that Plato would have rejected the existence of quasiabstract entities of the sorts which populate those rapidly growing suburbs
of the social world which are so important for the sorts of economic development. The same applies, too, though for different reasons, to Marxist
economists, who cast aspersions on the “speculators” and others who tend
the realms of the quasi-abstract—because of their conviction that all that is
of value must flow from physical labor. In this they are, like the defenders of
legal positivism, and like naturalists of various other stripes, manifesting a
prejudice in favor of what you can touch and see. De Soto with his analysis
of the workings of the formal property system, and Searle with his doctrine
of the “huge invisible ontology” of social reality (1995, 3), have taught us
that we need to slough off this prejudice in favor of a more adequate system of categories. Searle, now, should have the confidence of his convictions and recognize that the social world contains more, much more, than
appendings of nonphysical descriptions to physical objects and events.
C O D A :
S E A R L E
V E R S U S
S M I T H
Searle: I agree with most of what Barry has said, but I think that he is
being needlessly paradoxical when he suggests that there is some challenge
to naturalism here; that somehow or other, in addition to physical particles
and fields of force, there are all these abstract entities running around
between the molecules. That’s a misleading picture, which comes from
treating the object as the unit of analysis. We’re not interested in the
object, we’re interested in the processes or, as I like to put it, we’re interested in the facts. It isn’t the obligation as an object that is the topic of our
investigation, rather it is our undertaking an obligation, our recognizing a
preexisting obligation, our fulfilling an obligation. And when you realize
this the threat to naturalism disappears.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 49
Searle and de Soto: The New Ontology of the Social World
49
In fact I like the example of blind chess: here representations of the
pieces take the place of the pieces. So when blind chess players play a game,
they keep a record and say PK4 will be the first entry on the sheet, which
means white moves pawn to king 4, and then they fill in the rest and they
can always go back and look at the record and see what the position on the
board is. Well, of course, there’s an abstract character to all this; but the
record is part of the real world and I think part of the difficulty with his
presentation is that Barry is really attached to the old notion of the physical and to this dumb Cartesian vocabulary we’ve inherited. But I think we
shouldn’t be misled by it. The world contains everything it contains; we’re
used to calling it “physical” because we think that physics is somehow or
other the basic science, which it is. But if you describe what Barry said
without using the ontological categories that he seems to be committed to,
then it contains no threat to naturalism at all. I think Barry made a valuable contribution in recognizing that in many cases the representation is all
the reality we need to make the entity function. Interestingly, my very first
examples were cases of that: paper money was originally a representation;
it was a note that said “I promise to pay the bearer on demand.” Then the
representation of money became money. In the other cases you have representations of chess pieces that now function the way that chess pieces do.
So I agree with the general thrust of the argument, but I think it’s needlessly paradoxical to suggest that we’ve somehow got to alter our whole
metaphysics; we don’t.
Smith: I agree with John that we should get rid of these old Cartesian
dualist notions; I disagree with him when he thinks that there are no problems here for naturalism. He thinks that we can solve the problem by turning away from social objects and by looking at facts. Do you own stock,
John?
Searle: Well, in the aspect that I . . .
Smith: Just say “yes,” John.
Searle: All right, I’ll say yes. . . .
Smith: And when you’re lying in bed at night, are you thinking about
the facts and processes that pertain to when you bought them and the
transactions that you made? Or are you thinking about the stocks themselves, the objects?
Searle: I don’t think about the stock an sich. No, what I think about
are not the stocks themselves, but rather their current market value and
how it is declining. Because, you see, the subject-predicate structure of language makes it look as if there’s this preexisting set of objects, my stock,
but in fact what we’re talking about is a process: the stocks go up and
Mystery of CapitalCRev
50
2/18/08
11:13 AM
Page 50
Barry Smith
down, the stocks split, and when they split this doesn’t mean that they
physically split, it means that there’s a different entry in the system of representations.
Smith: I think that if we are going to understand the wondrous ways
of capital, then we need to think very precisely about this process called
“splitting stock.” But that means also that we need to take seriously the
fact that such processes involve objects—and that this is so even when the
stock itself exists only in virtue of certain representations which themselves
exist in the form of blips on computers. Do you agree with that?
Searle: No I don’t, I think that that’s the wrong picture. The real picture is this: we have a set of processes and we have a set of representations
which enable these processes to function, and in the case of the stocks splitting the corporation makes certain entries into their databases, into the system of records and representations whereby you are now represented as
having twice as many shares of a stock as you did before and that is the reality, that representation is constitutive of your having twice as many shares
as you did before.
Smith: I agree with all of that, I just think that, in the spirit of the First
Axiom of Realism for Social Reality, you should take equally seriously every
single word in the description you just gave.
R E F E R E N C E S
Bittner, Thomas, and Barry Smith. 2003. “A Theory of Granular Partitions.” In
Foundations of Geographic Information Science, edited by Matthew Duckham,
Michael F. Goodchild, and Michael F. Worboys, 117–151. London: Taylor and
Francis.
de Soto, Hernando. 2000. The Mystery of Capital: Why Capitalism Triumphs in the
West and Fails Everywhere Else. New York: Basic Books.
Ingarden, Roman. 1973. The Literary Work of Art: An Investigation on the
Borderlines of Ontology, Logic, and Theory of Literature, Evanston, IL:
Northwestern University Press.
Johansson, Ingvar. 2005. “Money and Fictions” Kapten Mnemos Kolumbarium.
Festschrift for Helge Malmgrens, Umeå, Sweden: Umeå University:
http://www.phil.gu.se/posters/festskrift2.
Klein, Daniel B., ed. 1997. Reputation: Studies in the Voluntary Elicitation of Good
Conduct. Ann Arbor: University of Michigan Press.
Searle, John. 1995. The Construction of Social Reality. New York: Free Press.
Smith, Barry, and Berit Brogaard. 2002. “Quantum Mereotopology.” Annals of
Mathematics and Artificial Intelligence 35, nos. 1–2: 153–75.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 51
Searle and de Soto: The New Ontology of the Social World
51
Smith, Barry, Igor Papakin, and Katherine Munn. 2004. “Bodily Systems and the
Spatial-Functional Structure of the Human Body.” In Ontologies in Medicine:
Proceedings of the Workshop on Medical Ontologies, Rome, October 2003, edited
by Domenico M. Pisanelli. Amsterdam: IOS Press.
Smith, Barry, and John Searle. 2003. “The Construction of Social Reality: An
Exchange.” American Journal of Economics and Sociology 62, no. 2: 285–309.
Also published in Laurence Moss and David Koepsell, eds., Searle on the
Institutions of Social Reality (Oxford: Blackwell, 2003).
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 52
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 53
The Construction of
Social Reality: Searle,
de Soto, and Disney
4
Jeremy Shearmur
1. Introduction: On Method in Social Ontology
If we are interested in what the world is like, how should we proceed? John
Searle’s work on social ontology offers us a powerful, but also a challenging, response to this question. Searle’s account is acute. Not only does he
offer a clear and systematic approach to a range of issues in social ontology, but also he advances some innovative ideas of a more general kind,
including ideas about the “background,” as discussed at some length in
The Construction of Social Reality. He also offers what seem to me some
particularly useful ways of developing points that have been made by others. (I have in mind here, for example, what seem to me Searle’s improvements over the issues that Hayek described in terms of the interrelation
between “subjectivism” and function (see, for example, Hayek 1979), and
Peter Winch’s emphasis on the role of rules in the construction of social
reality (see Winch 1958). In addition, Searle offers his classificatory system
in such a way as to leave space within it for approaches which differ from
his own. By this I mean the space that he accords to the possible role of
nonagentive functions in social life (Searle 1996, 123). My personal view
is that these nonagentive functions are of greater significance for our
understanding of the social than Searle’s writing might suggest. This point
I will pursue shortly. But first, I need to say something briefly about an
issue in methodology.
I would like to thank the organizers of the conference to which this paper was contributed
for a most interesting intellectual event; those present at the conference for excellent discussion, the academic referees of an earlier version of this paper for some tough—but very useful—criticism, and especially David Wall for his comments on successive versions of, especially,
the first part of this paper.
53
Mystery of CapitalCRev
54
2/18/08
11:13 AM
Page 54
Jeremy Shearmur
My broad view is that science—considered in its widest sense so as to
include also knowledge in the humanities—is to be seen as a product of the
critical revision of our commonsense knowledge, and that ontology is,
broadly speaking, what we will discover the world to consist of when the
enterprise of science so understood is completed. But science—like all our
significant knowledge—is fallible. It is fallible not just in the sense that it is
always possible that we may be mistaken about particular claims, but also
that our knowledge may always be open to significant theoretical and
hence conceptual revisions. This does not mean that we have to be overly
concerned about G. E. Moore–style issues, such as whether—when I am
waving them in the air in front of me—I in fact have two hands. But it does
mean that how we should best describe even commonsensical knowledge
may be an open question. (My argument is thus that, while commonsense
knowledge is important, we do not know how it is best conceptualized;
this has to be held open to the growth of knowledge of various different
forms.) This does not mean that we should not try to draw lessons from
reflection on what we are familiar with, and from our current state of
knowledge more generally. But it is, I would suggest, important to bear in
mind that the lessons that we draw may be significantly open to correction,
not least from work done in the sciences.
Philosophy, from such a perspective, cannot sensibly be foundationalist. There are the by now well-known problems facing the programmatic
idea that one can start with ideas that are both contentful and certain and
build up something significant therefrom. But also what we take to be
undeniable may well be simply a testament to our lack of imagination and
something that we can well expect may be questioned over time, not least
by developments in the sciences. Of course, we may set out to describe
what we think the foundations of anything might be; my argument is that
we can’t be sure that we are correct in respect of such claims.
What does this mean, in terms of how we should best proceed, if our
interest is in what exists? In my view, it means that, outside of specific and
limited technical problems where important intellectual issues rest on
whether or not something can be demonstrated, there is simply no point
in working as if one were a kind of technician, undertaking puzzle solving
within a framework whose correctness is tacitly assumed to be beyond
argument. Rather, it is important to work in a manner that is readily intelligible, makes clear to the reader what the point is of what one is doing
(i.e., just what is supposed to hinge on it), and introduces rigor not by
restricting itself to minutiae, but by way of the range of problems that it
commits itself to being able to address in theoretical terms.1
1. See, for a longer account and some defence of such an approach, chapter 1 of my
Hayek and After (1996a).
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 55
The Construction of Social Reality: Searle, de Soto, and Disney
55
In such a context, work may be of various kinds. It may set out to draw
attention to some problem about existing theories, an enterprise that may
require argument of a detailed and quite precise kind. Alternatively, it
might set out to comment on existing work by way of drawing attention
to the kinds of problems with which the approaches in question may need
to deal if they are to be fully adequate. Such work—and the present paper
is intended to be of this kind—is critical rather than constructive; it may be
wide-ranging in its character, and it may be concerned with broad problems and issues, rather than with criticism of the first, detailed kind. Finally,
work may be positive, and attempt to resolve problems of one kind or
another, in whole or in part; it may also set out to do this in detail, or to
suggest a kind of solution to problems of a certain sort, which may subsequently be collaboratively explored in more detail.
I have set these matters out in what I hope has not been too tedious a
detail just so that it may be clearer what kind of exercise I am engaged in.
My concern with Searle will thus be to outline what seem to me to be some
general problems concerning his approach to social ontology. They are, in
particular, arguments that suggest that we need for the task of social ontology to draw to a greater extent upon the social sciences and on philosophical reflection upon them than Searle’s own approach might suggest.
To put this another way, I wish here to offer some limited argument (limited, because I am drawing only on a few corners of the social sciences) to
the effect that, while social ontology might usefully be undertaken by
philosophers, we need to do this work not just by reflection on common
sense, but also by means of continuing critical reflection on the substance
of what is taking place in the various social sciences and, indeed, the
humanities. My language will be tentative, just because my concern is to
suggest lines of argument, rather than to offer detailed engagement after
the fashion of the first, negative, kind of argument referred to in the previous paragraph.
2. Searle and the Centrality of Agentive Functions
In Searle’s account of social ontology, pride of place is accorded to collective intentionality, the assignment of function, and constitutive rules. He is
surely right that these play an important role in the constitution of society.
But I wish to argue three points in qualification of his approach.
The first is that important work in the social sciences—and most associated commentary—draws our attention to the significance of what, from
Searle’s perspective, must be seen as nonagentive functions in social life.
These, to be sure, are the products of intentional action, both individual
and collective. But the unintended consequences of such actions—what
Mystery of CapitalCRev
56
2/18/08
11:13 AM
Page 56
Jeremy Shearmur
Hayek has written of as the products of human action but not of human
design (see, for example, Hayek 1967 and Hayek 1978)—can be seen as
having a thinglike structure that may be apprehended theoretically.
Further, how we understand such things may need in some respects to
depart from understanding at the level of the individually and collectively
intentional action that gives rise to, and sustains, such phenomena.
Second, such entities may have, in their turn, feedback effects upon us
as agents. They may structure the situations in which we act and—by virtue
of their specific character—may serve to enable or to frustrate our plans.
(As, say, in the case of the rate of interest that is available to us, should we
wish to borrow money to purchase a house.)
All this, Searle might argue, might be understood as embraced by his
inclusion—albeit not a very enthusiastic one—of nonagentive functions in
the context of his discussion of so-called latent functions. But more, surely,
might be drawn from this point. Searle, himself, discusses the idea of “the
background” in his account of what is going on when people conform to
the rules of an institution. His discussion seems to me acute. But it leaves
open the possibility that what goes into people’s conforming to rules may
differ from person to person, and in ways that are structured by patterns
created by the unintended consequences of human action. And this, in
turn, may suggest a way in which the effects of the entities to which I have
referred may play a significant role.
My point here is as follows. Searle’s emphasis, in his discussion, is upon
collective intentionality and on “we consciousness.” In stressing this, he is
surely right about much in the social world. But in some cases—how significant this is would seem to me a matter for empirical investigation—we
may find that beneath a shared rule or a we-function there are different
meanings for different subjects. For some, the rule may just be how they
proceed; for others, it may be what is imposed on them, and to which they
have no real alternative because of how our society is structured.
Accordingly, behind we-functions there may lurk a different kind of power,
dependent—and here Searle is surely right—on other we-intentions in its
turn, but where, to the extent to which the things to which I am referring
hold good, the character of social reality may be rather different than if it
were constituted simply by shared we-intentions, and so on.
Third, I will argue that not only may the character of we-intentions be
variable in its content but also empirical work by ethnomethodologists,
and some work in philosophy and the sociology of science, may suggest
that we should not overrate the extent to which what occurs should be
explained in terms of a shared context of we-intentions.
Let me start with the social division of labor. In Western societies—in
anything having the broad characteristics of “commercial society” in the
sense with which we are familiar from Adam Smith onwards—this is not
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 57
The Construction of Social Reality: Searle, de Soto, and Disney
57
only a distinctive phenomenon, but also one the importance of which has
been recognized and about the significance of which there has been much
discussion.2 On the face of it, the division of labor is a social institution,
but it neither originated in nor is sustained by a “we-intention” (although
clearly, some of the phenomena that give rise to it, are).
Searle is willing to write of “collective intentionality” in very broad
terms. When discussing the origin of paper money, Searle notes that “the
participants need not be consciously aware of the form of the collective
intentionality by which they are imposing functions on objects” (Searle
1996, 47). But it is not clear that in such cases there will be more to talking about “collective intentionality” than recognizing that there is some
social institution present. However, there would seem to be a significant
difference between cases in which people are participating in a standardized way of doing things that the observer may sum up in terms of a rule,
and those in which the following of some rule or convention is constitutive of or regulative of the activity in question, at least in the sense that it
could be articulated by those involved. Consider some of the early stages
in the development of money of the kind with which we are familiar from
the account given by Carl Menger (1892), and which Searle himself
describes. Initially, on Menger’s account, people who were trading by
barter may have started to exchange whatever they had brought to a market for other goods which could be more easily traded (rather than for
what they eventually wanted), just on the grounds that it would be easier
to trade these readily tradable commodities for something that they
wanted than it would for me to find someone who was “selling” potatoes
but wanted philosophy books in return. One can, by such means, see the
“natural” emergence of a particular commodity or commodities as a currency. And clearly one can see further how substances that are durable, of
high value, and such that their purity can be easily tested will win out over
others. Now in all this there may be a point where it becomes important
to recognize that people are not just participating in a social institution of
a certain kind but that they understand themselves to be so doing. Not
only may people’s conduct be different when they can—or when it is possible for them to be able to—conceptualize what they are doing in terms
of some collective intention; but if problems of some kinds develop they
may need not only to understand what is going on in explicit terms but
also to reflect critically upon it and make changes to their practices.
However, some significant social institutions, such as the social division of
2. See Smith 1976 and Hont and Ignatieff 1983. Think only of Smith’s own discussions
of its pros and cons, the way in which it plays an important role in Rousseau’s Second
Discourse; of its role in Hegel’s Philosophy of Right; in Marx’s early writings and in
Durkheim’s Division of Labour in Society, to say nothing of a plethora of recent works.
Mystery of CapitalCRev
58
2/18/08
11:13 AM
Page 58
Jeremy Shearmur
labor and the early stages in the development of money, seem not to fit
such a model. It might be asked, however, whether any harm is done if we
follow Searle’s wide usage and refer to both cases where there are and cases
where there are not collective understandings in terms of we-intentions.
First, there are problems as it were from the top down. The sufficiency
of Searle’s approach seems to me to be called into question once we recognize the existence of emergent social phenomena that constrain the
actions of individuals in ways that differ from how they are constrained by
social norms.3 Once we have an advanced market economy, then there are
phenomena within it—such as things to do with interest rates, or the rates
at which currencies exchange—that are products of actions within frameworks constituted by various we-intentions, but where these products
themselves have a (dependent) reality, that is autonomous of those weintentions. That, say, I can currently exchange an Australian dollar for
about seventy-seven U.S. cents could be talked about as relating to a weintention relating to the exchangeability of currencies. But what governs
the specific content of such exchangeability (that the value of the
Australian dollar is currently about seventy-seven cents), and how it constrains us, is in an important way an emergent product of ever-changing
transactions between individuals and institutions, and sometimes of the
actions of governments. To assimilate such constraints—which are after all
very much the stuff of social life and thus a key concern of the social ontologist—to we-intentions after the model of the rules of rugby, or even to
various formations on the rugby field, seems to me an invitation to misunderstand badly what is taking place in society, and, thus, to misunderstand
social ontology.
Next, one emphatically does not have to be a Marxist to recognize that
the opportunities available to individuals at any one time are in a significant sense the emergent products of systems of unintended consequences
of human action and of people’s reactions to these things. The number of
professional philosophy positions is clearly at one level a matter of the decisions of presidents of universities and of internal lobbying. But the
resources potentially available for the creation of such positions are emergent products of the state of the economy, the tax system, the budgetary
process of funding authorities, and so on. More brutally, one could also say
that an economy and an administrative structure of a certain kind and certain patterns of material expectations on the part of citizens can together
only be compatible with certain quantities of resources being spent by the
state on higher education in the humanities. Presidents of universities—
3. For one useful picture of the character of such constraints, see Robert Nozick’s discussion of “filter mechanisms” in his Anarchy, State and Utopia (1974, 21–22; 312–18).
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 59
The Construction of Social Reality: Searle, de Soto, and Disney
59
however humanistically inclined—are constrained by such things, yet what
constrains them is not itself a we-intention, even though it can be seen, in
part, as the product of such things.
To this, Searle could obviously respond: well, insofar as such things are
significant, they are surely covered by my discussion of the possible role of
nonagentive functions in social life. This would be fair enough—although
as I have suggested it might imply a modification of the emphasis that Searle
places upon the role of agentive functions in social life. However, as I indicated earlier, one may see nonagentive functions as also playing a role in
affecting what Searle has called the “background”—and so as affecting what
leads people to conform to the rules of some institution (cf. Searle 1996,
144). This in turn may serve to undermine the idea—suggested by describing these things as “we-intentions”—that the individuals involved must
share an understanding of the practices in question. What is involved, say,
in the application of the criminal law may be very different for the judge,
lawyers, police, and criminal. However, how significant these matters will
prove to be is, as I have suggested, a matter for empirical investigation.
One final point in regard to this initial top-down perspective: a phenomenon such as inflation may have the following rather odd character. It
is typically understood as a product of the actions of social agents of various kinds, both individual and institutional. Their actions create and sustain the phenomenon question. They may further have an understanding
of this phenomenon—they may have theories about it, and they may act
on the basis of such theories. But while we may need to understand the
theories upon which they are acting in order to understand their actions,
those theories may be wrong—they may include theoretical accounts of
how the phenomenon works that are descriptively incorrect. (The error is
not the same as in the case of Searle’s example of people misunderstanding
the status of a king [Searle 1996, 96], since the latter still shares the key
features of the we-intention, assignment of function, etc.) To understand
what takes place when individuals act in this way on the basis of theories,
we may need both to know what is in fact responsible for the resultant phenomenon—that is, to have a correct theory about it—and to understand
what will occur if actors act in their various social situations on the basis of
their incorrect theories as to the character of the phenomenon in question.
But there is yet more to this problem. For, in seeking to understand the
character of the phenomenon of inflation, economists will have to understand how it comes about as the product of the actions of social actors. In
this context they may need, for theoretical purposes, to describe how people are acting at odds with the way they describe their actions from the
“internal first-person perspective.” It isn’t that the economists are then
holding that the individuals in question are not doing what they think are
doing when their actions are conceived from a certain perspective; rather,
Mystery of CapitalCRev
60
2/18/08
11:13 AM
Page 60
Jeremy Shearmur
it is that they are holding that to understand the phenomenon in question,
one needs to group certain things together in ways that individuals do not
themselves do in the first-person view. Consider, say, monetarist economists’ different measures of money: M1, M2, and so on. To be sure, the
financially savvy could come swiftly to recognize what the economists were
doing, and might come to use this terminology themselves to talk about
their financial affairs; such talk could even gradually become very widely
adopted. But what is going on is surely very different from the we-intentions involved in, say, our game of rugby. In particular, the concepts in
question are not ones that ordinarily govern the actions of social agents;
they are, rather, ones that are formed by social scientists in order better to
understand the character of social entities which emerge from the actions
of those agents.
A further twist to this issue is given by a point that was made many
years ago by Pierre Duhem in the context of the physical sciences. In his
The Aim and Structure of Physical Theory (1954) Duhem discusses the discontinuity between the mathematical theoretician and the experimentalist
in science. An “experimental law” might be established. The theoretician
is concerned to give it a mathematical representation. But there are many
ways in which the experimental phenomenon might be represented in
terms of mathematical theories compatible with the experimental law. The
same, I have argued, is the case in the social sciences, and this despite
Lionel Robbins’s arguments to the effect that economics has commonsense foundations. For in the social sciences, too, there is the same problem of underdetermination of the choice of mathematical theory by those
commonsense foundations.4 My argument would be that the choice of a
theory has to be made on the basis of the adequacy of the theory to the
explanation of the phenomenon with which it is dealing. This is because
ideas from common sense and the ideas of those performing the salient
actions are insufficient to determine our choice of theories. All this points
to the need for us to recognize that there is much more to the social world
than Searle is allowing for—and that we may expect to learn about it from
reflection on the social sciences themselves.
Let me now turn to a different aspect of work in the social sciences that
seems to me to pose problems for Searle. In his “The Idea of a Social
Science,” Alastair MacIntyre made a critical comment on Peter Winch’s
stress on the significance of social rules by asking whether, if I am going
for a walk, my actions are rule-governed in the sense in which my actions
when playing chess are rule-governed (MacIntyre 1971, 218). I take the
point of his comment to be that while what someone is doing is made
4. See, for discussion and references, Shearmur 1991.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 61
The Construction of Social Reality: Searle, de Soto, and Disney
61
intelligible by saying that he is going for a walk, the intelligibility in question is not very informative about what he is likely to be doing. Clearly,
there are some things that would not count as going for a walk. But there
is a vast range of actual conduct, all of which would be compatible with
engaging in this activity, so that, to talk about the person’s “following a
rule” is not very helpful: it certainly does not tell us what he is doing with
any specificity. The same would seem to be true of we-concepts in respect
to similar activities.
This point may lead us in two directions. On the one side, it may lead
us to look at what the relationships are between rules or shared concepts,
and actions. In some cases, while there may be room for variation, it may
not matter (e.g., if one is getting married, it may not matter how one
behaves—within the scope of the rules—so long as one actually does what
are recognized as the right key things at the right key times). In other
cases, while rules and we-concepts do indeed form a framework that has to
be complied with, what matters much more is what people do in bringing
about this compliance as, say, in games of rugby or chess. In yet other
cases, the rules or shared concepts may be needed to understand what kind
of thing is going on, but they may be of little help in understanding what
specifically someone is doing—as in “she is engaged in a business transaction,” or “he is writing a philosophy paper.” An obvious issue that is then
opened up is how those approaches to the social sciences relevant to these
distinctions, such as rational choice theory,5 may help us in interplay with
the kind of phenomena the significance of which Searle has stressed.
However, there is also work dealing with such issues that might seem
to challenge rather than to complement Searle’s approach. I have in mind
here developments in the social sciences that have raised questions about
the usefulness of viewing people’s conduct as norm-governed.
First, consider the work that was done by those practicing “ethnomethodology” and related approaches in sociology (Garfinkle 1967;
Douglas 1967; McHugh 1968). The wholesale questioning of order and
shared ideas that informed this work seems to me both implausible and
nihilistic. Yet specific studies in the creation of meaning are interesting, and
may subvert the confidence that we might otherwise feel in the ubiquity
and determinacy of shared concepts. Second, some members of the
“Edinburgh School” in the sociology of science have suggested that striking lessons must be drawn from the finitism of some of Wittgenstein’s later
philosophical work (See Barnes 1982; Bloor 1983; Bloor 1997) and from
Kripke-style readings of the Philosophical Investigations (Kripke 1982). The
5. Compare particularly, for example, the sophisticated interpretation of this approach,
offered by Pettit 1990.
Mystery of CapitalCRev
62
2/18/08
11:13 AM
Page 62
Jeremy Shearmur
kind of work to which this had led involves taking issue with the idea that
what people do is determined by the content of their concepts and, by contrast, to the view that agents are better seen as “making out” in a variety
of institutional settings.
I do not wish to argue that this work is as a whole successful, and I have
been critical of it myself, not least because I think that it underrates the way
in which we may impose intellectual constraints upon ourselves that we are
not able easily to overcome (if we can do so at all). But nonetheless, interesting empirical and historical work has been undertaken under its influence (see Shapin 1982), and this work may repay study as a corrective to
our perhaps natural inclination to see the activities of ourselves and others
as strongly controlled by the shared content of concepts.
Let me sum up briefly this part of the chapter. Searle’s discussion seems
to me to be truly valuable. I have, however, argued that our approach to
these issues should be opened to the possibility it may need to be corrected
by social science and reflections thereon.
3. de Soto
The second part of this paper deals with de Soto’s work. I will draw, here,
just upon the ideas set out in his The Other Path and The Mystery of Capital.
I am both sympathetic to and appreciative of his arguments. Rather than
discuss the specific situations in South America that are his prime concern
in these works,6 I will take a step back and address his ideas at the broader
level of social theory.
I will develop two themes. The first is that, while in the situation with
which de Soto is dealing, his approach may be fine, some of the material
upon which he draws in its support—namely, his discussion of illegal occupation and its subsequent legitimation in the U.S.—may point to some
problems. In particular, I suggest that de Soto’s approach may run into difficulties in “settler” societies in relation to prior land holdings on the part
of aboriginal peoples. This I illustrate by drawing upon aspects of
Australian history.
My second theme is that de Soto’s approach requires that informal
holdings of land be regularized so as to unlock the value of people’s capital for other purposes. This—in the situations with which he was
dealing7—requires the agreement of politicians. Such a move provides the
6. Not least because of my personal ignorance of the specific conditions with which he
is dealing.
7. I write this way just because in other circumstances landholdings—and law, more generally—may be a product of the recognition of custom.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 63
The Construction of Social Reality: Searle, de Soto, and Disney
63
legal title that de Soto has argued is so important. But it also serves to
bring the land within a political system and thus to subject it to the pressures of interest-group politics. Clearly, solutions must be found to problems of the environment, planning, and so on. But the political path also
has its dangers. The value of land, buildings, and so forth may be radically
and deleteriously affected by the way in which it is impinged upon by the
political process. It is striking, say, that the value of some farming land in
Australia has been dramatically affected by the imposition of regulations
that limit the clearing of existing vegetation from the land. To make this
point is not to argue that such regulations may not need to be imposed.
Rather, the problem is with the way in which political processes might
operate, and with whether, say, the owners of the land receive compensation from general tax revenue should such regulation be introduced. All
this, however, may depend on the more general character of the political
process, and the extent to which the people in question have sufficient
political clout to defend their interests on a continuing basis.
Obviously, I am not arguing that the owners of property should be free
to do what they like in the sense of imposing negative externalities upon
their neighbors in a manner that they cannot do at present, or that they
should be able to obtain special benefits for themselves at the public
expense.8 But, as I shall argue, there may be something to be said for the
possibility that private corporations may combine land ownership with
planning powers, as was the case in respect of Disney World and
Celebration, in Florida, and in this role act as intermediaries between ordinary citizens and the government.
In these cases, the Disney Corporation’s concern was with the development of a greenfield site. But provided that the tax regime allowed for it 9
there might seem to be advantages in exploring the possibility of dealing
with problems of social and economic change by retaining the control of
land use in corporate hands, to see how this differs from simple political control. (Under such circumstances, individual landholdings, the character of
which would be specified, would be tradable, and would thus still constitute
capital in the way that meets de Soto’s concerns. Clearly, they would be subject to limitations, but the limitations would be of a different character from
those subject to the forces of democratic politics.) This difference, I am suggesting, might merit investigation by way of practical experimentation.
De Soto makes a powerful case for the legal legitimation of land rights
and of other forms of informal capital, so that people can make full use of
8. A point of some significance in light of the fact that I will be referring, later, to some
activities of the Disney corporation as a positive exemplification of some of the ideas that I here
have in mind. See, for a cautionary tale from the actual history on this point, Fogelsang 2001.
9. Compare, on this, McCallum 2002.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 64
Jeremy Shearmur
64
them. He discusses the range of disadvantages that people suffer if they do
not have a full legal title to such land and to the investments—in housing,
and in businesses—that they construct upon it. He also tells a fascinating
story about the way in which a regularization of what had been illegal settlement, similar to that which he is proposing, was in fact accomplished,
historically, in the U.S. It would be both interesting and important for
other scholars to take up his lead and to explore the ways in which these
things have happened elsewhere in the past—and what their pros and cons
have been. De Soto’s analysis seems to me both acute and telling. In what
follows, I will explain two themes that I extrapolate from his work in somewhat different directions.
3.1. Squatting
The first concerns issues about the legitimization of land occupation and
equity. My topic here relates to the question whether, if one takes de Soto’s
model as applicable universally, there arise problems that we need to bear
in mind to balance against its obvious advantages. In considering this, I
will call on some historical evidence from the situation in Australia, which
also parallels issues that arose in the United States. (While it might be
thought that this is pushing the applicability of de Soto’s approach beyond
its proper limits, it is worth recalling that he made use of U.S.-derived
material to illustrate his own argument.) This historical material, I believe,
also illustrates a more general philosophical problem. Consider James M.
Buchanan’s The Limits of Liberty (1975). In his reworking of Hobbesian
problems, there arises the issue of precontractual activity. On Buchanan’s
account, there are advantages for all to the formal legitimation of precontractual holdings in land and so forth. But if people know that this will take
place, it gives them an incentive to get what they can by any means possible prior to the formation of a social contract. As a result, the promise of
order and collective protection of property rights may itself give rise to an
incentive for some very grim behavior that it will pay people to undertake
prior to the contract, in the hope that at the point when the contract is
formed they will be in an advantaged position.
For someone living in Australia, de Soto’s ideas about the illegal occupation of land and the subsequent granting of legal property rights to
those who have done this successfully call up the memory of the “squatters.”10 (“Squatter,” it might be noted, was originally a term of abuse;
however, with the subsequent change in the fortunes of the people who
10. An old but nonetheless interesting study is Roberts 1935.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 65
The Construction of Social Reality: Searle, de Soto, and Disney
65
did it successfully, it came to refer in a morally neutral manner to families
with extensive land-based wealth derived initially from such activities.) This
is a topic worthy of exploration because of some general problems that it
serves to highlight.
In colonial Australia, the British authorities wished to confine settlement to restricted areas to make sure that settlement was relatively concentrated. But the economic return to the grazing of sheep and cattle on
lands hitherto unsettled by Europeans was immense. Prohibition of settlement was unenforceable, and a governor of New South Wales eventually
allowed unlimited occupation (but not ownership) of Crown land for the
payment of a small fee. This, in turn, and against the explicit conditions
under which these rights had initially been granted, was subsequently converted to a form of ownership. “Squatters” became, in time, the “squatocracy”—people who acquired immense and productive landholdings.
Their wealth had originated in pressures placed on the colonial government, initially by totally illegal settlement, and subsequently by the conversion of rights of a highly informal kind to full property rights or to fully
legitimated pastoral leases.
In 1935, Stephen H. Roberts published an interesting study of this
process, which drew on a variety of primary sources. The policy issues
upon which he reported were all formulated in terms of an interplay
between settlers and “Crown land,” and the interplay between the squatters’ concerns, those of colonial officials, and those of the British government. A compilation of regulations issued in 1858 dealing with land
settlement is—tellingly—entitled Laws and Regulations Relative to the
Waste Lands in the Colony of New South Wales (1858). But the reference to
“waste” here is in some ways highly misleading. For the land in question
had been used for a variety of purposes for tens of thousands of years by
Aboriginal Australians, who had—and in some cases still have—deep relationships with their land and who identify themselves in terms of it. The
British government, on a basis whose legitimacy does not seem easily able
to pass critical scrutiny,11 claimed ownership of the land for itself (not simply sovereignty, but also ownership). Australia was treated as Terra
Nullius—devoid of legitimate land ownership claims—and the entire con-
11. Cf. Reynolds 1987. The problems have, in some ways, become more interesting
still, with the High Court of Australia’s recognition of Native Land Title in common law, in
its Mabo judgment (Mabo and others v. Queensland 1992). While the High Court stressed
that its decisions related only to Australian domestic law, if they were right that native title
should have been recognized by common law, this would seem flatly at odds with the idea
that Australia was Terra Nullius when the British arrived, and, thus, that rights to land could
simply be assumed by the British Government, as a consequence of a claim to the country
made on a beach in New South Wales.
Mystery of CapitalCRev
66
2/18/08
11:13 AM
Page 66
Jeremy Shearmur
tinent was thus treated simply as the property of the British government.
They seem to have taken the view that the aboriginal inhabitants were
either so few in number that the bulk of Australia was, literally, deserted,
or that the kind of use that Aboriginal people made of the land involved
migration over it rather than ownership of it (a view that could draw support from some seventeenth- and eighteenth-century writings on natural
law). As Henry Reynolds has documented in his The Law of the Land, as
settlers came to understand something about conditions in Australia, these
assumptions swiftly proved to be incorrect. But a combination of the initial errors together with the thirst for land on the part of settlers meant that
the original decision stood—at least until very recently.
Insofar as the settlers addressed deeper issues of the legitimacy of their
occupation of the land, they seem to have made use of ideas that they
found in John Locke’s writings to legitimize what they were doing.12
Locke offers a theory that tied land rights to making productive use of
land. It suggested how persons could acquire a legitimate title independently of government and without everyone having actually agreed to it by
virtue of mixing their labor with the land.13 One further line of argument—in some ways in the spirit of Locke, who linked ownership to making productive use of the land—was that a case for this appropriation might
be made simply in terms of productivity. In the Second Treatise Locke
wrote that “God gave the World . . . to the use of the Industrious and
Rational” (§34) and that land that had been enclosed “was still to be
looked on as waste” if its fruits were allowed to spoil (§38). Through the
eyes of the settlers, aboriginal use of land appeared to be unproductive.14
What of the country’s aboriginal inhabitants (for the lands in question
were already being used by Aboriginal peoples)? They were often (but not
always) practicing different modes of subsistence from those that the
Europeans wished to practice, but nonetheless they had a very strong sense
of identification with the land and of ownership of it vis-à-vis outsiders. (For
example, if members of other aboriginal groups wished to cross people’s
land, permission or some other form of acknowledgment was typically
called for.) The authorities against whom squatters were often rebelling
were sometimes engaged in paternalistic attempts to defend the rights of
12. For (highly critical) accounts of this, compare Reynolds 1987 and Tully 1994.
13. There was a certain irony in this, in that the key form of land use in which settlers
were engaged was sheep herding and cattle grazing. While Locke does refer to ‘the grass my
horse has bit’ as becoming my property John Locke, Second Treatise of Government, §29, this
clearly relates to the grass itself, rather than the land on which it is growing.
14. Whether this was in fact the case, is a moot point; not least in the light of ecological problems that have emerged, in the longer term, from the forms of agriculture used by
settlers.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 67
The Construction of Social Reality: Searle, de Soto, and Disney
67
their aboriginal subjects. Broadly speaking, the situation seems to have been
that the British authorities had some real sympathy for the aboriginal people’s rights (at least at some periods), the settlers and would-be settlers were
opposed to their recognition, while the colonial authorities in Australia
were caught somewhere in the middle. The settlers’ views won out.
There would seem every reason to say that Aboriginal people were
treated in a terrible manner. While in Locke and in some of the “conjectural histories” of writers in the eighteenth century that also seem to have
influenced early settlers in Australia, hunters and gatherers may have been
nomadic and not attached to particular pieces of land, that was just not the
case in Australia. At the same time, there was a genuine problem if the kind
of use that was being made of the land, while efficient when considered as
the basis of a hunter-gatherer existence, represented a poor use of
resources if it was used in another way. The obvious response—that aboriginal peoples’ land rights should have been recognized, and that they
should be asked to sell some of their land—would not necessarily have
worked. Not only did aboriginal peoples seem attached to their traditional
way of life (which would often have required the full range of their
resources in order to be sustainable), but also the view that they often had
of their land—that they, in some sense, belonged to it—did not seem obviously compatible with its commercial alienation.
All told, what happened was grim. Yet it is not clear, once the forces of
European settlement had been unleashed, that it would have been easy to
avoid a grim outcome of one kind or another.15 The problems are similar
to those that occur today, when valuable minerals are to be found in the
remote lands of aboriginal peoples in South America. The logistics of effective policing, and the disruption that effective policing would itself cause,
may make protection of these vulnerable people very difficult. At the same
time, a clear legal recognition of prior ownership would at least have furnished a basis for recognition, negotiation, and, if necessary, legal action.
Settlement itself, however, even when land was not alienated, had
another effect. It introduced commercial society. The speculations of
Adam Smith and his contemporaries about ancient hunter-gatherer societies, illustrated by Biblical and classical sources, may not have been a good
guide to Aboriginal Australia. But these writers did have an acute insight
into the kind of society in which they were living and into its dynamics.
This is in some respects still very much with us today, and it provides the
setting in which we are now all living or are coming to live.
15. Henry Reynolds, a historian strongly sympathetic to Aboriginal land rights, writes:
“Could it have been different? Not completely. Australian geography alone made control of
frontier contact almost impossible” (1987, 160).
Mystery of CapitalCRev
68
2/18/08
11:13 AM
Page 68
Jeremy Shearmur
An acceptance of the fact that aboriginal people were dispossessed from
land to which they had rights, albeit of a customary character,16 is important. At the same time, it is not clear that it offers in itself a solution to the
problems we now face. At one level, ideas in Locke—and subsequently in
Nozick—that cases where rights are violated require restitution, may seem
attractive. At another level, who should receive what kind of restitution
and from whom, in a society in which there has been continuing immigration and also a history of cohabitation and intermarriage between aboriginal and non-aboriginal peoples, becomes a complex matter. It is further
complicated by all that has taken place since expropriation. Numerous
transactions have taken place concerning the land, and a wide range of
activities have taken place upon it. There is also the shattering of aboriginal life and culture that followed the destruction of aboriginal societies as
a consequence of the appropriation of their land—something that cannot
easily be put to rights.
But there is also another problem. It is posed by the fact that while
Aboriginal people clearly owned the land upon which they were living
(albeit not in a manner of which a legal positivist might approve), there is
a real problem about how that ownership is to be related to what is
involved in commercial society. The kinds of land use that is involved there,
in which land is a commodity the use of which is reshaped in response to
different kinds of consumer demand across a whole society and now across
the world, do not seem to fit readily with the kinds of understanding that
aboriginal peoples had of their land. While the sorts of pressures and incentives that commercial society unleashes make it unlikely that aboriginal
peoples will be left in peace to pursue their lives as they have done in the
past—unless no one in commercial society can see anything of value in
alternative uses of the land in question, seen as a commodity or a potential
commodity.
One recent reaction to the sad case of the denial of Aboriginal land
rights, notably in Canada but also in Australia following Canada’s lead, has
been to recognize aboriginal people’s land rights insofar as this can now be
done. In Australia, the Mabo judgment by Australia’s High Court (the
16. It might be questioned whether it is correct to refer to these things as rights. Clearly,
if what one has in mind, are rights that are the product of the declarations of a sovereign,
Western-style state, then they are not. But, on the one hand, most people living in Englishspeaking jurisdictions are living in common-law jurisdictions; and common law is, in its origin, is a matter of custom rather than of declarations by a sovereign, so there seems to me no
reason to accept a legal positivist view of the origin of rights. On the other, there seems to be
good documentation for the idea that, among Aboriginal peoples in Australia, it was typically
the case that members of some other group required the permission of the traditional owners of land, to cross it; which indicates the existence of something close to the idea of (collective) land rights. Compare, for some general discussion, chapter 1 of Goodall 1996.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 69
The Construction of Social Reality: Searle, de Soto, and Disney
69
equivalent of the U.S. Supreme Court, but sitting as a Common Law
court) recognized native title where it had not been extinguished by a
grant of land on the part of the government to settlers, and where there
was a continuing tradition of aboriginal attachment to the land.
Subsequently, in the Wik judgement (1996), native title was recognized as
continuing on land that had been given to settlers on so-called pastoral
leases, provided that it was not in conflict with the rights that had been
conveyed in the pastoral lease (cf. High Court of Australia Judgements
1996). Limited funds have also been allocated for the purchase of land by
Aboriginal peoples.
One can hardly but feel that it is important that something be done to
redress an ancient—or in some cases not so ancient—wrong. But there are
various problems about the form that the solution has taken. One is that
the recognition of native title has amounted to the recognition of rights on
a collective basis, so that while some individual may be a part-owner of a
large tract of land, it cannot be used for any of the kinds of things—such
as serving as the basis for a loan—that have concerned de Soto. This may
be fair enough, if the people in question all wish to live upon such land as
their ancestors have done, or in some modified form of collective life. But
one consequence of European settlement has been that it brought such
forms of life up against commercial society. And this—even in the miserable opportunities that it sometimes offers to aboriginal people—has its
attractions. The combination of dispossession, paternalistic but nonetheless cruel and exploitative policies (cf. Bringing Them Home 1997), and the
simple presence of commercial society and its products has had its effect.
It is not clear how many aboriginal people will be living anything like a traditional style of life in, say, three generations’ time. But the fact that their
landholdings are in a collective form may mean that it becomes difficult if
not impossible for them to make fruitful use of them in the commercial
societies in which they could well be living as individuals, and within which
they will wish to make something of their lives.
It might seem that the obvious response is to convert traditional land
rights to freehold, distributed to individual members of the groups in
question. But these issues are fraught with complications.17 Further, in the
U.S., the General Allotment Act of 1887, which tried to address an in
some ways similar problem, was based on the idea that “[i]t is doubtful
whether any high degree of civilization is possible without individual ownership of land.”18 The purpose of the act was to facilitate the breaking up
17. Not least as, in Australia, “native title” sometimes coexists with pastoral leases
granted—for specific purposes, by the government to non-Aboriginal people.
18. Compare Wilkinson 1987. The material is quoted on p. 8.
Mystery of CapitalCRev
70
2/18/08
11:13 AM
Page 70
Jeremy Shearmur
of Native American reservations into individual property holdings, but it
served also as the basis for the acquisition of Native American land by
non–Native Americans, under what in many cases may have been dubious
circumstances. The consequences of the act were highly problematic, and
certainly serve as a warning against any imposition of a system of individual landholdings where the people in question do not want it, or, if they
are not used to the ways in which commercial society operates, are not protected from exploitation. I will not, however, explore these difficult issues
further here, other than to note that there do not seem to be easy ways to
handle some of them.
All this serves to indicate that there are other precedents—and highly
significant ones—for the legitimation of squatting. But it also highlights the
fact that more may be involved than just issues of what is good for the
squatters and for the economy. The problems to which squatting and its
legitimation have led, in both Australia and North America, are serious, and
have left us with some difficulties which do not seem open to any obvious
solution. Accordingly, despite their real advantages, one needs to bear in
mind that de Soto’s arguments for the legitimation of squatting could also
in some settings lead to problems, not least by way of setting up incentives
for the occupation of vulnerable people’s land by way of the prospect of the
eventual legal legitimization of what is acquired through such activities.
3.2. Title: Government, Companies—and the Mouse
On de Soto’s account, once illegal settlement takes place, those who have
settled face a range of problems. While they may be granted a certificate
of some sort by an informal body—to whom they may have had to make
a payment—their title is not secure. Not only, in some circumstances,
may they have physically to occupy the property at all times in order to
secure occupation but, as de Soto argues at length, the fact that they have
no formal title means that they cannot use their land and buildings
located upon it as security for a loan. Wealth, which could potentially be
productive in many other ways, remains locked up unproductively in this
insecure form.
De Soto’s argument is, essentially, for governmental action to legitimate these landholdings. One problem that initially concerned me about
his approach is that he expected government to act in ways that advantage
not just ordinary people but those who are at the bottom of the social pile:
people who are newcomers, who may not have voting rights in the unofficial places where they are living, and who certainly do not have the
resources to make large campaign contributions. De Soto responded in private conversation that politicians may become sympathetic, once they
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 71
The Construction of Social Reality: Searle, de Soto, and Disney
71
understand that if these people’s landholdings are legitimated, they will
also become voters—and may be expected to show good will towards
those politicians who assisted them. This is an important argument. But it
would seem somewhat optimistic to suppose that the political system will
be responsive to these people’s needs on a continuing basis. Accordingly, I
wish to suggest that it may be at least worth exploring an alternative.
My underlying concern is as follows. There is, as de Soto has argued,
a reason for politicians to legitimate these landholdings in return for
votes. But it is not obvious that the people in question will continue to
do well out of the political process. Things could work out to their advantage. But if the political systems were to work out even as well as they do
in the United States, one could expect that such relatively poor people
could do badly, over time, if they are competing for political influence
with richer and better-organized groups: organization, money and effective lobbying are typically more significant than votes in the detail of
policymaking.
I would here like to suggest a somewhat wild idea as an alternative,
albeit one which has a range of partial historical exemplars (cf. Beito,
Gordon, and Tabarrok 2002). The suggestion is that it might be worth
experimenting with the possible role of corporations as intermediaries
between government and ordinary individuals of the kind with whom de
Soto is concerned. Such corporations would clearly need to receive legitimation of their titles to land from government, and here, selection by the
existing population on the basis of election could also play a key role, not
least in terms of the deals that were offered by competing corporations.
But from that point onwards, issues of development and land use would
be in the hands of corporations. This might seem to depend on the idea—
in Locke’s words, written in rebuke to Filmer—that “men are so foolish
that they take care to avoid what mischiefs may be done them by polecats
or foxes, but are content, nay, think it safety, to be devoured by lions.”19
But such corporations would have every incentive to develop and improve
in such a way as to make the areas that they control productive, just as the
owners of a shopping mall have incentives to increase the economic productivity of the mall. Indeed, they could be expected to assist those within
these areas in achieving greater economic productivity. In addition, however, such corporations could be expected to have a kind of clout with government to foster these concerns—or at least to avoid them being
hindered—that individual small players would not possess.
Such possibilities may also foster experimentation of a kind that government itself could not feasibly undertake. Should it do so, then there is
19. John Locke, Second Treatise of Government, paragraph 93.
Mystery of CapitalCRev
72
2/18/08
11:13 AM
Page 72
Jeremy Shearmur
also scope for learning from such experimentation and from the customs
and traditions that grow up and may embody various forms of tacit
knowledge. Consider, here, the argument of Jane Jacobs in her Death and
Life of Great American Cities (1961). about our need to learn from what
worked when we design cities, rather than to imagine that the secret of
how to conduct successful urban life could spring forth, full-grown, from
the mind of some architect or planning committee.
We need to allow for two things: on the one hand for ideas to be tried
out systematically; on the other, for innovation, and for people to be willing to put resources into activities hitherto untried. Above all, however, we
need to have structures within which learning can take place: that incentives be set up to make it possible for people to learn from what others have
accomplished, and at the same time, for those undertaking the activities
themselves to be ready to learn when things are not going well, and to be
ready to make the appropriate changes. This suggests that what we need is
not to make use of government (politicians will typically be unwilling to
admit to having made mistakes, not least because the mechanisms of
democratic politics make it difficult for them to do so). Rather, there are
advantages to private commercial activity (supplemented, if people so wish,
with various communal and cooperative efforts—though they are not as
likely to be ready to learn if things are going wrong).
Let us, however, return to de Soto’s ideas. Even if someone owns private property, certain kinds of regulation may have the effect of their being
unable to make use of it for the kinds of purpose that de Soto has in mind.
For example, if the property cannot be alienated, people will not be likely
to be able to borrow upon it. If it is subject to certain forms of traditiondictated collective ownership it may be difficult to get the agreement of
everyone concerned to undertake any kind of innovatory activity. If it is
subject to governmental land-use regulations (imposed, for example, for
the sake of conservation) then this will similarly limit what they may do
with a piece of land and hence its value as capital. But now recall that it is
the function of property to enable learning to take place by trial and error
with which I am here concerned. I am not arguing that no regulation (or
its equivalent) is needed. Rather, I suggest that it is salutary to consider the
way in which government ownership, or heavy government regulation, can
have the effect of freezing what is done with land, and in a way of turning
back the assets in question into something that freezes wealth almost as
effectively as did the initial situation that de Soto was addressing. In some
cases there may be arguments for the desirability of this (e.g., in the case
of public parks, although even here open public access may bring with it
problems of safety and of antisocial behavior). But in many others, it is useful to contrast the kinds of changes that take place in property that is not
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 73
The Construction of Social Reality: Searle, de Soto, and Disney
73
subject to such regulation over the years20 with the lack of movement of
regulated property and to ask, did government really get things right, back
when the regulations were originally made?
One additional problem is that we do not try out different kinds of systems of regulations by allowing them to compete (cf. Tiebout 1956).
Clearly, one would not wish to enable a group of people to impose its
unwanted externalities on others. But on the face of it there would seem
every reason to allow companies to purchase large areas of land, and to
replace, in respect of them, the existing functions of local (and possibly
state) government, provided that they were not imposing negative externalities on others. (They would thus not be able to impose more pollution
on others than did any other neighborhood, and they would be required
to make contributions to infrastructure affecting other areas—e.g., road
construction outside their boundaries—to match the kinds of costs that
they, like other neighborhoods, would be imposing on surrounding areas,
and on the same financial basis.)
What this would mean, however, is that not only could one get away
from the kind of dull uniformity imposed upon us by our existing regulations, but also it might be possible to try out different ideals, or to develop
ways of life that would speak to the needs of different people. (Here, one
might see such arrangements as playing a social role in some ways similar
to Michael Flanders’s description of the goal of his and Donald Swann’s
musical entertainment: “The purpose of satire, it has been rightfully said,
is to strip off the veneer of comforting illusion and cozy half-truth; and our
job, as I see it, is to put it back again” (cf. Flanders). Similarly, it would be
possible to set up designs for ways of living that draw upon the successes,
and learn from the lessons, of what has been accomplished in the past.
The underlying lesson, however, would be that just as with regard to de
Soto’s problems, we should try to set up the kind of property regime that
could be most conducive to making the best use of capital tied up in land,
by way of picking the kind of regulation for property which would be likely
to offer the best results (something that may combine learning from experience with theoretical analysis; for example, after the fashion of law and
economics). We should be looking for the best kind of property and regulatory regime for learning. Here we can look both to legal ideas, to experience, and also to ideas in methodology and epistemology. I have, elsewhere,
argued that Karl Popper’s work has made some important contributions to
this problem.21 He has suggested that for us to learn we need to constrain
20. Interesting in this context is Brand 1995.
21. See, on this, Shearmur 1980; Shearmur 1985, and Shearmur 1996b. See also, for a
much fuller development of the “social” aspects of Popper’s thought, Jarvie 2001.
Mystery of CapitalCRev
74
2/18/08
11:13 AM
Page 74
Jeremy Shearmur
ourselves by various methodological rules. We may, I have subsequently
suggested, consider the way in which various sociological, legal, and regulatory procedures act as methodological rules. But this means that, in turn,
when we address our problem of what makes for the best property and regulatory regime for the purposes of the exemplification of ideas and learning,
we might usefully look to epistemology for suggestions.
Rather than exploring these ideas in more detail here, I will, instead,
turn to the question of whether anything of this kind is likely to be of practical value.
We may, here, usefully look to the Disney Corporation’s town of
Celebration, Florida,22 as a partial exemplar of some of the ideas with
which I have in mind—and as pointing one way towards possible future
developments. Celebration is interesting because it was built upon land
owned by Disney, where they had—for reasons connected with the conditions under which they constructed Disney World—been able to get the
Florida legislature to grant them powers comparable to those of a
county.23 Their Reedy Creek Development Corporation operated in effect
as a private government. Celebration—an actual residential town (or, perhaps better, a large subdivision with some urban facilities)—was constructed upon land from this area which Disney negotiated to return to a
local county, not least, because, as the area was developed, the inhabitants
would otherwise have attained political control of Reedy Creek. This, however, meant that they were able to negotiate with the local county in such
a way that they retained a kind of control that residential developers seldom attain over their creations.
What Disney then did was to create a remarkably attractive town in
which strict design rules were developed and enforced. They drew—Jane
Jacobs–like—upon many other American towns, and on the architecture of
“new urbanism.”24 The result was intended to give people the kind of
experience of neighborliness they would have in a small town, but combined with intranet facilities, good medical services, and also architectdesigned public facilities and attractive restaurant and boutique shopping
facilities by the side of one of the town’s many artificial lakes. The town
was designed, physically, to enhance interaction between inhabitants. In
22. On which, see Franz and Collins, 1999; Ross 1999; and for my own treatment, with
further references, Shearmur 2002.
23. For a useful overview of these issues (written about Disney World, prior to
Celebration), see Foldvary 1994.
24. By contrast with Seaside, for example, there are limits to the extent to which properties can be let out. Its suburban setting also means that it can be a lived-in community,
rather than just a collection of holiday homes. (For some problems about Seaside, see
Jacobsen 2003.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 75
The Construction of Social Reality: Searle, de Soto, and Disney
75
addition, Disney set up the Celebration Foundation, financed by a levy
upon house sales, which set out to promote participation in charitable,
educational, and other activities. It thus, for those who choose to live
there, serves to overcome the kinds of problems caused by the fall-off in
social participation and volunteering that have been so bemoaned by
Robert Putnam in his Bowling Alone (2000).
I would not wish to depict Celebration as an ideal. But it does suggest
what is possible. What is particularly striking about it is that it would obviously be chosen as a location only by those who favored the kind of lifestyle
that it was offering. At the same time, however, it would seem to exemplify
a model that could be adapted to other needs. And—as is illustrated by the
materials in the recent collection The Voluntary City25—one might develop
such ideas in different ways, as suggested by actual historical examples.
However, for this to be possible, one would need to make the possibility
of areas extracting themselves from local and state governmental regulation much easier—provided, of course, that this did not mean that they
were able to impose externalities upon others of a kind that differed from
those imposed by other areas. Another way of looking at this is to point
out that what is needed is the possibility for private companies to take over
the kinds of functions currently discharged by local government, while at
the same time their residents would be exempted from local taxation (insofar as they would be paying for services they received by way of fees that
they paid directly to the companies). This would offer the possibility for
both the exemplification of difference and for experimentation of a kind
that one could not expect from government, and which it would also probably be inappropriate for government to undertake.
It is, indeed, this kind of model that I would commend to de Soto as
an alternative to having governments solve all the problems with which he
is concerned. Clearly, such things would have to be approved by government. But, however unlikely it might currently seem, I think that it would
be at least worth exploring the possibilities open up by such commercial
activity in this field—not least in the light of the impressive case that de
Soto made for the problems of depending just on government in his The
Other Path.
25. Beito, Gordon, and Tabarrok
Mystery of CapitalCRev
76
2/18/08
11:13 AM
Page 76
Jeremy Shearmur
R E F E R E N C E S
Barnes, Barry. 1982. T. S. Kuhn and Social Science. New York: Columbia University
Press.
Beito, David T., Peter Gordon, and Alexander Tabarrok, eds. 2002. The Voluntary
City. Ann Arbor: University of Michigan Press.
Bloor, David. 1983. Wittgenstein: A Social Theory of Knowledge. New York:
Columbia University Press.
———. 1997. Wittgenstein, Rules and Institutions. London: Routledge.
Brand, Stewart. 1995. How Buildings Learn: What Happens after They Are Built.
Harmondsworth: Penguin.
Bringing Them Home: A Guide to the Findings and Recommendations of the
National Inquiry into the Separation of Aboriginal and Torres Strait Islander
Children from their Families. 1997. Sydney: Human Rights and Equal
Opportunity Commission, April.
Buchanan, James. 1975. The Limits of Liberty. Chicago: University of Chicago
Press.
de Soto, Hernando. 1989. The Other Path. New York: Harper & Row.
———. 2000. The Mystery of Capital. New York: Basic Books.
Douglas, Jack D. 1967. The Social Meanings of Suicide. Princeton, NJ: Princeton
University Press.
Duhem, Pierre. 1954. The Aim and Structure of Physical Theory. Princeton, NJ:
Princeton University Press, 1954.
Flanders Michael. On Flanders and Swann, At the Drop of Another Hat. Cited from
http://www.vaporia.com/jwobus/music.html.
Fogelsang, Richard E. 2001. Married to the Mouse. New Haven, CT: Yale
University Press.
Foldvary, Fred. 1994. Public Goods and Private Communities. Aldershot: Edward
Elgar Publishing.
Franz, Douglas, and Catherine Collins. 1999. Celebration, USA. New York: Holt.
Garfinkle, Harold. 1967. Studies in Ethnomethodology. Englewood Cliffs, NJ:
Prentice-Hall.
Goodall, Heather. 1996. From Invasion to Embassy. St. Leonards, NSW: Allen and
Unwin.
Hayek, F. A. 1967. Studies in Philosophy, Politics and Economics. London: Routledge.
———. 1978. New Studies. London: Routledge.
———. 1979. “Scientism and the Study of Society.” In The Counter-Revolution
of Science [1952]. Indianapolis: Liberty Press.
High Court of Australia Judgements. 1996. FC 96/044 23 December 1996, The
Wik Peoples v The State of Queensland & Ors; The Thayorre People v The State of
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 77
The Construction of Social Reality: Searle, de Soto, and Disney
77
Queensland & Ors; see http://www.austlii.edu.au/cgi-bin/sinodisp/au/
cases/cth/HCA/1996/40.html?query=^wik.
Hont, I., and M. Ignatieff. 1983. “Needs and Justice in The Wealth of Nations.” In
Wealth and Virtue, edited by I. Hont and M. Ignatieff, 1–44. Cambridge:
Cambridge University Press.
Jacobs, Jane. 1961. The Death and Life of Great American Cities. New York:
Vintage.Jacobsen, Eric O. 2003. “Receiving Community: The Church and the
Future of the New Urbanist Movement.” Markets and Morality 6, no. 1
(Spring): 59–80; available at http://www.acton.org/publicat/m_and_m/
2003_spring/jacobsen.html.
Jarvie, Ian. 2001. The Republic of Science. Amsterdam: Rodopi.
Kripke, Saul. 1982. Wittgenstein on Rules and Private Language. Cambridge, MA:
Harvard University Press.
Laws and Regulations Relative to the Waste Lands in the Colony of New South Wales.
1858. Sydney: W. Hanson, Government Printer.
Locke, John. 1965. Two Treatises of Government. Introduction and notes by Peter
Laslett. New York: New American Library.
Mabo and others v. Queensland. 1992. No.2. CLR 1 F.C. 92/014; see http://
www.austlii.edu.au/cgi-bin/disp.pl/au/cases/cth/high%5fct/175clr1
.html?query=%7e+mabo.
MacIntyre, Alasdair. 1971. “The Idea of a Social Science.” In Against the SelfImages of the Age, 211–29. London: Duckworth.
McCallum, Spencer Heath. 2002. “The Case for Land Lease versus Subdivision.”
In Beito, Gordon, and Tabarrok, Voluntary City, 371–400.
McHugh, Peter. 1968. Defining the Situation. Indianapolis: Bobbs-Merill.
Menger, Carl. 1892. “On the Origins of Money.” Economic Journal 2: 239–55
(available online at: http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/
menger/money.txt).
Nozick, Robert. 1974. Anarchy, State and Utopia. Oxford: Blackwell.
Pettit, Philip. 1990. “Virtus Normativa: Rational Choice Perspectives.” Ethics 104:
725–55.
Putnam, Robert. 2000. Bowling Alone. New York: Simon and Schuster.
Reynolds, Henry. 1987. The Law of the Land. Ringwood, Vic: Penguin.
Roberts, Stephen H. 1935. The Squatting Age in Australia 1835–1847.
Melbourne: Melbourne University Press.
Ross, Andrew. 1999. The Celebration Chronicles. New York: Ballantine.
Searle, John. 1996. The Construction of Social Reality. London: Penguin Books.
Shapin, Steve. 1982. “The History of Science and its Sociological Reconstructions.”
British Journal for the History of Science 20: 157–211.
Shearmur, Jeremy. 1980. “Religious Sect as a Cognitive System.” Annual Review
of the Social Sciences of Religion 4.
Mystery of CapitalCRev
78
2/18/08
11:13 AM
Page 78
Jeremy Shearmur
———. 1985. “Epistemology Socialized?” et cetera, Fall
———.1991. “Common Sense and the Foundations of Economic Theory: Duhem
versus Robbins.” Philosophy of the Social Sciences 21, no. 1 (March): 64–71.
———. 1996a. Hayek and After. London: Routledge, 1996.
———. 1996b. Political Thought of Karl Popper. London: Routledge.
———. 2002. “Living with a Marsupial Mouse: Lessons from Celebration,
Florida.” Policy 18, no. 2 (Winter): 19–22. http://www.cis.org.au/policy/
winter02/polwin02-4.htm.
———. 2002–3. Review of The Voluntary City, edited by David T. Beito, Peter
Gordon and Alexander Tabarrok. Policy (Summer), http://www.cis.org.au/
policy/summer02-03/polsumm0203-10.htm#1.
Smith, Adam. 1976. Lectures on Jurisprudence. Oxford: Clarendon Press.
Tiebout, Charles M. 1956. “A Pure Theory of Local Expenditures.” Journal of
Political Economy (October): 416–24.
Tully, James. “Rediscovering America: The Two Treatises and Aboriginal Rights.”
In Locke’s Philosophy, edited by G. A. J. Rogers, 165–96. Oxford: Clarendon
Press.
Wilkinson, Charles F. 1987. American Indians, Time, and the Law. New Haven,
CT: Yale University Press.
Winch, Peter. 1958. The Idea of a Social Science. London: Routledge.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 79
How Philosophy and Science
May Interact: A Case Study
of Works by John Searle and
Hernando de Soto
5
Ingvar Johansson
1. Science and Philosophy
Many philosophers have taken philosophy to be an enterprise that is wholly
independent of the substantial content of the sciences. Some philosophers
(especially rationalists such as Descartes and Hegel) place philosophy
above science, claiming both that all philosophical problems can be solved
independently of science and that science has to stay within a framework
laid down by philosophy. Other philosophers (especially the logical positivists) place philosophy below science, regarding it as an enterprise which
can at best contribute to sharpening the conceptual weapons that scientists
use in their struggle to understand the structure of the world. In my opinion, both views are wrong. In what follows I argue, in relation to the work
of John Searle and Hernando de Soto, that philosophy and science are
overlapping disciplines. More precisely, I will show that philosophers can
help scientists to see abstract ontological relations more clearly, and that
scientists can help philosophers to see more clearly what might be called
the limits of the scientific significance of their philosophy.
The aim of the paper is fourfold:
(i)
to clarify, under the heading of a “Searle–de Soto Declaration” the
primary philosophical-scientific idea that de Soto utilizes from
Searle’s speech act theory and ontology of social reality (section 3);
I want to thank Barry Smith and Leo Zaibert for numerous comments of all kinds. The paper
was written under the auspices of the Wolfgang Paul Program of the Alexander von
Humboldt Foundation, the European Union Network of Excellence on Medical Informatics
and Semantic Data Mining, and the Volkswagen Foundation under the auspices of the project “Forms of Life.” It relates to earlier work based on a research grant from the Faculty of
Arts, Umeå University.
79
Mystery of CapitalCRev
80
2/18/08
11:13 AM
Page 80
John Searle and Hernando de Soto
(ii) to show that, philosophically speaking, de Soto could have learned
a little more from Searle, even though this extra insight would not
affect de Soto’s economic-political proposal (section 4);
(iii) to show, with the help of de Soto’s economic-political proposal,
that in abstracting away from what have been called “misfiring
acts” Searle’s speech act theory has the potential to lead to an
overestimation of how much help social scientists can expect from
philosophical accounts such as Searle’s (section 5);
(iv) to show, again on the basis of de Soto’s work, that Searle’s ontology of social reality is, even from a purely ontological perspective,
too restricted regarding the phenomena it takes into account (section 6).
2. The Views of de Soto and Searle
Real science, like real philosophy, is hard, and it is sometimes hard not only
to find a solution but also to state precisely the nature of the problem with
which one is dealing. Usually, however, once a substantial solution has
been proposed then the original problem comes into sharper focus as well.
In relation to the work of de Soto and Searle under consideration here, we
have reached a point where it is relatively easy to specify both the problems
and their solutions. This section is a brief presentation of the relevant problems and solutions in the works of both thinkers.
2.1. Hernando de Soto
Problem: What is to be done in order to create better and wealthier
societies and to eliminate or at least reduce poverty in the Third World?
Solution: According to de Soto’s analysis, poor people, at least the
poor in the big cities of the Third World, are just as entrepreneurial as
respected and successful entrepreneurs in other parts of the world. The
main cause of these people’s poverty is not, therefore, to be found in their
attitudes or culture. Rather, the cause is to be found in the institutional reality in which they live. Though most of these people already live in capitalist societies, the problem is that their primary social setting is, in a sense, not
capitalist enough. While these people produce, own, and save, what they
produce and own nevertheless cannot be turned into capital. They can own
things only in an informal or “extralegal” way and therefore their social setting does not contain the kind of legal property system that is necessary for
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 81
How Philosophy and Science May Interact
81
real economic development. The basic solution to this problem is to turn
the informal ownership structures of the Third World into modern legally
formalized systems of property rights, which will make it possible for people to easily acquire title to, sell, and buy what they have produced. The key
feature of such systems is that they make it possible for people to own, buy,
and sell things by means of making changes in legal representations of what
is owned. Therefore: impose a modern formal system of property rights on
the assets that the poor in an informal way already own.
Background ideas: Material things that are formally owned can be seen,
but the fact that they are owned cannot be directly seen. In order to come
to know such a thing, one has to look at the corresponding ownership representations, at documents and records. In a sense, therefore, capital has a
merely linguistic reality. It can be seen only in its representations; in itself it
is invisible. This fact is part of “the mystery of capital.” De Soto credits his
reading of philosophers such as Daniel Dennett, John Searle, Michel
Foucault, and Karl Popper (2001, 234–35), and of economists such as
Adam Smith and Karl Marx (38–42), with helping him become clear about
the idea that social facts and objects can have such a peculiar character.
2.2. John Searle
Problem: How can there be an objective social reality (that is, a world
of money, property, marriage, governments, elections, football games,
cocktail parties, law courts, and so forth) in a world that consists entirely
of physical entities?
Solution: According to Searle’s ontology, there is only one world, our
spatiotemporal world. Everything that exists exists in this world. The existentially basic entities are material entities. Some material entities, however,
at least human organisms, have a very special feature. Apart from properties such as having a shape, having a volume, having a mass, and having
causal capacities, they can also have intentional states. Intentional states
differ from those studied by the natural sciences in being in a certain sense
directed towards entities that are (normally) distinct from themselves.
Examples of such intentional states include perceptions, speech acts, and
desires. In contrast to physically directed magnitudes (vectors) such as
velocities and forces, what distinguishes intentional states is that they have
conditions of satisfaction; for details about this contrast, see Johansson
1992. For example, when a perception is veridical it is satisfied, when an
assertion is true it is satisfied, and when a desire results in the acquisition
of its desired object it is satisfied. When a group of people have the same
Mystery of CapitalCRev
82
2/18/08
11:13 AM
Page 82
John Searle and Hernando de Soto
kind and object of directedness, there is a collective intention. In such an
intersubjective context (C), material entities (X) can be ascribed “status
functions” (Y) such as being money, being owned, being married, and so
forth. The logical structure of institutional facts (which make up a subset
of all social facts) can be captured, Searle says, by the formula
“X counts as Y in C.”
Thus there can be an objective social reality because (i) some material
entities (human organisms) can have intentional states and, in turn, (ii) can
by means of collective intentional states impose status functions on, in
principle, any kind of material entity whatsoever. A certain person is a president because he is collectively counted as a president, and certain metal
coins are counted as dollars because, by virtue of collective intentionality
they count as dollars in certain intersubjectively recognized contexts. They
are what they are counted as because, as institutional entities, they are created by what they are believed to be.
Background ideas: According to Searle, there can be no institutional
facts without language. Therefore, his philosophy of language is important. He belongs to the so-called speech act theoretical tradition, founded
by the Oxford philosopher J. L. Austin, to whose work Searle has added
several lasting theoretical improvements and extensions. His views on
intentional states are, at one and the same time, both a generalization from
and an underpinning of his views about language (introduction to Searle
1983); for an overview of Searle’s development, see Smith 2003b.
3. What de Soto May Have Learned from Searle
As already mentioned, de Soto has said that he was helped in getting some
of his ideas clear by reading Searle. In spite of this, he has not told us
exactly and in detail which ideas he has in mind. Here I will argue that
what de Soto calls The Mystery of Capital can, using Searle’s philosophy, be
summarized in the sentence “Property rights are invisible and they can be
created ex nihilo.”
Every speech act, according to Searle (1979, chapter 1), belongs to one
of five generic kinds of such acts:
1. Assertives, e.g., “The cat is on the mat”; used to tell people how
things are.
2. Directives, e.g., “I order you to leave!”; used to try to get people
to do things.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 83
How Philosophy and Science May Interact
83
3. Commissives, e.g., “I promise to pay”; used to commit oneself to
doing things.
4. Expressives, e.g., “I thank you for paying”; used to express feelings
and attitudes.
5. Declarations, e.g., “I hereby declare the meeting open”; used to
bring about changes in the world through one’s utterance.
The most important kind of speech act for the purpose of elucidating
de Soto’s ideas is declarations. De Soto’s proposal can succeed only when
and where some kind of authority, accepted by the poor in question, puts
forward a declaration that can be given the Searlean form “X counts as Y
in C.” Let me call it a Searle–de Soto Declaration:
We, the authorities, hereby declare that these hitherto informally owned
assets (X) should in the future be (count as being) owned by means of
the following formal property rights (Y) in the context of our society (C).
In the moment when such a declaration is made and accepted, the
social world is changed. A new institutional fact has come into existence.
However, in order to prepare the way for understanding the ontological
structure of such a declaration, I will start with some words about a simpler case: the commissive speech act expressed by the utterance “I promise
to pay.”
When I say, “I promise to pay,” I put myself under an obligation; publicly, I commit myself. By my mere utterance and its being heard, a social
fact, the existence of my promise, comes into being. If I want to create
something in the material world, for instance a house, then I need to
acquire a lot of different kinds of material and engage in a certain amount
of manual labor. But in order to create a promise, no physical matter at all
and very little labor is needed, only language. Promises are, the existence
of language being taken for granted, created ex nihilo. Similarly, wizards
use language in the form of magical formulas in order to execute their
magic tricks, and, says the Bible, God used language in order to create the
world. He started by saying, “Let there be light!”
My first Searlean point can be put like this: only gods and magicians
can create natural facts ex nihilo, but human beings can create social facts
in such a way (Searle 1989, 535, 549).
Promise-generated obligations exist even after the speech act in
question has been made. But where and how do they exist? Would the
obligations exist even if the whole human race went out of existence?
Answer: no. Would they exist even if everybody has forgotten that the
promise has been made? Answer: Both yes and no. Yes, if it is regarded as
Mystery of CapitalCRev
84
2/18/08
11:13 AM
Page 84
John Searle and Hernando de Soto
possible that someone suddenly could once again remember it; no if such
a re-remembering is regarded as completely impossible. Obligations have
vaguely defined conditions of existence in relation to people’s thoughts. In
order for an obligation to continue to exist, there must be some people
that have some kind of dispositions to remember the promise in which it
had its origin. If the promise was written down, then the existence of the
corresponding piece of paper might suffice.
A promise-generated obligation is visible (audible) only at the moment
when the promise is made. Leaving aside the case where all existing human
beings irreversibly forget about the original promise, obligations can exist
even at times when they are not visible at all or are merely indirectly visible in virtue of certain representations (for example, in the forms of memories of the original promising act or of enduring written documents).
My second Searlean point can thus be put like this: Some social facts
can exist even though they are invisible.
Obligations are normally invisible, and they are always created ex nihilo.
The same two points can be made in relation to the consequences of many
types of declarations, too; but with a difference (one I will come back to
later): a promise by an individual is in a certain sense a one-person affair,
whereas declarations are normally many-person affairs. When I say “I
promise,” I put only myself under an obligation. But if I am the chair of a
board and say “I hereby declare the meeting open,” then I put all the
members of the board under a vaguely defined set of obligations. When
this difference between promises and declarations is disregarded, and property rights are regarded as the result of declarations, then one can truly
claim:
Property rights are invisible and they can be created ex nihilo.
This claim is, in my opinion, both a philosophical-ontological truth and
a social-scientific truth. It belongs to both philosophy and science. How is
this possible? Answer: because these disciplines have overlapping research
domains. In principle, this and similar truths can be discovered by philosophers alone, by scientists alone, and by a cooperation between philosophers
and scientists; according to the scientist de Soto himself, he was, in fact,
helped in his discovery of this by the philosopher Searle.
4. What de Soto Could Have Learned, but Did Not
Learn, from Searle
The four philosophers mentioned by de Soto—Searle, Popper, Dennett,
and Foucault— have something very abstract in common. None of them
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 85
How Philosophy and Science May Interact
85
is a reductive materialist, and all of them stress the existence of some linguistic or conceptual kind of reality. But the differences between the four
philosophers are also important. Put briefly and without argument: Searle
alone among them is of the opinion that a linguistic reality can exist only
on the basis of and in a mind-independent material external world.
Popper’s so-called World 3 has some clearly Platonist features; Dennett is
an instrumentalist who tells us not to care about what the world really
looks like since he thinks that we can freely choose to take on different
kinds of “stances” (for instance, an intentionalist stance or a materialist
stance) which then seemingly create a corresponding kind of world;
Foucault is part of the French poststructuralist movement that claims that
nothing at all (be it material entities, Platonic entities, or intentional states)
can as such exist in the present, and that, therefore, we have to get rid of
all “metaphysics of the present.”
De Soto seems not to have been concerned with the differences
between the philosophers he refers to. Implicitly, however, he gives the
impression of being closer to Searle than to the others. In his books, the
world, apart from capital, comes out very much like the common sense
world we perceive and ordinarily take ourselves to be living in. And, among
the philosophers mentioned, only Searle defends this view. The others,
especially Dennett and Foucault, let their thoughts about linguistic reality
lead them in a direction that comes into conflict with ordinary robust
materialism.
5. What Searle Could Have Learned by Taking
Searle–de Soto Declarations Seriously: (I) An Improved
Analysis of Declarations
Back to Searle-de Soto Declarations: We, the authorities, hereby declare that
these hitherto informally owned assets (X) should in the future be (count as
being) owned by means of the following formal property rights (Y) in the context of our society (C).
In order to be able successfully to make such a declaration, a lot of
preparatory work has to have occurred. De Soto and the Institute for
Liberty and Democracy have been working both with governments and
with poor people whose property systems they want to transform.
Through efforts of “enlightenment” they try to change the beliefs and
desires both at the top and at the bottom of society. The kind of new institutional reality that a Searle–de Soto Declaration attempts to create can
successfully be brought into and maintained in existence only if many people are in favor of it. Therefore, let us take a careful look at Searle’s analysis of declarations.
Mystery of CapitalCRev
86
2/18/08
11:13 AM
Page 86
John Searle and Hernando de Soto
As already stated, Searle distinguishes between assertives, directives,
commissives, expressives, and declarations. In order for a speech act to
belong to any of these kinds, there has to be an “uptake,” that is, there has
to be at least one listener who understands the speech act in question.
Situations where this is not the case have not been discussed in detail by
either Austin or Searle, and they are the key issue in the revision of Searle’s
account of declarations that I wish to propose. However, many other
dimensions of speech acts have been profitably investigated by Searle, and
it is necessary to understand something about these before the need for a
revision to the account of declarations will be clear. In the table below I
summarize some of the major components of Searle’s theory of speech acts
based on his classic paper “A Taxonomy of Illocutionary Acts” (Searle
1979, chapter 1).
Assertive
Directive
Commissive
Expressive
Declaration
Mind-to-world (
World-to-mind (
World-to-mind (
None
(
Both ways
(
↓)
≠ )
≠ )
Ø)
↓)
↓
1.
2.
3.
4.
5.
Direction of fit:
↓
↓
Kind ofact:
Publicly
expressed
psychological
state:
Conditions speech
of satisfaction:1
Belief
Wish
Intention
Varies
None
World in general
Other people
Speaker in the future
None
The utterance itself
I agree with everything in the table except the last row, but I will give
some explanatory comments for all of them.
1. Assertives: A person who utters an assertive such as “The cat is on
the mat” is thereby necessarily publicly claiming that his mind has managed
to fit the world in a certain respect, and he is necessarily also publicly
expressing a belief to this effect. Whether he is lying or not is another matter that is outside the scope of what is publicly expressed. Note, though,
that one cannot lie without claiming that one is not lying. The assertive
“The cat is on the mat” is satisfied (true) if the cat in question is on the
mat in question.
1. Searle makes a distinction between “external” and “internal” conditions of satisfaction
that I will not discuss here, though I find it problematic; see Johansson 2003. If this distinction is used in the table above, rows 1–4 describe only external conditions of satisfaction,
whereas in the fifth row external and internal conditions become identical. In the modified row
5 that I will propose at the end of this section, all conditions of satisfaction are external only.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 87
How Philosophy and Science May Interact
87
2. Directives: A person who utters a directive like “I order you to
leave!” is thereby necessarily publicly trying to make the world fit his mind
in a certain respect, and he is necessarily publicly expressing a wish to this
effect. An order is satisfied when it is obeyed. Whether or not it is satisfied
thus depends on other people.
3. Commissives: A person who utters a commissive (“I promise to
pay”) is thereby necessarily publicly committing himself to trying to make
the world in the future fit the present content of his mind. He is also necessarily publicly expressing a corresponding intention. A promise is satisfied if the speaker keeps it and fulfils its content in his actions.
4. Expressives: A person who expresses a feeling or an attitude thereby
publicly creates something—an expression—that has no direction of fit.
Necessarily, though, a corresponding psychological state is (whether truly
or falsely) publicly expressed. Since expressives have no direction of fit,
they have no conditions of satisfaction either.
5. Declarations: According to Searle, a person who makes a declaration
like “I hereby declare the meeting open” is thereby necessarily publicly
claiming both that he is trying to make the world fit his mind (≠) and that
his mind already fits the world (Ø). In his 1979 paper, Searle claims that
such a speaker publicly expresses no psychological state at all (see last row,
column three in the table); today, however (Searle at a workshop in
Buffalo, April 12, 2003), he has the much more reasonable view that the
speaker expresses two psychological states: a wish and a belief, that is, there
is one state for each arrow and direction of fit. In the example used, the
speaker has then (i) a wish that the meeting will be opened by means of his
declaration and (ii) a belief that this state of affairs is currently coming into
existence. This change of opinion on Searle’s part, however, has repercussions on what ought to be placed in row 5 under “conditions of satisfaction.” Regarding declarations Searle claims that such utterances comprise
their own conditions of satisfaction, that is, they both fulfill themselves
(the wish) and make themselves true (the belief). How is such a feat possible? Searle himself has addressed this question. I quote: “with the declarations we discover a very peculiar relation. The performance of a
declaration brings about a fit by its very successful performance. How is
such a thing possible?” (1979, 18). In answering this question, he distinguishes between those declarations that do and those that do not require
extralinguistic institutions. With respect to the former, the kind of declaration pertinent to our interest here, Searle says that “speaker and hearer
must occupy special places within [some relevant] institution. It is only
given such institutions as the church, the law, private property, the state
and a special position of the speaker and hearer within these institutions
Mystery of CapitalCRev
88
2/18/08
11:13 AM
Page 88
John Searle and Hernando de Soto
that one can excommunicate, appoint, give and bequeath one’s possessions
or declare war” (1979, 18).
Rephrased in a negative form, this view reads as follows: If speaker and
hearer do not occupy special places within institutions such as the church,
the law, private property, the state, then it is impossible successfully to
excommunicate, appoint, give and bequeath one’s possessions or declare
war.
According to the whole tradition of speech act theory, speech acts that
rely on extralinguistic institutions can “misfire” (Austin’s term). They do
so when speakers or hearers do not occupy the right kind of position within
the relevant institution. For instance, if someone who is not supposed to
open a meeting of a certain organization says, “I hereby declare the meeting open,” then the meeting is not opened; the presumed declarational act
misfires. Austin places misfires outside his area of investigation, and Searle
follows suit. Thus, though in the table above the condition of satisfaction
for a declarational speech act is the utterance itself, this is only because it
has already been assumed that the utterance does not misfire. The relevant
portion of the table thus tells us merely that a nonmisfiring declaration can
be regarded as being satisfied by the declaration itself. Such a restriction,
however, makes this part of speech act theory lose much of its significance
for social scientific purposes and interests.
Speech act misfiring can be due to problems on both the side of the
speaker and that of the hearer. For example, if de Soto alone makes a
Searle–de Soto Declaration, then it will certainly misfire, and the same goes
for declarations made by the poor themselves. Is it then, contrariwise, the
case that no Searle–de Soto Declaration made by a legitimate government
can misfire? No, it is not. If such a declaration is immediately contested by
riots and turmoil in the streets, then it is as much a misfire as a declaration
made by a speaker who is not in a formal position to make it. Some more
words about this.
When a promise is given, the promise exists as soon as the speech act is
completed and heard. However, the keeping of the promise, namely, the
realization of its (external) condition of satisfaction, lies outside of the
speech act itself; it lies somewhere in the future. The promise is connected
with its satisfaction by means of an obligation. In analogy with this, my
view is that as soon as a declarational speech act is completed, then a declaration exists, but its main conditions of satisfaction lie outside the speech
act, namely in the acceptance of the declaration by the relevant group of
people. My claim is that acceptance is to declarations what keeping is to
promises and obeying is to orders. A declaration-generated new institution
does not exist if that declaration is not accepted by others and, thereby, satisfied. The fifth row of the table above should be replaced by the following one:
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 89
How Philosophy and Science May Interact
89
Kind of
sppech act:
Direction of fit:
Publicly
expressed
psychological
state:
Conditions speech
of satisfaction:1
5. Declaration
Both ways
↓
Both wish and
belief
Acceptance by all or
most other persons
involved
( ↓)
One reason why this view of declarations has not been discussed before
is, I think, that speech act theoreticians have abstracted away from the issue
of misfires, and thus left them out of the domain of their research.
However, it is impossible to make such an abstraction when one is interested in the analysis of problematic political declarations in the real world,
as a social scientist and reformer such as de Soto actually is.
6. What Searle Could Have Learned by Taking
Searle–de Soto Declarations Seriously: (II) The Need
for an Ontology of Desires
When reading de Soto’s two books, one becomes very aware of the fact
that politics can be peaceful and consensual, peaceful and conflictual, and
also conflictual and violent. This last point is particularly clear if one considers the history of de Soto’s own Institute for Liberty and Democracy
and its relationship to the Shining Path guerilla movement in Peru (de
Soto 2002, preface). Searle rightly stresses that language is a crucial factor
in creating institutional reality. However, his way of doing this implicitly
neglects the conflictual side of institutional reality; see also Smith 2003a.
Searle’s general formula for the logical structure of institutional reality is
X counts as Y in C;
but the formula below is, Searle says (1995, 104), more basic to the existence of institutional facts:
We accept (S has power [S does A]).
Equally important, I think, is the following:
We accept (S has power [S does A]), and we force them to accept the
same thing.
Mystery of CapitalCRev
90
2/18/08
11:13 AM
Page 90
John Searle and Hernando de Soto
Of course, Searle can reply that people who are being forced to accept
something nonetheless accept, and that, therefore, his formula is more
basic. However, there is still something missing. Quite obviously, a lot of
human conflict has to do with conflicting human desires, and a lot of
human consensus is due to harmonized human desires. I find it a bit astonishing that in a book like Searle’s The Construction of Social Reality, which
is concerned with the basic features of the ontology of social reality, human
desires are not discussed at all. Indeed, Searle does not even draw attention
to the fact that they are being disregarded. Can something that so many
social scientists take so seriously really be left out of account in an ontology of the social? I think not, and Searle seems in recent times to be closer
to such a view as well. In particular, this can be seen in his clearly stated
Weberian view: “A monopoly on armed violence is an essential presupposition of government” (2003, 209). Both the existence of violence and the
need for a monopoly on it within a society arise from the existence of conflicting desires.
When, for instance, a new property system really has become institutionalized by means of an accepted declaration, it is also normally taken for
granted that the system will last for some time. It is, I would say, taken for
granted that conflicts among human desires will not make the property system fall apart at once. Searle claims that we cannot grasp the basics of the
ontology of social reality without an ontology of language. I will claim that
an ontology of human desires and their objects is no less indispensable.
However, the question must first be asked, is such an ontology possible?
Perhaps human desires and their objects are structured the way
Wittgenstein thought that speech acts are structured, that is, in such a way
that a theory of the corresponding open-ended phenomena is impossible.
It could be argued that there is such a multitude of concretely different
desires, with only family resemblances between them, that no taxonomy
whatsoever could possibly encompass this variation. This seems to be the
view held by some social constructivists. However, just as Searle claims
(1979, vii–viii) that Wittgenstein is wrong and that there is a definite number (five) of generically different kinds of speech acts, I think that there is
also a definite number of abstract taxa of objects of human desires
(Johansson 1995).2 The point here is by no means to argue that I have
found the right number of objects of desire; it is only to provide support
for the claim that the search for such a number is as meaningful and theoretically interesting in relation to human desires as it is in relation to speech
acts.
2. Here I leave the question open as to whether there is also a connection between kinds
of desired objects and kinds of desiring, and hence the possibility of providing a perspicuous
classification of both.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 91
How Philosophy and Science May Interact
91
I think that there are three fundamental or rock-bottom desires (as
contrasted with mere wishes and with unconscious instincts): a desire to
have desires in general, a desire to have cognitions in general, and a desire
to feel affections in general. The following list of eight different kinds of
objects of human desires, divided into two families, captures the remaining cases:
OBJECTS OF DESIRE
EGOISTIC
pleasure
food
sex
shelter
activity
confirmation
ALTERISTIC
benevolent objects
malevolent objects
Since, to repeat, my intent here is only to make plausible that an ontology of human desires is possible, I will not explain and argue for all the
proposed taxa, but confine myself to some brief comments. In particular,
and in agreement with Searle (2001, 191–92), I think the view that all
desires are desires for pleasure is false. I think there is a desire to be active
(both bodily and intellectually) in general. A desire for pleasure is a desire
on my part for pleasure on my part, and similarly for the other items in the
left column—all of which are thus egoistic. A desire for another’s pleasure
is a case of benevolence, and a desire for another’s displeasure is a case of
malevolence. In general, benevolence is a desire for the satisfaction of
another person’s egoistic desires, and malevolence is a desire for the frustration of another person’s egoistic desires.
As in all philosophical ontologies, we are here moving on a very
abstract level, but there are nonetheless truths that can be found. Searle
nowhere attempts to classify desires, but he has made some remarks about
the structure of desires in general in introducing his views on “desire-independent reasons.” According to Searle, desires have a world-to-mind direction of fit, and they can be directed towards things not only in the present
or the future, but also in the past. True descriptions of desires include thatclauses (“X desires that . . .”), desires can be parts of larger desires, and one
can rationally and consistently have inconsistent desires (Searle 2001,
248–49). In relation to this I would like to make four specific claims; the
first one is also made by Searle (2001, 157–58), and the other three are,
as far as I can see, consistent with everything that he has written.
First, independently of whether the object of one of my desires is related
to myself (ego Æ ego) or to someone else (ego Æ alter), the desire is
Mystery of CapitalCRev
92
2/18/08
11:13 AM
Page 92
John Searle and Hernando de Soto
always a desire of my ego. This position, which one might call “trivial egoism” is thus logically prior to “real egoism.” Trivial egoism is therefore
quite consistent with the existence of benevolence and altruism.
In order to see the distinction between egoistic and alteristic desires
clearly, one needs something like Searle’s concept of an intentional state.
An ordinary property of an ordinary thing is just a property of that thing,
but an intentional state of a person is not just a feature of the person alone,
it also has directedness towards something else. Egoistic desires have the
structure from ego towards the same ego, whereas alteristic desires have the
structure from ego towards alter. Thus when an alteristic desire is satisfied
or frustrated in an individual ego, there is also and necessarily either satisfaction or frustration in an alter.
Second, egoistic desires are logically prior to alteristic ones (or: real
egoism is logically prior to altruism). In a world with only egoistic desires
many actions would still take place; but in a world with only alteristic
desires, and no false beliefs to the contrary, no actions at all would occur.
No person could then try to satisfy or frustrate another person’s desire.
Third, every ontology of desires that contains both egoistic and alteristic desires implies a simple classification of persons into (1) ordinary people (people that can have both egoistic, benevolent, and malevolent
desires); (2) psychopaths (people that can have only egoistic desires); (3)
angels (people that can have only benevolent desires); and (4) devils (people that can have only malevolent desires). Ordinary people are easily
caught in tragic situations in which they have to face irresolvable conflicts
between their egoistic and alteristic desires. Perhaps devils live beyond the
domain of the tragic, but for psychopaths and angels, too, there are tragiclike situations. Suppose P is a psychopath who is put in jail for something
he (or she) has done, and that he is told that his sentence will be reduced
if he is able to make himself a somewhat more empathetic person. For
purely egoistic reasons P wants to become a little less egoistic, but his
nature makes it impossible for him to satisfy this egoistic desire. Think
next of an angel, A, who has learned about Adam Smith’s theory of the
invisible hand of the market. He (or she) wants to make other people
happy by acting in an egoistic way in the market, but A’s nature makes it
impossible for him to satisfy this alteristic desire. Be this as it may, in my
opinion, the ontology of social reality needs only to take ordinary people
into account.
Fourth, there are not only consistent and inconsistent desires, but also
what we might call “superconsistent desires.” Two desires are consistent if
both can be satisfied; two desires are inconsistent if they pull you, like
Buridan’s ass, in two opposed directions; two desires are superconsistent if
they are satisfied by the same action. For instance, if a friend who likes to
cook invites you to dinner, then you can by attending the dinner satisfy
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 93
How Philosophy and Science May Interact
93
both your egoistic desire for food and your alteristic desire to be benevolent towards your friend.
Searle wants to understand how there can be an objective social reality,
but he has nonetheless not tackled the issue of what constitutes “the
cement of society” (Elster 1989), namely, human desires. I regard this as
a flaw, though an excusable flaw. Probably, it is impossible for pioneers to
take everything into account. But back to the question: What glues the
individuals in a society together? Is it language? Is it desire-independent
reasons? Is it egoistic calculations which bring the mutual benefit of social
cohesion as a side effect? I think that all such one-factor explanations are
false. For language, desire-independent reasons, and side effects of egoistic desires all play a role. But so also do benevolent desires, and so also does
the existence of superconsistency between benevolence and egoism.
In The Construction of Social Reality (1995), Searle does not discuss
egoism and altruism at all; in Rationality in Action, he discusses them
(2001, 157–65), but only in order to contrast both egoistic and altruistic
(benevolent) desires with altruistic commitments and the concomitant
desire-independent reasons that speech acts can create. He regards benevolent desires as cases of “weak altruism” and altruistic commitments as
cases of “strong altruism.” From a morally evaluative point of view, this
might be an adequate use of the concepts “weak” and “strong,” but from
a motivational point of view, I am sure it is the other way round, that is,
“weak altruism” is strongly motivational and “strong altruism” is only
weakly so. I make these points in order to stress the fact that, so far,
Searle’s ontology of social reality does not contain any analyses of the role
played by motivations in giving rise to social unity and social disunity,
respectively.
De Soto has written, “I am not a diehard 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 these 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” (de Soto 2001, 242). Here, one might ask
whether de Soto deceives himself when he thinks that he is able to have
such benevolent desires. I think he does not, but all those who think that
human beings are completely egoistic have to deny this. What this points
to is that the ontology of human desires one accepts makes a difference in
how one views human motivation and the nature of social unity. In this
connection it is worth noting that the founding father of market thinking,
Adam Smith, was not at all of the opinion that all humans are completely
egoistic. Already in part I, section I, chapter 1, first paragraph of his The
Theory of Moral Sentiments, published in 1759, he writes: “How selfish
soever man may be supposed, there are evidently some principles in his
Mystery of CapitalCRev
94
2/18/08
11:13 AM
Page 94
John Searle and Hernando de Soto
nature, which interests him in the fortune of others, . . . Of this kind is pity
or compassion, the emotion which we feel for the misery of others, . . . [It]
is by no means confined to the virtuous and humane, . . . The greatest ruffian, the most hardened violator of the laws of society, is not altogether
without it” (Smith 1984).
He shared these views with his friend David Hume, who in 1751
writes, “We cannot without the greatest absurdity dispute that there is
some benevolence, however small, infused into our bosom; some spark of
friendship for human kind; some particle of the dove kneaded into our
frame, along with the elements of the wolf and serpent” (Hume 1975,
271).
I have got the impression that Searle agrees with the views (and even
sentiments) expressed by Hume, Smith, and de Soto in these passages. But
nowhere in his writings on the ontology of social reality do we find any
indication of this fact. Why? My guess is that it mirrors Searle’s neglect of
desires in his social ontology. There is more to social reality than language
and all the things X that are “counted as Y in C.” There are desires of various kinds too. And here can be seen once more how careful attention to
the issues of social science can help inform and expand a philosophical
account of the nature of social reality. Just as de Soto has been able to use
the philosophy of John Searle to help him in his activities of social scientific research and reform, so also Searle’s philosophical ontology of the
social can be filled out and rendered more accurate by careful attention to
the issues faced by scientists and reformers such as de Soto.
7. Words of Conclusion
I am in perfect agreement with the opinion that in Searle’s writings on the
ontology of social reality there is: “a certain highly promising theory, dealing with a hitherto neglected but in fact very interesting and extremely
important problem area, and [that] this theory is not in a perfect shape at
the moment” (Moural 2002, 78). Furthermore, I think there are a growing number of philosophers and social scientists with whom I share this
opinion. I hope that most of these thinkers share also my view that philosophy and science are overlapping disciplines that can benefit from
interaction.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 95
How Philosophy and Science May Interact
95
R E F E R E N C E S
de Soto, Hernando. 2001. The Mystery of Capital [2000]. London: Black Swan.
———. 2002. The Other Path [1989]. New York: Basic Books.
Elster, Jon. 1989. The Cement of Society. Cambridge: Cambridge University Press.
Hume, David. 1975. Enquiries concerning Human Understanding and concerning
the Principles of Morals [1751]. Edited by Selby-Bigge. Oxford: Clarendon
Press.
Johansson, Ingvar. 1992. “Intentionality and Tendency: How to Make Aristotle
Up-to-Date,” in Language, Truth and Ontology, edited by K. Mulligan,
180–92. Dordrecht: Kluwer.
———. 1995. “Postmodernismen, det goda livet och människans begär” [Postmodernism, the good life, and human desires]. In Det goda livet: Etik i det
(post)moderna samhället, edited by Carleheden and Bertilsson, 89–108.
Stockholm: Symposion.
———. 2003. “Searle’s Monadological Construction of Social Reality.” In John
Searle’s Ideas About Social Reality: Extensions, Criticisms, and Reconstructions,
edited by D. Koepsell and L. S. Moss, 233–55. Oxford: Blackwell.
Moural, Josef. 2002. “Searle’s Theory of Institutional Facts: A Program of Critical
Revision.” In Speech Acts, Mind, and Social Reality, edited by G. Grewendorf
and G. Meggle, 293–307. Dordrecht: Kluwer.
Searle, John. 1979. Expression and Meaning. Cambridge: Cambridge University
Press.
———. 1983. Intentionality. Cambridge: Cambridge University Press.
———. 1989. “How Performatives Work.” Linguistics and Philosophy 12: 535–58.
———. 1995. The Construction of Social Reality. New York: Free Press.
———. 2001. Rationality in Action. Cambridge, MA: MIT Press.
———. 2003. “Social Ontology and Political Power.” In Socializing Metaphysics:
The Nature of Social Reality, edited by F. F. Schmitt, 195–210. Oxford:
Rowman & Littlefield.
Smith, Adam.1984. The Theory of Moral Sentiments [1759]. Indianapolis: Liberty
Fund.
Smith, Barry. 2003a. “The Ontology of Social Reality.” In John Searle’s Ideas about
Social Reality: Extensions, Criticisms, and Reconstructions, edited by D.
Koepsell and L. S. Moss, 285–99. Oxford: Blackwell.
Smith, Barry. 2003b. “John Searle: From Speech Acts to Social Reality.” In John
Searle, edited by B. Smith, 1–33. Cambridge: Cambridge University Press.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 96
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 97
Language and Institutions
in Searle’s The Construction
of Social Reality
6
Josef Moural
I
n chapter 3 of his The Construction of Social Reality (CSR), John Searle
endeavors to explain and justify his claim that language is essential to the
constitution of institutional reality. Unlike several other components of his
theory of institutions (collective intentionality, deontic power, constitutive
rules), this claim of Searle’s has not yet been made a topic of critical discussion. However, there are several difficulties connected with this part of
Searle’s theory. This paper is an attempt to show what they are and how
they might be addressed from within Searle’s own account.
First, I shall summarize Searle’s main argument for the necessary role
of a linguistic element in the establishment of institutional reality, provided
at CSR 66–71. Then (section 2), I shall point out what seem to be the
weak points of this argument. Finally (section 3), I shall discuss two further points raised by Searle, and attempt to articulate the best way to view
the problems raised by Searle’s discussion in chapter 3. The resulting view
is more detailed and hopefully much clearer than Searle’s position in the
book. While the position I propose probably differs from Searle’s position
in one or two respects, I shall attempt to show that it can claim support—
besides the immediate force of argument—also from Searle’s hallmark doctrine of intrinsic versus derived intentionality.
1.
The claim about the constitutive role of linguistic elements in the ontology of institutional reality appears twice already in chapter 2 of CSR
(37, 51), but detailed discussion of the relationship between language
and institutional reality is reserved for chapter 3 (59–78). Let us first get
clear about the content of Searle’s claim and how he proceeds in justifying it.
97
Mystery of CapitalCRev
98
2/18/08
11:13 AM
Page 98
Josef Moural
According to Searle, institutional reality is built up of status functions
recognized by a community of agents. Status functions are characterized as
agentive functions, meaning that they modify the range of what agents can
and cannot do. More specifically, they are agentive functions of a noncausal type. This means that they modify the range of possible action available to an agent not solely in virtue of the causal (physical, chemical, etc.)
properties of the bearers of function, but rather in virtue of certain statuses
that are imposed on such bearers insofar as they are consciously recognized
within a community of agents as bearing the function in question. We can
use the formula “X counts as Y” to express the relationship between a status function Y and a bearer X (where X can be either a physical thing or
event, or an agentive function of lower order). Such a relationship, a status function Y imposed by a community of agents on a bearer X, is an elementary institutional fact.
The claims of Searle that we are concerned with are his claims that institutions are impossible without some form of language (CSR 59); that “the
institution of language is logically prior to other institutions” (CSR 60)
and that all other institutions “presuppose language” (CSR 60). More
specifically, Searle says that language “has a constitutive role in institutional
reality” (CSR 61) in the following sense: each institution requires linguistic representation of the facts within itself (CSR 60).
It is important to notice that, according to Searle, it is not necessarily
a fully developed language with syntax, infinite generative capacity, and so
forth that is involved in this claim. The minimal languagelike structure
required to make possible the existence of institutions is something far
more primitive than a natural language like English or French. Searle
writes, “The feature of language essential for the constitution of institutional facts is the existence of symbolic devices, such as words, that by convention mean or represent or symbolize something beyond themselves”
(CSR 60). The minimal structure required is simply a set of symbolic
devices, specifically a set of entities that represent something beyond themselves. Thus, Searle’s basic claim “amounts to the claim that institutional
facts contain some symbolic elements in this sense of ‘symbolic’: there are
words, symbols, or other conventional devices that mean something or
express something or represent or symbolize something beyond themselves, in a way that is publicly understandable” (CSR 60–61).
Such is the claim; next, we need to look at how Searle justifies it.
Between the formulation of the claim (CSR 59–61) and the main argument (CSR 66–71), Searle inserts what might be called a methodological
digression (CSR 61–66). In my opinion, the main line of exposition in this
passage is misleading and invites criticism; however, I shall attempt to propose a view from which what Searle says both withstands such criticism and
provides us with an insight that is helpful for understanding the rest of the
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 99
Language and Institutions in The Construction of Social Reality 99
chapter. Thus, my aim in the following five paragraphs is twofold: to help
the student of Searle’s book who might be baffled by the apparent circularity in the exposition, and to bring to light a message which seems to be
involved in the text but not stated explicitly.
In the methodological digression, Searle begins with introducing two
general distinctions: the first between language-dependent and languageindependent facts, and the second between language-dependent and language-independent thoughts (CSR 61). We know already that what Searle
wants to show is that each institutional fact is necessarily language-dependent. From this restatement of his claim, he proceeds as follows: to show
that a fact is language-dependent, it is sufficient to show (1) that there are
certain thoughts or mental representations partly constitutive of the fact,
and (2) that these thoughts are language-dependent (CSR 62). According
to Searle, it is immediately clear that condition (1) is met by institutional
facts. Thus, what remains is to show the same about condition (2) (CSR
62–63).
How does one show a thought to be language-dependent? In general,
one can do it in two different ways: either by arguing that the complexity
of the thought is such that it is empirically impossible for us to think it without the help of some linguistic representation, or by arguing that the content of the thought is such that it would be logically impossible for the
thought to be the thought it is if there were no linguistic representations
involved. Since empirical impossibility is not strict enough, Searle seeks to
show that the thoughts in question are language-dependent in the latter,
stricter sense (CSR 64–65).1
However, it turns out that, in this stricter sense, “the thought is language dependent because the corresponding fact is language dependent”
(CSR 65). That is, in order to show (2), we need to show that the facts
which are the content of the thoughts in question are themselves languagedependent. But does this not mean that we have simply gotten back to
where we started from? Namely, to the attempt to show that certain facts
are language-dependent?
Now this procedure, as described by Searle, does not necessarily involve
circularity. If we consider the proposed structure of inquiry purely formally, it is conceivable that, in attempting to justify the language-dependence of an institutional fact F1 in terms of the language-dependence of a
thought T1 that is partly constitutive of it, we proceed to justifying the language-dependence of T1 by the language-dependence of a fact F2 that is
1. However, later Searle briefly returns to the notion of empirical impossibility and—
rather plausibly—claims that most of institutional reality is so complex that a capacity to deal
with it requires linguistic representation anyway (CSR 77).
Mystery of CapitalCRev
100
2/18/08
11:13 AM
Page 100
Josef Moural
the content of T1—and, in general, F2 need not be identical with F1. Also,
nothing said so far precludes the possibility that F2 (or some Fn of a higher
order, if we think of the procedure as iterable) is itself not institutional—
which should be desirable given that Searle’s goal is to show the languagedependence of all institutional facts (and we could hardly gain any
advantage from employing a procedure that endlessly shifts our task from
language-dependence of one institutional fact to another). However, since
the only available way to show that a fact, institutional or not, is languagedependent is to show a thought (at least) partly constitutive of it to be language-dependent, and the only available way to show it about the thought
is to show it about a fact that is its content, the only alternative to circularity is infinite regress (or to provide another, independent way of showing the language-dependence of either facts or thoughts).
However, if we look at how Searle proceeds in his actual argument, we
see that his F2 are invariably institutional and equal to F1 (at least in the crucial moments of the argument): those thoughts constitutive of institutional
facts that are relevant for Searle are the thoughts that have as their content
the very institutional fact they are constitutive of.2 Thus, there is no infinite
regress here, but what about circularity? The circularity involved would have
been harmful if we read the passage (CSR 61–66) as proposing a method,
a linear path of inquiry—and what makes the passage quite misleading is
the fact that its rhetorics suggests that much. Instead, I propose that we
should view the passage as a logical analysis of mutual entailment: in order
to show an institutional fact to be language-dependent, it is enough to show
that the thought thinking that institutional fact is language-dependent; but
in order to show a thought to be necessarily language-dependent, one needs
to show that the fact thought by that thought is language-dependent.
Consequently, showing either of the two would do the job, but one shall
hardly show one without showing the other simultaneously.3
2. Which should be no surprise for the reader: from the beginning, Searle is emphasizing
that institutions “exist only because we believe them to exist” (CSR 1), i.e., that what is constitutive of an institutional fact is a thought (actually, a recognition shared in the relevant
community) which has as its content the very institutional fact. More precisely, “that representation is now, at least in part, a declaration: it creates the institutional status by representing it as existing. It does not represent some prelinguistic natural phenomenon” (CSR 74).
3. It may be a question worth pursuing whether there are other kinds of language-dependent thoughts than such that the content of the thought is institutional. Searle himself proposes an example when he says that “the fact that today is Tuesday the 26th of October is not
an institutional fact because, though the day is institutionally identified as such, no new status-function is carried by the label” (CSR 65). But it is not clear why it is not an institutional
fact, and it seems that Searle is using an unnecessarily restrictive conception of institutional
facts here (compare the case of void powers such as being elected Miss Bielefeld, discussed in
my “Searle’s Theory of Institutional Facts,” 284–85n13).
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 101
Language and Institutions in The Construction of Social Reality 101
After the methodological digression, we turn back to the original problem. Searle needs to show that either institutional facts or thoughts about
them are language-dependent—and we know that the way to show one is
to argue for the other (so much results from the digression, CSR 60–66).
Thus, it is legitimate that Searle not only does not keep distinguishing
which of the two seemingly alternative ways he is following, but also that
he keeps shifting attention from the thoughts to the facts and back during
the presentation of his main argument. Perhaps, given the nature of institutional reality, this is the right way to proceed, and, as far as I can see, the
difficulties I have with Searle’s main argument do not stem from this
methodological peculiarity.
The core of Searle’s main argument, presented at CSR 66–71, has two
major steps: (1) the lowest-level shift from X to Y (i.e., the shift from the
level of brute facts to the first level of institutional reality) can occur only
if it is represented as existing (representation requirement); (2) there is no
way to represent the Y element extralinguistically because there is nothing
extralinguistic there that one can perceive or otherwise attend to in addition to the X element (no availability of extralinguistic markers). Thus, the
conclusion (3) that one needs words or other symbolic markers to be
involved in the representation, and this makes the creation of an institutional fact (that X counts as Y) language-dependent (in the broad, permissive sense of the word “language” discussed above). Let us look more
closely at Searle’s presentation of the argument.
He presents it twice, first using an example from football (CSR 66–68),
and then on a more general level (CSR 69–71). He begins with considerations regarding the fact (and the corresponding thought) that “a touchdown counts six points.” Searle claims that such a fact cannot be thought
about without linguistic symbols, for points can exist only relative to a linguistic system for representing and counting points (notice the shift: arguing about a thought from the fact level). Why is this the case?
The answer, to put it simply, is that if you take away all the symbolic devices for
representing points, there is nothing else there. . . . [T]here is no thought independent of words or other symbols to the effect that we have scored six points.
The points might be represented by some symbolic devices other than actual
words, for example, we might count points by assembling piles of stones, one
stone for each point. But then the stones would be as much linguistic symbols
as would any others. They would have the three essential features of linguistic
symbols: they symbolize something beyond themselves, they do so by convention, and they are public. (CSR 66)
Notice the inverse shift (arguing about a fact from the thought level), and
notice the broad notion of language being appealed to.
Mystery of CapitalCRev
102
2/18/08
11:13 AM
Page 102
Josef Moural
The same argument again, this time with some more detail on the crucial point of the no availability of extralinguistic markers:
Even if we don’t have words for ‘man’, ‘line’, ‘ball’, etc., we can see that man
cross that line carrying that ball, and thus we can think a thought without
words, which thought we would report in the words ‘The man crossed the line
carrying the ball’. But we cannot in addition see the man score six points
because there is nothing in addition to see. The expression ‘six points’ does not
refer to some language-independent objects in the way that the expressions ‘the
man’, ‘the ball’, ‘the line’ and ‘The Evening Star’ refer to language-independent objects. Points are not ‘out there’ in the way that planets, men, balls, and
lines are out there. (CSR 68)
Here, too, the argument about thoughts is based on the ontology of the
content of the thought, that is, of points.
And, still dealing with the football example, but now relating the argument to the more technical terminology in which the theory was stated,
and adding point (1), the representation requirement:
At the lowest level, the shift from the X to the Y in the move that creates institutional facts is a move from brute level to an institutional level. That shift . . .
can exist only if it is represented as existing. But there can be no prelinguistic
way to represent the Y element because there is nothing there prelinguistically
that one can perceive or otherwise attend to in addition to the X element. . . .
Without a language, we can see the man cross a white line holding a ball. . . .
But we cannot see the man score six points . . . without language, because points
are not something that can be thought of or that can exist independently of
words or other sorts of markers. (CSR 68)
And this, Searle claims, holds about institutional reality in general. Notice
that here, at the crucial point, argumentation about the fact and about the
thought coincide: “points are not something that can be thought of or that
can exist . . .” (my italics).
On the general level, the argument is supplemented by a few additional
considerations. Status functions “exist only by way of collective agreement,
and there can be no prelinguistic way of formulating the content of the
agreement, because there is no prelinguistic natural phenomenon there”
(CSR 69). More precisely, “in the case of status-functions, there is no
structural feature of the X element sufficient by itself to determine the Y
function. Physically X and Y are exactly the same thing. The only difference
is that we have imposed a status on the X element, and this new status
needs markers, because, empirically speaking, there isn’t anything else
there” (CSR 69). Now could the X term itself be such a marker, the “conventional way to represent the status”? Notice well Searle’s answer: “it
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 103
Language and Institutions in The Construction of Social Reality 103
could, but to assign that role to the X term is precisely to assign it a symbolizing or linguistic status” (CSR 69).
Searle summarizes his argument as follows:
Because the Y level of the shift from X to Y in the creation of institutional facts
has no existence apart from its representation, we need some way of representing it. But there is no natural prelinguistic way to represent it, because the Y
element has no natural prelinguistic features in addition to the X element that
would provide the means of representation. So we have to have words or other
symbolic means to perform the shift from the X to the Y status. (CSR 69–70)
Here, notice the two-step movement—first arguing about thoughts (“we
need some way of representing . . .”) from the level of facts (the mode of
existence of the Y level), then about facts (language-dependence of the
shift) from the level of thoughts (language-dependence of the thought)—
and the identity of F1 and F2 (the representations constitutive of the institutional facts have as their content the very institutional fact they
constitute).
2.
So far we have examined Searle’s claim that institutional reality depends for
its existence upon language, and how he explains and justifies this claim.
Next, let us turn to certain difficulties that arise in connection with Searle’s
argument. In my view, the main are the following three: first, Searle’s argument is in tension both with his claim that continuity exists between the
linguistic and the nonlinguistic, admitting of no sharp line of demarcation
(CSR 71), and with his argument that his account is not circular (CSR
72–76). Second, the markers can hardly be of any help in the initial shift
from X to Y unless they are already endowed with the capacity to symbolize beyond themselves: but if they are, the initial shift has already been performed and the markers come too late. Third, the argument is vacuous or
nearly vacuous because it operates with an extremely weak concept of what
it means for something to be linguistic: it requires only that a thing have
the capacity to symbolize beyond itself in a publicly understandable way,
and is ready to confer it indiscriminately. Let us look at each of the difficulties in more detail.
First, we have seen that Searle’s argument presupposed a rather sharp
distinction between the brute level and the symbolism-endowed (i.e., linguistic) level. Without such a sharp distinction, the argument does not
work. Why? Because of the “no availability of extra-linguistic markers”
premise. The conclusion that it is only in the realm of language (or, rather,
Mystery of CapitalCRev
104
2/18/08
11:13 AM
Page 104
Josef Moural
symbolism) where the required markers could be found can be drawn only
if it is clear that (a) they are not available on the brute level, and (b) there
is no other place to look for them but language (symbolism). In other
words, it requires a sharp and comprehensive topography of the area in
question, the more so given the modality of Searle’s lemmas (he says
“there can be no prelinguistic way to represent the Y element because there
is nothing there prelinguistically,” and “we cannot see the man score six
points . . . without language, because points are not something that can be
thought of or that can exist independently of words or other sorts of markers”—CSR 68, my italics). If the boundary between the brute level and the
level of the symbolic is not sharp to the extent that we can safely exclude
the possibility of some semibrute, semisymbolic entities, or of entities of
some other (unknown) kind that could compete with symbolism in
explaining how it is possible that football points exist, I do not see how it
is possible for Searle to draw the desired conclusion.
But if Searle’s main argument (not the main argument of the book, of
course, just the main argument of Chapter 3, main regarding our topic of
the relationship between institutional reality and language) requires that
there is a fundamental gap between the brute and the symbolismendowed, we need to get worried by another claim he makes. He says: “I
do not think there is a sharp dividing line between . . . the linguistic and
the prelinguistic” (CSR 71). I do not see how to reconcile this statement
(if it is meant ontologically and not epistemically, which is what the context suggests) with the conditions that are required for the main argument
to go through.
A similar clash occurs between the main argument and another part of
Searle’s exposition, this time not just a single isolated remark but a point
with an indispensable role in the architecture of Searle’s doctrine. I mean
Searle’s treatment of the problem of language itself as an institution: if all
institutions presuppose language, and language is itself an institution, then
does it presuppose language too, or not? And what does it mean if it does?
This is obviously a serious problem that Searle has to deal with, and he
addresses it in the five pages immediately following the main argument
(CSR 72–76). Basically, the challenge is for Searle to show why what was
impossible in the case of extralinguistic institutions, namely, that they be
recognizable as existing without the help of some sort of linguistic markers, is possible in the case of language itself.
The stakes here are high, for there is nothing on the brute level of
sound or visual tokens that can serve as a clue to the symbolic level, exactly
like in the case of touchdowns and points: “If it is true, as it surely is, that
there is nothing in the physical structure of the piece of paper that makes
it a five dollar bill, . . . then it is also true that there is nothing in the
acoustics of the sounds that come out of my mouth or the physics of the
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 105
Language and Institutions in The Construction of Social Reality 105
marks I make on paper that makes them into words” (CSR 72–73). I am
afraid that Searle’s solution comes here as a remarkable anticlimax. Here is
what he says:
The solution to our puzzle is to see that language is precisely designed to be a
self-identifying category of institutional facts. The child is brought up in a culture where she learns to treat the sounds that come out of her own and others’
mouths as standing for, or meaning something, or representing something.
And this is what I was driving at when I said that language does not require
language in order to be language because it already is language. (CSR 73)
This may all be true, but the answer we were expecting, the answer to the
question what makes language different, what allows us to recognize the
symbolism in this case without appeal to other symbolism, while we
assumed it be impossible in all the other cases; that answer is not here. All
that we are told is that in fact this is what happens: children do learn the
meanings that patterns of sound or shape have. It indeed does happen, but
if it can happen in the case of language, what makes it impossible in the
case of other institutions? If we cannot explain what makes this difference,
the force of the main argument is seriously damaged.
The second difficulty is at least as grave as the first, and it does not concern a tense relationship between the main argument and some other part
of Searle’s theory, but rather the strength of the main argument itself.
Remember, the situation discussed in the main argument is that of the initial shift from the brute level to the institutional, from the world consisting solely of physical objects to the imposition of the first status-function
Y. The crucial point of the argument was: without linguistic markers, such
a step could not be taken, for there is nothing in the physical object X
alone that could serve as a clue to its symbolic dimension. If we take the
symbolism away, there remains nothing there but the physics, and one just
cannot find the way from pure physics to the existence of touchdowns,
football points, or money without linguistic markers, without some conventional way of representing the status, of formulating the content of the
collective agreement.
But, we need to ask, what are these markers? In particular, are they
already endowed with the power to symbolize or not? If they are not, they
can be hardly of any help, as they are just objects among others and the
same argument applies to them: there is nothing in them serving as a clue
to the symbolic dimension. But if they are already endowed with a power
to symbolize, they come too late to help us with the problem of the initial shift,
for that shift has already been performed when these markers were created
as markers (when the status-function Y has been imposed on the physical
X).
Mystery of CapitalCRev
106
2/18/08
11:13 AM
Page 106
Josef Moural
Alternatively, one could develop the second horn of the dilemma in the
form of an infinite regress objection. How could the marker M1 have been
created without the help of some other marker or markers? Clearly, if the
main argument is valid, there had to be at least one other marker M2 around,
otherwise there is no clue to the symbolic dimension of M1. Obviously, the
same question could be asked regarding M2 (were M2 already endowed with
the power to symbolize?), leading us to another marker, M3, and so on. This
seems to be a serious difficulty for the main argument.
The third difficulty has to do with the permissively broad concept of
language used by Searle. One could, of course, express a concern whether
such terminology is appropriate, and whether it is not misleading to
announce a topic like “the role of language in institutional reality” (CSR
57), when what is in fact discussed is the role of simple symbolism equivalent to marking football points by piles of stones (as in the example from
CSR 66 quoted above, **). But such concerns I am leaving aside, for I
have a more substantial worry. My worry is that the all too permissive concept of language threatens to make the initial claim that institutional reality depends on language vacuous or nearly vacuous: if every X becomes
automatically linguistic with the shift from X to Y, then there is not much
information contained in the claim that a linguistic element is necessarily
involved in the existence of every institutional fact.
Such potential panlinguisticism is not foreign to the text we are discussing. When discussing the indispensability of markers (as ways of representing statuses), Searle inserts a question posed by a fictive interlocutor, to
which he immediately answers: “‘But why couldn’t the X term itself be the
conventional way to represent the new status?’ The answer is that it could,
but to assign that role to the X term is precisely to assign it a symbolizing or linguistic status” (CSR 69). Similarly, Searle says that we must think of language as constitutive of genuine institutional fact, “because the move that
imposes the Y function on the X object is a symbolizing move” (CSR 71).
And here are two other passages that make the same point quite clearly:
“The move from the brute to the institutional status is eo ipso a linguistic
move, because the X term now symbolizes something beyond itself” (CSR
73); and “The move from X to Y is already linguistic in nature because once
the function is imposed on the X element, it now symbolizes something else,
the Y function” (CSR 74). I shall refer to this position as to the eo ipso view,
and to the class of cases of which it is supposed to hold, the eo ipso cases.
Now if we adopt the eo ipso view, it seems inevitable that we should
answer Searle’s question “what exactly is the role of language in the constitution of institutional facts?” (CSR 37) by saying: “None. For all that is
really needed comes already with the imposition of status-function. It is
true that such imposition necessarily involves symbolism, for the X element
now means or symbolizes more than can be found in its physical, chemi-
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 107
Language and Institutions in The Construction of Social Reality 107
cal, and other similar features, and one can even call such symbolizing a
linguistic element (although it may be questionable whether it is not terminologically extravagant)—but all that is just subsequent describing and
labeling, which does not add anything to what is already there simply due
to the imposition of status-function, due to the move from X to Y.”
At this point, it not only seems that the main claim of chapter 3 is vacuous, but one can also worry whether the eo ipso view is compatible with
what I called the main argument (summarized in section 1 above). For, in
the main argument, Searle intended to show that the shift from X to Y is
impossible without help of symbolic markers, while here he appears to be
saying that the shift from X to Y already contains all the symbolism
required. However, on a closer look it turns out that this need not be a
problem, at least if we boldly adopt the panlinguistic attitude. This, essentially, is the route that Searle takes. In the continuation of the passage
about the child who learns a language quoted above (**p. 6–7), he says:
“Why can’t all institutional facts have this self-identifying character of
language? Why can’t the child just be brought up to regard this as so-andso’s private property, or this physical object as money? The answer is, she
can. But precisely to the extent that she does, she is treating the object as
symbolizing something beyond itself; she is treating it as at least partly linguistic in character” (CSR 73).
In light of this passage, we can see how the eo ipso view and the main
argument click together. It is because of the main argument’s point about
the need of symbolic markers that we can be sure that in each shift from X
to Y such a symbolic element is present. The appearance of incompatibility is only the result of the tendency to read the main argument as arguing
for the nonvacuity version of the claim, that is, the version which would
claim the linguistic element to be an autonomous, self-standing necessary
constitutive component of institutional facts, and not only a descriptive
feature with no separable constitutive role. When oriented on the nonvacuity version of the claim, we expect the symbolic markers necessary for the
shift from X to Y to be somehow external to the shift and pre-existent in
the treasury of the language. However, we see that we cannot stick to such
a conception, for it would make impossible the institution of language.
Thus, we have to admit that the symbolism required can be internal to the
shift, can be simply a descriptive aspect of the imposition of status-function. From the perspective of the vacuity version, the threat of incompatibility disappears, and so does the second difficulty discussed above4 (I
discuss what remains of the first difficulty in section 3 below).
4. If markers are not (always) external and pre-existent, the problem of infinite regress of
the original shift (i.e., the second difficulty) does not occur.
Mystery of CapitalCRev
108
2/18/08
11:13 AM
Page 108
Josef Moural
“Now is it really a difficulty you are talking about here?” someone
might ask at this point; “is it not rather the case that we have here a clear
and flawless doctrine, only of a slightly different content (i.e., the vacuity
version of the claim) than expected?” We shall return to this question in
section 3 below, where I shall attempt to find the best way to treat the topics discussed in chapter 3 of Searle’s book. But, preliminarily, I should say
that it indeed seems to be a difficulty for the position presented in the
book, for Searle obviously was concerned to argue for the nonvacuous
claim. “Throughout this book I have tried to emphasize that in institutional facts language is not only descriptive but constitutive of reality,” he
says quite clearly (CSR 120; see also CSR 59, 60, 64), and where he comes
closest to explicitly endorsing the vacuity version, he says “I am not comfortable with it” (CSR 74).
3.
In this section, I introduce and discuss two more potential solutions to our
problem, one Searle’s, the other half Searle’s and half mine (or perhaps
Searle’s without qualification, but not made clear enough in the book).
These two ideas will show us the way to remove the difficulties faced so far
by Searle’s account.
First, by distinguishing between the vacuity and the nonvacuity version
of the claim, we certainly did not exclude the possibility of a mixed
approach, which would ascribe the eo ipso symbolism to one portion of
institutional reality and the external markers symbolism to the other. Now
such a mixed approach appears to be Searle’s considered position, stated
most clearly in the following passage:
So we need words, such as ‘money’, ‘property’, etc., or we need word-like symbols, such as those just considered [royal crowns, wedding rings, uniforms, etc.—
J.M.], or in the limiting case we treat the X elements themselves as conventional
representations of the Y function. To the extent we can do that, they must be
either words or symbols themselves or enough like words to be both bearers of
the Y function and representations of the move from X to Y. (CSR 75)
The classification seems to be clear here: the required representation is
either an external marker, or the eo ipso symbolism included in the move
from X to Y. External markers can be (i) words or (ii) wordlike symbols; eo
ipso symbolism can be involved when X is (iii.a) a word, (iii.b) a word-like
symbol or (iii.c) anything else.5
5. Another passage speaking in favor of the mixed approach: “a thought they cannot
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 109
Language and Institutions in The Construction of Social Reality 109
Of course, to the extent that a language-dependency claim is made
about institutional reality in general, and not per partes about its various
regions, the content of the claim should collapse to the lowest common
denominator, that is, to the vacuity version—but this is basically an issue
of formulation, not of substance. However, there remains a substantial
problem, namely, what to do with the threat of incompatibility between
the main argument (CSR 66–71; see section 1 above) and the existence of
the eo ipso cases, regardless of how marginal they may be. Remember, the
conclusion of the main argument can be drawn only if eo ipso cases are
impossible: thus, unless there is a substantial explanation of why eo ipso
symbolization is allowed for one class of cases and not allowed for another,
the mixed approach inherits at least the first of the difficulties discussed in
the previous section.
I believe that it is only in the following brief remark where Searle provides us with a hint regarding the solution to the difficulties we are facing.
He says: “The account also has this consequence: the capacity to attach a
sense, a symbolic function, to an object . . . is the precondition not only of
language but of all institutional reality. The preinstitutional capacity to
symbolize is the condition of possibility of the creation of all human institutions” (CSR 75). Searle does not elaborate on this point at all in the
book, but we can—and we can use several other texts by Searle to support
our attempt.
First, who or what is the bearer of the capacity to symbolize in the passage just quoted? Does Searle mean the capacity of things to receive
imposed symbolism, the capacity of X to be assigned a status-function Y? I
believe he does not, and my reasons for believing that have to do as much
with relevance as with truth. First, even if nearly everything that Searle says
in the short passage applies also to things as potential bearers of symbolic
function, their capacity in this respect simply is not interesting enough, and
nothing (or nearly nothing) gets explained by invoking it. Second, Searle
speaks not only of a capacity to symbolize, but also of a capacity to attach a
symbolic function, and this is a capacity that things do not have. Who or
what does? It is us, humans, who are the bearers of this capacity, and Searle
pointed out this “remarkable capacity that humans and some other animals
have to impose functions on objects” already early in chapter 1 (CSR
13–14).
Thus, the basic explanation on which all that we discussed so far
appears to depend is the following: it is intentionality that is responsible
for the creation of symbolic markers and institutional reality. In each such
think without words or other symbols, even if the only symbol in question is the object itself” (CSR
76; my italics).
Mystery of CapitalCRev
110
2/18/08
11:13 AM
Page 110
Josef Moural
case, the ascription of the particular function Y ascribes to the X in question something that is not to be found in the X when we disregard everything symbolic; in that precise sense, each such move—by making X to
count as Y—makes X to symbolize something beyond itself, and can be
said to be symbolic or linguistic in a very broad sense. Then, in many of
the following moves, the already created symbolism-loaded objects can be
used by intentionality in creation of further symbolism-loaded objects.
This view is not only in perfect agreement with Searle’s well-known
doctrine of derived intentionality,6 it is even required by that doctrine. To
see this it is sufficient to repeat our earlier question, from where does the
symbolism of the symbolic markers come? And here the answer is clear:
their intentionality, their capacity to point to something beyond themselves, is only borrowed or derived from the intrinsic intentionality of the
mind (and is thus observer-relative). Our question has been already asked
and (regarding the main issues) solved by Searle in his 1983 book
Intentionality: “How does the mind impose Intentionality on entities that
are not intrinsically Intentional, on entities such as sounds or marks that
are, construed in one way, just physical phenomena in the world like any
others?” (27).
With this explanation at hand, we can see why Searle did not make language one of the three or four basic elements—imposition of function,
collective intentionality, constitutive rules, and perhaps the Background
(CSR 13)—required for the construction of institutional reality. We see
that collective intentionality on the one hand and assignment of statusfunction plus constitutive rules on the other7 are already a strong enough
explanatory basis, and that the constitutive role of language is ultimately
reducible to the constitutive role of intentionality combined with the assignment of function. And we see that the difficulties we were facing before are
now disappearing.
For now we can see that the difficulties were largely the result of overexaggerating the role played by symbolic markers. Having assumed that
the markers themselves were enough to perform the shift from the brute
to the institutional level, we encountered difficulties insofar as it appeared
that the markers would inevitably come too late to assist with the primary
shift, and with the explanation of why what was shown in general to be
6. See Searle 1980, 451–52; Searle 1983, 27–28 and 176–79; and Searle 2002, 116.
7. I have suggested elsewhere that the structural relationship between assignment of status-function and constitutive rules in the architecture of Searle’s theory is not clear, and that
it seems that they do largely or entirely the same job (once there is a status-function assigned,
there is no separate work remaining to be done by the constitutive rule) and thus are likely
to be just two descriptive aspects of one and the same thing (which I proposed to call acceptance unit). See Moural 2001, 90, and Moural 2002, 274–75 and 280.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 111
Language and Institutions in The Construction of Social Reality 111
impossible (i.e. to find a clue to the symbolic dimension in a purely brute,
symbolism-void entity) now should be possible for language. The necessity
to account for the creation of language itself as one of the institutions led,
insofar as we tried to stick to the unrealistic claim ascribing the over-loaded
role to the markers, to keeping the litera of the claim but emptying its content: the only way to save the claim was to say that the emergence of the
markers is (or at least can be) epiphenomenal on the ascription of statusfunction (the eo ipso doctrine). These difficulties, we can see now, resulted
from neglecting the true agent of the actions in question, i.e. the intrinsic
intentionality.
To sum up the view resulting from our considerations: the vacuous linguistic element (i.e. the fact that, once assigned a new status-function, the
X in question—qua Y—necessarily means something beyond itself) is
undoubtedly a pervasive descriptive feature of institutional reality. Besides,
there are a number of good reasons to believe that there is a non-vacuous
constitutive role for linguistic elements to be found in a large portion of
institutional reality: one reason for this is the sheer complexity of most institutions (CSR 77), another is the deontic powers connected with them (CSR
70), yet another is the epistemic role the markers are likely to play (CSR
76–77). But we do not gain anything by attempting to overstretch the
extent to which such markers play a non-vacuous role. And when we
attempt to do this, the theory loses plausibility and perhaps even coherence, for it is clear that there cannot be any already existing linguistic markers assisting in the creation of the first linguistic markers. In particular, it
may be a good thing to abandon what I call the main argument (CSR
66–71), because it clashes with the eo ipso view required in the case of the
creation of linguistic markers themselves. And the clash is now resolved:
once we recognize the role of intentionality as the preinstitutional capacity to attach symbolic function, we see that what appeared impossible in
the main argument (i.e., to assign symbolic function without pre-existing
symbolic markers) is really possible, for intentionality already is such a
pointing-out-beyond-itself, which we understand is necessary in order to
perform the semantic shift beyond the brute level.
In Moural 2002, I attempted to draft a program of future work that
should be done on Searle’s theory of institutions (which, by the way, I consider one of the most promising and most exciting philosophical theories
of the past few decades). Among the open problems I mention there are:
(1) the worrying fact that there seem to be “two different sets of claims”
connected with the linguistic element, “one grandiose . . . , and one
extremely modest” and possibly bordering on self-annihilation (Moural
2002, 281); and (2) the problem of how successful Searle has been in dealing with his unified ontological task (i.e., the task to integrate institutions
into a more basic physical and biological ontology—CSR xi) (Moural
Mystery of CapitalCRev
112
2/18/08
11:13 AM
Page 112
Josef Moural
2002, 279). I hope it is much clearer now what we should think about the
double set of claims. Regarding the unified ontology task, I think it is clear
now that the crucial point is to show how intentionality is possible “in a
world that consists entirely of physical particles in fields of force” (CSR xi).
Once we manage that, Searle has shown us very plausibly how to deal with
the rest (linguistic markers, institutions etc.).8
R E F E R E N C E S
Moural, Josef. 2001. “Two Worries relating to Searle’s Theory of Rationality.”
Philosophical Explorations 4.
———. 2002. “Searle’s Theory of Institutional Facts: A Program of Critical
Revision.” In Speech Acts, Mind, and Social Reality: Discussions with John R.
Searle, edited by Günther Grewendorf and Georg Meggle, 271–86. Dordrecht:
Kluwer.
Searle, John R. 1980. “Intrinsic Intentionality.” Behavioral and Brain Sciences 3:
450–56.
———. 1983. Intentionality. Cambridge: Cambridge University Press.
———. 1995. The Construction of Social Reality. Harmondsworth: Penguin.
———. 2002. Consciousness and Language. Cambridge: Cambridge University
Press.
8. My work on this paper has been supported by the GAâR grant 401/01/0968. I have
benefited tremendously from having spent the academic year 2001/2002 at the University of
California, Berkeley, as a Fulbright Scholar. I learned a lot from the participants of John
Searle’s graduate seminar on institutional reality in Berkeley, spring 2002, especially from Axel
Seemann and Hui-chieh Loy. Most deeply indebted I am to John Searle, who invited me to
teach that seminar together with him, was a very generous host during my Berkeley stay, and
keeps being a most highly demanding discussion partner in philosophical matters. Later, I
benefited much from very competent proposals and comments of Andrew D. Spear.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 113
The Mystery of Human
6
Capital as Engine of
Growth, or Why the U.S.
became the Economic Superpower
in the Twentieth Century
Isaac Ehrlich
Prologue
Common to the bulk of the “new” economic growth and development literature is the idea that the process by which less-developed countries break
out of a poverty trap and achieve steady, self-sustaining growth in real percapita income is predicated on persistent production and accumulation of
“human capital.” This powerful concept is wrapped up in three layers of
mystery. First, unlike physical capital, human capital is not a tangible asset.
How, then, can we account for it empirically? Second, what explains its
continuous formation over time? Third, how is such formation transformed into growth in real output and personal income?
One of the objectives of this essay is to unwrap this apparent mystery
through an exposition of a general-equilibrium paradigm of economic
development where human capital, or knowledge, is the engine of growth,
its accumulation is enabled by parental and public investments in children’s
education, and underlying “exogenous” institutional and policy variables
are ultimately responsible for both human capital formation and long-term
growth.
The original version of this paper was presented as the author’s thesis lecture for his Honorary
Doctorate from the Université d’Orleans, France, on October 1, 2002. It was later presented
in the April 2003, NSF-supported interdisciplinary conference The Mystery of Capital and the
New Philosophy of Social Reality held at UB and revised as NBER Working Paper No. 12868,
2007. It was also presented as the author’s Provost Lecture at SUNY Stony Brook on April
12, 2007. The author is indebted to Jinyoung Kim for collaboration on section 6.C of this
paper, and to Robert King, Warren Sanderson, Eric Hanushek, Sam Peltzman, Claudia
Goldin, Yong Yin, Serguey Braguinsky, and Zhiqiang Liu for valuable comments and suggestions on earlier drafts. Hyong-uk Kim, Xuezheng Qin, and Yiqun Wu provided dedicated
research assistance.
113
Mystery of CapitalCRev
114
2/18/08
11:13 AM
Page 114
Isaac Ehrlich
The paradigm is developed in the context of a competitive market
economy in which human capital, measured imperfectly by quantitative
indicators of schooling and training, is competitively rewarded and efficiently allocated to productive activities. The model also recognizes, however, the role of externalities such as market imperfections that affect
adversely the accessibility and financing costs of schooling for those with
borrowing constraints, or informal knowledge-spillover effects emanating
from workers and entrepreneurs with superior education and skill, which
enhance the productivity of others with whom they interact. The way these
externalities are internalized may vary across different economies by the
political and legal framework governing the economy, and as a consequence of accommodating economic and educational public policies, especially insofar as higher education is concerned. Such factors ultimately
account for differential long-term growth patterns in different countries.
A more specific objective of the presentation is to illustrate the power
of the “human capital hypothesis” to explain observed differences in longterm growth dynamics across specific countries. The case in point is the
emergence of the U.S. as the world economic superpower, overtaking the
U.K., and Europe in general. The U.S. was a relatively poor country over
much of the nineteenth century. In the last few decades of that century,
and especially during the twentieth century, however, the U.S. has overtaken the U.K. and other major European countries, and then developed
considerable advantage over these countries in terms of not just gross
domestic product, but per-capita GDP as well. What may be less known is
that over the same period the U.S. has developed a considerable gap over
Europe in the schooling attainments of its labor force, especially at the
higher education level. The gap remained significant through the entire
twentieth century, although it narrowed in the latter part of it, and is continuing to narrow in this decade. Largely accounting for this gap was the
massive high school movement of 1915–1940, but an independent gap
emerged as early as the 1860s with the U.S. foray into tertiary education
beginning with the first Morrill Act of 1862, and continuing especially
with the massive higher education movement following World War II. A
basic argument of this paper is that the U.S. lead in knowledge formation,
imperfectly measured by higher educational attainments, has been a major,
and perhaps the major instrument through which the U.S. overtook
Europe as the economic superpower in the twentieth century.
To illustrate the case empirically, it is worth noting that by popular
measures of real income used in international comparisons (GDP, adjusted
by Purchasing Power Parity), the U.S. maintains a considerably larger level
of per-capita income relative to practically all top twenty-five countries in
the world, including even small tax-heaven countries (see appendix A, table
A). In the early1800s, however, the U.S. had levels of GDP and GDP per
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 115
The Mystery of Human Capital as Engine of Growth
115
capita considerably below that of the U.K. and it was not until 1872 for
GDP and 1905 for GDP per capita when the U.S. has overtaken the U.K.
Figures 1 and 2 (see appendix B) illustrate the comparisons poignantly.
Abstracting from year-to-year and cyclical fluctuations, both the U.S. and
U.K. graphs relating the logarithm of GDP or GDP per capita to chronological time appear over the long haul to resemble the shape of an upwardsloping straight line. The slope of each line represents the long-term
annual growth rate of GDP or GDP per capita. The fundamental difference is that the slopes are higher for the U.S. relative to the U.K. In other
words, the U.S. has overtaken the U.K. because its long-term growth rates
have been higher: Over the 131-year period 1871–2003 (starting at the
point of overtaking) the U.S. versus U.K. GDP growth rates have been
3.39% versus 1.91% per annum while the corresponding per-capita GDP
growth rates were 1.87% versus 1.42%.1 In recent decades, these gaps have
narrowed. For example, over the period 1961–2003, the comparative
growth rates of GDP in the U.S. versus the U.K. were 3.37% versus 2.43%,
while those for per-capita GDP were 2.25% versus 2.11%, respectively.2 My
basic thesis is that differences in long-term per-capita income growth stem
primarily not from differences in physical stocks, including land or other
natural resources, but from differences in the rates of growth of human
capital. Both human capital formation and its impact on growth, however,
are ultimately attributable to underlying institutional and policy factors
which reward knowledge formation within an economy. In what follows I
examine whether this hypothesis has a leg to stand on.
1. The “Mystery” of Growth: The Human Capital
Hypothesis
What accounts for differences in wealth across nations has been a key puzzle of economic science since Adam Smith. Logically, the question involves
1. These statistics are taken from Maddison 2003. All figures are converted to 1990 U.S.
dollars using the Geary Khamis Purchasing-Power-Parity (PPP) method. Similar graphs apply
to other major European countries as well. For example the growth rates of GDP and GDP
per capita (in parentheses) over the period 1850–2003—starting when the U.S. overtook
other major European countries in per-capita GDP—were: 3.52 (1.83) for the U.S.; 1.98
(1.46) for the U.K.; 2.06 (1.72) for France; 2.31 (1.71) for Germany; 2.48 (1.75) for Italy;
2.18 (1.82) for Spain.
2. The shorter-term trends have been uneven for other major European countries. Over
the period 1961–2003 the per-capita GDP growth rate in France and Italy were 0.21% and
0.40% higher than in the U.S., respectively, while in Germany it was .14% lower. However,
over 1976–2003, e.g., the U.S.’s per-capita GDP growth was 0.28% higher than France’s,
0.47% higher than Germany’s, and .06% higher than Italy’s.
Mystery of CapitalCRev
2/18/08
116
11:13 AM
Page 116
Isaac Ehrlich
both static and dynamic elements: why are some nations doing better than
others economically at a point in time, and why some nations become
more successful than others over time. In the terminology of the current
literature on economic growth and development, this two-part question
relates to determinants of the long-term rate of growth, as distinct from the
level, of per-capita real income or GDP, taking the latter to represent a
scalar measure of personal economic welfare.
A significant advance in the modern economic treatment of the problem
came about with the neoclassical growth model, which identifies key factors
contributing to a steady-state level of per-capita income and its associated
capital-labor ratio (K/L), under any exogenously given rate of population
growth and level of production technology. The model thus attributes persistent growth in per-capita income over time, which is a more relevant measure of private economic welfare than aggregate income, strictly to
exogenous technological shocks. This inference can be conveniently illustrated via the following “neoclassical” aggregate production function:
Y = B(T)F(L, K), where Y is the economy’s aggregate output, F is a
constant-returns-to-scale production function summarizing the impact of
conventional labor (L) and physical capital (K) inputs on production, and
B(T) represents the process by which “technology” (T) augments the
impact of these inputs. Under an exogenously given technology, the neoclassical growth model suggests that the steady-state level of per-capita real
income (y) is given by:
(1) y* ; B(T)f(k*),
here k* ; (K/L)* is the “golden rule,” or equilibrium capital to labor
ratio.
Growth in the equilibrium per-capita income level y* can thus occur by
this analysis through exogenous technological advances. The role of technology, B(T), can be interpreted more broadly to include any and all factors
that enhance the utilization of the labor and physical capital resources available to the economy at a point it time. In principle, therefore, the economic
and regulatory policies that facilitate the operational efficiency of the market
economy within which economic resources are utilized are also subsumed by
this factor—a point that will be further underscored in later sections. Like
technology, these factors are assumed to be exogenously given to the economy. They affect the level of output per capita at a point in time.
In the last two hundred years or so, however, the world has witnessed
a relatively new phenomenon in economic history: persistent and seemingly self-sustaining growth in per-capita real income over the long haul in
most of the so-called developed economies following the technological
shock produced by the industrial revolution. Periodic and occasionally
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 117
The Mystery of Human Capital as Engine of Growth
117
large business-cycle disturbances notwithstanding, this phenomenon is still
continuing, although at a different pace in different countries.
Furthermore, over the last century or so, the world has also experienced
episodes of economic takeoffs by less developed countries from relatively
stagnant, low income levels into regimes of self-sustaining growth (e.g.,
the Asian Tigers), as well as episodes in which a relatively poor economy
has overtaken a much wealthier one (e.g., the U.S. versus Europe). If
“exogenous” factors, such as accidental technological discoveries, are the
key to this mystery, what accounts for the smooth and continuous, but also
variable, productivity growth in different countries, especially when technological discoveries originating in one country can be rapidly imitated
and adopted by any other country?
The answer offered by much of the recently developed “endogenous
growth” literature (see Lucas 1988, and the articles in Ehrlich 1990) rests
on identifying “technology” as “human capital,” and modeling continuous
and self-sustaining technological advances as the outcome of persistent
investment in human capital treated as a decision variable, subject to individual and social choice, within a dynamic, general equilibrium framework.
The concept of human capital as an intangible asset is perhaps best defined
as a stock of embodied and disembodied knowledge, comprising education,
information, health, entrepreneurship, and productive and innovative skills,
that is formed through investments in schooling, job training, and health,
as well as through research and development projects, and informal knowledge transfers (see Ehrlich and Murphy 2007). By this definition human
capital has two inherent dimensions: “embodied” and “disembodied.” The
first is knowledge embodied in workers, or skill, which augments the productivity of labor and physical capital inputs at a point in time. The second
is creative knowledge that flows from the minds of scholars, scientists,
inventors, and entrepreneurs and increases their capacity to accumulate new
knowledge. This “disembodied” knowledge is manifested in papers, books,
patents, and algorithms, and winds up as technological advances—product
and process innovations—at the firm and industry levels. It is thus more
likely to be acquired and produced in tertiary institutions of teaching and
research. While these types of human capital are distinct, they are also complementary, as creative knowledge feeds on previously accumulated embodied knowledge and facilitates the acquisition of new knowledge.
In this view, technology as popularly understood—inventions, innovations, scientific discoveries—does not “fall from heaven”: it stems from
decisions made by families, firms, and governments to invest in schooling,
job training, and research and development, making human capital the relevant “engine,” or facilitator, of growth. The fuel that feeds this engine are
the rewards or rates of return offered by efficient markets and government
policies to investments in knowledge formation, or human capital. Skill
Mystery of CapitalCRev
118
2/18/08
11:13 AM
Page 118
Isaac Ehrlich
and creative knowledge can accumulate continuously in a given economy
only if the underlying reward system in that economy supports a sufficient
investment in skills and creative knowledge beyond a critical level.
But how does one measure human capital empirically? The empirical
literature associated with this concept identifies it typically as a function of
years of schooling and job experience. These measures must be supplemented, however, by corresponding measures of educational quality. Also
missing are supplementary education and research efforts at the firm level,
which become more important at advanced stages of development, and
informal knowledge transfers. Indeed, the hypothesis that investment in
schooling serves as an engine of long-term growth is yet to be verified
through systematic econometric studies (but see section 6.C for some
empirical insights). Nevertheless, I here venture to apply this hypothesis
using as a case study the comparative long-term real income growth and
educational attainment paths of the U.S. versus the U.K. and other major
European countries over the last century. My dual hypotheses are: first, the
economic overtaking of Europe by the U.S. beginning in the late nineteenth century, and its continuing dominance through the twentieth century, owe largely to the faster and more widespread schooling attainments,
especially at the upper-secondary and the tertiary levels; and second, these
differential schooling attainments, whether domestically produced or
imported, are ultimately attributable to the higher reward the U.S. economy has offered to human capital attainments owing to accommodating
political and institutional factors. To flash out these arguments I begin by
surveying some historical evidence on the evolution of different schooling
attainments in the U.S. relative to Europe over the twentieth century.
2. Evidence on Educational Attainments: Does the
Thesis Have a Leg to Stand On?
The following is a summary of illustrative data on comparative educational
attainments and educational spending by selected categories involving the
U.S. and other European or OECD countries, as reported in authoritative
publications. Since year-to-year reports do not always involve the same categories, occasionally alternative years of data have been selected.
2.1. Data on Schooling Attainments in the U.S. versus OECD
Countries over the Last Century
Table 1: Average years of formal educational experience of the population
aged 15–64 in 1913 and 1989 (Maddison’s data). Highlights of table 1 (see
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 119
The Mystery of Human Capital as Engine of Growth
119
appendix A) include Maddison’s finding (1991) that in 1913 average
schooling years in the U.S. (6.93) was behind Germany (6.94) and the
U.K. (7.28). Japan had the lowest attainment (5.10). Even at that point,
however, the U.S. already had the highest average higher education attainments in years in 1913 (0.2), followed by Netherlands (0.11), and France
(0.10). In 1989, in contrast, Maddison’s data indicate that the U.S.
became the leader in schooling attainments at all levels. Average schooling
years in the U.S. shot up to 13.39, ahead of Japan (11.66), France (11.61),
and the U.K. (11.28). Germany slipped to last place at 9.58. The average
number of higher-education years attained in the U.S. was 1.67, ahead of
France (1.32), with other countries substantially lower. Note that Japan,
which was at the last place in average schooling attainments in 1913, rose
to second place in 1989.3 Unfortunately, no comparable data were available for the same population groups and countries in more recent years,
but the following tables allow for such international comparisons using
alternative educational attainment measures.
2.2. Recent Evidence from OECD’s Education at a Glance,
1998 and 2003
2.2.1. SCHOOLING ATTAINMENTS
Table 2: Percentage of the population that has attained at least tertiary
education Type-A by age group 1998 and 2003. Table 2 (see appendix A)
shows that in 1998, the U.S.’s percentage of the population 25–64 years
of age educated in tertiary type-A programs, defined as regular four-year
colleges or universities and advanced research programs, reaches 26.6%,
followed by Norway’s 23.7%. In this year, the U.S. figure is decisively
above Europe’s five major economies: U.K., Germany, France, Italy, and
Spain (E-5), while the average for all OECD countries is scarcely above
half of the U.S. A striking pattern of the educational gap is that it is
higher among older age cohorts. In the age group 55–64, for example,
the corresponding U.S. percentage is 22%, relative to just 9% for the
OECD average. By 2003 Norway catches up with the U.S. in the age
group 25–64 at 29%, but the average for all OECD countries is still substantially below the U.S. (16%). In the age groups 45–54 and 55–64,
however, the U.S. maintains a decisive advantage of a 2 to 1 ratio or over
in 2003 as well.
3. Early comparative educational data are difficult to collect. Some economic historians
believe, however, that the U.S. relative advantage in education was showing up even before
1913, which would even more strongly support the basic thesis of this paper.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 120
Isaac Ehrlich
120
Tertiary type-B programs, in contrast, which are more popular in some
OECD countries (e.g., Canada, Japan, New Zealand, Sweden) relate to
vocational, rather than academic institutions. But even in total tertiary
educational attainments, the U.S. is second only to Canada in the age
group 25–64 and is leading in the age group 55–64 in 2003. (These data
are not included in table 2, but the source for both is the same.)
Table 3: Distribution of the population that has attained at least upper secondary education, by age group 1998 and 2003. Highlights of table 3 (see
appendix A) include that in 1998 and 2003, the U.S. is leading in the age
group 25–64 (86%, 88%), relative to the OECD means (61%, 66%) but
much more so in the age group 55–64 (80%, 85%), where the second highest are Germany and Japan (76%, 78%). The gap narrows at younger age
groups. In the age group 25–34 in 2003, the U.S. is in eighth place
behind, Korea, Norway, Japan, the Czech and Slovak Republics, Sweden,
Finland, and Canada, but above all the E-5, including Germany. These
data indicate that a number of OECD countries have caught up with the
U.S. in terms of secondary schooling in more recent years. But the U.S.
again shows overwhelming leadership in terms of the proportion of the
population that has attained at least tertiary education.
Table 4: Expected years of tertiary education for all 17-year-olds (1998). This
table (see appendix A) demonstrates more vividly that while the U.S. is still
in a dominant position in terms of the expected number of years of tertiary
type-A education: 2.7 years for both part-time and full-time workers,
Finland (2.9) and Norway (2.7) have already caught up with the U.S., but
France at 1.9 and the U.K. at 1.7 have not done so.
The attainments data tell a dynamic story: the U.S. advantage is highest in the older age categories. The gap is narrowing at the younger ages
as well as over time, which indicates that Europe is closing the educational
gap. But the U.S. still holds a commanding lead in the category of those
who hold at least tertiary type-A education, especially at older age cohorts.
2.2.2. EXPENDITURES
ON
EDUCATION
Comparative schooling attainments, as illustrated by tables 1–4, are but
one dimension of an effective measure of human capital. As important is
the quality of the education experience. A possible measure of quality typically used by economists is educational spending, to which I turn next.
Table 5: Expenditure on educational institutions as a percentage of GDP for
all levels of education by source of funds (1990, 1995, and 2002) (see appen-
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 121
The Mystery of Human Capital as Engine of Growth
121
dix A). At 7.2% of GDP in 2002, the U.S. ranks among the top countries
in terms of total expenditure from both public and private sources for education institutions, being surpassed only by Iceland (7.4%), with Denmark
and Korea (both 7.1%) following the U.S. But these numbers are not fully
revealing because they do not account for the differences in the magnitude
and composition of student populations across countries. More relevant
are data on total spending per student, and these are much higher in the
U.S. relative to other OECD countries (see below).
Table 6: Annual expenditures on educational institutions per student (U.S.
dollars converted using PPP) by levels of education based on full-time equivalents (2002) (see appendix A). The U.S. expenditure per student on all
levels of secondary education in 2002 was $9098, while the average among
OECD countries was $6992, but at this point the U.S. already ranks
behind Switzerland ($11,900), and Norway ($10,154) (Luxembourg at
$15,195, is not a comparable country). In the case of tertiary educational
expenditures (both type A and B), however, the U.S. ($20,545) is second
only to Switzerland ($23,714), and only Sweden ($15,715) and Denmark
($15,183) have spending levels above $15,000.
Table 7: Expenditure per student (private and public) relative to GDP per
capita by level of education based on full-time equivalents (2002) (see appendix A). The U.S. ratio here (25) is just about equal to the average in
OECD countries in the case of all secondary expenditures (26), but at 57,
it is still substantially above the average in OECD countries (43) in the case
of all tertiary expenditures. To the extent that education can be considered
a consumption good, this ranking indicates only that higher education in
the U.S. is now a necessity rather than a luxury good (with income elasticity of demand falling short of unity). But these ratios may largely reflect
differences in the weight of other types of spending on, say, private consumption or public defense, across different countries.
3. How the U.S. Schooling Advantage Emerged: Major
Sources and Trends
a. The secondary schooling advantage. Claudia Goldin (see, e.g., 2001)
argues that what has been mainly responsible for the U.S. advance
over Europe is the massive “high school movement of
1910–1940.” Her thesis is that, although advances in higher education have been important, the mass secondary education system,
which first emerged in the U.S., set the stage for the subsequent
transition to the mass higher education movement. In 1910, school
Mystery of CapitalCRev
122
2/18/08
11:13 AM
Page 122
Isaac Ehrlich
enrollment rates for five- to nineteen-year-olds were fairly similar
among the world’s economic leaders (the ratio of enrollments relative to the U.S. set at 1 was: .93 in France, .96 in Germany, and .82
in the U.K.). But by 1930, the U.S. was three to four decades ahead
of Britain and France, and the high school gap remained large until
the 1950s. The median eighteen-year-old person was already a high
school graduate in the early 1940s. This had a knock-on effect on
the massive development of higher education institutions after
World War II: when President Franklin Roosevelt signed the GI Bill
in 1944, the average GI could attend college because (s)he had
already graduated from high school.
b. The Morrill Acts and the Land Grant institutions of higher learning.
What is being overlooked by the previous explanation, however, is
that the U.S. already held the lead in tertiary enrollment in 1913,
as Maddison’s data show. What may have been responsible for this
historical development are the Morrill Acts (Land Grant Creation)
of 1862 and 1890, and related accommodating factors which made
higher education in the U.S. accessible to larger segments of the
population relative to Europe. John Morrill was a Congressman
from Vermont who managed to convince Congress and President
Lincoln to launch a system of public higher education, to be
financed through land grants from the federal government to the
states. Under the terms of the original Morrill Act, later supplemented by the Hatch Act of 1887, the second Morrill Act of 1890,
and the Smith-Lever Act of 1914, public lands, or funds in lieu of
public lands, were granted to the states for the establishment and
support of land-grant colleges and universities, as well as research
stations that focused on agricultural and mechanical-art studies and
research. I am not aware of any systematic analysis of the role the
Morrill Acts had in the evolution of the higher education system in
the U.S., but some important facts allude to their significance.
There were sixty-eight land-grant public institutions and universities located in the fifty states and Puerto Rico in 1961. Although at
that point in time—following the explosion in tertiary institutions
after World War II—these institutions, varying greatly in size from
the University of California to Delaware State College, accounted
for just less than 5% of all four-year institutions of higher learning,
they still accounted for 48% of total organized research expenditures, 40% of the doctorates conferred, 33% of the current-fund
income for educational and general purposes, and 28% of the value
of plant assets in the U.S.4
4. See Statistics of Land-Grant Colleges and Universities [LGCU], Year ended June
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 123
The Mystery of Human Capital as Engine of Growth
123
c. The GI Bill of 1944. The public education system, bolstered by
the Land Grant movement, received a huge impetus by the
Servicemen’s Readjustment Act, popularly known as the GI Bill,
signed by President Roosevelt in June 1944. The act mandated
the federal government to subsidize tuition, fees, books, and
educational materials for veterans meeting educational admission
requirements, and to contribute to the living expenses they
would incur while attending college or other approved institutions of their free choosing. The GI Bill created a massive higher
education movement. Within the following seven years, approximately eight million veterans received educational benefits. Of
that number, approximately 2.3 million attended colleges and
universities. The high school movement of 1910–1940 played a
critical role in facilitating this development since almost half of
the soldiers returning home from World War II had a high school
diploma and were thus eligible to enroll in colleges and universities. The U.S. lead in higher education was enhanced not just by
the GI Bill, but also by federal Pell grants and the legislation of
tuition assistance supports in many states. Again, Europe was lagging behind the U.S. in this regard over much of the second half
of the twentieth century. The British Education Act of 1955, for
example, just guaranteed all youth a publicly funded elementary
and secondary schooling.
d. Immigration and the brain drain. Another key factor which
accounts for a good part of the U.S. schooling advantage is immigration of human capital into the U.S. In an open economy human
capital is not necessarily just homegrown—it can be imported
through immigration of skilled and highly educated labor. It is
beyond the scope of this essay to assess systematically the brain
drain into the U.S., but there is general agreement for the proposition that the U.S. became a magnet for skilled labor and scientists,
first from Europe and later from Asia as well, following the economic advances of the U.S. in the twentieth century, especially after
World War II. Dramatic support for this conjecture is provided in a
1961, U.S. Department of Health Education and Welfare, Office of Education. In June
2005, the LGCU national association had 214 members. This includes seventy-six land-grant
universities (36% of the membership), of which eighteen are the historically black public institutions created by the Second Morrill Act of 1890, and twenty-seven public higher education
systems (12% of the membership). In addition, tribal colleges became land-grant institutions
in 1994 and 33 are represented in the National Association of State Universities and LandGrant Colleges) through the membership of the American Indian Higher Education
Consortium.
Mystery of CapitalCRev
124
2/18/08
11:13 AM
Page 124
Isaac Ehrlich
2005 study by the Committee on Science, Engineering, and Public
Policy, showing that the share of all the science and engineering
doctorates awarded to international students rose from 23% in 1966
to 39% in 2000, the share of temporary residence among science
and engineering post-doctoral scholars increased from 37% in 1982
to 59% in 2002, and more than one-third of U.S. Nobel Laureates
to date are foreign born.
A number of caveats need to be recognized, however, for a more complete assessment of the U.S. schooling advantage:
i. The U.S. advantage at the tertiary level applies unequivocally to
type-A institutions (regular four-year colleges/universities), but not
as much to tertiary type-B, which are more vocational in nature.
The latter has remained more popular in Europe. Also, the numbers
do not include post formal training and apprenticeships, which are
more prevalent in Europe.
ii. However, schooling attainments, measured as the number of years
of schooling or the percentage of the population with tertiary education, have institutional upper limits, for instance, a PhD degree,
thus becoming a less effective measure of knowledge formation in
highly developed economies. It is thus critical to take into account
another dimension of educational attainments, which is more openended—schooling quality as captured by level of spending per student. In this regard, the educational gap between the US and the
major European countries remains significant, as illustrated by
Tables 5–7. Furthermore, investments in knowledge at the firm
level via general on-the-job training and specific research and development programs are becoming a more important means of knowledge formation in the more developed economies. The U.S. may
still hold a sizeable advantage over Europe in this supplementary
human capital measure as well.
iii. Both schooling lengths and expenditure levels are in essence
“inputs” into effective human capital formation. The picture is far
more mixed concerning “output” or quality measures, such as math
test scores. Evidence indicates that the distribution of U.S. combined mathematics literacy scores of fifteen-year-old students is, in
fact, below that of the average of OECD countries and in the midrange of the E-5 countries (see appendix A, table 8). In contrast, at
the tertiary level, U.S. academic institutions are generally ranked
higher than Europe’s and attract more international students and
faculty.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 125
The Mystery of Human Capital as Engine of Growth
125
4. Whence the Divergence? Contributing Factors
(a) Educational templates. Goldin (2001) and Goldin and Katz
(1999) emphasize the implicit choice between general training
(formal schooling) and specific training (apprenticeship, on-thejob training options). General training is more expensive, but it
produces more transferable and flexible skills across geographical
areas, occupations and industries. The focus on general training in
the U.S. is attributable to the U.S. developing into a larger opentrade area relative to European countries. Its labor force in the
early twentieth century was more mobile and responsive to technological changes in manufacturing, telecommunications, largescale farming, and retailing.
(b) Economic development. The growth of the industrial and transportation sectors of the economy and the expanding size of the
U.S. domestic market raised the rate of return to education, secondary and higher education specifically. The intellectual high
school movements which started in New England spread quickly
to the rich agricultural areas in central and western states, where
rates of return to schooling were as high for blue-collar workers
and farmers as for white-collar workers. The high school movement gained momentum also because of the decentralized educational system in the U.S. owing to the fiscal independence of local
school boards.
(c) Feedback wealth effects. By the early twentieth century, the U.S.
already had the highest income per capita, enabling families to
more easily finance the higher education of offspring.
(d) Educational policies. The U.S. educational system has been more
democratic, secular, and gender neutral. In contrast, the educational systems in Germany, France, and other European countries
were more rigid and elitist over much of the twentieth century.
Differences in institutional restrictions are manifested especially in
the context of tertiary education. In the U.S., publicly subsidized
higher education started with the Morrill Acts, becoming massive
in 1944, while in Europe this process began later—in some countries not until the 1960s and 70s. In France, for example, the
number of college students started increasing considerably only
during the 1980s because of the knock-on effect of expanding secondary education: a political decision was made to increase to 80%
the percentage of age cohorts that would reach the level of the
baccalauriat, and admissions to the first year of university studies
Mystery of CapitalCRev
126
2/18/08
11:13 AM
Page 126
Isaac Ehrlich
was guaranteed to anyone with a high school diploma, regardless
of type. Although European tertiary institutions have become virtually tuition-free in recent decades, access to these colleges and
universities remained much more restricted until recently. The
U.S., in contrast, has practiced virtually universal admission to
higher education, albeit with differences between community colleges and public and private colleges and universities. As noted in
section 2, however, that the gap in higher education enrollments
between the U.S. and Europe is fast closing.5
(e) The political-economic systems. Last, but not least, the U.S. has had
a more democratic political system; e.g., suffrage was extended to
all (white) U.S. males early in the nineteenth century, but much
later in almost all European countries. It has also had a freer and
more decentralized economy, where individuals, families, and
firms can make resource allocation decisions in largely free markets, bolstered by the rule of law and protection of property
rights, including intellectual property. The U.S. has also had less
regulated labor markets, and greater openness to external trade
and immigration relative to Europe. These factors helped produce
a relatively high rate of return to human capital investments for
the domestic population, and a larger premium on completed
education for skilled immigrants.
The preceding analysis traces the gap in educational attainments favoring
the U.S. in the twentieth century to the interplay of two main forces: first,
the feedback effects on private demand for education generated by the new
industrial economy, economic growth, and personal wealth; second, the
impact of the more open economy and society in the U.S. on the returns
to human capital formation, whether domestically produced or imported,
and thereby on economic growth.
By items (a)–(c) above, economic affluence leads to greater demand for
education as consumption, or to greater ability to finance private educational investments by overcoming inherent imperfections in the capital
market. Items (d)–(e) above trace the growth in educational attainments
to institutional, political, and economic policies that lower the costs, or
raise the potential returns to investment in especially higher education,
thus enabling individuals and firms to capture more fully any external
effects generated by education. These factors also encourage immigration
of workers with superior education or entrepreneurial ability. Put differ5. For a survey of European school systems, see section B (Structures and Schools) of
Eurodice 2000.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 127
The Mystery of Human Capital as Engine of Growth
127
ently, the democratic capitalism exercised in the U.S. has0 contributed to
a higher rate of return to individual investment in human capital generally,
and tertiary education in particular.
While the two groups of factors represent apparently opposite directions of causality regarding the association between human capital formation and economic growth, they are, in fact, complementary. Greater
investment in human capital as a proportion of total production capacity
raises productivity growth, while the demand for human capital investments is partly a by-product of economic growth, and this needs to be
accounted for in regression analyses aiming to explain productivity growth
as a function of educational spending. But this would be a partial-equilibrium view of economic development. The endogenous growth, general
equilibrium model discussed below sees both human capital formation and
productivity growth as endogenous outcomes of underlying legal and
political factors. Moreover, prudent political and economic policies are also
affected by the schooling level of the electorate. In this view, the critical
causal factors can be traced especially to those summarized in item (e).
5. Linking Human Capital Formation with Economic
Growth
5.1. The Endogenous Growth Hypothesis: Human Capital as
the Engine of Growth
The literature on endogenous growth attempts to go beyond the neoclassical model of economic growth in two important ways: (a) explaining persistent growth as a result of factors endogenous to the economy, rather
than exogenous, unpredictable technological inventions; (b) identifying
“technology” as human capital, or knowledge. By this view, knowledge
breeds greater knowledge. Some new knowledge translates into higher
productivity of existing resources (embodied human capital), and some is
manifested through innovations, patents, manuscripts, and specialized capital goods that account for what is commonly perceived of as technological innovations (“disembodied human capital”). Human capital is
ultimately the source of both types of “technology,” and can therefore be
considered the engine of growth (see Lucas 1988, Becker et al. 1990, and
Ehrlich and Lui 1991).
The reason persistent growth is enabled by human capital formation is
that knowledge is the only instrument of production that is not subject to
diminishing returns, as John Maurice Clark (1923) argued. The idea can
be formalized in a simple way by specifying a law of human capital accumulation as follows:
Mystery of CapitalCRev
2/18/08
11:13 AM
128
Page 128
Isaac Ehrlich
(2) Ht+1 = A(He + Ht)ht
Here Ht and Ht+1 represent the human capital stocks of a representative agent in generations t and t+1, A represents the technology of learning and human capital transfer, (He + Ht) denotes production capacity (He
representing fixed personal or family endowments and Ht acquired knowledge at t), which is transformed to per-capita real income, or output y =
(He + Ht), at an implicit constant competitive rental rate (normalized at 1);
and ht represents the fraction of production capacity spent by members of
generation t on the human capital formation of members of generation
t+1. While the level of human capital attained by the next generation, Ht+1,
could in principle be subject to diminishing returns in the rate of investment by the current generation, captured by ht, it is specified as a linear
function of the human capital attained by the current generation, Ht. The
implicit argument is that attained knowledge and skill by any given generation enhances both the creation of new knowledge and the productivity
of intergenerational knowledge transfer to the overlapping future generation, thus escaping diminishing returns.
Human capital can thus grow perpetually from one generation to the
other essentially because the level of productive knowledge attained by a
current generation serves as an input into the generation of knowledge in
the succeeding generation. But whether the latter exceeds the former (or
Ht+1 > Ht) and to what extent, critically depends on whether investment in
human capital exceeds a threshold level: by equation (2) if investment, ht,
is not sufficiently high, the knowledge attained by generation t + 1 will be
stuck at the level of generation t, Ht, producing a stagnant equilibrium
level of output. In a decentralized market economy and a democratic political system, investment in human capital is affected directly by individuals
and families, as well as indirectly by the level of public spending they
demand from their local and federal government.
Of course, the production of human capital is a necessary but not a sufficient condition for expansion in productive capacity. Implicit in this
analysis is the assumption that accumulated human capital contributes to
expansion in desired output (Y) through the aggregate production function introduced in section 1 and the accommodating role of efficient markets, which assure the allocation of skill and creative knowledge to their
most productive uses. The endogenous growth paradigm indicates that in
a steady state of continuous growth, physical capital accumulation, including natural resources and productive land, would adjust to the pace of
human capital accumulation, making the latter the economy’s engine of
growth. At a given population level, continuous human capital formation
will lead to continuous expansion in real output per capita (y). Human capital (H) thus replaces the concept of “technology” (T) in equation (1).
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 129
The Mystery of Human Capital as Engine of Growth
129
The model outlined in the preceding discussion is a closed economy
model. In an open economy, expansion of output is also conditional on the
ability of the economy to retain the human capital it produces. The U.S.
was not the first to take off: the industrial revolution began in Europe. But
the emergence of the U.S. as an economic superpower can be attributed to
the ability of the U.S. market to provide a high reward for human capital
investments, and thus to both retain domestically produced human capital
and attract human capital produced abroad.
5.2. The Special Role of Higher Education in Economic
Growth
The previous analysis also rests on the simplifying assumption that workers
are homogenous. In reality, people are heterogeneous in terms of both
innate ability and family endowments they possess. A more complete view
of endogenous growth and development, based on human capital as
engine of growth, must recognize differences among individuals and families in terms of their capacity to both acquire and implement knowledge.
This is the framework used in my current joint work on income growth
and income inequality (Ehrlich and Kim 2007) which is used to explain the
dynamic pattern of both income growth and income distribution over different stages of economic development.
The story is simple: human capital, as measured by average schooling attainments, has a direct effect on the skill and productivity of the
existing labor force, but also an indirect effect on the emergence of new
ideas, that is, technological innovations and productivity growth. Those
who are in a position to acquire more human capital, especially higher
education, because of personal ability or family endowments allowing
them to more economically finance higher education, are likely to be the
“first movers” when it comes to create new knowledge, or implement
advances in knowledge triggered by technological shocks. Both schools
and the labor market also allow for the socialization of knowledge,
whereby the achievements of workers with superior knowledge can spill
over to, and be shared by, other workers. These “spillover effects” tie
population groups of different human capital attainments together over
the development process as well as in a regime of persistent growth, and
ultimately produce stable income distributions. The existence of spillover
effects and imperfections in the capital market also justify government’s
subsidization of education, and especially higher education, in order to
maximize social income and welfare.
Mystery of CapitalCRev
130
2/18/08
11:13 AM
Page 130
Isaac Ehrlich
5.3. The Role of Underlying Factors
The endogenous growth models described above are general equilibrium
models. In such models, both human capital accumulation and income
growth are “endogenous” choice variables: they attain self-sustaining
growth as a consequence of individual choices about optimal investments
individuals make in themselves and their offspring, motivated by a desire
to maximize the return they obtain on these investments. Individual welfare maximization in a decentralized market system thus leads to continuous, self-sustaining growth for the average person in the economy—a
dynamic restatement of Adam Smith’s basic proposition.
But this also means that human capital accumulation and income
growth are two sides of the same coin: while the production functions (1)
and (2) represent a causal relation flowing from per-capita human capital
formation (H) to per-capita income (y), this is a secondary causality. The
primary one relates to the causal effects of underlying “parameters” that
influence both variables; most importantly, factors enhancing the incentives
individuals and families have to invest in their own, and their offspring’s,
knowledge, as well as the ability of the domestic economy to effectively utilize the human capital it generates or imports in domestic production.
Basic parameters affecting both output and knowledge accumulation
are knowledge production and transfer technologies—A and B(T) in
equations 2 and 1—and population longevity (see Ehrlich and Lui 1991),
which enable those investing in learning and training to recoup the benefits of their investments over a longer lifetime horizon. Equally important, however, are “institutional” factors, such as the “rule of law”, a legal
system which protects intellectual and property rights, and a free-enterprise system where wages and rates of return on investment are determined by competitive market forces rather than bureaucratic intervention.
They also include accommodating public educational policies that help
overcome capital market constraints in education financing and internalize spillover effects generated by basic science. These accommodating factors, including government regulations and tax policies, can greatly affect
output growth by the way they enhance or discourage the incentives to
invest in human capital. For example, under a heavily regulated system, let
alone a command economy, the bureaucracy rather than free markets
determines the allocation and remuneration of resources, including education. The Soviet Union invested heavily in basic sciences used largely to
promote military might, not necessarily economic might. Its command
economy system also fostered investment in “political capital” promising
bureaucratic power to apparatchiks, rather than in market-driven productive human capital (see Ehrlich and Lui 1999.) A free market system is
better geared to reward human capital of the productive type through the
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 131
The Mystery of Human Capital as Engine of Growth
131
market mechanism, and is thus more likely to produce self-generating
growth.
Free trade and an open economy create greater opportunities for
human capital accumulation, but also greater challenges. Greater opportunities, because investment in “disembodied knowledge” such as new production processes or new products is subject to scale economies, which
make their returns higher in a larger market open to free trade. Greater
challenges, because opportunities to migrate from one region or country
to another mean that investment in human capital made in one place may
actually wind up benefiting another. Public investment in human capital in
Peru or in Ireland before 1986, for example, did not bring about an economic takeoff and self-sustaining growth partly because graduates of institutions of higher learning sought employment in the U.S. market rather
than in their own countries. But this does not refute the thesis that investment in human capital is the key to economic growth. It simply reflects the
fact that investment that is not backed up by a market system that assures
an adequate reward to knowledge cannot be expected to yield its full economic benefits.
A final underlying factor is the role of externalities inherent in both the
production and transfer of human capital. Private human capital, unlike
physical capital, cannot serve as collateral in financial markets, which limits
borrowing opportunities. This justifies a public role in the financing of
education at all levels, but especially higher education, where investment is
substantial, which enhances accessibility to such educational opportunities
according to talent rather than social class and borrowing constraints.
Moreover, since higher education can generate spillover effects on the productivity of less educated workers that are not fully internalized through a
private reward system, subsidizing it becomes an especially important role
of government. That the U.S. was a leader in opening up massive high
school and higher-education systems has been a significant factor explaining its emergence as an economic superpower.
6. Evidence Linking Education and Productivity Growth
6.1. Evidence from Growth Accounting
Estimates of the role of schooling in explaining per-worker income variations or growth rely on a “growth accounting methodology,” following
the works of Denison (1974) and Solow (1957). The technique ascribes
changes in the aggregate economy (GDP per capita) to variations in aggregate measures of capital utilization and labor employment, with the labor
employment index weighted by measures of the education attainments of
Mystery of CapitalCRev
132
2/18/08
11:13 AM
Page 132
Isaac Ehrlich
workers. Claudia Goldin and others estimate that over the twentieth century (actually since 1915) the expansion in the educational index has
accounted for close to a quarter of the 1.62 percent per year increase in
U.S. labor productivity. Hall and Jones (1999) estimate that in 1988, educational attainments account for over 20 percent of the international variation in labor productivity across different countries.
Studies using the growth accounting methodology invariably find a
substantial unexplained residual variation in productivity, known as the
“Solow residual.” It is generally attributed to “technological growth.”
However, much of this residual variation may be ascribed to the indirect
role of education in inducing technological advancements, as technology is
a derivative of special knowledge, or specific human capital. Indeed, this is
the crux of the “endogenous growth” literature that identifies human capital as the engine of growth.
6.2. Evidence from Rates of Return to Education
That education is the critical factor explaining differences in earnings
across individuals at a point in time has been well established by human
capital theory and related empirical work. The human-capital-earningsgenerating function formulated by Jacob Mincer links the logarithm of
individual earnings to the number of years of schooling and a quadratic
specification of the number of years of job-market experience. This specification allows the measurement of the “rate of return to human capital”
as the regression coefficient associated with the number of years of schooling. Table 9 (see appendix A), based on a study by Heckman, Lochner, and
Todd (2003), indicates that the real rate of return to schooling thus measured has been stable at upward of 10% in six decennial years, but has
approached 13% in 1990. More important, by estimating separate regressions for white and black males, this study shows that over the period
1940–1990, rates of return to blacks, initially lower than those of whites,
have more than caught up with the latter in 1990, indicating that the U.S.
labor markets have become more competitive over time, and better able to
reward human capital regardless of race.
The Mincerian linear regression model does not allow for separate
estimation of rates of returns by alternative levels of schooling. By relaxing various linearity restrictions implicit in the Mincer model, however,
Heckman, Lochner, and Todd (2003) have also estimated rates of return
for primary, secondary, and tertiary levels of schooling as well. Their
results indicate that the rates of return are considerably higher for those
actually completing high school and college education relative to other
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 133
The Mystery of Human Capital as Engine of Growth
133
levels of schooling.6 Other studies indicate that that the rate of return to
especially college education shoots upward at times of rapid technological
innovation, essentially because people with higher skills adapt more quickly
to changes in technology.
These studies focus on returns to education captured in market earnings. New work in economics indicates that this may greatly understate the
full individual returns to education, which are derived from various nonmarket activities as well, such as improved health, longevity, and implicit
individual assessments of their own life-saving values. Ehrlich and Yin
(2005), for example, estimate that both age-specific life expectancies and
implicit private values of life-saving are substantially higher for those with
tertiary, relative to high-school education.
6.3. Linking Investment in Schooling and Per-Capita Income
Growth
Empirical studies linking educational attainments and economic growth
have not produced uniform conclusions, partly because of disagreements
about the quality of available schooling data. Barro and Lee’s (1993)
study, for example, indicates some positive but weak correlation between
the overall schooling data they assembled and growth rates. Following
Ehrlich and Kim 2007, we here attempt to offer a different perspective on
the link between education and growth by stressing the correspondence
between investments in education, rather than the level of educational
attainments, and long-term growth rates of per-capita income. By our
theoretical analysis, the steady state rates of investment in human capital,
which are endogenous outcomes of underlying demographic, institutional
and public policy variables, are the critical determinant of corresponding
long-term growth rates of both per-worker human capital stocks and percapita real output in a growth-equilibrium regime. While reported data on
educational outlays are incomplete, investment levels can be imputed
from time-series evidence on relatively long-term rates of growth of
schooling attainments in different countries. We thus expect a systematic
link between equilibrium values of average growth rates of schooling
6. International comparisons using Mincer’s model or related techniques are hampered
by the absence of comparable data. Existing evidence suggests, however, that estimated rates
of return in the U.S. tend to be high relative to those in other highly developed countries
(See, e.g., Psacharopulous and Patrinos 2002). Less developed countries may show unusually
high rates of return to schooling during a takeoff period from stagnation to continuous, selfsustaining growth regimes.
Mystery of CapitalCRev
134
2/18/08
11:13 AM
Page 134
Isaac Ehrlich
attainments per worker (H) and per-capita GDP (GDPPC) over relatively
lengthy periods of time in countries experiencing persistent growth. To test
this hypothesis, we first estimate expected growth rates of per-capita GDP,
[1 + g(GDPPC)*], and schooling attainments, [1 + g(H)*], which are predicted from underlying country-specific factors through a regression
model described below, and then compute their association using the following log-linear regression specification:
(3) Log[1 + g(GDPPC)]* = a + blog[1+ g(H)]*
Specifically, we use Barro and Lee (2003) data on average schooling years
attained by the population aged 15–65, and Summers and Heston estimates of real GDPPC as proxies for our endogenous variables, along with
data on explanatory variables listed below, to construct a panel of fiftyseven developing and developed countries over an intermediate-length
period of thirty-one years (1960–1991). We first run fixed-effects regressions relating each of our two endogenous variables to a set of underlying
country-specific factors. These include demographic variables (population
longevity measures), public policy variables (the share of government
spending in GDP and a measure of the social security tax rate), as well as
chronological time and the interaction terms of these explanatory variables
with time. (For an explanation of the role of these explanatory variables see
Ehrlich and Kim 2007) The fixed-effects specification also accounts for the
role of idiosyncratic institutional factors that are unchanging over the sample period. This method allows us to generate multiple predicted values of
g(GDPPC)* and g(H)*, in each country over our sample period. We can
then estimate equation (3) using an OLS regression model. Variant 1 of
the model imposes a common intercept term (·) representing the same
technology linking human capital formation to output growth in all countries, whereas variant 2 allows for variation in the latter, using a fixedeffects regression specification.7
7. The analysis involves the following steps. In step 1 we run fixed-effects regressions of
log(GDPPC) or log(H) as a dependent variable on a set of regressors as follows: t, t*log(Pi1),
t*log(Pi2), t*log(G), t*log(PEN), log(Pi1), log(Pi2), log(G), log(PEN), where t is chronological time in years, PEN is a measure of the social security tax rate, Pi1 and Pi2 are probabilities of survival of children to adulthood and of adults to old age, respectively, and G is the
share of government spending in GDP. (For detail see Ehrlich and Kim 2007.) In step 2 we
compute multiple predicted country-specific growth rates of GDP and H over the entire sample period, g(GDPPC)* and g(H)*, based on the estimated regression coefficients involving
t and the interaction terms of the basic explanatory variables with t from step 1. This produces
a large scatter of observations on 1+g(GDPPC)* and 1+g(H)* allowing a meaningful estimation of equation (3). In step 3 we then estimate variants 1 and 2 of equation (3) via OLS
and fixed-effects regressions. Since the countries in our panel are in varying development
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 135
The Mystery of Human Capital as Engine of Growth
135
The idea behind this experiment follows the basic thesis underlying our
endogenous growth model. If human capital is the engine of growth, the
equilibrium rates of growth of the two endogenous variables of the
model—human capital attainments g(H) and real income g(GDPPC)—
should be outcomes of the economy’s institutional and demographic factors, including the degree of government intervention in private economic
activity. If these two variables are predicted separately from these underlying country-specific “parameters,” they should be closely related within
countries. The results are presented in figure 3 (appendix B) and table 10
(appendix A). Figure 3 shows the noisy scatter of estimated expected
growth rates of per-capita GDP and average schooling attainments within
countries. The line going through this scatter represents the estimated
regression line of variant 1 of equation (3). Table 10 shows also the estimated results of variant (2) of equation (3), which cannot be depicted
graphically. The results in table 10 indicate the existence of a statistically significant correlation between the predicted growth rates of per-capita schooling attainments and real income within countries in our panel. These results
are experimental and preliminary. More complete measures of human capital formation and productivity growth over longer periods, and more elaborate sensitivity analyses, would be required to confirm the findings.
Epilogue: Looking Back and Looking Ahead
Although the evidence assembled in this paper concerning the long-term
growth dynamics of per-capita GDP and schooling attainments is largely
“circumstantial,” it appear to be remarkably consistent with the view that
human capital formation, even though imperfectly measured by schooling,
has been the “secret weapon” through which the U.S. has been able to
achieve its robust long-term rate of persistent, self-sustaining growth in
productivity and per-capital income. Moreover, it supports the hypothesis
that the documented educational gap between the U.S. and Europe in
terms of average high school, and especially higher education attainments,
is a major factor explaining why the U.S. has overtaken Europe as an economic superpower in the twentieth century. Can the U.S. maintain its lead
in the twenty-first century?
Table 11 (see appendix A) summarizes the evidence on schooling
attainments shown in tables 2 and 3 for the 5 major European countries
stages, in additional regressions which we skip here for simplicity, we also allow the intercept
terms in variants 1 and 2 to drift downward over time, which our model predicts to occur
over the development process. These regressions produce very similar results to those
reported in table 10, and have even higher explanatory power.
Mystery of CapitalCRev
136
2/18/08
11:13 AM
Page 136
Isaac Ehrlich
(E-5: Germany, U.K., France, Italy, Spain) expressed as percentages of the
U.S.’s attainments over the period 1998–2003, which may serve as a rough
indicator of the trends over the last few decades as well. Even over this
short period we see evidence of closing educational gaps, primarily for
upper high-school attainments, where the simple average level of schooling attainment for the age group 25–64 in the E-5 rose from 64.9% to
68.2% of that of the U.S. The gaps are closing even faster at the tertiary
type-A level, where the corresponding simple average level of schooling
attainments rose from 46.7% to 51.7%. Of all E-5 countries, the U.K. has
converged most closely to the U.S.’s schooling attainments at the tertiary
level, rising from 55.6% in 1998 to 65.5% in 2003.
However, as argued earlier, schooling attainments are subject to institutional upper limits (say, Ph.D. education), thus becoming a less effective indicator of human capital formation at more advanced development
levels, where spending on educational quality and knowledge generated
within firms may be more important supplementary measures of effective
human capital. The US may still maintain a significant lead over much of
Europe in these measures. Indeed, corresponding trends in long-term
GDP and per-capita GDP (GDPPC) growth rates present a more mixed
picture. Figure 4 shows how percentage differences in long-term real
GDPPC growth rates between the U.S., U.K., and the E-5 (based on the
Maddison 2003 data) have evolved over the last 150 years, as we gradually shift the starting reference period from 1850–2003 (the longest time
period) to 1991–2003 (the shortest and recent time period). The longterm percentage differences indicate a consistent U.S. advantage,
although they also exhibit quite a bit of noise and sensitivity to influential intermediate-term sub-periods. For example, over the Great
Depression, the U.S. absolute GDPPC gap over the E-5 was declining
significantly along with the U.S.’s long-term growth rate advantage
before rising again during recovery. Over World War II and its aftermath,
in contrast, the U.S. absolute gap over the E-5 was first rising because of
the collapse of the E-5 economies, but was then falling because of the
exceptionally high GDPPC growth rates in the E-5 over the following
2–3 decades of European recovery. More recently, however, the U.S.
GDPPC growth rate advantage over the E-5 has trended back toward its
1850–2003 level.
One exception seems to be the U.K., where the U.S.’s long-term
GDPPC growth-rate gap has been falling more steadily since the early
1930s, and again from the early 1960s when the U.K. has also made significant progress in relative educational attainments. In Germany, in contrast, the U.S.’s GDPPC growth-rate advantage has intensified since 1967,
while its educational advantage over Germany has been increasing in more
recent years. Thus even this, more recent evidence points to a positive cor-
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 137
The Mystery of Human Capital as Engine of Growth
137
relation between relative growth rates of tertiary schooling attainments
and per-capita GDP, at least in these two countries.8
Clearly, there are other forces in play which explain the evolution of
comparative growth rates of the U.S. and the E-5 over the twentieth century, such as changes in labor market, welfare, free-trade, and immigration
policies, but the U.S. advantage in human capital formation, as judged by
schooling attainments especially at the tertiary level, seems to provide a
powerful explanation for its long-term growth rate advantage over Europe.
Is the U.S. losing this advantage? The closing schooling gaps might
indicate that Europe could catch up with, and even surpass this indicator
of U.S.’s human capital formation and ensuing per-capita income growth.
However, as figure 5 shows, the absolute historic gap between the U.S. and
the E-5 in per-capita GDP levels is still far from closing, and it will continue to grow in absolute terms even if the respective growth rates converge. More important, future developments depend on the comparative
trends in the underlying causal factors which produced the U.S. long-term
advantage in the first place.
Looking back, it is ultimately the relative efficiency of the free-market
and open-economy system in the U.S. and the relatively higher reward it
provided to skill and creative knowledge, which induced a higher rate of
growth and efficient utilization of various components of human capital,
whether domestically produced or imported. The democratic political system in the U.S. has also augmented the process of human capital formation through prudent government subsidization of education generally,
and higher education in particular, much ahead of similar efforts by
Europe. These accommodating factors have been a major determinant of
the ability of the U.S. to attract, and put to effective use, human capital
from other countries as well.
Looking ahead, therefore, one may conclude that continued support of
an efficient economic environment that assures a competitive reward to
investment in human capital and encourages its persistent formation and
utilization could sustain the U.S. lead for years to come. The U.S. still
enjoys a significant advantage in terms of the quality of its higher education system and innovative activities relative to Europe and other countries. At the same time, there are strong indications of the failure of the
public elementary system in the U.S. to produce competitive educational
outcomes relative to other countries. Recognition of current shortcomings
8. Spain constitutes another example: while the U.S.’s long-term growth rate of GDPPC
1850–2003 slightly exceeds that of Spain, from 1877 Spain is reported to have had a higher
growth rate, which expanded during World War II. Spain’s advantage is still holding in recent
years as well, but it also shows the highest percentage increase in higher-education attainments among the E-5, according to table 12.
Mystery of CapitalCRev
138
2/18/08
11:13 AM
Page 138
Isaac Ehrlich
in the public education system in the U.S., along with the challenge to
compete with educational systems in other countries, may improve human
capital formation in the U.S. at all levels. Whether or not the U.S. lead is
maintained is ultimately a secondary issue. World welfare would be best
served if all countries adopt competitive economic and educational policies
yielding continuous human capital formation, per-capita income growth,
and equitable income distributions.
R E F E R E N C E S
Barro, Robert J., and Lee Jong-Wha. 1993. “International Comparisons of
Educational Attainments.” Journal of Monetary Economics 32:363–94.
Becker, Gary S., Kevin M. Murphy, and Robert Tamura. 1990. “Human Capital,
Fertility, and Economic Growth.” Journal of Political Economy 98, no. 5, pt. 2:
S12–S37.
Clark, John M. 1923. “Overhead costs in the Modern Industry.” Journal of
Political Economy 31 (October): 606–36.
Committee on Science, Engineering, and Public Policy (COSEPUP). 2005. Policy
Implications of International Graduate Students and Postdoctoral Scholars in the
United States, Board on Higher Education and Workforce, National Research
Council.
Denison, Edward F. 1974. Accounting for United States Economic growth
1929–1969. Washington DC: Brookings Institution.
Ehrlich, Isaac, ed. 1990. “The Problem of Economic Development. A Conference
of the Institute for the Study of Free Enterprise Systems.” Journal of Political
Economy 98, no. 5, pt. 2: S1–S11.
Ehrlich, Isaac. 2007. “The Mystery of Human Capital as Engine of Growth, or
Why the US Became the Economic Superpower in the 20th Century.” NBER
Working Papers 12868, National Bureau of Economic Research, Inc.
Ehrlich, Isaac, and Francis Lui. 1991. “Intergenerational Trade, Longevity, and
Economic Growth.” Journal of Political Economy 99, no. 5 (October):
1029–59.
———. 1999. “Bureaucratic Corruption and Endogenous Economic Growth.”
Journal of Political Economy 107, no. 6, pt. 2: S270–S293.
Ehrlich, Isaac, and Jinyoung Kim. 2007. “The Evolution of Income and Fertility
Inequalities Over the Course of Economic Development: A Human Capital
Perspective.” Journal of Human Capital 1 (December): 137–74.
Ehrlich, Isaac, and Kevin Murphy. 2007. “Why Does Human Capital Need a
Journal?” Journal of Human Capital 1 (December): 1–7.
Ehrlich, Isaac, and Yong Yin. 2005. “Explaining Diversities in Age-Specific Life
Expectancies and values of Life Saving: A Numerical Analysis. Journal of Risk
and Uncertainty 31, no. 2: 129–62.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 139
The Mystery of Human Capital as Engine of Growth
139
Eurodice. 2000. “Key Data on Education in Europe—1999/2000 Edition.”
Brussels: Eurostat.
Goldin, Claudia. 2001. “The Human Capital Century and American Leadership:
Virtues of the Past.” Journal of Economic History 61, no. 2: 263–92.
Goldin, Claudia, and Lawrence F. Katz. 1999. “The Higher Education: The
Formative Years in the United States, 1890 to 1940.” Journal of Economic
Perspectives 13, no. 1: 37–62.
Hall, Robert, and Charles Jones. 1999. “Why Do Some Countries Produce So
Much More Output Per Worker Than Others.” Quarterly Journal of Economics
114 (February): 83–116.
Heckman, James J., Lance J. Lochner, and Petra E. Todd. 2003. “Fifty Years of
Mincer Earnings Regressions.” NBER Working Papers 9732.
Lucas, Robert E., Jr. 1988. “On the Mechanics of Economic Development,”
Journal of Monetary Economics 22, no. 1: 3–42.
Maddison, Angus. 1991. Dynamic Forces in Capitalist Development: A Long-Run
Comparative View. Oxford: Oxford University Press.
Maddison, Angus. 2003. Development Centre Studies: The World Economy;
Historical Statistics. OECD, Paris.
Organisation for Economic Co-operation and Development (OECD).
2001–2007. “Education at a Glance.” http://www.oecd.org/statisticsdata/
0,3381,en_2649_37455_1_119656_1_1_37455,00.html.
Psacharopoulos, G., and H.A. Patrinos. 2002. Returns to Investment in Education:
A Further Update. Washington D.C. World Bank Policy Research Working
Paper.
Solow, Robert M. 1957. “Technical Change and the Aggregate Production
Function.” Review of Economics and Statistics 39, no. 3 (August): 312–20.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 140
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 141
Appendix A: Tables
Table A Comparison of real GDP per capita for the top 25 countries
(U.S. dollars converted using purchasing power parity)
Country
Luxembourg
Jersey
United States
Norway
Bermuda
San Marino
Hong Kong
Switzerland
Cayman Islands
Denmark
Ireland
Iceland
Canada
Per Capita
GDP
Estimate
Year
58900
40000
40100
40000
36000
34600
34200
33800
32300
32200
31900
31900
31500
2004
2003
2004
2004
2003
2001
2004
2004
2004
2004
2004
2004
2004
Country
Austria
Belgium
United Kingdom
Netherlands
Japan
Finland
Aruba
Germany
France
Sweden
Monaco
Singapore
Per Capita
GDP
Estimate
Year
31300
30600
29600
29500
29400
29000
28000
28700
28700
28400
27000
27800
2004
2004
2004
2004
2004
2004
2002
2004
2004
2004
2000
2004
Sources: Central Intelligence Agency, The Word Factbook 2005,
http://www.cia.gov/cia/publications/factbook, file name:
factbook2005\factbook\fields\2004.html; World Facts and Figures for 2005,
http://www.worldfactsandfigures.com/gdp_country_desc.php
141
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 142
Isaac Ehrlich
142
Table 1 Average years of formal educational experience of the population
aged 15–64 in 1913 and 1989
1913
Country
France
Germany
Japan
Netherlands
United Kingdom
United States
Total (Rank)
6.18
6.94
5.10
6.05
7.28
6.93
(4)
(2)
(6)
(5)
(1)
(3)
Primary (Rank)
4.31
3.50
4.50
5.30
5.30
4.90
(5)
(6)
(4)
(1)
(1)
(3)
Secondary (Rank)
1.77
3.35
0.56
0.64
1.90
1.83
(4)
(1)
(6)
(5)
(2)
(3)
Higher (Rank)
0.10 (3)
0.09 (4)
0.04 (6)
0.11 (2)
0.08 (5)
0.20 (1)
1989
Country
France
Germany
Japan
Netherlands
United Kingdom
United States
Total (Rank)
11.61 (3)
9.58 (6)
11.66 (2)
10.51 (5)
11.28 (4)
13.39 (1)
Source: Data from Maddison 1991, 64.
Primary (Rank)
5.00
4.00
6.00
6.00
6.00
6.00
(5)
(6)
(1)
(1)
(1)
(1)
Secondary (Rank)
5.29
5.20
4.95
3.82
4.75
5.72
(2)
(3)
(4)
(6)
(5)
(1)
Higher (Rank)
1.32 (2)
0.38 (6)
0.71 (3)
0.69 (4)
0.53 (5)
1.67 (1)
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 143
The Mystery of Human Capital as Engine of Growth
143
Table 2 Percentage of the population that has attained at least tertiary
education Type-A by age group (1998 and 2003)
1998
Country
25–64
2003
25–34 35–44 45–54 55–64
25-64
25–34 35–44 45–54 55–64
Australia
Austria
Belgium
Canada
Czech Republic
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Japan
Korea
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Slovak Republic
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
17
6
12
19
10
13
11
14
11
13
16
11
9
18
17
N/A
12
24
13
24
11
7
N/A
14
13
14
6
15
27
19
7
16
23
10
14
15
14
15
14
19
16
9
23
23
N/A
15
27
16
27
12
8
N/A
21
10
16
7
17
27
18
8
13
18
12
15
10
16
14
14
18
11
11
23
19
N/A
14
26
13
25
10
7
N/A
16
14
15
7
17
26
16
5
10
18
10
13
10
15
10
14
15
7
9
15
11
N/A
10
23
12
22
11
5
N/A
11
15
13
6
15
29
10
4
6
13
8
8
6
10
6
10
9
5
5
9
8
N/A
5
17
7
17
10
4
N/A
6
11
11
3
11
22
20
7
13
22
12
16
14
14
13
15
20
16
10
21
22
6
14
22
16
29
14
8
11
18
18
18
10
19
29
25
8
18
28
12
23
22
14
17
17
23
23
12
26
30
7
16
25
21
37
20
13
13
26
24
20
11
24
30
21
8
14
22
14
17
13
15
15
16
22
16
11
25
26
7
15
23
17
30
13
9
11
19
17
19
8
19
29
20
7
11
20
11
14
11
15
12
15
19
13
10
20
14
6
12
21
15
25
11
6
12
14
17
16
9
18
30
14
5
8
18
10
12
10
12
7
14
12
9
7
12
9
4
7
17
10
20
11
3
8
9
16
15
7
14
27
Country Mean
14
16
15
13
9
16
20
17
15
12
Note: Denmark is omitted in this table because the reported annual data for tertiary type-A
attainments in Denmark are incompatible between 1998 and 2003. But the overall country
mean includes Denmark.
Sources: OECD, Education at a Glance 2000, 36, table A2.2b; OECD, Education at a Glance 2005,
Indicator A1: Educational attainment of the adult population,
http://www.oecd.org/dataoecd/22/35/35282639.xls (table A.1.3a).
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 144
Isaac Ehrlich
144
Table 3 Distribution of the population that has attained at least upper
secondary education, by age group (1998 and 2003)
1998
Country
25–64
2003
25–34 35–44 45–54 55–64
25-64
25–34 35–44 45–54 55–64
Australia
Austria
Belgium
Canada
Czech Republic
Denmark
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Japan
Korea
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Slovak Republic
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
56
73
57
80
85
78
68
61
84
44
63
55
51
41
80
65
N/A
21
64
73
83
54
20
N/A
33
76
81
18
60
86
64
84
73
87
92
85
84
75
88
66
77
61
67
55
93
92
N/A
26
74
79
93
62
29
N/A
53
87
88
24
63
88
58
78
61
83
88
80
78
63
87
52
73
58
56
50
91
70
N/A
23
68
77
88
59
20
N/A
38
80
83
19
62
88
52
68
51
77
84
78
62
56
84
36
65
55
41
35
77
45
N/A
16
59
69
78
53
14
N/A
23
73
80
13
58
87
44
56
34
65
74
67
41
41
76
22
31
40
31
19
57
27
N/A
9
50
58
65
37
12
N/A
12
60
71
7
53
80
62
79
62
84
86
81
76
65
83
51
74
59
62
44
84
73
59
21
66
78
87
48
23
87
43
82
70
26
65
88
75
85
78
90
92
86
89
80
85
72
83
64
78
60
94
97
68
25
76
84
95
57
37
94
60
91
76
33
71
87
64
83
68
86
90
82
85
69
86
60
81
62
67
50
94
83
61
24
71
81
92
49
22
91
48
88
72
25
65
88
58
75
55
83
84
80
73
59
84
44
75
58
52
39
82
55
54
18
62
76
85
46
16
84
33
80
68
21
64
89
47
69
43
71
77
74
55
48
78
28
53
48
38
24
65
32
50
12
53
64
76
40
10
70
19
69
61
16
57
85
Country Mean
61
72
65
57
44
66
75
70
62
51
Sources: OECD, Education at a Glance 2000, 35, table A2.2; OECD, Education at a Glance 2005,
Indicator A1: Educational attainment of the adult population,
http://www.oecd.org/dataoecd/22/35/35282639.xls (table A.1.2a).
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 145
The Mystery of Human Capital as Engine of Growth
145
Table 4 Expected years of tertiary education for all 17-year-olds (1998)
Country
Full and Part Time
Rank
Full Time Only
Rank
Australia
Austria
Belgium
Canada
Czech Republic
Denmark
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Japan
Korea
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
2.3
1.8
1.3
1.9
0.9
1.3
2.9
1.9
1.7
1.7
1.6
1.6
N/A
2.2
N/A
1.9
N/A
0.8
2.2
2.1
2.7
1.9
1.7
2.5
2.3
1.1
0.8
1.7
2.7
5
14
21
10
24
21
1
11
15
15
19
19
~
7
~
11
~
25
7
9
2
11
15
4
5
23
26
15
2
1.4
1.8
1.2
1.4
0.8
1.3
2.9
1.9
1.7
1.7
0.9
1.6
N/A
2.2
N/A
1.9
N/A
0.8
1.9
1.5
2.4
1.0
1.7
2.3
1.8
1.1
0.8
1.4
1.8
16
8
20
16
24
19
1
5
11
11
23
14
~
4
~
5
~
24
5
15
2
22
11
3
8
21
24
16
8
OECD Average
1.8
Source: OECD, Education at a Glance 2000, 158, table C3.2.
1.6
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 146
Isaac Ehrlich
146
Table 5 Expenditure on educational institutions as a percentage of GDP
for all levels of education by source of funds (1990, 1995, and 2002)
Country
2002
1995
1990
Public Private Total
Public Private Total
Public Private Total
Australia
Austria
Belgium
Canada
Czech Republic
Denmark
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Japan
Korea
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Slovak Republic
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
Country mean
4.4
5.4
6.1
N/A
4.2
6.8
5.9
5.7
4.4
3.9
5.0
6.8
4.1
4.6
3.5
4.2
N/A
5.1
4.6
5.6
6.7
5.5
5.7
4.0
4.3
6.7
5.7
3.4
5.0
5.3
5.1
1.5
0.3
0.3
N/A
0.2
0.3
0.1
0.4
0.9
0.2
0.6
0.6
0.3
0.3
1.2
2.9
N/A
1.1
0.5
1.2
0.3
0.7
0.1
0.2
0.5
0.2
0.5
0.4
0.9
1.9
0.7
6.0
5.7
6.4
N/A
4.4
7.1
6.0
6.1
5.3
4.1
5.6
7.4
4.4
4.9
4.7
7.1
N/A
6.3
5.1
6.8
6.9
6.1
5.8
4.2
4.9
6.9
6.2
3.8
5.9
7.2
5.8
4.5
5.9
N/A
6.2
4.7
6.1
6.2
5.9
4.5
3.1
4.9
N/A
4.7
4.7
3.5
N/A
N/A
4.6
4.5
4.8
6.8
5.7
5.3
4.6
4.5
6.1
5.4
2.3
4.8
5.0
~
1.2
0.3
N/A
0.8
0.7
0.2
x
0.4
0.9
n
0.6
N/A
0.5
N/A
1.1
N/A
N/A
1.0
0.4
N/A
0.4
N/A
n
0.1
0.9
0.1
N/A
N/A
0.7
2.2
~
5.7
6.1
N/A
7.0
5.4
6.3
6.3
6.3
5.4
3.2
5.5
N/A
5.3
N/A
4.7
N/A
N/A
5.6
4.9
N/A
7.1
N/A
5.3
4.7
5.4
6.2
N/A
2.3
5.5
7.2
~
4.2
N/A
N/A
N/A
N/A
N/A
N/A
5.1
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
8.1
N/A
N/A
4.8
4.4
5.1
N/A
2.8
4.2
4.9
~
0.8
N/A
N/A
N/A
N/A
N/A
N/A
0.5
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.3
0.7
N/A
N/A
N/A
0.1
2.2
~
5.0
N/A
N/A
N/A
N/A
N/A
N/A
5.7
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
5.1
5.1
5.1
N/A
2.8
4.3
7.1
~
OECD total
4.9
1.2
6.1
~
~
~
~
~
~
Source: OECD, Education at a Glance 2005, Indicator B2: Expenditure on educational institutions
relative to Gross Domestic Product, http://www.oecd.org/dataoecd/2/11/35286380.xls
(table B2.1a)
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 147
The Mystery of Human Capital as Engine of Growth
147
Table 6 Annual expenditures on educational institutions per student
(US dollars converted using PPP) by levels of education based on full-time
equivalents (2002)
Country
Primary
All secondary
Tertiary-type A
All tertiary
Australia
Austria
Belgium
Canada
Czech Republic
Denmark
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Japan
Korea
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Slovak Republic
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
5169
7015
5665
N/A
2077
7727
5087
5033
4537
3803
3016
7171
4180
7231
6117
3553
10611
1467
5558
4536
7508
2585
4940
1471
4592
7143
7776
N/A
5150
8049
7375
8887
8272
N/A
3628
8003
7121
8472
7025
4058
3184
7229
5725
7568
6952
5882
15195
1768
6823
5698
10154
N/A
6921
2193
6010
7400
11900
N/A
6505
9098
13410
12701
N/A
N/A
6671
N/A
11833
9132
11860
5646
8187
8232
N/A
8649
11984
7630
N/A
N/A
13163
N/A
N/A
N/A
N/A
4756
8074
N/A
25524
N/A
N/A
N/A
12416
12448
12019
N/A
6236
15183
11768
9276
10999
4731
8205
8251
9809
8636
11716
6047
N/A
6074
13101
N/A
13739
4834
6960
4756
8020
15715
23714
N/A
11822
20545
Country Mean
OECD Mean
5313
5273
7002
6992
~
~
10655
13343
Source: OECD, Education at Glance 2005, Indicator B1: Educational expenditure per student,
http://www.oecd.org/dataoecd/2/12/35286348.xls (table B1.1).
Mystery of CapitalCRev
148
2/18/08
11:13 AM
Page 148
Isaac Ehrlich
Table 7 Expenditure per student (public and private) relative to GDP
per capita by level of education based on full-time equivalents (2002)
Country
All secondary education
All tertiary education
Australia
Austria
Belgium
Canada
Czech Republic
Denmark
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Japan
Korea
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Slovak Republic
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
27
30
29
N/A
22
27
26
31
26
21
22
25
18
29
26
32
29
19
23
26
28
N/A
37
17
26
26
37
N/A
23
25
45
41
42
N/A
38
51
42
34
41
25
57
29
30
33
43
33
N/A
65
44
N/A
37
43
37
38
35
56
73
N/A
41
57
Country Mean
26
43
Source: OECD, Education at Glance 2005, Indicator B1: Educational expenditure per student,
http://www.oecd.org/dataoecd/2/12/35286348.xls (table B1.2).
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 149
The Mystery of Human Capital as Engine of Growth
149
Table 8 Average combined mathematics literacy scores of 15-year-old
students by percentiles (2003)
Country
5th
10th
25th
75th
90th
95th
90th–0th
difference
Australia
Austria
Belgium
Canada
Czech Republic
Denmark
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Japan
Korea
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Slovak Republic
Spain
Sweden
Switzerland
Turkey
United States
364
353
334
386
358
361
406
352
324
288
335
362
360
307
361
388
338
247
385
359
343
343
321
342
335
353
359
270
323
399
384
381
419
392
396
438
389
363
324
370
396
393
342
402
423
373
276
415
394
376
376
352
379
369
387
396
300
357
460
439
456
474
449
453
488
449
432
382
426
454
445
400
467
479
430
327
471
455
433
428
406
436
426
446
461
351
418
592
571
611
593
584
578
603
575
578
508
556
578
562
530
605
606
557
444
608
593
560
553
526
565
546
576
595
485
550
645
626
664
644
641
632
652
628
632
566
611
629
614
589
660
659
611
497
657
650
614
607
580
619
597
631
652
560
607
676
658
693
673
672
662
680
656
662
598
644
658
641
623
690
690
641
527
684
682
645
640
610
648
626
662
684
614
638
246
242
284
225
249
236
214
239
269
242
241
233
221
247
258
236
239
221
241
256
238
231
228
241
229
243
256
260
251
OECD Average
332
369
432
570
628
660
259
Source: U.S. Department of Education, Institute for Education Sciences, National Center for
Education Statistics, “International Comparisons of Mathematics Literacy,”
http://nces.ed.gov/programs/coe/2006/section2/table.asp?tableID=464.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 150
Isaac Ehrlich
150
Table 9 Estimated coefficients from Mincer log-earnings regressions
for males
Whites
Coefficient Std. Error
Blacks
Coefficient Std. Error
1940
Intercept
Education
Experience
Experience-Squared
4.4771
0.1250
0.0904
–0.0013
0.0096
0.0007
0.0005
0.0000
4.6711
0.0871
0.0646
–0.0009
0.0298
0.0022
0.0018
0.0000
1950
Intercept
Education
Experience
Experience-Squared
5.3120
0.1058
0.1074
–0.0017
0.0132
0.0009
0.0006
0.0000
5.0716
0.0998
0.0933
–0.0014
0.0409
0.0030
0.0023
0.0000
1960
Intercept
Education
Experience
Experience-Squared
5.6478
0.1152
0.1156
–0.0018
0.0066
0.0005
0.0003
0.0000
5.4107
0.1034
0.1035
–0.0016
0.0220
0.0016
0.0011
0.0000
1970
Intercept
Education
Experience
Experience-Squared
5.9113
0.1179
0.1323
–0.0022
0.0045
0.0003
0.0002
0.0000
5.8938
0.1100
0.1074
–0.0016
0.0155
0.0012
0.0007
0.0000
1980
Intercept
Education
Experience
Experience-Squared
6.8913
0.1023
0.1255
–0.0022
0.0030
0.0002
0.0001
00.000
6.4448
0.1176
0.1075
–0.0016
0.0120
0.0009
0.0005
0.0000
1990
Intercept
Education
Experience
Experience-Squared
6.8912
0.1292
0.1301
–0.0023
0.0034
0.0002
0.0001
0.0000
6.3474
0.1524
0.1109
–0.0017
0.0144
0.0011
0.0006
0.0000
Source: Heckman, Lochner, and Todd 2003.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 151
The Mystery of Human Capital as Engine of Growth
151
Table 10 Correlating Predicted Growth Rates in Per Capita GDP and
Average School Years of the Adult Population (based on Ehrlich and Kim
2007)
Variant 1 *
Variant 2 **
Intercept (·)
Slope(‚)
t-value (‚)
Adjusted R2
0.00567
**
1.67458
1.25854
21.23
11.40
0.3036
0.3682
Number of observations = 1,032.
*OLS regression estimates of equation (3)
**OLS fixed-effects regression estimates of equation (3) allowing for country-specific intercepts, not
reported in this table.
Econometric procedure: see text and footnote 6.
152
Attaining at least tertiary education Type-A:
1998
2003
35–44
45–54
55–64
25–64
25–34
35–44
45–54
55–64
US
France
Germany
Italy
Spain
United Kingdom
E4*
E5**
E11***
100.0
40.7
51.9
33.3
51.9
55.6
44.4
46.7
52.2
100.0
55.6
51.9
33.3
77.8
63.0
54.6
56.3
57.9
100.0
38.5
61.5
42.3
61.5
65.4
51.0
53.8
59.4
100.0
34.5
51.7
31.0
37.9
51.7
38.8
41.4
47.0
100.0
27.3
45.5
22.7
27.3
50.0
30.7
34.5
43.8
100.0
48.3
48.3
34.5
62.1
65.5
48.3
51.7
56.4
100.0
73.3
46.7
40.0
86.7
80.0
61.7
65.3
68.8
100.0
44.8
51.7
37.9
65.5
65.5
50.0
53.1
58.3
100.0
36.7
50.0
33.3
46.7
60.0
41.7
45.3
50.0
100.0
37.0
44.4
25.9
33.3
51.9
35.2
38.5
45.8
Country
25–64
25–34
35–44
45–54
55–64
25–64
25–34
35–44
45–54
55–64
United States
France
Germany
Italy
Spain
United Kingdom
E4*
E5**
E12****
100.0
70.9
97.7
47.7
38.4
69.8
63.7
64.9
80.0
100.0
85.2
100.0
62.5
60.2
71.6
77.0
75.9
89.9
100.0
71.6
98.9
56.8
43.2
70.5
67.6
68.2
83.1
100.0
64.4
96.6
40.2
26.4
66.7
56.9
58.9
74.9
100.0
51.3
95.0
23.8
15.0
66.3
46.3
50.3
65.9
100.0
73.9
94.3
50.0
48.9
73.9
66.8
68.2
81.4
100.0
92.0
97.7
69.0
69.0
81.6
81.9
81.8
93.1
100.0
78.4
97.7
56.8
54.5
73.9
71.9
72.3
86.3
100.0
66.3
94.4
43.8
37.1
71.9
60.4
62.7
77.2
100.0
56.5
91.8
28.2
22.4
67.1
49.7
53.2
69.3
*
**
***
****
E4: Simple average of the normalized data for France, Germany, Italy, and Spain
E5: Simple average of the normalized data for France, Germany, Italy, Spain and United Kingdom
E11: Simple average of the normalized data for Austria, Belgium, Finland, France, Germany, Italy, Netherland, Norway, Sweden, Switzerland, and the United Kingdom
E12: Simple average of the normalized data for E11 countries and Denmark
Page 152
Attaining at least upper secondary education:
11:13 AM
25–34
2/18/08
25–64
Isaac Ehrlich
Country
Mystery of CapitalCRev
Table 11 Relative percentage differences in educational attainments (U.S. = 100) by level and age group (1998 and 2003)
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 153
Appendix B: Figures
Figure 1 Comparison of U.S. and U.K. Real GDP in Log Terms
(1850–2003)
UK
US
17
16
15
14
13
12
11
1997
1997
1990
1990
1983
1983
1976
1976
1969
1969
1962
1962
1955
1955
1948
1948
1941
1941
1934
1934
1927
1927
1920
1920
1913
1913
1906
1906
1899
1899
1892
1892
1885
1885
1878
1878
1871
1871
1864
1864
1857
1857
1850
1850
10
Note: GDP data are converted to 1990 U.S. dollars using the Geary-Khamis Purchasing-PowerParity (PPP) method. Data for 1851–1859 and 1861–1869 are imputed.
Source: Data from Maddison 2003.
153
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 154
Isaac Ehrlich
154
Figure 2 Comparison of U.S. and U.K. Real GDP per capita in log
terms (1850–2003)
UK
US
10.5
10
9.5
9
8.5
8
7.5
7
Note: Per-capita GDP data are converted to 1990 U.S. dollars using the Geary-Khamis
Purchasing-Power-Parity (PPP) method. Data for 1851–1859 and 1861–1869 are impute
Source: Data from Maddison 2003.
1997
1990
1983
1976
1969
1962
1955
1948
1941
1934
1927
1920
1913
1906
1899
1892
1885
1878
1871
1864
1857
1850
50 58 66 74 82 90 98 06 14 22 30 38 46 54 62 70 78 86 94 02
18 18 18 18 18 18 18 19 19 19 19 19 19 19 19 19 19 19 19 20
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 155
The Mystery of Human Capital as Engine of Growth
155
Figure 2 Comparison of U.S. and U.K. Real GDP per capita in log
terms (1850–2003)
UK
US
10.5
10
9.5
9
8.5
8
7.5
1997
18
50
18
1850
58
1857
18
66
1864
18
74
1871
18
82
1878
18
90
1885
18
98
1892
19
1899
06
19
1906
14
19
1913
22
19
1920
30
1927
19
38
1934
19
46
1941
19
54
1948
19
62
1955
19
70
1962
19
1969
78
19
1976
86
19
1983
94
20
1990
02
7
Note: Per-capita GDP data are converted to 1990 U.S. dollars using the Geary-Khamis
Purchasing-Power-Parity (PPP) method. Data for 1851–1859 and 1861–1869 are impute
Source: Data from Maddison 2003.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 156
Isaac Ehrlich
156
.04 .04
0
Log(1+g(GDP)*)
.02 .02
0
Log(1+g(GDP)*)
.06 .06
Figure 3 Correlating predicted growth rates in per-capita GDP and
average school years of the adult population (based on Ehrlich and Kim
2007)
.005
.01
.015
Log(1+g(H)*)
.02
Note: The regression line in this scatter is based on Variant 1 of Equation 3.
.025
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 157
The Mystery of Human Capital as Engine of Growth
157
Figure 4 Deviations in long-term per-capita GDP growth rates per
annum over the period 1850–2003 between the U.S. and E-5, and U.S.
and U.K.
US-E5
Growth Rate Differences US-E5, US-UK
Real GDP Per-Capita
US-UK
1.00 %
0.50 %
1918
1871
1850
1914
1929 1939
1905
0.00 %
1967
-0.50 %
1945
-1.00 %
-1.50 %
Note: Chart shows Percentage differences measured at progressively later starting dates from
1850-2003 up to 1991-2003. GDP data are in real (PPP) 1990 Geary-Khamis dollars.
* E5 includes: France, Germany, Italy, Spain, and United Kingdom
Source: Data from Maddison 2003.
1991
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 158
Isaac Ehrlich
158
Figure 5 Annual per-capita GDP differences between the U.S. and
major European countries 1871–2003 (1990 Geary Khamis $)
Pe r-Capita
GDP
Diffe
rence
s s
Pe r-Capita
GDP
Diffe
rence
US-FR
US-FR
US-IT
US-IT
US-UK
US-UK
US-GR
US-GR
US-SPA
US-SPA
14 ,000
14 ,000
12 ,000
12 ,000
10 ,000
10 ,000
8 ,000
8 ,000
19 9119 91
6 ,000
6 ,000
4 ,000
4 ,000
19451945
2 ,000
2 ,000
0
0
1 8711 871
-2 ,000
-2 ,000
19 2919 29
19 1819 18 193 9
19 051919
193 9
051419 14
Source: Data from Maddison 2003.
19 6719 67
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 159
Allocation and Misallocation
of Human Capital:
Some Lessons from Japan
and Russia
8
Serguey Braguinsky
Human Capital as the Engine of Growth
In October 1945, Masaru Ibuka and a couple of his friends rented a utility room in the war-devastated Tokyo that did not even have glass in its
window and started up a radio repair shop. On May 7, 1946, a new company called “Tokyo Tsushin Kogyo” was officially registered, with shareholders’ capital of 190,000 yen. The new firm had no capital equipment
and whatever tools its employees used they had themselves made by hand.
It was constantly running out of money to cover operating expenses.
Fifty years after, in 1996, the shareholders’ capital of the company
stood at 1,459,332,000,000 yen, or about $15 billion, with a comparable
figure representing the market value of its plants, capital equipment, and
other capital assets. Its total market capitalization approached $30 billion;
the company employed 151,000 people and had 998 subsidiaries worldwide, including in the United States. Long before that in 1957, the company officially changed its name to Sony.
This episode is just one illustration of a well-established empirical fact
that the twentieth century was the century of human capital (e.g., Goldin
2001). Theoretical literature on “endogenous growth” (see Ehrlich 1990,
for a review of this literature) convincingly demonstrates that human capital is indeed the most important “engine of growth.”
But what exactly do we mean by “human capital” in the context of
growth and development? Education is the most commonly used proxy,
although even in this case, it is not immediately clear what level and what
type of education is most important. For example, according to Professor
I am grateful to Isaac Ehrlich, Salavat Gabdrakhmanov and two anonymous referees for useful comments. All remaining errors are mine. —S. B.
159
Mystery of CapitalCRev
160
2/18/08
11:13 AM
Page 160
Serguey Braguinsky
Ehrlich (in this volume), one of the major reasons why the United States
became an economic superpower was its superior higher (tertiary) education that produced more human capital of the highest quality and of general applicability than did the Old World educational system. Several
African countries have failed to improve their economic performance
despite large-scale investment in educational projects, most of which were
in the primary education area (Easterly 2001).
An even more general definition of human capital as related to economic growth also has to include reputation, trust, and productive “relational capital” (Boot et al. 1993, Fudenberg and Kreps 1987, Greif 1993,
Bezemer et al. 2003). But, again, reputation, trust, and especially relational
capital are not always conducive to capitalistic development. As pointed
out by Tanzi (1995), corruption can in fact be also defined as a form of
“relational capital” (absence of an “arm’s length relationship”), and most
empirical studies find a negative relationship between corruption and
growth (e.g., Mauro 1995). Murphy, Shleifer, and Vishny (1991) and
Ehrlich and Lui (1999) show that when relational capital takes the form of
unproductive political capital or rent-seeking connections, allocation of talent is adversely affected and economic growth definitely suffers. Since both
productive human capital and destructive rent-seeking capital are produced
by investing in nontangible human assets (although of a different nature),
we can interpret these models as pointing to the need to distinguish human
capital that is the engine of growth from human capital that is actually
“bad” for economic development.
We are thus led to the conclusion that a closer look is required into how
different types of human capital affect the process of development and,
most importantly, how different incentive mechanisms affect the creation
and allocation of these different types of human capital. Without aiming at
full generality, in this paper I will discuss how some types of reputational
and relational capital can help allocate human capital to its most productive usage, thereby jumpstarting economic development, while other types
of such capital result in misallocation of human capital and actually derail
growth. This theoretical discussion will be illustrated by examples taken
from Japan (a case in which the allocation of human capital has generally
benefited economic progress) and Russia (a case in which human capital
has been and largely still is misallocated).
Allocating Real Resources to Human Capital: The Case
of Japan
Professor de Soto (in this volume; see also de Soto 2000) stresses that formal property rights to physical assets, especially real estate and housing that
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 161
Allocation and Misallocation of Human Capital
161
can be pledged as collateral for borrowing, are important, if capitalism is
to work. The idea is that in order to make possible a capitalistic enterprise,
individuals must have access to productive resources, and the only way they
can gain such access is by borrowing from capital markets. This basic idea
is indeed extremely important. While human capital is the “engine of
growth,” access to real resources needed to implement “innovations” is
the fuel without which an engine cannot run. Ever since Schumpeter published his “Theory of Economic Development” back in 1912 (see
Schumpeter 1934), this link between capital markets and growth had been
the focus of attention in development literature, with the general conclusion (already postulated by Schumpeter) that better developed financial
markets can foster economic progress (see also Goldsmith 1969 and Shaw
1973). More recently, this literature has been further developed in a string
of papers emphasizing the importance of the legal system in protecting
outside investors and maintaining corporate governance (see, for example,
La Porta et al. 1998).
There is thus little doubt that well-developed capital markets and a
properly functioning legal system that offer reliable protection to outside
investors can play a very important role in economic development by
enabling resources to be allocated to innovators possessing large amounts
of human capital, or, more generally, to the most efficient users of such
resources. This statement, however, does little to shed light on how such
a system can be generated in the first place. As the discussion of a Russian
example below will show, a legal system registering and protecting property rights will not be enforceable unless economic incentives work in the
right direction to begin with and there is already some degree of reputational and relational capital of the right kind accumulated in the economy.
Indeed, as pointed out by Arrow (1974), even “a criminal law cannot be
enforced if it is sufficiently disobeyed. . . . Ultimately . . . authority is viable
to the extent that it is the focus of convergent expectations. An individual
obeys authority because he expects that others will obey it” (7, 72). A legal
system, indeed any kind of a social contract, is no more and no less than
“an implicit self-policing agreement between members of society to coordinate on a particular equilibrium in the game of life” (Binmore 1994, 35).
The same is true of capital markets: their growth and development presupposes the existence of conditions that make it possible for capitalistic
development to start in the first place. Financial market development,
improvements in the legal system, and economic development usually go
hand in hand; equally it can be argued that the development of capitalism
is the precondition for those institutions to arise rather than the other way
round.
As the example of Japan’s transition to capitalism shows, the prior existence of a legal system and capital markets indeed does not appear always
Mystery of CapitalCRev
162
2/18/08
11:13 AM
Page 162
Serguey Braguinsky
to be necessary for initiating capitalistic growth, provided that the right
kind of human capital is available. Some express skepticism about the view
that human capital can be enough to jumpstart capitalistic growth, because
borrowing against the collateral of such capital is supposedly impossible.
Indeed, barring slavery, property rights to human beings are inalienable
from them and cannot be pledged as collateral. The argument becomes
much less convincing, however, if the definition of human capital is
expanded to include reputational and relational capital.
Let us look more closely at the example of Sony. At the start the company founders had absolutely no tangible assets to offer as collateral. In
order to gain access to real resources, Ibuka and other engineers who ran
the firm made use of their access to reputational and relational capital. It
initially came in the form of Ibuka’s relationship with his father-in-law,
Maeda, who was a prominent intellectual and minister of education in the
first postwar Japanese government. Maeda agreed to assume the post of
president of the company for the initial few years to back his son-in-law’s
startup firm with his reputation and his contacts. This turned out to be
crucial for Sony’s business success, as it was Maeda and the other reputable members of the board of directors that he enlisted who introduced
the company’s management to several wealthy families with assets to
invest. Those families subscribed to new issues of Sony’s shares, which
around 1950 enabled the firm to embark on its first truly big project, the
production of the first Japanese-made tape recorder. Some members of
those wealthy families also became very closely involved in the day-to-day
operations of the firm, helping it to find more clients to buy tape
recorders.
It should be specially noted that at no stage was a formal registration
system or provision of tangible collateral involved. Sony’s financing came
from what in modern terminology is called “relationship banking,” a system in which a company secures investors’ money to finance innovative
ideas with a commitment from a reputable individual who maintains
hands-on status with respect to the management and at the same time
serves as a mediator between management and investors.
The founding of Sony is an example that is quite characteristic of the
success story of Japanese capitalism in general. While the post–Second
World War “Japanese miracle” is relatively well known (although also subject to many misconceptions, including gross overstatements of the role
played by the government), the first Japanese miracle of the late nineteenth
century is studied much less frequently, even though it shares some important features with the postwar example of Sony. Mitchell (1995) argues
that the same kind of relational capital manifested in extended families and
business networks played a very big role in the development of capitalism
in Hong Kong.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 163
Allocation and Misallocation of Human Capital
163
Japan was the first Asian country to industrialize on its own, and the
first modern industry to emerge in Japan in the late 1880s was cotton spinning. The remarkable establishment of this industry was the first step in
“the Japanese miracle”: “the astonishing ascendance of Osaka over
Lancashire stands as the first completely successful instance of Asian assimilation of modern Western manufacturing techniques” (Saxonhouse 1974,
150). For example, Japanese firms introduced new ring spinning frame
technology faster than any country in the world: in 1910, 98.5 percent of
Japanese spinning frames were rings as compared to 82.4 percent in the
United States, 51.6 percent in Russia, and only 16.6 percent in the U.K.
In the mid-1880s Japan still imported over 80 percent of its domestic consumption of cotton yarns. Then, between 1888 and 1900, domestic production of cotton yarn increased more than twenty times over. Exports
began in 1890, and the value of exports exceeded that of imports in 1897.
By the early 1930s the three largest cotton-spinning firms in the world
were all Japanese.
Contrary to a perception still pervading much of the literature, early
Japanese capitalism possessed neither a good institutional system nor a
strong benevolent government to make this remarkable success happen. In
particular, its driving force was private entrepreneurial initiative, not government intervention (which remained limited until the 1930s). Early
modern Japanese manufacturing firms did not borrow money from financial intermediaries using real estate or some other tangible assets as collateral either. Instead, they relied on the same kind of reputational and
relational capital as Sony did more than half a century later, successfully
selling equity to finance investment in capital equipment.
It is interesting to note that some of the earliest and most successful
corporations in early Japanese industrialization had been set up even
before the country passed its first law governing the formation of jointstock companies. Despite the absence of guarantees provided by the law,
wealthy people with a good reputation in the business community did not
hesitate to purchase company shares when they knew and personally monitored the company’s management and the engineering personnel. In the
absence of a proper legal system, local authorities had an unlimited free
hand in imposing various restrictions and rules of their own, thereby causing a lot of delays and obstacles in starting up new businesses (Kinugawa
1990). But in sharp contrast to what happened and still happens in Russia
and other developing countries (cases documented by de Soto are particularly telling in this respect), reputational and political capital of the owners helped early Japanese corporations to overcome bureaucratic red tape
relatively easily. To put it simply, local bureaucrats were no match for the
powerful business elite whenever such an elite appeared to have put its
reputation and relationships to work for the success of the productive
Mystery of CapitalCRev
164
2/18/08
11:13 AM
Page 164
Serguey Braguinsky
enterprises they owned rather than resort to rent seeking. The “handson” style of management by reputable owners (which also meant that
corrupt bureaucrats and criminals had to keep their hands off) then
encouraged small investors to also purchase shares, creating the basis for
business expansion. For example, the first successful modern enterprise in
nineteenth-century Japan, the Osaka Cotton Spinning Company, paid
out over 20 percent in annual dividends to its shareholders, regardless of
the number of shares, thereby greatly contributing to the creation of a
healthy stock market. It also seems that whenever their own wealth was
not enough, people with good reputation in the business community
used their reputations and monitoring ability as a form of collateral for
bank borrowing, receiving personal loans that they used to buy more
shares.
One important aspect of employing reputational and relational capital
as collateral for bringing in the resources needed to implement an innovation is their relation to the distribution of wealth and the ability to be personally involved and familiar with the business concerned. This link was
first noted by Demsetz (1988, chap. 14) but it still remains largely unexplored in the literature.
The essence of Demsetz’s argument is that when large-scale business
concerns are efficient, a certain but not excessive degree of wealth inequality is required to ensure effective control. Completely equal distribution of
wealth inevitably means that ownership of a large firm is dispersed among
many small investors, impairing efficient control over the firm’s management. Too high a concentration of wealth, however, also produces problems of its own. With only a few people owning the bulk of the economy’s
wealth, a single owner has to spread his limited resources across too many
firms, again leading to a loss of efficiency. Hence, some, but not too much,
wealth inequality is required for the economy to have just the right number of owners owning substantial stakes in individual firms, but not in too
many, and controlling their management effectively.
Although Demsetz makes his argument in the framework of the principal-agent problem, his reasoning can be readily extended to the mechanism of allocating resources to innovative entrepreneurial activity. If
reputational and relational capital serve as collateral for borrowing that
matches real resources with productive human capital, then lenders, almost
by definition, have to be directly involved with the entrepreneurs they are
lending to and must be able to monitor how resources are being used.
Hence, the number of lenders and the number of potential innovators
should be roughly of the same order of magnitude. With no deep pockets,
the task of allocating resources to innovators becomes formidable, at least
without well-functioning capital markets. This is something that cannot be
expected in an economy just about to start moving toward capitalism. But
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 165
Allocation and Misallocation of Human Capital
165
with only a few “oligarchs” who have each amassed a huge amount of
wealth, most potential innovations would go unrealized, as there are clear
limits to the scope of relational capital that any individual lender can establish between himself and his borrowers.
To sum up, our conjecture about the success of capitalism in Japan is
that in the second half of the nineteenth century (and perhaps once again
after World War II) the country had just the right amount of reasonably
wealthy people with good reputation. Their wealth, and most importantly,
the quality of their reputation (human capital) not only made the start of
economic growth possible but also provided the crucial initial impetus for
the creation of a modern legal system and capital markets.
The presence of this factor itself can perhaps be traced back to the
legacy of the Tokugawa era (the feudal regime that had governed the
country since the early seventeenth century). Tokugawa Japan was neither
a fully national state nor a completely decentralized feudalism but rather a
combination of both (Passin 1965, 15). There was enough centralism to
maintain law and order and to guarantee peace (coming after almost a century of fierce feudal warfare that had devastated the country). At the same
time, provinces were largely autonomous and local nobility competed for
wealth, tangible as well as human. One consequence of this competition
was the creation of a broad educational system that later helped Japan to
secure enough human assets to be transformed into human capital during
industrialization and the post–Second World War reconstruction. Another
consequence was that although Japan was largely premodern in the 1870s,
the previous system had generated a sufficiently large supply of chunks of
material wealth and also reputational and monitoring capacity manifested
in local noble families. The fact that those families were rich but not overly
rich and had to compete by finding productive ways of employing their
wealth, rather than by being engaged in rent seeking and redistribution,
played an important role in the success of capitalistic development.
Although, as already mentioned, Japan did not have a functioning modern
legal system when it first started its transition to capitalism, an informal
trust and monitoring system proved to be a good enough substitute for
such a system, which later developed endogenously as part of the overall
development of Japanese capitalism.
Overall, the Japanese example convincingly demonstrates not only
that human capital is the engine of sustainable endogenous growth but
also that when complemented by the appropriate type of social capital
(trust and reputation), it can be a sufficient condition to trigger the
growth process. As the example of the former Soviet Union and Russia
shows, however, human capital may very easily be completely misallocated if the existing system of trust and relational capital is of the wrong
kind.
Mystery of CapitalCRev
166
2/18/08
11:13 AM
Page 166
Serguey Braguinsky
Human Capital Caught in a Rent-Seeking Environment:
The Case of the Former Soviet Union and Russia
The example of the Soviet Union shows that even high-level human assets
may contribute virtually nothing to economic growth and welfare if the
environment enabling them to be matched to real resources and proper
incentives are lacking.
The Russian empire’s record on education was not particularly impressive. Although the education of a very small elite was perhaps not inferior
to any other European nation, the rate of illiteracy among the ordinary
population was extremely high, and tertiary education was also very limited. But the Soviet authorities took mass education seriously, so that after
the collapse of communism, Russia inherited a quite respectable level of
human capital (assets) from the former Soviet Union. In 1994 the fraction
of population in the age group of 25–64 with at least a college degree
stood at 17.2 percent, more than 3 percentage points higher than the average for 28 OECD countries cited in Ehrlich’s chapter in this volume.
Comparing this figure with the data in Ehrlich’s table T.2, we can actually
see that Russia ranked behind only the United States, the Netherlands,
Norway, Canada, and Japan. And if some have lingering suspicions that
only a small elite enjoyed excellent education while the rest of the population was deprived of it (as it was the case under the Czars), it is enough to
point out that the literacy rate in Russia is higher than in the United States
and that the fraction of the population in the 25–34 age group that had
attained at least upper secondary education was 93.5 percent, the highest
among all countries, when compared to table T.3 in Ehrlich’s chapter.
Despite this presence of human capital, capitalism in Russia after the
start of the transition to a market economy has not produced any serious
economic development. On the contrary, ever since the country opened
up its borders, Russia has been losing its human capital to emigration at
the rate of hundreds of thousands of people per year, as reported by the
Russian press. Moscow State University, the flagship of Soviet and Russian
higher education is reported to have lost over 20 percent of its best scholars. And those who stay behind often take up occupations that are at best
remotely related to the optimum employment of their human assets. For
example, trained engineers might be selling homegrown potatoes in a
farmer’s market. Clearly, something prevents the occurrence of the same
kind of growth based on human capital and the use of reputational and
relational aspects of it as a collateral as happened in Japan.
For the answer, we probably have to look into the history of totalitarian communist regimes, in which a system of hierarchical promotion produced a derived demand for reputational and relational capital that was
oriented toward building political connections and rent seeking rather than
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 167
Allocation and Misallocation of Human Capital
167
seeking productive employment. Not only had this ruled out any kind of
independent innovative entrepreneurship, it also created a lock-in that
remains in place long after the previous regime collapsed.
Under the Soviet system, the share of one’s claims to the ownership of
assets was determined by one’s place in the hierarchy. Economic incentives
could not be ignored completely, however. After brief experimentation
with “wartime communism,” in 1921 Lenin declared the “New Economic
Policy,” which although later reversed with regards to the private sector in
industrial production, trade, and agriculture, remained in place in the sector of individual consumption right until the end of the Soviet Union.
Limited as its use was, economic motivation complemented the system of
incentives provided by the hierarchical structure of the society and caused
the evolution of the centrally planned economy that eventually led to its
collapse and to the start of the transition to a market economy (see
Braguinsky and Yavlinsky 2000 for a more detailed discussion).
The basic limitation on the role played by money in the system of economic incentives in the former Soviet Union lay in the fact that money by
itself gave its owner almost no additional claims to real assets, and could
even be a source of trouble if not supported by appropriate hierarchical
connections. Those trying to increase their ownership claims on collective
assets could thus serve their goal either by aiming at promotion in the hierarchical system or by establishing a relationship with someone already high
enough in that system. Since money was necessary to increase private consumption, a natural symbiosis developed between communist party mandarins and those economic agents who managed to accumulate large
money funds. “Connections” (svyazi), the Russian term for relational capital, was the single most important form of asset that economic agents
needed both for personal consumption and for a career in the hierarchy,
and this relational capital was often lubricated by outright bribery as well
as by other forms of money transfer. Economic incentives in the form of
the increasing role played by wealth expressed in money penetrated the
socialist system and corrupted it from the within; once this process had
reached a certain scale, the system itself was doomed.
As a result, at the end of its history, the former Soviet Union faced a
situation that was not much different from Japan’s at the start of its transition to capitalism (Miwa and Ramseyer 2000). Although asset ownership
under the communist system was highly centralized, as the planned economy disintegrated, the de facto control over those assets largely was transferred to appointed managers, forming local elite groups. After the
communist system was gone, these wealthy local groups could in principle
have entrusted the assets they owned to the high-level human capital of
Soviet engineers and the generally well-educated labor force and relied on
these factors for the productive use of assets. But this did not happen.
Mystery of CapitalCRev
168
2/18/08
11:13 AM
Page 168
Serguey Braguinsky
Instead, the reputational and relational capital that enabled control to be
exercised over assets turned out to be the biggest obstacle to capitalistic
development.
Part of the problem may be due to the fact that Russia is a country rich
in natural resources, the exploitation of which naturally gives rise to competition based not on productive innovation but on political capital and
rent seeking. The exporting of mineral resources, control of the country’s
power plants, and the flow of money from the government budget indeed
appear to be the most important sources of the reproduction of wealth for
new Russian capitalists (Braguinsky and Yavlinsky,2000). For example, as
of the late 1990s, the only two firms that had an annual volume of sales
over 10 billion US dollars, comparable to large transnational corporations
in market economies, were monopoly holding companies in electric energy
production (UES Russia) (22.8 billion dollars’ worth of annual sales) and
extraction of natural gas (Gazprom) (22.5 billion dollars’ worth of annual
sales). Twenty-three companies had an annual volume of sales worth 1–10
billion US dollars; twelve of those were represented by holding companies
in the oil industry, another seven were the largest steel factories.1
Thus, instead of becoming centers for promoting new businesses and
new industries, as happened in Japan, most of the largest financial-industrial groups in Russia have been formed on the basis of windfall wealth, and
most firms belonging to these groups had been acquired by the owners
during privatization with a view to using their connections to make the
best out of any chance of grabbing formerly state-owned property for free.
Political connections and influence with the government (federal and local)
have played and continue to play the most important role, while the questions of strategic management have stayed (and continue to stay) in the
background. The biggest tycoons, or “oligarchs,” whose positions in the
ruling class continue to depend crucially on the personal “working relations” they had developed with influential leaders of the federal and
regional governments, hastened “not to miss the leaving train” without
thinking too much about where the train was headed. As Boris Berezovsky,
one of the most notorious Russian oligarchs, put it back in 1996, “the best
business in Russia is in politics.” It was impossible to organize an efficient
system of monitoring and control under such conditions, and most of the
oligarchs have shown little interest in organizing such a system because
their fabulous new wealth was larger than they could effectively control
anyway, and because they were too busy fighting each other for the pro1. Since this paper was completed, Russian economy has experienced some moderate
growth due mainly to very favorable trend in world prices of oil, gas and other primary
resources. This has only made the dominance of companies in the resource-extracting/metallurgy sector even more pronounced.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 169
Allocation and Misallocation of Human Capital
169
tection of their existing turf and taking chunks out of others’ turf whenever they sensed a chance.
With major oligarchs and members of the government competing with
each other for political control of the economy and acting more like predators than like prudent investors with respect to the businesses they came to
own, individual firms and local groups of firms have found that the only
way to protect their ownership claims is to rely on a system of political protection. But promises to exchange protection for political support are likely
to be credible only among individuals who have good reputations for honoring such agreements. The resulting equilibrium of the social game is one
in which political support is valid only for a limited elite, cemented by the
system of insider trust and shutting out all outsiders. Productive capital can
be owned only by the members of such an elite oligarchy with political
connections.
Given this system of oligarchic property rights, the task of getting oligarchic groups and the government catering to them to actively enforce
outsiders’ claims against their own members becomes a formidable issue
(Braguinsky and Myerson 2007a). The essential feature of the oligarchies
is that they protect their members’ assets but not the assets of outsiders.
Of course, any individual oligarch would benefit if he could credibly commit himself to honor debt obligations to outside investors. But once the
loans or outside investments have been received, the oligarch’s incentives
will be reversed, and he will prefer to use his political power to protect
himself against his outside creditors. Any other member of the local oligarchy who then supported these outside creditors could be accused of
violating the internal protection norms of the oligarchy and would be
expelled from it. These oligarchic norms would also naturally support the
use of their economic power against outside creditors. For example, consider what might happen if one oligarch were asked by another to help in
defrauding outside creditors, say by participating in illicit, unreported
transactions that hide assets and conceal profits. Given the critical importance of keeping good relationships with others in the local oligarchy, it
could be much safer to grant such illicit assistance than to deny it, as the
internal law of the oligarchy may have effective priority over any formal
statutory laws. As a result, a special culture is established in which business
executives who honestly report their transactions are ostracized and keeping transactions secret is the norm. Vested interests of corrupt officials covering such illicit transactions complete the vicious circle.
A similar logic applies not only to borrowing and lending but also to
buying and selling assets. Tons of reports in the Russian press tell stories
of investors spending large amounts of money thinking that they were purchasing valuable assets, only to find out that they had been cheated and
received no ownership rights for their money (Braguinsky and Myerson,
Mystery of CapitalCRev
170
2/18/08
11:13 AM
Page 170
Serguey Braguinsky
2007b). Thus, neither collateralizing nor selling relational connections
based on insider trust appears to be possible, and economic agents outside
of oligarchies remain completely deprived of ownership and investment
opportunities regardless of the level of human capital they possess. Clearly,
privatization of formerly state-owned assets and the establishment of a formal legal system designed to create a registry of private property rights
would not work in such an environment, given this limitation of the social
capital governing the actual relations of ownership. Nontransferability of
the relational capital that protects the oligarchs’ wealth and ownership
rights continues to prevent investment and the onset of capitalistic
growth.
Once such an environment becomes firmly entrenched, attempts at
policy reform to protect the property rights and asset claims of outsiders
could be viewed as a threat to the whole system of oligarchic privileges
and are likely to meet with strong opposition and remain only on paper.
A political equilibrium in which nobody holds valuable investments outside the sphere of control of his oligarchic group is a sustained problem
preventing economic development in Russia and many other undeveloped
countries. Clearly, neither human nor physical assets can be used as collateral for productive employment of capital, and resolving the problem
requires moving to a totally different equilibrium of the social game.
Some Questions for Future Research
In this chapter I discussed two episodes from recent history where reputational and relational capital that was largely accumulated under a premodern socioeconomic system played diametrically opposite roles in the
subsequent development of capitalism. In one case, that of Japan, it was
deployed as collateral that enabled real resources to be matched with the
appropriate human capital and to jumpstart capitalistic growth. This
growth then led to further institutional improvements, such as the development of an effective legal system and capital markets. In the other case,
that of the former Soviet Union, the relational capital was used to grab
existing assets for free, leading to continuous political fighting over the
control of those assets, an economic decline, and the effective blocking of
institutional reforms. Human capital accumulated in the former Soviet
Union remains largely alienated from the real resources that it needs to put
the economy on the trajectory for growth.
There were similarities between the situation faced by Japan in the late
nineteenth century and the situation faced by the former Soviet Union
and other countries in transition to a market economy in the late twentieth century. Nevertheless, the paths of development appear to be very
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 171
Allocation and Misallocation of Human Capital
171
different. There is no doubt that historical lock-in and differences in natural wealth played an important role in this divergence. However, a closer
look at economic incentives governing the process of building relations
and reputations, as well as the ways in which this type of human capital was
subsequently employed, can shed additional light on the complex question
of why capitalism triumphed in one case and failed in the other. More
research is needed in order to answer this question in general terms.
R E F E R E N C E S
Arrow, Kenneth, J. 1974. The Limits of Organization. New York: Norton.
Bezemer, Dirk, Uwe Dulleck, and Paul Frijters. 2003. “Socialism, Capitalism, and
Transition: Coordination of Economic Relations and Output Performance.”
Mimeo.
Binmore, Ken. 1994. Game Theory and the Social Contract. Vol. 1, Playing Fair.
Cambridge, MA: MIT Press.
Boot, Arnoud, Stuart Greenbaum, and Anjan Thakor. 1993. “Reputation and
Discretion in Financial Contracting.” American Economic Review 83, no. 5:
1165–183.
Braguinsky, Serguey, and Roger Myerson. 2007a. “Capital and Growth With
Oligarchic Property Rights.” Review of Economic Dynamics 10, no. 4:
676–704.
Braguinsky, Serguey, and Roger Myerson. 2007b. “A Macroeconomic Model of
Russian Transition: The Role of Oligarchic Property Rights.” Economics of
Transition 15, no. 1: 77–107.
Braguinsky, Serguey, and Grigory Yavlinsky. 2000. Incentives and Institutions: The
Transition to a Market Economy in Russia. Princeton, NJ: Princeton University
Press.
de Soto, Hernando. 2000. The Mystery of Capital: Why Capitalism Triumphs in the
West and Fails Everywhere Else. New York: Basic Books.
Demsetz, Harold. 1988. Ownership, Control, and the Firm. Basil Blackwell.
Easterly, William. 2001. The Elusive Quest for Growth. Economists’ Adventures and
Misadventures in the Tropics. Cambridge, MA: MIT Press.
Ehrlich, Isaac. 1990. “The Problem of Economic Development: Introduction.”
Journal of Political Economy 98, no. 5, part 2: S1–S11.
Ehrlich, Isaac, and Francis Lui. 1999. “Bureaucratic Corruption and Endogenous
Economic Growth.” Journal of Political Economy 107, no. 6, pt. 2:
S270–S293.
Fudenberg, Drew, and David Kreps. 1987. “Reputation in the Simultaneous Play
of Multiple Opponents.” Review of Economic Studies 54, no. 4: 541–68.
Goldin, Claudia. 2001. “The Human Capital Century and American Leadership:
Virtues of the Past.” NBER Working Paper, no. w8239.
Mystery of CapitalCRev
172
2/18/08
11:13 AM
Page 172
Serguey Braguinsky
Goldsmith, Raymon. 1969. Financial Structure and Development. New Haven,
CT: Yale University Press.
Greif, Avner. 1993. “Contract Enforceability and Economic Institutions in Early
Trade: The Maghribi Traders’ Coalition.” American Economic Review 83, no.
3: 525–48.
Kinugawa, Taiichi. 1990. Hompo Menshi Boseki Shi [The history of our country’s
cotton yarn and spinning industry]. 7 vol. Tokyo: Hara Shobo. (Orig. pub.
1937–44.)
La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny.
1998. “Law and Finance.” Journal of Political Economy 106, no. 6: 1113–55.
Mauro, Paolo. 1995. “Corruption and Growth.” Quarterly Journal of Economics
110, no. 3: 681–712.
Mitchell, Katharyne. 1995. “Flexible Circulation in the Pacific Rim: Capitalisms in
Cultural Context.” Economic Geography 71, no. 4: 364–82.
Miwa, Yoshiro, and Mark J. Ramseyer. 2000. “Corporate Governance in
Transitional Economies: Lessons from the Pre-War Japanese Cotton Textile
Industry.” Journal of Legal Studies 29, no. 1: 171–203.
Murphy, Kevin M., Andrei Shleifer, and Robert Vishny. 1991. “The Allocation of
Talent: Implications for Growth.” Quarterly Journal of Economics 106, no. 2:
503–30.
Passin, Herbert. 1965. Society and Education in Japan. New York: Teachers
College Press / Columbia University.
Saxonhouse, Gary. 1974. “A Tale of Japanese Technological Diffusion in the Meiji
Period.” Journal of Economic History 34, no. 1: 149–65.
Schumpeter, Joseph. 1934. The Theory of Economic Development: An Inquiry into
Profits, Capital, Credit, Interest, and the Business Cycle. Cambridge, MA:
Harvard University Press.
Shaw, Edward. 1973. Financial Deepening in Economic Development. New York:
Oxford University Press.
Tanzi, Vito. 1995. “Corruption, Arm’s-Length Relationships, and Markets.” In
The Economics of Organized Crime, edited by Gianluca Fiorentini and Sam
Peltzman, 161–80. Cambridge: Cambridge University Press.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 173
On the Essential Nature
of Human Capital
9
Gloria Zúñiga y Postigo
Throughout the history of economic thought, the term capital has been
the subject of misunderstandings. In 1871, Carl Menger advanced a definition in an attempt to correct previous misconceptions. Menger explained
that capital is constituted by those economic goods that are available in the
present and whose services together are capable of being applied to the
production of new economic goods in the future.1 It is not surprising that
confusions emerged in the formative stages of economic science or that
they continued even into the classical economic period, but it is troubling
that the meaning of the term capital should still be misunderstood today.2
The culprits today, however, are not the economists. Today’s misunderstandings are mostly on the part of nonexperts, or laypersons. But this does
not lessen the concern, since all ordinary citizens of a nation participate to
a greater or lesser extent in the acquisition and productive use of capital.
In contrast, consider the concept of human capital, a concept famously
introduced by Nobel laureate Gary Becker in the 1970s that has since been
the subject of many investigations. Economists, however, have no clear
definition of this term. Despite the lack of a clear definition, economists
claim that human capital is a significant factor in a nation’s growth. What
they really mean is this: education is a significant factor in a nation’s
growth. Arguably, this claim is motivated by an intuition that seems to be
I would like to acknowledge with gratitude Barry Smith, Maria Elisabeth Reicher, Mark
Pestana, and Kevin Schmiesing for their comments..
1. This received definition of capital simpliciter was advanced by Carl Menger—the
founder of the Austrian School of economics—in an appendix to his 1871 Principles of
Economics.
2. Menger addressed some of the mischaracterizations of the meaning of the term capital by his predecessors in appendix E of his Principles (1871). Here we find that even the illustrious economist J. B. Say encountered difficulties with the meaning of the term capital.
173
Mystery of CapitalCRev
174
2/18/08
11:13 AM
Page 174
Gloria Zúñiga y Postigo
corroborated by practical wisdom. The intuition is that the more one
invests in education, the greater the opportunities for employment. It is
important to note that this understanding of human capital seems to presuppose that the ends of human capital are similar to the ends of capital
simpliciter: new production. Hence, investigations into the phenomenon
of human capital have been dedicated mostly to the role of education in
human capital formation and human capital formation has been typically
measured in a nation’s economic growth.3 Although economists recognize
that education is only one constituent of human capital, the reason for this
narrow focus is that education lends itself to measurement and, thereby, to
empirical and econometric analysis.
We have no reason to doubt that important findings may be on the
horizon with this approach of the reducing human capital to education for
practical purposes. Yet it is quite troublesome to find empirical investigations about human capital that lack a theory of human capital. Without a
formal framework, what is to police excesses with empirical data? Lacking
at least a working hypothesis of what human capital is, how could mistakes
be identified? Moreover we must ask, what is the relation of education to
the other constituents of human capital? Inasmuch as we have learned to
recognize that moral knowledge is positively correlated to capital development—since honesty and trust are fundamental ingredients of healthy markets—perhaps we need to recognize the significance of all the constituents
of human capital, even those that are difficult if not impossible to measure.
To follow this direction of inquiry, however, would be to situate the examination of human capital beyond the grasp of the mathematical methods of
mainstream economics. The question is, then, what could be the new
province of such an inquiry? If it is true that any subject about which we
lack definite knowledge falls squarely in the province of philosophy, then it
would seem that, from this latter perspective at least, human capital is a
subject for philosophical examination.
On this basis, I shall endeavor here to approach the task of unraveling
the nature of human capital. But instead of trying to examine what it is, I
shall attempt to examine what it would mean for human capital not to exist
in persons. My impetus for this unusual approach was triggered by the
term dead capital coined by Hernando de Soto in his book The Mystery of
Capital. Dead capital exists whenever a parcel of land cannot be applied
productively. And by the term dead de Soto does not suggest that by
necessity the parcel of land was previously capable of being applied productively and then it became incapable. We can restate de Soto’s notion of
dead capital more formally as follows: There are objects of which it is true
3. See, for example, Barro 2001, Barro 1997, and Hanushek and Kimko 2000.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 175
On the Essential Nature of Human Capital
175
that there are no such objects.4 In other words, there are parcels of land
qua capital of which it is true that no capital obtains. The consideration of
a social object such as dead capital resurrects the heretofore-puzzling
philosophical matter of the real existence of nonexistent objects raised by
Alexius Meinong.5 De Soto seems to have succeeded in showing that there
are things in the world that make true the proposition that “there is dead
capital.” The correlate of this proposition is not, strictly speaking, the
physical land in question but the state of affairs in which a particular plot
of land lacks a title or any other evidentiary document of property rights
that belongs to a formal system of law and, based on this lack, the relation
of this plot land to the realm of capital is nonexistent.
We assume that the physical nature of a given portion of land gives it
the potential to serve as a constituent object of capital. This potentiality is
not just apprehensible but, more importantly, it is apprehended by at least
one person who is willing to carry out the transformation of the land that
will allow it to serve the production of a complex consumption good, for
example, through supporting the construction of a building, a factory, a
resort. Nonetheless, if the potentiality of any parcel of land whose character as a constituent of capital (that is, as a means of production) is thwarted
by its legal status—or, more precisely, by its lack of legal identity as property belonging to one or more persons—then this parcel acquires the character of dead capital. There is indeed no other way to describe more
precisely an object that could be productive, an object that is apprehensible as a means for production, but whose productivity is hampered or
destroyed entirely by a certain institutional state of affairs. This is the economic tragedy that we find in much of the developing world and de Soto
blames the institutional state of affairs in which titles for landed property
are either not formalized or, if they exist, they are not part of a uniform
system of legal representation of landed property.
The problem is not that landed property that falls out of a uniform
legal system is merely capital in potentia waiting for its realization, similar
to an acorn prior to realizing its potential as an oak tree. And the problem
is not that landed property that falls out of a uniform legal system merely
lacks the immediate potential to become a capital good in the same way
that an acorn lacks the immediate potential to become a wooden chair.
Ultimately, the acorn can realize a mediate product—the oak tree—that
can lead to the production of a wooden chair. But we are hampered when
4. This is the idea of real non-existence stated by Alexius Meinong in “Über Gegenstandtheorie,” originally published in 1904.
5. According to Alexius Meinong, “There are objects of which it is true that there are no
such objects” because the object “stands beyond being and non-being” (1960, 83).
Mystery of CapitalCRev
176
2/18/08
11:13 AM
Page 176
Gloria Zúñiga y Postigo
we attempt to use landed property without a legally protected title to realize any product, mediate or immediate. And if the institutional setting
destroys any possibility of its realization as capital, then the land in question is nothing other than dead capital. This insight by de Soto is quite
powerful because it points to the essence of landed property in such an
institutional state of affairs.
It might appear odd to say that the predication dead capital refers to a
nonexistent object. One could easily quibble, for example, that a case of
dead capital in de Soto’s sense is just something that could have been capital under other circumstances. Hence, once could argue that it is not the
case that capital in no way exists.6 Here, however, we prefer a realist
account of meaning. In other words, the real object correlative to the belief
is not only the physical parcel of land, but the character of capital of the
physical parcel of land. On this robust view of meaning, capital is a type of
social object that is instantiated upon the basis of a physical object, such as
landed property, and thus becomes particularized. Accordingly, a belief
could only correspond to a token of capital and not to the type capital
itself. But a parcel of land as a token of capital exists only when believed to
be a token of capital. The character of a parcel of land as capital is thus not
intrinsic to the parcel of land, but carried into the situation by cognitive
acts on the parts of human beings. In other words, the character of capital
of a parcel of land is intended by relevant human beings with the belief that
it is capital. In this sense, then, whenever a parcel of land is not apprehended as capital, capital does not exist. The nature of capital, as a social
object, is indeed transcategorial in the sense that it is constituted by beliefs
on the basis of concrete real objects.
When de Soto observes that landed property without a formal title constitutes dead capital, then he seems to be asserting something along the
lines of: there is a nonexistent social object of the type nonbeing of capital,
which inheres in particular real existing parcels of land in such a way as to
have certain specific consequences, so that the nonbeing of capital can be
shown to have real existence.
Now, let us return to our concern with human capital. If it is legitimate
to conceive of the idea of dead capital (simpliciter) in this way, then is it
similarly legitimate to admit of dead human capital? Could zombies, for
example, exemplify dead human capital? It would be useful to address these
questions if we are to arrive at a description of the essential nature of
human capital in its proper, productive sense. After all, if we have not
arrived at a definition of human capital by means of the more conventional
method of examining what it is, perhaps we will encounter fewer obstacles
by examining what it is not.
6. And one would find support for this in Bertrand Russell (1905).
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 177
On the Essential Nature of Human Capital
177
1. Why Zombies?
Zombies have not been merely the subjects of Hollywood films. The most
celebrated use of zombies in philosophical inquiry is found in David
Chalmers’s investigation of consciousness. A zombie provides an interesting case for our purposes, since he is a living dead person. He is living insofar as he is, following Chalmers’s discussion, physically identical to a
human being except that he lacks conscious experience. An important
characteristic of the Chalmers zombie is that he is not a corpse: a corpse is
merely the body of a dead person. A corpse has no life.
The Chalmers-type zombie is also psychologically identical to a conscious being by virtue of his being able to process psychological phenomena. He will thus be able to report the character of his perceptions, tastes,
and other stimuli, and he will be able to control his attention and behavior. The crucial difference between the Chalmers zombie and a conscious
being is that the zombie lacks any conscious experiences. In other words,
he is not able to experience perceptions, tastes, mental states even if he is
able to make assertions which seem to report their character. The Chalmers
zombie functions and responds like a living person, but he does not feel
anything because he lacks consciousness.
We must keep in mind that zombies, for Chalmers, are a matter of logical possibility and not of physical probability.7 Their conceivability, he
holds, entails their logical possibility. Chalmers’s zombie is unlike the zombie of Hollywood films in that the latter typically suffers from functional
impairments such as, for example, he is typically depicted as ambulating
with arms stretched out in front of him since he may not otherwise be able
to avoid obstacles in his path. The Hollywood zombie also reveals in his
behavior a capacity for enjoyment, albeit one that is limited to, for example, enjoyment in eating or killing people (see Block 1995). In large part
for this reason, the Hollywood zombie is not useful for our examination.
Consequently, our attempt to investigate the matter of dead human capital will consider only the Chalmers-type zombie but for aims altogether
different than his. But this will come later on. First, we must consider in
detail the theoretical framework in economics from which our assumptions
begin.
7. A proposition is logically possible if and only if there is some coherent way for the world
to be, under which the proposition would be true. But this way for the world to be need not be
the way the world actually is; it need only be logically coherent. So, for example, the false
proposition there are real zombies in the world is also logically possible, so long as we are able
to conceive of some logically coherent world in which there are real zombies. And we indeed
seem to be able to conceive of zombies by evidence from the many films about zombies that
have been produced.
Mystery of CapitalCRev
2/18/08
178
11:13 AM
Page 178
Gloria Zúñiga y Postigo
2. Capital 101
What is capital exactly? Menger describes it as the sum total of economic
goods that are available in the present and whose services together are
capable of being applied to the production of new economic goods in the
future. Bricks, cement, and steel, for example, are economic goods that
together can be applied to the construction of a building.
But there are many misconceptions in ordinary use of what the term
capital means. Consider, for example, the use of the term capital in ordinary language to signify a sum of money, as in the expression “capital in the
bank.” But the most common yet least recognized mistake is the conflation
of capital goods with income-producing items of wealth, such as rental
housing. What is not recognized is that no new production is obtained by
merely housing new, different, or a larger number of tenants. According to
de Soto’s Mystery of Capital, this error is especially poignant in developing
nations. “The poor,” de Soto writes, “have accumulated trillions of dollars
of real estate during the past forty years,” but they lack the legal means to
apply such assets toward new production because developing nations often
lack formal mechanisms for recording property rights”(47–48). All that the
landed poor can do beyond occupying the land they have acquired and
building improvements is to make it available for rent. Rental income is not,
however, capital. More specifically, while it is true that the landed poor can
gain income from renting real estate, this does not amount to their applying the land toward the production of a new economic good.
To think that land produces capital through rent is again to confuse
capital with sums of money gained. This is a mistake with grave economic
consequences. The chief concern of de Soto is that, without formalized
property rights, the landed poor in developing countries will be unable to
direct their real estate assets to actual capital production. Without capital
production, there will be no development in the sense with which we are
familiar in the industrialized world.
Our misconceptions about the true meaning of capital lead to a certain
complacency that serves to entrench the precarious economic status quo of
developing nations. As de Soto tells us, capital “is not the accumulated
stock of assets but the potential [an asset] holds for deploying new production.”8 This potential is apprehended by an entrepreneur in relation to
a particular future end. A parcel of land by a beach, for example, constitutes part of the capital necessary for erecting a new hotel. The ideal exis-
8. de Soto 2000, 42; brackets mine. Following Adam Smith, he holds the realist view that
“for accumulated assets to become capital and put additional production in motion, they
must be fixed and realized in some particular subject.”
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 179
On the Essential Nature of Human Capital
179
tence of the hotel in the mind of the entrepreneur is what gives the parcel
of land its character as capital. Similarly, an entrepreneur may apprehend a
sand deposit as having the potential to deploy the production of computer
chips. The ideal existence of the future production is what gives sand its
character as a constituent object of capital.
But capital is not an ideal object as de Soto seems to assert.9 According
to the contributions to economic theory of Böhm-Bawerk and other oldworld Austrian economists, only the future product is the ideal object.10
On this account, capital is constituted by real objects in the world. The
capital for the construction of a building is constituted by bricks, cement,
cranes, and so on. These real objects are unified by the mind that conceives
them together as the means for producing something new in the future.11
Capital can be thought of as a social object in the sense that it is constituted by both beliefs about some future end (the ideal object) and by the
real objects that will realize that future end. As such, it is important to recognize that a ton of bricks and mixed cement do not constitute capital
independently of the production plans of an entrepreneur-builder and the
relevant circumstances of time and place for the realization of these plans:
the bricks and cement must be in the right place and at the right time, and
subject to the right sorts of control. Above all, capital as a social object
does not exist independently of the human social world.
Nonetheless, capital has meaning only by means of its concrete real
form of particular capital goods—e.g., this crane, those two tons of bricks,
and so on—because the price and actual function and performance of the
concrete things that, together, are conceived as capital are of fundamental
significance in relation to the production aimed at realizing the entrepreneur’s ideal future product. The entrepreneur-builder cannot build his
building with an idea alone, but only with the aid of capital goods—with
crane and bricks. The idea of the building, or of whatever is the finished
product, is indeed an ideal object driving the entrepreneurial effort. But its
realization relies on actual capital goods, which have concrete, material
form, and the investment decision turns on the perceived causal relations
among these actual capital goods, on their prices, function, performance,
9. He writes, “The moment you focus your attention on the title of a house, for example, and not on the house itself, you have automatically stepped from the material world into
the conceptual universe where capital lives” (2000, 50).
10. Eugen Böhm-Bawerk explains that our present actions are motivated by the idea of
the future feelings. Hence, “we set up goods or renditions of services in readiness for utilization in the future” (1959, II:261).
11. According to Eugen Böhm-Bawerk, capital is “a complex of goods which came into
existence as the result of a previous process of production, and which are destined, not for
individual consumption, but for the acquisition of further goods” (1959, I:5).
Mystery of CapitalCRev
180
2/18/08
11:13 AM
Page 180
Gloria Zúñiga y Postigo
availability, and so forth, and the realization of the final product as conceived by the decider. As Böhm-Bawerk tells us, the value of capital
depends on the marginal utility that the final product for which they will
be used is capable of delivering (1959, II:168).
Now, a real object such as land can exist as a capital good only if it is
legally identified as property in a way that gives an owner the rights to
employ it in an economically productive way. According to de Soto, “property has given minds the mechanisms with which to extract additional work
from commodities” (2000, 217).12 In the absence these mechanisms, of
exercisable property rights, obstacles to capital growth in developing
nations are created, to which de Soto offers a solution in the establishment
of uniform systems of titles and property registries.
3. Enter Dead Capital
Let us now consider a real case reported by de Soto in which public housing neglected by the relevant government officials was used as a source of
income by entrepreneurially minded tenants who created additional space
to sublet without official approval.13 This is a phenomenon that is not
uncommon in developing countries where the incentives for this sort of
exploitation of public property are often large. The problem is that the
addition to the public housing is not such that it can be properly considered public property but it cannot be formally owned by the tenants who
built it either. This means that, although the addition can produce income
for the entrepreneurial tenants, albeit extralegally, it cannot be sold or
mortgaged in order to deploy new production. The additions in question
are then dead capital because the potentiality to serve as capital has no possibility of being actualized in the given institutional context.
It is quite seductive to find justice in this situation because we tend to
approve of poor tenants who strive to better their lot in creative ways. We
rejoice when clever tenants benefit from inefficiency or neglect on the part
of public authorities. This reaction, however, must be tempered by sound
economic analysis, which tells a different story: the small gains by a few will
never offset the economic consequences of not directing resources (land,
land improvements, human creativity, and vision) to their most efficient
uses. The point de Soto makes is clear: dead capital is not only an obstacle
to development and growth; it is also immoral since it results from a legal
12. Carl Menger describes a commodity as “products that the producers or middlemen
hold in readiness for sale.” See Menger 1871, 238.
13. See de Soto’s chapter in this volume.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 181
On the Essential Nature of Human Capital
181
framework that accepts no role in protecting private property. Only when
dead capital is understood in this way does it become clear that de Soto is
not merely attempting to standardize titles of landed property in developing countries that lack a formal property registry system. What he suggests,
fundamentally, is the establishment (or restoration) of the rule of law, but
he recognizes that this is a task impossible to accomplish through any one
simple institutional change. To change a legal system from a state of affairs
in which landed property is not protected into one that enjoys a formal
property registry system is a step in the direction of restoring the rule of
law, but other steps are needed—including education in the proper use of
such a system and of its associated habits and artifacts. But eliminating
dead capital via formal property registry systems is still, in de Soto’s eyes,
“the only game in town” when it comes to directing an economy in the
direction of capital formation. Perhaps it is also the only safe, peaceful, and
painless way to moving society towards a more widespread and thoroughgoing embrace of the rule of law in developing nations.
4. The Mystery of Human Capital
[tx]The chief mystery of contemporary macroeconomics is not the role of
human capital in relation to development. Rather, it is the answer to this
more fundamental question: What is the exact constitution of human capital? Economists provide different answers14 But the most common
characterization of human capital sees it as the stock of a person’s incomeproducing skills. What we must recognize is that this characterization com14. In the Concise Encyclopedia of Economics (Liberty Fund, 1999-2002, “Human
Capital” entry), Gary Becker writes that “schooling, a computer training course, expenditures
of medical care, and lectures on the virtues of punctuality and honesty also are capital. That
is because they raise earnings, improve health, or add to a person’s good habits over much of
his lifetime. Therefore, economists regard expenditures on education, training, medical care,
and so on as investments in human capital. They are called human capital because people cannot be separated from their knowledge, skills, health, or values in the way they can be separated from their financial and physical assets.” (See http://www.econlib.org/library/
Enc/HumanCapital.html) But there are other accounts of human capital. In human development theory, whose most notable contributor is Amartya Sen, there are distinctions drawn
among social capital (social trust), instructional capital (sharable knowledge), and the individual’s capital (leadership and creativity). These are seen as three distinct human capacities
in economic activity. The problem is that in the human development context, the term
human capital is often employed in ambiguous combinations of these distinctions.
Nonetheless, such distinctions allow for interactions with welfare, education, and healthcare
systems to be modeled even past retirement. By comparison, according to strict neoclassical
analysis, human capital would be zero at retirement because labor, employment, or goods are
no longer involved.
Mystery of CapitalCRev
182
2/18/08
11:13 AM
Page 182
Gloria Zúñiga y Postigo
mits the same error as that which is made today by laypersons in regard to
capital simpliciter. In other words, a person’s skills for hire do not constitute a capital good, any more than rental housing constitutes a capital
good, for capital production is not tantamount to an asset’s capability to
produce income. Rather, capital production is the deployment of an asset
toward a new and greater end that employs, as de Soto explains, “the most
economically and socially useful qualities about the asset” (2000, 49).
Similarly, then, human capital production would arguably employ a person’s assets in a way which draws on their most economically and socially
useful qualities.
We shall recall that despite the lack of a clear understanding of the term
human capital, the existence of human capital is widely presupposed in
development economics, especially by economists who argue that a
nation’s growth in real production is primarily the result of the productivity of human capital.15 Economist Isaac Ehrlich, for example, maintains
that the economic growth attained by the United States since the late nineteenth century is primarily due to gains in university education. Although
Ehrlich does not reduce human capital to education, he limits his analysis
of human capital to education because it is a measurable factor. This is
indeed in the direction of the neoclassical mainstream in economics.
In Gary Becker’s seminal work on human capital (1975), his analysis is
devoted mostly to education. Nonetheless, he mentions that, in addition
to measurable investments in human capital such as education, there are
also unmeasurable investments, such as migration and even perhaps the
mere change in one’s living environment, that affect not only future monetary income but also future psychic income. Here, Becker seems to suggest a broader understanding of human capital, as not merely the stock of
skills that affect one’s job-related productivity and associated income generation. Unfortunately, Becker’s acknowledgement of psychic income
seems to have been passed over in the literature and thus it remains undeveloped. We shall attempt to remedy this oversight here. One possible
understanding of Becker’s notion of psychic income can be seen by the
light cast by the Aristotelian aesthetic of the good life. When a person
chooses to act virtuously, he does so “for the sake of the noble” (NE 1120a
23-24). The noble can also be understood as beauty. In this sense, a welldone task in one’s work and a good deed share an aesthetic common
ground: they contribute to our sense of personal fulfillment, of living well.
They add to our psychic income. After all, despite the immeasurability of
personal fulfillment, an examination of a nation’s capital development must
reckon with the significance of shorter-hour days, early retirement, a
15. See, for example, Ehrlich and Lutter 1989.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 183
On the Essential Nature of Human Capital
183
decreasing supply of unskilled labor, and other characteristics of the
Western developed world as factors that improve quality of life. The examination of human capital is then much more complex than that of capital
simpliciter. Moreover, the current treatment of human capital in economics that focuses on education and its effect on growth conflicts with knowledge we gain in ordinary experience: monetary income and psychic income
are not positively correlated necessarily. This means, then, that education
does not necessarily enhance human capital even if it contributes to
growth. We could speculate, for example, that activities such as prostitution reduce psychic income in the long run. But if a prostitute’s monetary
income from prostitution is in the six-digit range, would this offset the loss
of psychic income? Clearly, the latter is not measurable. But if only that
which is measurable is considered, the analysis of human capital will overlook important considerations.
We could suppose a world in which feelings of pleasure are scientifically
measurable. Anything that positively affects the feeling of happiness has an
effect on this measurable psychic income. A drug addict’s happiness could
then be considered a manifestation of a high psychic income, even if this
state has an inverse relation to his monetary income due to the addict’s
inability to maintain a job. In order to avoid the objection that this is unsustainable in the long run, we could suppose that the drug addict has a benefactor who pays for all of his drug expenses without limit. We can further
suppose safely that the addict’s drug use increases as his tolerance for the
drug increases and as a result and he affirms that he has never been happier.
Can we say that his human capital has increased to a level never achieved
before? The chief point here is that even if we were to be able to measure
feelings of pleasure, or other forms of psychic income, a clear understanding of human capital still requires the careful consideration of all that may
constitute human capital, and of the relations between these constituents,
in order to correctly assess the state of a person’s human capital.
A corollary that cannot be ignored is that the aggregate analysis of
human capital may not be a suitable means for examining the effects of
human capital on a nation’s growth in real production. An analysis of all
dimensions of each and every individual’s human capital in a nation is not
feasible. It already seems clear, however, that studies of the effects of education on a nation’s growth should not too readily be identified as studies
of human capital in the broad sense.
5. An Application of the Thesis of Aussersein
De Soto’s remarks on dead capital points to a new avenue for arriving at a
description of human capital, an avenue laid out by the philosopher Alexius
Mystery of CapitalCRev
184
2/18/08
11:13 AM
Page 184
Gloria Zúñiga y Postigo
Meinong.16 In the Meinongian ontology everything is an object. Objects
that have a location in space and time, such as a tiger or a loaf of bread,
but also my present headache, are said to enjoy present real existence.
Entities that are not localized in space and time, such as the number
3.1416 or Sherlock Holmes, are said to subsist. For Meinong, to exist and
to subsist are the only two modes of existence. But he also recognizes that
we entertain thoughts about entities with nonexistence, and he claims that
in order to provide a realist account of judgment and assumption, these,
too, must be conceived as directed at some referent. They enjoy not existence but Aussersein—they are beyond being and nonbeing.
Let us employ an illustration that applies this aspect of the Meinongian
ontology to the sphere of the social world that de Soto addresses: landed
property. Suppose that there are two prospective buyers contemplating the
purchase of a plot of land. Prima facie, it would seem that their contemplations are directed at a real existing object—the land. Suppose further
that one believes that the plot of land is dead capital, while the other
believes that the purchase of this plot of land is a good capital investment.
These two judgments reveal that the actual object of these judgments is
not the plot of land. Rather, it is the possibility of the character of capital
adhering in the plot of land. Incidentally, if the buyer who believes that the
land is dead capital, then this means that the possibility of capital obtaining in the plot of land has no being. Now, we must keep in mind that, for
Meinong, all objects towards which judgments are directed have
Aussersein. The most interesting ones are, however, those with negative
judgments. For example, suppose we find ourselves driving on a freeway
and suddenly traffic reaches a standstill. We could easily form the assumption that there is an accident ahead. But we are quickly informed that there
is no accident ahead as the cause of the standstill. We would then form a
negative judgment with respect to our previous assumption by negating
the state of affairs in which there is an accident ahead. Or, consider another
example. Suppose we make the following judgment about the candidate
that one is interviewing for a job: “he does not meet the requirements for
the job.” This is a negative judgment with respect to the assumption for
scheduling an interview in the first place was that the candidate was qualified. What is even more interesting in this Meinongian ontology is that all
of the objects—the accident that does not exist in the relevant state of
affairs, the qualifications that did not realize in the candidate interviewed—
enjoy some constitution (Sosein) that make them eligible subjects of true
propositional statements such as the negative judgments mentioned.
16. For further historical and philosophical reference, see Chisholm 1982 and Smith
1994.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 185
On the Essential Nature of Human Capital
185
In this light, we can see that de Soto can make propositional statements, such as “This is dead capital.” The object presented before him is
a plot of land, but the object of the judgment about is the capital that does
not obtain in the plot of land. This is of importance to a realist account
because the truth of this judgment can be settled objectively, which means
independently of perceptions or points of view. Above all, this is what we
understand when we hear expressions such as that which Democratic candidate Lloyd Bentsen uttered in rebuttal to Republican candidate Dan
Quayle in what is perhaps the most notorious vice-presidential debate in
the United States: “Senator, you are no Jack Kennedy.” No one mistook
the object of this propositional statement as the particular characteristics
that Dan Quayle lacked, for the criticism was bolder. The object was the
state of affairs in which Dan Quayle, qua politician, embodies the nonbeingness of the character of Jack Kennedy qua politician.
Now here is the twist on Meinong that we propose makes his ontology
very sympathetic to social objects: Jack Kennedy qua politician is a social
object that is constituted not only by properties such as being human, but
also by beliefs about his political character. But the being of Jack Kennedy
qua politician is not identical to the being of Jack Kennedy the man. If we
understand the Bentsen rebuttal, then, we have sufficient reason to suspect
that Russell had an incorrect understanding of Meinong. This reason is
sufficient insofar as it is grounded on ordinary use of language and corresponding pretheoretical beliefs. More explicitly, the matter does not hinge
on reconciling the assertion that Jack Kennedy qua politician has a sort of
existence (Sosein) by virtue of our thinking of him whenever we do, with
the empirical fact that Jack Kennedy died in 1963 and thus does not enjoy
real existence now. We are clear, at least it seems to be so, that these are
not only two distinct objects but also two different senses of being.
We do not notice how often we advance true predications about what
is nonexistent. This, however, does not amount to affirming that any state
of no being is a kind of being.17 This would be objectionable for the same
reason that it would be objectionable to refer to counterfeit money as a
kind of money since counterfeit it is not money at all (Zúñiga y Postigo,
1998, 161–64). While it still remains unclear whether Meinong commits
this mistake, he is nonetheless an outcast in the anglo-american philo-
17. Meinong scholars disagree on this point. According to Reinhardt Grossman, “At
times, Meinong was inclined to assume that there is a third mode of being which belongs
to everything” (1974, 67–68). He is referring to the second edition of Ûber Annahmen
(1910, 79–80). “But,” Grossman adds, “his principal view is that existence and subsistence
are the only modes of being.” According to other scholars, however, Meinong conceded in
his later writings that even Aussersein is a kind of being. I am thankful to Maria Reicher for
this comment.
Mystery of CapitalCRev
186
2/18/08
11:13 AM
Page 186
Gloria Zúñiga y Postigo
sophical literature for what many characerize as either an absurd or untenable broad ontology.18 Peter Simons attributes this characterization to
Bertrand Russell’s “inaccurate picture,” which perpetuated a number of
misunderstandings about Meinong’s work (Simons 1992, 187). But outside of the academy de Soto has unknowingly provided us with what seems
to be a defensible Meinongian predication.
In the Mystery of Capital de Soto could have chosen other terms in
place of the expression dead capital—such as wasted resources, unutilized
resources, foregone potential—to express his notion of landed property
that by virtue of lacking ownership representation in the form of a legally
recognized title, it has been stripped of its potential of functioning as capital. It must be clear that for de Soto the expression dead capital does not
merely predicate an absent quality of some parcel of landed property. Dead
capital is not identical to asserting that something is not capital. Rather, by
dead capital he means the state of affairs in which the non-existence of capital is realized in such parcel of landed property. Dead capital is thus a social
object whose negative status of being is its constitution. To talk of dead
capital is to talk of something that exists and is present in a given locale.
Consider an abandoned parcel of public land in coastal Peru, formerly
rich with anthropological relics that have been mostly lost to theft. When
someone says, “These sand dunes are not an anthropological site,” what is
being predicated of the land here does not refer to what it is, but to what
it is not. The sandy parcel is indeed not an anthropological site. This predication is true, but it is possible to make a more significant assertion than
this negative predication, which addresses what the sandy parcel could have
been had its potential not been stripped away by thieves and poachers.
Now, if we make a judgment that this or that plot of land is dead capital, what makes this negative judgment true? Not, surely, the land itself for
there is nothing intrinsic in the land that makes it dead capital. Perhaps the
only intrinsic property of all that we call land is that it is the solid part of
the earth’s surface. But in the human social world land could have the
potential of being a capital asset if it belonged to a formal system of property ownership, or it could be the site of natural beauty, or the basis for the
demarcation of a political boundary, or the evidence for a geologic period,
and so on. What makes the proposition “this is dead capital” true is a different social object, one in which the land is merely the material basis that
realizes the nonbeing of capital.
We are now ready to turn to the examination of human capital and let
us begin by considering the notion of dead human capital. We can conceive
18. But not all prominent philosophers have waved their hands in dismissal of Meinong,
and among these we find J.N. Findlay, Roderick M. Chisholm, and Peter Simons.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 187
On the Essential Nature of Human Capital
187
of zombies as the material basis that realizes the nonbeing of human experience. As described earlier, our zombies are creatures that although physically identical to human persons, they lack phenomenal awareness.
Suppose they could read Aristotle, but they could not gain any insights
from such reading. Or, suppose they run a marathon, but they could feel
neither the physical exertion nor the emotional elation upon finishing.
Zombies, then, can experience fulfillment with respect to neither their
labor nor any other sort of personal achievements. Above all, they are incapable of any psychic income. To the best of our knowledge, human phenomenal awareness can only emerge on the physical basis of a human
person, specifically his brain. But in the case of zombies, this potential is
thwarted even with a brain. Again appealing to the Meinongian terminology, we might say that zombies (if they existed) would represent the being
of the nonbeing of a human person.
6. From Dead Capital to Dead Human Capital
If we apply the foregoing to the matter of human capital, then we can
begin to understand how Meinong’s ideas on existence and nonexistence
can help us to understand the structure of social reality. Human capital,
like capital simpliciter, can emerge and be sustainable only on the basis of
some real existing physical object. In the particular case of human capital,
the physical basis will be always a human body. This applies, also, to the
nonbeingness involved in dead human capital.
Human capital is a social object in a way similar to capital simpliciter: it
rests on a combination of beliefs and concrete actions against a background of rules. A person’s education, moral character, manners, affable
character, and physical health are characteristics realized in actions. And
physical health is not only a physical matter affecting a person’s body but
also influences a person’s attitudes in ways that are realized in actions. In
order for all of these and other similar characteristics to be put together as
human capital, there must be some mind perceiving and recognizing them
in a certain way. Such a perceiver must conceive these together as providing the means for producing something new and greater: a better secretary, a better entrepreneur, a great lawyer, a great teacher, an excellent
student, and so on. Like the building that an entrepreneur conceives as the
final end for constitutive objects of capital such as bricks and cement, so
the person-qua-something-great results from the unification of some or all
of the person’s manifested attributes by an observing mind.
Max Weber’s remarks in praise of Protestantism, for example, may be
understood as pointing to attributes of those German Protestants he
observed who were involved in wealth-creating activities—activities that in
Mystery of CapitalCRev
188
2/18/08
11:13 AM
Page 188
Gloria Zúñiga y Postigo
his mind constituted the proper end of a good society. He unified such
attributes into something he called work ethic, an ideal object that has since
been accepted as one character descriptor for a good society, and as a goal
toward which individuals should strive.
If a person manifests no salient attributes, then perceivers will be unable
to grasp the person’s attributes-in-potential as human capital, because they
will not be able to see a connection between what the person can offer and
some productive end. Clearly, mistakes in perception occur. We can think
of many cases in which a person’s attributes are not fully grasped by one or
more observers. We should also bear in mind that the possibility of someone’s grasping a person’s attributes may depend on the observed person
himself and on his own grasping of his own attributes. A professor may see
promise in a student, but how could the student after graduating convince
an employer of the human capital he can contribute when he himself is not
convinced he commands such human capital? Human capital is a social
object constituted by beliefs and actions, including one’s own beliefs about
one’s own attributes.
7. The Return of the Zombies
The question with which we are confronted now is as follows. Is dead
human capital a possibility? Here, we mean not merely the unfulfillment of
a person’s potential, but the complete destruction of his potential. If we
think of human capital as a matter of degree, then we could imagine that
we find at one end the zombie—a human being with no productive potential and no psychic income—and at the other end the person with fully
realized potential and a robust psychic income. The question is, are there
actual human correlates to the zombie? To begin to answer this we must
consider that the zombie is not part of a social world by virtue of his lack
of phenomenal awareness. The fact that human beings typically choose to
be in communion with others depends in large part on the human capacity for a wide range of qualitative experiences that typically gain more significance in the context of a social network. We experience comfort and joy
in the company of family and friends even if these experiences do not lead
directly to new production or increased material gains, or even if these
experiences are not consistently pleasant. We also seek an extended group
because we have discovered that the gains of cooperation extend beyond
the practical and the material. For example, we live in cities, and sit alongside others as spectators of public entertainment, we look forward to
exchanging stories with coworkers, and we prefer to eat in the company of
others not because they serve our material needs. We enjoy social networks.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 189
On the Essential Nature of Human Capital
189
In this light, then, any degree of damage to a person’s phenomenal
awareness or any incomplete development of the senses that permit it,
then, may result in a corresponding partial isolation from the social world.
This the most likely outcome in cases of dementia, schizophrenia, and
other sociopathic disorders. These cases involve social isolation in part
because the persons in question may lack the ability to experience the qualitative character of their perceptions or stimulus. Persons who suffer from
Alzheimers disease, for example, eat but can no longer taste the flavor of
food and are unable to discern whether it is agreeable or not. In advanced
stages they cease to recognize loved ones or, if they do, they may be unable
to feel any pleasure on seeing them. In the most extreme cases, they may
lose all sense of who they are as well as all memories of their lives. Such
compromises to the phenomenal human experience undoubtedly erode
humanity—that term we often employ to refer to the experience of being
human. This includes not only our capacity for language, abstract reasoning, and introspection but also our autonomy, preference for pleasure,
aversion to pain, our dependence on others for enjoying the significance of
our triumphs as well as our reliance on others for support in difficult times,
and the importance of play to our reaching fulfillment. This is not to say
that a person who suffers from Alzheimers is less human, only that their
capacity for realizing their human experience is progressively thwarted.
Ontologically, they increasingly realize the non-being of the human beings
they used to be. This recognition is precisely what makes their situation so
devastating to their loved ones.
We may conceive also of phenomenal erosion of other sorts. There are
social factors that can thwart human experience as much as physical factors.
Incarceration, for example, prevents the qualitative experience of autonomy, creativity, and of voluntary social interaction. It must be clear that my
point here is not morally relevant; it is merely ontological. As such, it
makes no difference whether the incarceration is a just punishment or cruel
one, for the state of incarceration is identical in either case. Social oppression or any kind of domination of one human being over another have similar effects to incarceration since these have the same nature: they restrict
behavior and freedom. Labor exploitation also erodes the human phenomenal experience insofar as such circumstances prevent the victims of
exploitation from enjoying the human experience of achievement and fulfillment, and replace these with psychological effects such as lack of selfesteem and depression that further constrict human flourishing.
Let us also consider the human phenomenal experience in the sphere
of economic life. Karl Marx argued that productive activity is the means for
man to find purpose and fulfillment. Industrialization, in his view, changed
this because the repetitive nature of mass production turned work into a
mind-dulling activity. This inverse relation between repetitious work and
Mystery of CapitalCRev
190
2/18/08
11:13 AM
Page 190
Gloria Zúñiga y Postigo
mental sharpness sounds not only intuitively true but it is consistent with
man’s rational nature. Arguably, then, any activities that detract from
man’s rational nature would, in principle, hamper personal fulfillment.
Similarly, terrorism would have the same effect since terror incites only
extreme primitive responses of survival in which emotional responses override rationality.
On the basis of these observations, we can advance a preliminary
description of those aspects of the human phenomenal experience and
activities that are necessary for psychic income gains consistent with human
flourishing. These are: language, abstract reasoning, introspection, autonomy, preference for pleasure, aversion to pain, social support systems, play,
freedom, creative expression, personal purpose, confidence, sense of well
being, emotional balance, and intellectual challenges. These, together, can
be indeed effective in deploying new production. In this sense, human capital can be seen as having a common character with capital simpliciter. But
human capital is not a species of capital simpliciter. The reason is that, in
addition to being a power to deploy new production, human capital is
dependent on the mental, intellectual, or psychological attributes of a person, as well as the physical state of the person—i.e., on brain functions as
well as on physical well-being. Not least of all, human capital is also dependent on the proximity to a social network for protection and support.
Before closing we must briefly tie some loose ends. First, let use revisit
the economic studies on human capital in relation to this examination.
Economists, we shall recall, have focused on education because this is a
measurable factor in human capital. But in light of our examination, we
must recognize that a person’s education can be understood as a contributing factor to human capital but not independently of constraints or
negative influences on the person’s psychological attitudes, physical wellbeing, material circumstances, and social network. Education may not offset these other constraints or negative influences. In addition, we must also
recognize that aggregate analyses of human capital will indeed show a relation between education and growth. At the micro level, however, education does not necessarily have a positive relation with human capital since
education is often not rewarded in the form of human fulfillment. In addition, we must pursue a fuller development of Becker’s broad understanding of human capital not only as measurable investments such as education,
but also unmeasurable investments, such as migration, living environment,
and any others that affect not only future monetary income but also future
psychic income. Our examination was one step in this direction but the
task now is to attempt a positive description of human capital.
What is left now is an answer to the somber question we left pending
earlier: Is dead human capital possible? Dead human capital may arise, in
principle, when human capital is not permitted to emerge at all in any form
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 191
On the Essential Nature of Human Capital
191
of productive flourishing because of factors, both internal and external,
beyond the control of the agent involved. Our intuition is that a complete
destruction of human capital is not possible even if the erosion to the
potential for human phenomenal experience is considerable. Perhaps only
brain death can bring about a complete destruction of this potential.
R E F E R E N C E S
Barro, Robert J. 1997. Determinants of Economic Growth: A Cross-Country
Empirical Study. Cambridge, MA: MIT University Press.
———. 2001. “Human Capital and Growth.” American Economic Review
91:12–17.
Becker, Gary S. 1975. Human Capital. Chicago: University of Chicago Press.
Block, N. 1995. “On a Confusion about a Function of Consciousness.” Behavioral
and Brain Sciences 18:227–47.
Böhm-Bawerk, Eugen. 1959. Capital and Interest. 3 vols. Trans. George D.
Huncke and Hans F. Sennholz. South Holland, IL: Libertarian Press. (Orig.
pub. 1884, 1889, and 1909).
Chalmers, David J. 1996. The Conscious Mind. Oxford: Oxford University Press.
Chisholm, Roderick M. 1982. Brentano and Meinong Studies. Amsterdam:
Rodopi.
de Soto, Hernando. 2000. The Mystery of Capital. New York: Basic Books.
von Ehrenfels, Christian. 1988. “On Gestalt Qualities,” translated by Barry Smith.
In Foundations of Gestalt Theory, edited by Barry Smith. München: Philosophia
Verlag. (Orig. pub. 1890.)
Ehrlich, Isaac, and Randall Lutter, eds. 1989. Proceedings of the Second Conference
of the Institute for the Study of Free Enterprise Systems: Human Capital and
Economic Growth. SUNY at Buffalo, May.
Grossman, Reinhardt. 1974. “Meinong’s Doctrine of the Aussersein of the Pure
Object” Noûs 8: 67–82.
Hanushek, Eric, and Dennis D. Kimko. 2000. “Schooling, Labor-Force Quality,
and the Growth of Nations” American Economic Review 90: 1184–208.
Husserl, Edmund. 2001. Logical Investigations. London: Routledge. (Orig. pub.
1900–1901.)
Meinong, Alexius. 1983. On Assumptions. University of California Press. (Orig.
pub. 1902 as Über Annahmen.)
Meinong, Alexius. 1960. “The Theory of Objects.” In Realism and the
Background of Phenomenology, edited by R. M. Chisholm. Glencoe, IL: The
Free Press. (Orig. pub. 1904 as “Über Gegenstandtheorie.”)
Menger, Carl. 1871. Principles of Economics. Translated by James Dingwall and
Bert F. Hoselitz. New York: New York University Press, 1976.
Mystery of CapitalCRev
192
2/18/08
11:13 AM
Page 192
Gloria Zúñiga y Postigo
Mulligan, Kevin, Peter Simons, and Barry Smith. 1984. “Truth Makers.”
Philosophy and Phenomenological Research 44: 287–321.
Russell, Bertrand. 1905. “On Denoting.” Mind 14:479–93.
Searle, John R. 1995. The Construction of Social Reality. New York: The Free Press.
Simons, Peter. 1992. “On What There Isn’t: the Meinong-Russell Dispute.” In
Philosophy and Logic in Central Europe, 159–91. Dordrecht: Kluwer.
Smith, Barry. 1994. Austrian Philosophy: The Legacy of Franz Brentano. Chicago:
Open Court.
Zúñiga y Postigo, Gloria. 1998. “Truth in Economic Subjectivism.” Journal of
Markets & Morality 1:158–68.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 193
Property Law for
Development Policy and
Institutional Theory:
Problems of Structure,
Choice, and Change
10
Errol Meidinger
1. Introduction
Hernando de Soto argues that the less developed countries of the world
should reform their property systems to recognize and incorporate the
“extralegal” property rights that exist in their various squatters’ settlements, rural enclaves, and other suppressed social fields. By doing this, he
says, they will establish the institutional environment necessary to support
economic growth. In making this argument, de Soto draws not only on
development studies, but also on Western property law and institutional
ontology. He does not argue for the simple importation of Western property institutions, but rather for the recognition, codification, and integration of indigenous ones in a way that will support economic development.
To do this he draws upon the ontology of John Searle to discern the essential elements of social institutions. He also draws on the history and structure of Western property law to discern basic institutional characteristics
that may be essential to economic development.
De Soto’s amalgamation of these three fields is unusual. Assessing his
argument requires a broader than usual academic compass. At the same
time, it is not possible in one writing to respond from all three perspectives. This article joins the discussion from the perspective of modern, primarily Anglo-American, property law. It aims to render property law in a
way that speaks to both de Soto’s development policy and Searle’s ontology. Because few people are familiar with all three fields, I will provide concise summaries of Searle’s and de Soto’s positions, identifying key points
introducing the subsequent discussion of property.
I will also examine modern property law with a view to questioning and
prompting further advances in de Soto’s development prescriptions and
Searle’s ontology. I make several arguments. First, while modern property
law has incorporated many innovative forms of property rights, and has
193
Mystery of CapitalCRev
2/18/08
194
11:13 AM
Page 194
Errol Meidinger
allowed them to operate in multiple configurations, it has simultaneously
limited their number and form. This suggests that there may be important,
but only dimly understood, constraints on the incorporation of additional
forms of property rights in modern legal systems. Second, Western
property law has always exhibited a certain amount of indeterminacy and
changeability, thus leaving the exact contents of many property rights and
duties open to doubt. Meaningful ontology and development policy,
therefore, may be well advised to deal with the persistence of normative
reasoning and multiple decisional forums in property institutions. Third,
modern property law has often excluded or suppressed property rights
based in indigenous institutions. Thus, there may be implicit limits on
incorporation. Fourth, the boundaries of the communities that define
property rights in the modern system seem to be expanding outward.
Thus, some property rights within nation-states are effectively being
defined by international organizations such as the World Trade
Organization, while others are being defined by private transnational networks of Non-Governmental Organizations. Finally, the conclusion suggests that these elements of the modern system, taken together, raise
questions about an ontology and development policy that focus on relatively static definitions of rights and duties. A satisfactory understanding of
property systems may have to incorporate processual elements that are not
reducible to existing rights and duties.
2. Background
The essence of de Soto’s prescription is that less developed countries
should create integrated property systems incorporating informal or
extralegal property rights into their official legal systems. He believes that
this institutional adjustment will facilitate economic growth because the
resultant general understanding of who has what property rights will allow
formerly “dead” capital to metamorphose into “live” capital supporting
investment, mortgages, utility hookups, and the like, and thereby economic growth.
One of de Soto’s primary empirical bases for this prescription is the history of Western property systems, and particularly the U.S. system, which
he argues laid the necessary institutional conditions for rapid economic
growth in the late nineteenth century by incorporating informal rights in
a unified property system. One of his theoretical bases is Searle’s social
ontology, which stresses the importance of widely accepted symbolic representations of well-defined rights and duties for functional institutions.
De Soto’s emphasis on institutions is neither unique nor unusual in
modern policy discussions. Institutional analysis enjoys renewed currency
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 195
Property Law for Development Policy and Institutional Theory
195
across a variety of academic disciplines. Institutions are increasingly treated
as a subject of analysis in their own right, and not as mere derivatives of
other variables (such as economic efficiency or political power). Part of
what makes institutions an appealing subject is that they can be characterized as distinct, yet important and durable, shapers of human behavior, and
that they can be discussed without insisting upon a larger social-theoretical apparatus. Since institutional analyses operate in a fairly open-ended
theoretical field, they can be relatively pluralistic and consider a broad array
of institutional forms. In all, then, it is not surprising that reform proposals from across the ideological spectrum focus on developing better institutions.
To say that there is a convergence of interest in institutions is not to say
that there is unanimity on what they are or why they are important, however. Yet, at a general level there is fairly broad agreement: institutions refer
to widely accepted conventions that define the roles, rights, powers, and
duties of specific types of social actors in specific settings (e.g. North 1990;
Powell and DiMaggio 1991; Scott 1987; March and Olsen 1989).
Institutions shape and give meaning to behavior, provide predictability to
social actors, and play a large role in determining the resources and life
chances of specific individuals. While some institutions take the form of
law, others do not.1 Which institutions one focuses on depends on what
questions one wishes to answer.
Property is a standard verity of institutional discourse. So conventional
is the identification of institutionalism and property, ironically, that some
disciplines tend to treat property as requiring no particular analysis.2 That
repose has recently been disrupted by the growing influence of institutional economists on global development policies, particularly through the
International Monetary Fund and other lending agencies. These agencies
have maintained, often in a rigid, nonempirical way, that adoption of
certain Western institutions is a precondition to economic growth in thirdworld and former Eastern block countries.3 De Soto’s work, while occasionally identified with these positions, is more sophisticated. Rather than
the wholesale “cookie cutter” adoption of Western institutions, he advocates the clarification and solidification of indigenous ones in ways likely to
1. There is, however, little careful analysis on where the line between law and nonlaw
falls. Compare, for example, the relatively unexamined distinction between state and nonstate
rules in the “law and norms” literature (e.g., Posner 2000) with the more inclusive definition
of law in the “institutional theory of law” literature (e.g., MacCormick and Weinberger
1986).
2. In one of my own home disciplines, sociology, property has not been a focus of significant empirical or theoretical concern for three quarters of a century.
3. See Stiglitz 2002 for a summary and critique of the position.
Mystery of CapitalCRev
196
2/18/08
11:13 AM
Page 196
Errol Meidinger
support economic growth. He seeks to draw lessons from the essential
characteristics of Western institutions, rather than from their substantive
details. It is thus fair to say that he is more interested in the ontology—the
fundamental characteristics, categories, and relationships—of property
institutions than in their content.
3. Searle’s Ontology of Institutions and Property
Probably the most influential ontological perspective on social institutions
is that of John Searle. Like most empirically oriented philosophers who discuss social phenomena, Searle seeks to describe the distinctive features of
social relationships, features which are implicitly not reducible to deterministic workings of atomic and subatomic phenomena. In contrast to the
efficiency-driven institutional analysis of economics that has shaped most
institutional analysis of property, Searle’s ontological analysis is self-consciously indifferent to substantive social goals. While he seems to assume
that institutions in general are a good thing (presumably because they facilitate social order) and acknowledges that in practice they function to promote certain values, he eschews commitments to those values. He seeks to
describe the essential elements of institutions regardless of the values they
might promote.
Institutional Facts: Searle builds his ontology on two fundamental
categories of facts: brute and social. Brute facts are those that exist independent of human intentionality, such as mountains, molecules, and tides.
They exist and are facts whether humans regard them as such or not,
indeed whether humans exist or not. Social facts, in contrast, depend on
human intentionality for their existence. The simplest examples are physical tools. A screwdriver, for example, may exist as a collection of materials
with certain properties, but it is not a screwdriver unless conscious agents
regard it as one. Tools do not exhaust the category of social facts, however.
There is another, arguably more interesting subcategory, which Searle
labels institutional facts. His paradigmatic example is money. Like the
screwdriver, money must be regarded by conscious agents as such in order
to function as money. Unlike the screwdriver, however, what can function
as money is not limited to a specific set of physical characteristics. For
Searle this is the hallmark of an institutional fact: it cannot perform its
function solely by virtue of its physical structure, but only through collective acceptance. Still, Searle insists, such facts are objective in that, for
example, there is a real set of functions that money can perform, and others that it cannot. Institutional facts are thus “ontologically subjective and
epistemologically objective.”
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 197
Property Law for Development Policy and Institutional Theory
197
Searle posits three essential attributes of institutional facts: (1) collective intentionality, (2) assignment of function, and (3) constitutive rules.
Collective Intentionality: Social behavior, both among humans and
among animals, involves and indeed requires collective intentionality—for
instance, a shared intention to engage in a transaction or not to interfere
with a certain kind of behavior.4 Collective intentionality for Searle thus
involves both a shared mental directedness and a capacity to coordinate
behavior. But it is not enough by itself to establish institutions such as
money, property, marriage, or government.
Assignment of Function: Social institutions also require the crucial
process of assignment of a function to a specific thing. As noted above,
such functions are never intrinsic to the thing, but always assigned, and
therefore always relative to interests of users and observers. Thus, a piece
of paper with certain physical features and origins can be assigned the function of money in a certain political jurisdiction and can function that way
due to collective acceptance by the relevant actors. The same goes for a
group leader.
Constitutive Rules: The assignment of a function is itself based on constitutive rules, which create the very possibility of certain types of institutional behavior. They do this by specifying the circumstances under which
a particular thing or actor counts as having a specific function. The exact
nature of constitutive rules is only partially worked out in Searle’s scheme,
as Searle acknowledges (1995, 29), but he stresses several important features. First, constitutive rules are to be distinguished from mere regulative
rules, which regulate “antecedently occurring activities.” Thus, a speed
limit is a mere regulative rule for driving a car rather than a constitutive one.
Second, constitutive rules often require “performative utterances” (Searle
1995, 34), for instance, saying: (1) “know ye that I give Blackacre to
Ethelbert” before witnesses and handing over an actual piece or product of
the soil or (2) “I thee wed” before someone empowered to marry people
or (3) “I declare this meeting in session” before a groups of people who are
gathered for a meeting. Third, each of these constitutive rules is dependent
on a web of other constitutive rules, such as those defining whether the
grantor actually had the power to convey Blackacre, the bride and groom
to marry, the chairperson to call the meeting to order, and so forth.
General Form: Searle posits that all constitutive rules have the form,
X counts as Y in context C, where X refers to the thing being given the
4. Searle also argues that collective intentionality is not reducible to the sum of individual intentions (1995, 26) but that is not important to this discussion.
Mystery of CapitalCRev
198
2/18/08
11:13 AM
Page 198
Errol Meidinger
special status (e.g., Blackacre, the bride and groom, the gathering), Y to
the status (Ethelbert’s property, being married, an official meeting), and C
to the conditions in which that status applies.
The above summarizes Searle’s theory of institutions. With it he seeks
to account for the distinctive structures and processes which organize
human society. It has several important attributes for purposes of further
discussion.
Positivism: Searle’s account is determinedly empirical as opposed to
normative. It seeks to describe the nature of things—institutional things—
in the world. These things have the status of facts, and may involve brute
facts, but cannot be explained in terms of them. While Searle argues that
every institutional fact must have some physical manifestation, he also
accepts that they may continue to exist after the physical manifestation
(e.g., the performative utterance) no longer exists in any physical form (see
B. Smith 2003). He seeks to avoid asking whether one should accept a particular obligation, or whether a particular kind of property should be
allowed, and prefers to focus on whether one “is” under an obligation or
“has” property. These, to him, are “epistemologically objective” matters,
although they depend on “ontologically subjective” states.
Collective Acceptance: The above summary of Searle’s theory emphasizes the importance of collective acceptance to the persistence of social
institutions: “The secret of understanding the continued existence of institutional facts is simply that the individuals directly involved and a sufficient
number of members of the relevant community must continue to recognize
and accept the existence of such facts” (1995, 117). If people no longer collectively accept an institutional status it will no longer be a fact. Yet Searle
has not undertaken to develop a theory of collective acceptance (legitimacy). While nodding to the efforts of Durkheim, Simmel, and Weber, he
neither elaborates nor spends much time on them (Searle 2003, 5).5
Indeed, he argues it is not feasible to develop a theory that explains the
granting or removal of collective acceptance (1995, 92). Even at a lower
theoretical level, Searle does not discuss how to ascertain what constitutes a
sufficient number of acceptors, nor what is the relevant community.
Iterative Institutions: The reasons for Searle’s neglect of the bases for
collective acceptance of institutions are not entirely explicit, but part of his
5. Indeed, Searle argues that the classical social theorists fall short of the mark by failing
to describe the attributes which separate persistent social institutions from mere social facts.
Similarly, while acknowledging the influential efforts of Plato and Rawls to develop normative standards for institutions, Searle eschews that project in favor of developing an empirical
account of the institutions that exist.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 199
Property Law for Development Policy and Institutional Theory
199
reasoning appears to rest on the proposition that collective acceptance is
often explained by the prior existence of collective acceptance of related
matters. This reflects the iterative and interlocking nature of institutional
facts in Searle’s scheme. For example, the bride and groom are treated as
married after the completion of the ceremony because many of the elements of the process already enjoy collective acceptance. These include the
authority of the official to marry the couple, the authority of the couple to
choose to marry, the general rights and duties of marriage, the elements of
the ceremony, and so on. Thus, acceptance of a given institutional fact is
largely assured by prior acceptance of many related institutional facts.
Moreover, there appears to be no limit on the lateral and iterative growth
of institutional facts.
Plural Origins: Institutional facts thus appear to be “turtles all the way
down” (decisions by authorized actors) in most cases, but Searle acknowledges also that institutions can derive from unintentional evolution and
custom6 as well as from occasional unilateral acts, such as constitution-producing revolutions or adverse possession of property (1995, 116, 118).
Again, the problem of why these facts receive collective acceptance is not
treated at a theoretical level. Rather, Searle seems to assume that the collective acceptance speaks for itself, and indeed is good at least in that stability and predictability are better than disorder.7
Status Indicators: Because institutional facts depend on collective
acceptance and are not derivable from brute facts, they often include specific status indicators, such as passports, driver’s licenses, wedding rings,
property titles, uniforms, and so on. While some of these indicators may
be necessary to constituting an institutional fact, they also have independent importance in communicating the status. Communication of institutional status is necessary to its effective functioning in Searle’s scheme.
What is not clear, however, is how much information such indicators
should or do communicate. If a title indicates that Blackacre is “Ethelbert’s
property,” that does not necessarily communicate much information about
6. His account here parallels that of Hume 1739.
7. “One of the most fascinating—and terrifying—features of the era in which I write this
is the steady erosion of acceptance of large institutional structures around the world. The
breakdown of national identification in favor of ethnic tribalism occurs in places as various as
Bosnia, Canada, the former Czechoslovakia, Turkey, and many American universities. . . . several African Countries . . . . Russia . . . . The temptation in all these cases is to think that in
the end it all depends on who has the most armed might, that brute facts will always prevail
over institutional facts. But that is not really true. The guns are ineffectual except to those
who are prepared to use them in cooperation with others and in structures, however, informal, with recognized lines of authority and command. And all of that requires collective
intentionality and institutional facts” (1995, 117).
Mystery of CapitalCRev
200
2/18/08
11:13 AM
Page 200
Errol Meidinger
what it means for Blackacre to be Ethelbert’s property. As is discussed later
in this paper, this is currently an important question in debates about the
structure of modern property law.
Process Orientation: Searle argues that the central importance of
institutional facts is not their existence per se, but rather the potential they
create for social action.
Social objects are always . . . constituted by social acts; . . . the object is just a
continuous possibility of the activity. . . . A twenty dollar bill is the standing
possibility of paying for something. (1995, 36)
What we think of as . . . governments, money, and universities, are in fact just
placeholders for patterns of activities. . . . [T]he whole operation of agentive
functions and collective intentionality is a matter of ongoing activities and the
creation of the possibility of more ongoing activities. (1995, 57)
Thus, institutional facts are resources for collective action, and either
are or can be designed so as to make certain kinds of actions possible.
Creativity and change in Searle’s model generally grow out of authorizations to act in a certain way, however. He does not focus on how people
may act creatively to reshape those authorizations.
Rules, Rights, and Duties: A hallmark of institutional facts in Searle’s
scheme is that they are capable of codification, whereas other social facts
(like walking together in a park) are not. Institutions thus have a rulelike
or lawlike form, regardless of whether their underlying rules are in fact
codified (1995, 87–88). Codification will only be done if it is worth doing
to achieve some social end.
Moreover, institutional statuses generally take a “deontological”
form—that is, one composed of powers and duties. These powers and
duties are socially constructed and recognized, but have a simple and pervasive internal logical structure according to Searle. The elements are: (1)
collective acceptance (2) that a given individual or group (3) may do something or must refrain from doing something, (4) the doing of which is then
realized in social interaction.8 Searle divides these into enablements and
requirements (powers and duties hereafter), which have the following general forms (1995, 105):
We accept (S is enabled [S does A])
We accept (S is required [S does B])
8. This is as close as Searle seems to come to discussing the problem of implementation
of legal powers and duties. It follows form collective acceptance and recognition.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 201
Property Law for Development Policy and Institutional Theory
201
Powers and duties in Searle’s account also exhibit the kind of logical
consistency both relished and promoted by philosophers. Thus,
S is enabled to perform act A if and only if it is not the case that S is
required not to perform act A.
And,
S is required to perform act B if and only if it is not the case that S is
enabled not to perform act B.
While this proposition does not seem troubling as a logical matter,
depending on how far it is taken it may have serious implications in a world
of epistemological objectivity, for it seems to assume that the rights and
duties of social actors can be clearly and accurately ascertained in advance
of their action. The question is, to what extent are property rights specified, and to what extent are they left undefined? If one makes the assumption that they are relatively completely specified, and that they can only be
changed through predetermined processes, then one has the considerable
problem in dealing with real world legal systems, wherein much uncertainty is experienced. If one makes the assumption that rights are often
only partially defined, then one may need an additional kind of theory to
explain how they are further defined.
Property: Although Searle frequently cites property as an archetypical
institution, he provides little specific analysis of property institutions.
Following a tradition going back to Grotius, he maintains that while property often begins in sheer physical possession of things (a brute fact) it
becomes an institutional fact when that possession is recognized by society
(Grotius 1625, § II.2.ii.1).9 Possession may continue to serve as the primary signifier of property status for many kinds of personal property, but
some kinds of personal property and all property in land gradually receive
other kinds of signifiers, often in the form of registration or title documents issued by governments.
Eventually institutional structures for “buying and selling, bequeathing, partial transfer, mortgaging, etc.” (Searle 1995, 84–85), are developed that typically require specific speech acts to signify the changed status
of the property. But this concept of status change is largely limited to
changes in ownership. It barely extends to changes in the types of interests—rights and duties—that might be created (mortgages being the sole
9. There is a powerful contrary position holding that property rights are better understood as growing out of preexisting social relationships. E.g., Milsom 1976.
Mystery of CapitalCRev
202
2/18/08
11:13 AM
Page 202
Errol Meidinger
example), and seems to imply a model of property that is greatly limited by
the brute facts of things to the questions of which actor owns them. As will
be seen below, this may be a significant limit in Searle’s conception of
property, one which lags well behind the structure of property law in practice. Nonetheless, from within his framework it is possible to express the
general form of Searle’s concept of property as follows:
Blackacre (X) counts as Ethelbert’s Property (Y) in New York State (C)
We accept (Ethelbert is enabled [Ethelbert farms Blackacre])
We accept (Ethelbert is required [Ethelbert pays real estate taxes])
As already noted, this general form fails to address many questions
about property, including: (1) what the full list of rights and duties is, and
whether it can be completely known, (2) whether there are inherent limits
to structure or complexity of rights and duties, (3) how property rights and
duties change and whether there are any limits to change, (4) how new
types of interests or rights and duties are created, and (5) how competing
claims to property rights based in different collectivities are reconciled with
each other.
Summary: Searle envisages society as a complex architecture of institutions built out of a huge number of iterated and interrelated rights
and duties. Their content varies greatly among different types of social
actors. Institutionalized rights and duties are important because they
enable future-oriented collective action, often in the form of complex
cooperation. Rights and duties have a general, simple, and logically consistent structure. In many cases, holders of rights and duties carry a specific status indicator, which apparently plays an important role in
effectuating their rights or duties. Searle’s overall approach means that
many questions that are often cast as normative ones by others are cast
as empirical ones: what rights or duties one has are questions of fact in
the specific situation. Although rights and duties depend for their existence on collective acceptance, Searle does not describe what conditions
constitute collective acceptance—neither what is a “sufficient number of
members” nor what the “relevant community is,” nor how acceptance is
achieved.
4. De Soto’s Concepts of Property and Capital
While he does not discuss all of Searle’s basic premises, Hernando de Soto
seems to accept most, with the possible exception of logical consistency in
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 203
Property Law for Development Policy and Institutional Theory
203
rights structures. De Soto, however, is addressing a different question.
Rather than What are the essential attributes of social institutions? he is asking Why are third-world and former eastern-block countries consistently failing to achieve economic prosperity? As is noted above, de Soto finds the
answer in institutions. Based on extensive research and analysis of economic activity in third-world countries, he rejects several conventional
explanations. The problem, according to de Soto, is not a lack of assets. In
fact, enormous wealth exists in the informal urban sectors of all of these
economies—typically two-thirds to four-fifths of total wealth (2000,
15–37). Nor is it a lack of markets; markets are everywhere in the third
world, and new ones cropping up regularly. Nor is the problem a lack of
individual initiative or entrepreneurship; de Soto finds enormous entrepreneurial creativity and energy in many impoverished urban areas. And,
finally, the problem is not culture; many areas of the developing world have
well-developed cultural traditions of effort, coordination, hard work, and
so on. Moreover, the cultures of the developed countries vary enormously,
as is illustrated by the contrast among, for example, Japan, Switzerland,
and California. The reason for persistent poverty, according to de Soto, is
a lack of institutions that facilitate the creation of capital:
Walk down most roads in the Middle East, the former Soviet Union, or Latin
America, and you will see many things: houses used for shelter, parcels of land
being tilled, sowed, and harvested, merchandise being bought and sold. Assets
in developing and former communist countries primarily serve these immediate physical purposes. In the West, however, the same assets also lead a parallel
life as capital outside the physical world. They can be used to put in motion
more production by securing the interests of other parties as “collateral” for a
mortgage, for example, or by assuring the supply of other forms of credit and
public utilities. (2000, 39)
Divided Property Systems: De Soto maintains that the fundamental
obstruction to economic growth in poor countries is the lack of a uniform
set of representations of assets that would allow them to function as capital—that is, the lack of a unified property system. Instead, the developing and former eastern-block countries are characterized by multiple,
often conflicting property systems. In one social sphere, the “bell jar,” are
the official state property systems. These are highly formal and cumbersome. Their high costs and complexity make them accessible only to the
upper classes—impenetrable to the poor. Moreover, de Soto argues, the
official systems are out of touch with social reality; they are not attuned
to the types of relationships and transactions that they should be able to
facilitate.
Mystery of CapitalCRev
204
2/18/08
11:13 AM
Page 204
Errol Meidinger
In a separate sphere are the neighborhood or “informal” or “extralegal” property systems. These exist in virtually all large neighborhoods
surrounding the centers of third-world cities, as well as in most rural areas.
In these places, excluded from the bell-jar legal systems, self-organizing
communities have created their own property systems, often borrowing
some institutional practices from the official legal system and incorporating inventions or traditions of their own. According to de Soto, local consensus almost invariably exists on “who owns what property and what each
owner may do with it” (2000, 186). In fact, in most urban neighborhoods
these interests have been committed to paper (184). But, recognition of
neighborhood property rights is limited to small groups and there are
often plausible competing claimants:
The problem with extralegal social contracts is that their property representations are not sufficiently codified and fungible to have a broad range of application outside their own geographical parameters. Extralegal property systems
are stable and meaningful for those who are part of the group, but they do
operate at lower systemic levels and do not have representations that allow
them to interact easily with each other. (181)
Consequently, unremitting and largely unproductive politicking is necessary to maintain that recognition. The uncertainty, confusion, conflicts,
and wasted energy resulting from the cacophony of property systems and
interests make thriving capitalism impossible.
Unifying Property Systems: De Soto maintains that the problem of
conflicting and incomplete property systems can be solved rather simply.
Given that property systems already exist in the informal sectors, the first
step is to do field work on them. The systems have a structure, and it is not
hard to uncover and document that structure. The second step is to fuse
the informal property system with the official one. This is ordinarily not
very difficult as a conceptual matter, according to de Soto, first because the
informal systems have borrowed heavily from the formal one and operate
within a common culture, and second because they are reasonably similar
to most Western systems.
[M]ost extralegal social contracts about property are basically similar to
national social contracts in Western nations. Both tend to contain some explicit
or tacit rules about who has rights over what and the limits to those rights and
to transactions; they also include provisions to record ownership of assets, procedures to enforce property rights and claims, symbols to determine where the
boundaries are, norms to govern transactions, criteria for deciding what
requires authorized action and what can be carried out without authorization,
guidelines to determine which representations are valid, devices to encourage
people to honor contracts and respect the law, and criteria to determine the
degree of anonymity authorized for each transaction. (180)
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 205
Property Law for Development Policy and Institutional Theory
205
Given that incorporating informal rights will often involve taking away
officially recognized property rights,10 this position may seem an oversimplification; however de Soto does not dwell on it as a conceptual matter,
presumably because he believes that the expropriated properties could not
have been enjoyed by their official owners in any event. He argues that the
national governments should undertake the job. They have the capacity,
and doing so is in their interest since the resultant economic development
will increase their revenues and organizational capacities. He stresses that
open and reform-minded lawyers—rather than hidebound ones with their
attention focused on formal Western legal systems—will have to be
recruited to carry out this task.
The resulting unified property system should then allow the effective
creation of capital. The economic potential of each asset will be fixed in a
formal representation, and there will be a single system of formal representations. Individual asset holders will become accountable beyond their
families and neighbors to a much larger sphere of potential partners.
Physically differentiated interests will become fungible. Secure transactions
will become possible. And, ultimately, the property systems will create “a
network through which people can assemble their assets into more valuable combinations” (de Soto 2000, 61).
The Western Model: Since unified property systems have not been
tested in the developing world, how can de Soto be so confident that their
establishment will lead to dynamic capitalism? Much of the empirical basis
for his argument is drawn from his reading of the history of Western property systems, particularly that of the United States. He argues that in the
eighteenth and nineteenth centuries the U.S. was the equivalent of a modern third-world country, with large amounts of extralegal land settlement
(squatting) and development. It suffered from divided, competing property systems, with the imported English property system confronting many
localized squatter systems with their own titles, rules, and rights. After the
systems grated on each other for decades, a broad unification process
occurred late in the nineteenth century, culminating in harmonized property laws effectively recorded in registry systems.
The American legal system obtained its energy because it built on the experience of grassroots Americans and the extralegal arrangements they created,
while rejecting those English common law doctrines that had little relevance
to problems unique to the United States. In the long and arduous process of
10. King 2003, 470. This article assesses alternative ways of making these transfers in
practice and argues generally that the best way to do it is for the state to act as a developer
which formally takes the rights (most often with compensation) and then reallocates them.
Mystery of CapitalCRev
206
2/18/08
11:13 AM
Page 206
Errol Meidinger
integrating extralegal property rights, American legislators and jurists created a
new system much more conducive to a productive and dynamic market economy. This process constituted a revolution born out of the normative expectations of ordinary people, which the government developed into a systematized
and professional formal structure. (de Soto 2000, 150)
Summary: For de Soto, creating a workable property system capable of
supporting economic growth is largely a technical and empirical problem,
one that can be solved with the application of skill and effort. The task is
first to ascertain and codify the property rights that already exist in the
informal sectors of developing countries, and then to integrate them into
the formal legal systems in ways that are sensitive to local context. Once
the institutional apparatus and the representations necessary to effectuate
existing property rights are in place, dynamic capitalism can flourish.
De Soto thus shares a number of key assumptions with Searle. First,
property rights are largely an empirical rather than a normative question.
This is partly because, as the quotations above indicate, de Soto maintains
that “social contracts” are already in place in the informal and “extralegal”
sectors, and that integrating the rights and duties thereby established into
the official legal system should not be seen as a normatively controversial
policy. It is probably also because he believes that there is little doubt that
poor people in the less developed economies want economic growth
through capitalism. He is thus not prone to spend much argumentative
time on the question of what would be a good property system. Like
Searle, therefore, he relies heavily on collective acceptance as a foundation
for institutions.
Also, as does Searle, de Soto stresses the importance of institutions as
resources for future-oriented collective action. Better property systems are
important not in their own right, but because they will allow people to
engage in more productive economic transactions. Both de Soto and Searle
see institutions as built up of rights and duties and ways of signifying them.
Perhaps even more than Searle, however, de Soto stresses the central role
of formal representations, and suggests at least that clear property representations may have a constitutive role in creating stronger property rights.
5. The Institutional Ontology of Property Law
This section aims to describe the structure and dynamics of modern property law in a way that tests and develops some of the key arguments made
by de Soto and Searle. It does not directly address de Soto’s historical
account of the unification of U.S. property law or his causal argument
regarding the role of property law in U.S. economic development, much
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 207
Property Law for Development Policy and Institutional Theory
207
less his argument about the nature of property rights in less developed
countries. Nor does this paper attempt to give a full account of the institutional ontology of property law. Its goal, rather, is to give an account of
modern property law which bears upon the central propositions in de
Soto’s policy prescriptions and Searle’s ontology in a way that might
prompt intellectual progress in all three fields.
Before specific problems can be discussed, however, it is necessary to
provide a basic overview of the modern property system. This is more
important than it might seem because there appears to be some disparity
between “commonsense” concepts of property and formal legal definitions
of property rights in the legal system (see, for example, Ackerman 1977).
Additional caution is in order because there is a real question whether
property is a meaningful category. A common quip among property professors is that “the subject is held together mainly by the covers of the textbook.” At a further abstract level, moreover, there are strong arguments
that property is not a coherent concept.11 Nonetheless, given that property is a category employed in a huge number of institutional arrangements, this section proceeds on the assumption that property is a fruitful
subject of analysis.
Definition and Scope: The most elemental idea of property is that it
refers to control over a thing by a person. “That thing is mine—I can do
what I want with it.” This idea also tracks a core legal understanding,
which is that property involves rights to things; indeed, this seems to be
the conventional definition of the term in civil legal systems (Zaibert 1999,
88). But “rights” also inherently refer to other people; to have a right is
meaningless unless there are other people who are obligated to respect it.
My right to control a thing thus depends on other people abiding by that
right and not acting to interfere with or take it away from me. So, a basic
legal definition of property would be that it refers to “relations among
people with respect to a thing.”12 However, each of the basic terms in this
definition raises some interesting questions.
Objects of Property: Taking the last term first, what kinds of “things”
are covered by property? Most Western property systems have traditionally
focused on two primary categories of objects: land and other things (real
and personal property in the Anglo-American tradition, immovables and
moveables in the civil law tradition). But neither have the distinctions been
simple nor the categories exhaustive. Thus, real property in the Anglo-
11. Perhaps the sharpest presentation of this thesis is Grey 1980.
12. “The word ‘property’ is used . . . to denote legal relations between persons with
respect to a thing.” American Law Institute 1936, at 3.
Mystery of CapitalCRev
208
2/18/08
11:13 AM
Page 208
Errol Meidinger
American system has included things like door keys, title deeds, uncollected loose minerals, and things connected to buildings which, while
moveable, were intended to stay (“fixtures”). Conversely, personal property included things attached to buildings but not intended to stay with
them, buildings raised off the ground, and rights to possess land defined
to last for a lesser duration than a human life (e.g., a term of thirty years)
(Baker 1990, 428).13
My purpose is neither to argue that traditional categories are arbitrary
nor to find a deep structure in them, but rather to point out that they were
determined not so much by the things involved as by human assignments
of rights with regard to the things. Those rights were shaped by human
goals and relationships. This point is driven home by another fact of property: many of the “things” covered by property rights are hard to describe as
“things” at all. Traditional Anglo-American examples include the real
property rights of advowsons (rights of certain land owners to nominate
clergy), franchises (exclusive rights of certain land holders to operate specified types of markets or to take royal revenues such as treasure trove), and
offices (e.g., exclusive rights to bear the king’s armor) (Baker, 1990, 283,
428). 14 More obvious contemporary examples are so-called intellectual
property rights—exclusive rights to use certain technologies, processes,
word patterns, or images. These are not things in any conventional sense
of the word, yet we talk about property in them. Similarly, many other
modern property interests, such as shares of corporate stock, bonds, bank
accounts, insurance policies, and interests in “commercial paper” (various
types of documents promising the payment of money) cannot be characterized as rights to specific things.
The loose-to-disappearing connection between property and things
has two possible implications: either some “property” should not be
called property at all, or the concept of property should be expanded
beyond things. Modern property law has largely settled upon the second
course, readily incorporating rights such as those to obtain certain kinds
of revenues or to exclusively use certain techniques or patterns of sym-
13. This distinction between leasehold and life estates in land requires some explanation.
In the traditional Anglo-American property system, a life estate was viewed as inherently
greater than a term of years, despite the fact that any particular life might go on for a shorter
time than a given term of years. This can be partly understood from a modern perspective
because a life is at least capable of lasting more than any typical term of years. More important from a premodern perspective, however, was that fact that the holder of the interest
would not lose it so long as he was alive; his ownership was guaranteed absent treasonous
behavior or other highly unlikely occurrences.
14. There are many other examples of such “incorporeal hereditiments,” including
seignories, tithes, easements, dignities, etc.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 209
Property Law for Development Policy and Institutional Theory
209
bols as forms of property.15 Accordingly, the definition of property has
gradually been adjusted to refer to “resources” rather than things. Joseph
Singer, for example, writes that property “concerns legal relations among
people regarding control and disposition of valued resources” (Singer
2001, 2).16 If this expanded definition is appropriate, I doubt it is
because there is a shared underlying nature in the “objects” involved,
one just waiting there to be elucidated by a particularly insightful lawyer
or philosopher. Rather, it seems more likely that what qualifies as an
object of property depends on how society is organized, what it values,
and especially how it structures relationships with regard to what it
values.
Relations of Property: What are the relations of property? As Searle
and de Soto assume, modern property interests are conventionally defined
in terms of rights and duties.
Rights: At an elementary level, property rights can include powers to
take the following kinds of actions with regard to a resource:
1. use it, including:
a. manage it
b. derive profits from it
c. alter it (including changing it to produce more revenue or
possibly even destroying it)
2. exclude others from it
3. transfer it, including:
a. convey it to someone else during the owner’s life
b. bequeath it to someone else after death through a will
c. leave it to legal heirs at death by operation of law
15. Although there is a continuing discussion among scholars of intellectual property
about whether theirs is really a field of property or one of regulation, this fact does not undermine the point I am making here, which is that intellectual property is treated and structured
in the same way as other property. All property law can be conceived as a form of regulation.
Thus, my right to have exclusive use of a house can be understood as nothing more than a
governmentally made and enforced regulation that others may not enter my house without
my permission.
16. Jeremy Waldron goes part of this distance, and defines property as “a system of rules
governing access to and control of material resources” (1988, 31) Waldron’s use of the vague
modifier “material” perhaps indicates his caution in extending the definition. Those who cling
to thingness in property can see the term as ratifying their views. Conversely, those who think
property can include nonphysical assets such as techniques and symbols can draw on its other
meaning (“having real importance or great consequence”—Webster’s New Collegiate
Dictionary 1974) to see it as ratifying theirs.
Mystery of CapitalCRev
210
2/18/08
11:13 AM
Page 210
Errol Meidinger
4. divide it
a. in space
b. in time
c. in interest (i.e., divide the various rights listed above among
different holders)
Indeed, some commentators argue that all of these powers more or less
follow from the idea of property as control, and therefore are logically
entailed in each other (see, for example, Honoré 1961). As I discuss below,
however, it also follows from the idea of control that an owner should be
able to separate and even further divide these rights, placing them in different people, possibly at different times. When this happens property can
get very complicated. First, however, a note on duties.
Duties: When rights are defined as above in terms of powers over
resources, the duties all appear to fall on non–property owners obliged,
simply, to respect whatever rights owners choose to exercise. Typically,
property owners are also under duties, such as not to use their property in
a way that unreasonably damages the property of others, to let others
access it under certain circumstances, to keep it from deteriorating into an
“attractive nuisance,” to restrain vermin, to pay taxes, and so forth
(Hohfeld 1913, 1917).17 Certain such rights of other persons in the
owner’s property, for instance, to gather profits à prendre (the right to take
something from the land of another), to use easements, to restrain nuisances, to prevent development, also have the formal status of property
rights. Thus the property rights in any given resource can be held by multiple people and can connect them in a variety of ways.
People: Relatively unexamined in the discussion thus far, and to some
extent in property law as a whole given its focus on powers and duties
regarding resources, is what sorts of people are the holders and subjects of
property rights. They could in principle range from those who directly use,
control, or transfer property to a much broader set of people who benefit
from or are precluded from benefiting from property—conceivably as
broad as society at large. There is a deep echo of this range in one area of
modern property scholarship, which focuses on the “property/contract
interface” (Merrill and Smith, 2001). Thomas Merrill and Henry Smith,
argue that a central distinction between contract and property rights is that
contract rights refer to very specific arrangements between particular peo-
17. Hohfeld used an eightfold system of rights and their correlatives of categories
(right/duty, privilege/no-right, power/liability, and immunity/disability) to classify the various kinds of rights and duties that can exist, but there is no need to go into them here.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 211
Property Law for Development Policy and Institutional Theory
211
ple, whereas property rights refer to very general rights relative to the
world as a whole. While this insightful argument is discussed further below
I first want to suggest that it both implies and partially obscures a key element of property, which is the idea that property relationships persist
through time as well as space.
Time: The important old decision of Tulk v. Moxhay (1848) serves to
illustrate both the role of time in property rights and several problems of
change and choice discussed below. In 1808 Tulk sold a vacant piece of
land in Leicester Square (a “square garden and pleasure ground”) to Elms
but retained a number of houses around the square. In addition to giving
Tulk money for the garden, Elms promised that he, as well as his “heirs
and assigns” would refrain from building on it, would keep it in good
repair, and would allow Tulk’s tenants to walk there for a reasonable fee.
Over the next several decades the square changed hands several times.
Around 1840 it came into the ownership of Moxhay, who made known his
intention to build on the lot in violation of Elm’s promise. Thus the overall set of transactions can be diagrammed as in Figure 1:18
Figure 1. Tulk v. Moxhay
LAND LEICESTER SQUARE
Tulk
1808
Money + Promises to:
1. Not build on the land
2. Keep it in good repair
3. Let Tulk’s tenant’s walk there.
Elms
X
Y
Moxhay
(1840)
18. This is the form that has become conventional among property scholars, and that
serves as the basis for discussions of “horizontal” (Tulk and Elms) and “vertical” (Elms to
Moxhay) privity. It should be noted, however, that perhaps a more logically consistent diagram would simply continue in a horizontal line such as follows:
Tulk → Elms → X → Y → Moxhay
This second approach better illustrates the conceptual difficulty of subjecting subsequent
purchasers to duties undertaken by earlier ones. But it should also be noted that this difficulty
inheres in most duties respecting property, which were typically worked out when predecessors were owners.
Mystery of CapitalCRev
212
2/18/08
11:13 AM
Page 212
Errol Meidinger
No restriction on building was included in the property deed Moxhay
received, but he was aware of the promises that Elms had made to Tulk.
Tulk sought an injunction to prevent Moxhay from building on the lot.
Moxhay, of course, had not made the promise; Elms had. More importantly, the longstanding view of the English courts was that regardless of
whether the promise not to build bound Elms, it did not bind Moxhay
under the circumstances of the case. This was quite clear to the law courts,
which had primary responsibility for adjudicating property rights; there
was not a sufficient relationship between the two estates—no “horizontal
privity”19—to justify imposing the burden on Elm’s successors. The equity
courts had long followed the law courts, although one or two decisions in
the late 1830s had enforced such covenants on successors (Simpson 1986,
257–62). Thus, Moxhay had good reason to believe that he held the land
free of the promises made by Elms, and may have paid more for it as a
result of that belief.
Tulk’s lawyer took the case to the equity courts and ultimately obtained
an order to Elms not to carry through with his building plans. The
Chancellor rested his decision on a traditional equity doctrine that promises
should be enforceable against subsequent purchasers with notice of those
promises. He supported it with the arguments that: (1) Tulk should be able
to sell part of his land without the risk of rendering the remainder worthless; (2) it would be inequitable to allow Moxhay to escape the covenant
when Elms had probably paid a lower price for the property due to the
covenant; and (3) Elms could not sell what he did not have (i.e., the right
to build on the property). The Chancellor concluded that Tulk had
“attached . . . an equity” to the property, and the decision established an
important new species of property right, the equitable servitude.
Structure—Fragmentation and Bundling: The Tulk case illustrates
the ability of property owners to fragment not only their physical assets,
but also their rights to them. When Tulk sold Leceister Square, he sought
to withhold the rights to build on it, to exclude his tenants, and to not
keep it up,20 thus giving Elms a custom-tailored set of rights and duties to
the land. This case only begins to suggest the potential ability of property
owners to rebundle rights to resources, however. Tulk could also have
19. This term refers to the kind of relationship between the two parties thought necessary to establish an obligation that would stay with the land as it passed from the original
promisor to successors. At English law, the only relationship that qualified was a landlord-tenant relationship.
20. The imposition of an affirmative duty on the buyer to keep the property in good
repair probably was not possible in English law at the time, but would be possible in American
law today, provided Tulk’s lawyer was careful in creating the interests.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 213
Property Law for Development Policy and Institutional Theory
213
divided rights to the square in time, for example by selling a thirty-year
interest to Elms, giving the remainder to his own grandchildren, and possibly retaining a right to retake the property if certain conditions were violated. He could have also transferred the property to a trustee to manage
in specified ways and to pay the income to designated people who could
vary over time and under different conditions. All of the interests of the
managers and beneficiaries would qualify as property rights under modern
law. The trustee is said to have legal title to the property while the beneficiaries have equitable title, which itself can be divided into a variety of
interests.
While all of the above interests are property rights, they vary greatly—
just as one package of rights can vary greatly from the next. The meaning
of property, therefore, no longer looks much like the commonsensical one
described above—“that thing is mine and I can do what I want with it.”
Rather, rights to important resources are often distributed among a number of different people, and in a number of different rights configurations.
Practically speaking, the only thing common to property rights is that they
involve a legal right to draw a benefit from a valuable resource (and correlative duties to respect those rights). Indeed, this is the predominant view
of the definition of property rights developed over the past century, first by
the legal realists (for example, Cook 1919 and Cohen 1935; see generally
Grey 1980) and then by the economists of law (e.g., Coase 1960 and
Demsetz 1967). This concept of property as a potentially infinite set of
rights to draw benefits from resources accords with the models of de Soto
and Searle, who both seem to assume that people will develop whatever
rights and duties they choose to develop.
U.S. property law, however, has never followed this path. While it has
facilitated the development of some new types of property rights over time,
it still has strictly limited the total number (Merrill and Smith, 2000).
Legions of property teachers continue to regularly educate their students
that property interests must fall within a fixed number of categories.21
Property owners are thus generally denied authority to fragment and
rebundle their interests in more than a limited number of ways, despite the
fact that the power to do so can be seen to follow from power to control
and dispose of property (e.g., Heller 1999; Merrill and Smith 2001).
Although new categories of property interests are occasionally established,
as was the equitable servitude in the case of Tulk v. Moxhay described
above, such developments are quite rare. The same general conditions
21. Much of the practical content of property courses involves learning how to use recognized property interests to achieve the highly variable ends of property holders, and how
to deal with interests do not fall readily into the permitted categories.
Mystery of CapitalCRev
214
2/18/08
11:13 AM
Page 214
Errol Meidinger
apply in civil law systems under the numerus clausus principle, although the
details are different and the total number of property interests tends to be
smaller (Merryman 1974).
What does the general limitation of types of allowable property rights
in Western systems mean for institutional theories of property? The standard perspective in North American scholarship is a functionalist one: the
limitation in the number of estates is assumed to reflect efficiency needs. If
new interests cannot be created, it is because the social costs of allowing
them would exceed the benefits (following Demestz 1967). The general
assumption is that transactions costs (i.e., of information gathering, negotiation, enforcement) are the primary problem. Merrill and Smith have
developed a more specific version of this perspective that focuses on information costs. Their fundamental argument, as suggested above, is: given
that property rights are rights against the world, their complexity must be
sufficiently limited so that the costs of gathering information on them do
not become too high for them to function effectively. Contract rights, by
contrast, are rights against particular persons that can be tailored to specific
situations, and can therefore efficiently be far more complex (Merrill and
Smith 2001).
Smith is reworking this perspective based on information theory. He
focuses on the limitations on rights definitions that derive from the need
to communicate effectively to the duty holders who will be obliged to
respect that right. His basic argument is that the complexity of property
rights is inversely related to the size and diversity of the audience that must
receive the communication of the right (H. Smith 2003). Audiences will
vary with the nature of the specific right, and therefore the communication
limits on rights and their symbolization will vary as well. As Ed Rubin
points out, however, the audience may not be the same as the group
obliged to respect the right, since professionals hired to interpret property
interests are often the effective audiences (Rubin forthcoming).
There is also a relatively undeveloped functionalist-oriented line of reasoning against fragmentation from an environmental perspective, which
argues that the natural resources to which property rights attach are both
unique and uniquely interconnected, therefore property law must either
limit fragmentation (Arnold 2002, Freyfogle 2002) or require coordination (Meidinger 1998).
While functionalist justifications of finite property rights structures are
highly influential, they do not have the field to themselves. A libertarian
school of thought argues that bundles of property rights must be limited
with the aim of preserving the ability of owners to manifest their freedom
through property. The limitation derives from the survival of assets
through time as described above. If one owner were able to exercise freedom so as to disaggregate rights to resources to a great extent, that would
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 215
Property Law for Development Policy and Institutional Theory
215
preclude future owners from exercising comparable freedom. Therefore
the property system constrains the liberty of specific owners to rebundle
property rights to resources in order to preserve a high level of liberty for
all (e.g., Epstein 1995).22
Finally, there are possible explanations that also refer to effects in society, but are less benign. First, of course, it is possible that property rights
are established not because they will make society as a whole better off, but
rather because they will give certain powerful social groups an advantage.
Saul Levmore (2003), for example, argues that property rights arrangements often reflect the organizational advantages and established power of
affluent groups, who often manage to further adjust property rights to create greater wealth for themselves. James Scott (1998) provides a lengthy,
well-documented argument that property rights have typically been systematized not to recognize existing social relationships, but to allow
nation-states to control and reshape them—that is, to exercise and stabilize political power. In the process of doing so, states have frequently acted
to simplify and homogenize property rights by eliminating the complexities of traditional property rights.
The above explanations are essentially instrumental and cultural. It
would be nice if institutional ontology could cast some additional light on
limitations in property rights institutions. If there is something about the
fundamental nature of institutions, or of rights, which helps explain the
limited number of property interests, this would be illuminating both for
property rights theorists as well as for practitioners like de Soto. At present,
however, institutional ontology seems to have little to say about this issue.
It is raised here in the hope of spurring further discussion among ontologists. The obvious areas to be explored are whether there is something
inherent in the nature of rights, or perhaps in their symbolization, which
contributes to such limits in the number of species.
Even without a better ontology, the numerus clausus principle has
direct implications for a property-focused development theory like de
Soto’s. First, those in charge of integrating informal with formal property
systems in less-developed countries will have to pay attention to how many
types of interests are involved. If there are not significantly more than exist
in property systems generally, they do not face a particularly complicated
fragmentation/bundling problem, and can proceed to deal with the other
issues before them. It would still be important to have this information
reported to property and other institutions scholars, however, since it
22. This argument assumes that it is significantly more difficult to reaggregate property
rights than it is to disaggregate them in the first place, thereby incorporating a transactions
cost perspective.
Mystery of CapitalCRev
216
2/18/08
11:13 AM
Page 216
Errol Meidinger
would suggest that there is a general cross-cultural pattern to be explained.
If, however, property law unifiers find a great profusion of potential interests they will be faced with a difficult question of how many and which
ones to recognize. If they follow the functionalist analysis offered by
Merrill and Smith, they will have to deal with questions of transactions
costs and interpretability. If they follow the more culturally based libertarian perspective offered by Epstein, however, they will at least in principle
be free to recognize a much larger profusion of interests on grounds that
different levels and types of freedom through property are appropriate in
different cultures. This could be an important learning opportunity for
institutional theory if information is compiled on what kinds of property
interests are ultimately recognized in the less-developed countries, and
how they fare over time.
Choice: The essentially quantitative numerus clausus problem may be
one of the simpler problems facing institutional theories of property. There
are also important questions of choice involved in (1) defining the contents
of specific rights and (2) choosing among competing property rights based
in different cultural systems.
Competing Definitions: Many property interests are only partially
defined, and are subject to sometimes surprising elaborations over time.
Whether Tulk had the legal right to prevent Elms’s successors from building on Leicester Square, for example, was questionable at best when he
sold Elms the land. Assuming he had good legal advice, Tulk essentially
gambled that a court in the future might see things his way. Elms, on the
other hand, may have been confident that his promise was not enforceable
against his successors, but if well advised would also have realized there was
some risk that it might eventually be enforced. For present purposes, what
is important is that a certain amount of indeterminacy seems to be the general attribute property rights.23 New possibilities, problems, costs, opportunities, and understandings inevitably arise which put them in question.
Thus, between the right and the duty in any specific property interest may
reside a considerable amount of uncertainty.
Partial indeterminacy of rights may not be a significant problem for de
Soto’s development policy, since no system can avoid it, but it creates a
conceptual gap that a satisfactory rights-based institutional ontology can
23. There were many other such questions. Could one of Tulk’s tenants have enforced
Elm’s promises? Perhaps, but it is difficult to be sure. Could a married woman have enforced
them? No then, but yes later. Thus, who could hold the right was changed from outside the
context of the right. If tenants had affirmative rights to walk in the square, did they have the
right to bring their guests? Could Moxhay have killed songbirds on the land? One could go
on, but the point should be clear enough.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 217
Property Law for Development Policy and Institutional Theory
217
be expected to address. One approach, of course, is simply to say that definitions of rights and duties are subject to the inherent limits of language
and leave it at that. But that approach may fail seriously short of comprehending the institutional dimensions of the problem.
An alternative approach would be to attempt to analyze rights indeterminacy and the institutions which address it in practice. The Tulk case, for
example, illustrated two interesting institutional legal phenomena. First,
two distinct decisional forums—the law courts and the equity courts—had
the capacity to define and elaborate the contents of property rights. This is
a common condition in legal systems, and one which Searle’s model does
not really address. It may violate what I called the condition of logical consistency earlier. This is because it is the case that both the law and the
equity courts were empowered to answer the same question of rights and,
in effect, to answer it differently. One could try to evade this problem by
noting that in the end the equity court’s answer prevailed, but this would
then further enfeeble institutional ontology’s capacity to illuminate widespread phenomena of great practical importance.
A second striking feature of the Tulk case was that in deciding it the
equity court took a general principle that it had been applying in other
lines of cases—that a purchaser with notice of an obligation should take the
property subject to that obligation—and applied it to the question of when
a “real covenant” should run with the land. This too is an extremely common characteristic of legal decision-making. Courts, and, for that matter,
legislatures, are constantly asked to treat one claim as certain others are
treated (and not as still others are treated). Often these requests call on
general principles such as fairness, efficiency, or moral rectitude. It is difficult to describe this process adequately in terms of a rights-based, deontological model—at least if rights are not conceived at least as part containing
or being subject to further normative argument. Addressing this phenomenon may require ontology to incorporate certain hermeneutic or discursive elements.24
Competing Systems: When Europeans arrived in North America they
found functioning native property systems (Cronon 1983), although they
often did not recognize them as such. Those property systems were inconsistent with the Europeans’ own, and generally inconsistent with their
claims to resources in the “new world.” When the inevitable conflict
between rights based in the two systems reached the U.S. Supreme Court
in the early nineteenth century, Chief Justice Marshall ruled for the unanimous Court that land rights obtained from the U.S. trumped those
24. For a pragmatic hermeneutic perspective, see Rose 1994.
Mystery of CapitalCRev
218
2/18/08
11:13 AM
Page 218
Errol Meidinger
obtained from Native Americans (Johnson v. M’Intosh 1823). The U.S., he
said, had acquired by treaty the rights held by the British under European
legal principles. The “doctrine of discovery” gave the first European nation
to discover land “then unknown to Christian peoples” the right to take
possession of and impose its law on it, which the British had done in much
of eastern North America. The U.S. courts, according to Marshall, had no
choice but to follow the law of the U.S. system. Neither Britain nor the
U.S. Congress had made any effort to recognize and incorporate Indian
land rights, and the Court thus felt bound to recognize their decision to
override Indian title.25 Far from incorporating indigenous property systems, the U.S. system sought to override them.
At the same time, however, the Supreme Court did not go as far in
overriding Indian property rights as might have been expected. The Court
limited its holding to the proposition that discovery gave the U.S. the
exclusive right to extinguish Indian title. Until the U.S. did that, native
tribes retained a right of occupancy to their lands, a right which could be
elaborated or strengthened through treaty and other negotiations.
Moreover, the decision tried to limit the U.S. policy to what Marshall presented as the particular difficulties of dealing with Indians:
Although we do not mean to engage in the defence of those principles which
Europeans have applied to Indian title, they may, we think, find some excuse,
if not justification, in the character and habits of the people whose rights have
been wrested from them. . . .
Where incorporation is practicable, humanity demands, and a wise policy
requires, that the rights of the conquered to property should remain unimpaired; that the new subjects should be governed as equitably as the old, and
that confidence in their security should gradually banish the painful sense of
being separated from their ancient connexions, and united by force to
strangers. . . .
But the tribes of Indians inhabiting this country were fierce savages, whose
occupation was war, and whose subsistence was drawn chiefly from the forest.
To leave them in possession of their country, was to leave the country a wilderness; to govern them as a distinct people, was impossible, because they were as
brave and as high spirited as they were fierce, and were ready to repel by arms
every attempt on their independence. (Johnson v. M’Intosh, 589–90)
25. “The British government, which was then our government, and whose rights have
passed to the United States, asserted a title to all the lands occupied by Indians, within the
chartered limits of the British colonies. It asserted also a limited sovereignty over them, and
the exclusive right of extinguishing the title which occupancy gave to them. These claims have
been maintained and established as far west as the river Mississippi, by the sword. The title to
a vast portion of the lands we now hold, originates in them. It is not for the Courts of this
country to question the validity of this title, or to sustain one which is incompatible with it.”
Johnson v. M’Intosh, 588–89.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 219
Property Law for Development Policy and Institutional Theory
219
As overwrought as the language about the savage nature of Indians might
seem to the modern reader, the overall thrust of the opinion was to ratify
the U.S. power to extinguish Indian title, but also to keep alive the discussion of appropriate limits on that power. This discussion has continued
in the U.S. legal system for nearly 200 years since the decision, and the
issue of Indian land rights still has not been conclusively settled.26 This
suggests several points about property rights for ontology and development policy. First, of course, not all informal rights were incorporated in
the U.S. property system during the nineteenth century. The U.S. system
refused to give many Native American–based property claims the status of
institutional facts, yet it retained them as normative problems to be
addressed. This raises the question of what types of rights are and should
be incorporated in modern property systems. Like the process of elaborating existing rights, the choice of which rights to incorporate is hard to
describe as a purely factual question, particularly when the official decision
process continues a normative dialogue on the proper respect for rights
originating outside the system.
Development policy has no choice but to address the problem of which
rights to incorporate. For example, when, if at all, should state systems
incorporate informal property systems that seriously disadvantage
women?27 Similarly, when should informal property rights deriving from
violence or the threat of violence be incorporated? Making such decisions
will at a minimum require some sort of normative analysis. But the prob-
26. This unsettled question is part of a larger legacy of plural legal systems. Indian legal
systems, although greatly altered by the colonial experience, remain in effect in large parts of
the country, creating many complicated questions of rights and identity. See, e.g., McSloy
1994. There are also numerous other property rights systems operating inside the U.S. that
are neither incorporated nor effectively suppressed by the official legal system. For example,
lobster fishermen working in public waters typically organize into groups that define and
enforce boundaries to their fishing areas, as well as other rules for catching lobsters. These
property systems are outside the official system, and are occasionally challenged by U.S. officials when the lobstermen’s enforcement systems become too aggressive. But for the most
part they are allowed to continue without either incorporation or suppression (Acheson
1988). Some systems seem more directly at odds with the official system, but also continue
to persist. One of my colleagues, for example, relates the story of how his father bought a
window-washing business in New York City. The father needed a loan, but had no real property with which to secure the loan. He obtained a loan from a private financier, with the clear
understanding that if he defaulted on the loan several of his limbs would be broken. We could
say that the borrower gave the lender a security interest in his physical well-being. The lender
in turn provided capital (at extremely high interest rates) but also protected his borrower’s
“territory,” ensuring that competitors would not enter the area so as to drive down prices and
reduce the value of the loan. This was a common arrangement for certain kinds of small business loans in New York City for several decades, and might still be.
27. This is a very real question in development policy. See, e.g., Mukhopadhyay 2001.
Mystery of CapitalCRev
220
2/18/08
11:13 AM
Page 220
Errol Meidinger
lem might also be more ontologically complex. For there is also a body of
scholarship suggesting that there are fundamental incompatibilities
between traditional and modern legal systems, and that translating traditional relationships into a modern system will alter both of them (e.g.,
Zerner 2003, Engel 1978). If so, the challenges to development policy and
institutional ontology are great indeed.
Externally Driven Change: One of the most interesting current developments is that definitions of property rights in national legal systems are
increasingly subject to transnational influences. Two types of developments
exemplify this process. The first is the growth of “regulatory expropriations” law through international trade treaties. The second is the definition
and enforcement of standards for property management by nongovernmental organizations.
Regulatory Expropriations: The North American Free Trade
Agreement provides that no country may “directly or indirectly expropriate an investment of an investor” from another country, or “take a measure
tantamount to . . . expropriation,” unless it meets a number of conditions,
including the payment of compensation.28 The provision has close analogues in other trade treaties, and is being vigorously promoted as a desirable trade provision by many transnational business organizations and
developed countries.
In a widely noted case several years ago a NAFTA tribunal found
Mexico to have violated the provision in the case of a U.S. corporation that
acquired a Mexican company involved in constructing a hazardous waste
landfill in the state of San Luis Potosi. The Mexican company had obtained
several federal and state permits to build the landfill, commenced construction, and indeed transported some hazardous waste to the site. Several
years after commencing these efforts the same period the Mexican company began negotiating to sell its assets, including the permits (arguably
another example of intangible property rights), to U.S. based Metalclad
Corporation. Shortly after the sale was consummated the municipality
issued a “stop work” order on grounds that the company lacked a necessary construction permit. There were also ongoing local demonstrations
against the plant. Although they maintained that such a construction permit was not required for the landfill, and assured Metalclad that it had all
of the necessary permits, Mexican federal officials urged it to apply for the
28. North American Free Trade Agreement, Article 1110(1): “No Party may directly or
indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment
(“expropriation”), except: (a) for a public purpose; (b) on a nondiscriminatory basis; (c) in
accordance with due process of law . . . and (d) on payment of compensation . . . .”
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 221
Property Law for Development Policy and Institutional Theory
221
additional permit and to continue negotiations with the state and local
governments. The city continued efforts to block the project, and
Metalclad eventually filed a claim under the NAFTA provision quoted
above. Thereafter the state governor declared a large area including the
plant site as a natural area for the purpose of protecting rare cacti, precluding construction of the landfill there.
While it appears quite unlikely that this sequence of events would have
been treated as a compensable taking under Mexican law, the NAFTA tribunal found the Mexican state and local governments to have violated the
expropriation provision. It ruled that expropriation under NAFTA
includes:
. . . not only open, deliberate and acknowledged takings of property, such as
outright seizure or formal or obligatory transfer of title in favor of the host
State, but also covert or incidental interference with the use of property which
has the effect of depriving the owner, in whole or in significant part, of the use or
reasonably-to-be-expected economic benefit of property even if not necessarily to the
obvious benefit of the host state. (emphasis added) (Metalclad v. United Mexican
States 2001)
The Mexican government was ordered to pay Metalclad U.S. $16.7
million plus interest. On appeal a British Columbia court (which had jurisdiction under NAFTA because the arbitration was officially located in the
Province) largely upheld the Tribunal’s order, although it reduced it
reduced the amount of interest in the award on grounds that the expropriation was not realized until the governor declared the site a protected
area (Mexico v. Metalclad Corp. 2001)
Most notably, the standard for defining the expropriated property
interest was not Mexican law, but rather the reasonable expectations of
business owners as defined by the NAFTA tribunal and foreign appellate
court. Thus property rights of foreign investors are coming to be defined
not by the national legal system of the country, but rather by international
business tribunals authorized to accept complaints by foreign corporations
against individual countries.29
Nongovernmental Rights Definition: A second process of transnational property rights definition operates largely outside the realm of government, and is practiced by transnational civil society organizations
seeking to set global standards for proper business behavior. A good
29. The ironic result is that, at least in some cases, the property rights of a foreign
investor will be greater than those of a domestic one, and that in any event they will not be
defined solely in reference to national law.
Mystery of CapitalCRev
222
2/18/08
11:13 AM
Page 222
Errol Meidinger
example is the Forest Stewardship Council (FSC), which sets and implements global standards for forest management. These standards are formally voluntary, but companies that meet them can claim to be meeting
the highest standards of propriety. Products derived from their forests can
carry the FSC logo, which brings with it the approval of transnational environmental, labor, and social justice organizations.
The standards set by the FSC include protections for communities,
indigenous groups, laborers, and biodiversity, among other things.30 For
example, certified forestry operations are required to respect customary use
rights such as traditional hunting and gathering rights. In many national
legal systems these rights are either not recognized or not protected. One
of the main goals of the FSC process is to gain them recognition, and
thereby to raise the level of protection of customary property rights. Its
goals are similar with regard to indigenous peoples’ rights, labor rights,
and environmental protection. The basic assumption is that if enough public demand for meeting these standards can be established through a formally voluntary certification program, they will eventually become
institutionalized duties applicable to forestry operations in general. Perhaps
they will be adopted into formal legislation, which has happened in some
places, but perhaps not. So long as the duties become established and
accepted expectations, property rights will have been redefined to include
them.
While it is too early to say that the FSC process has been a thoroughgoing success, it is already clear that it has had a considerable influence.
The center of opinion among practicing foresters seems to have moved
from vigorous resistance to grudging acceptance to a near embrace of certification system duties. The FSC process has given rise to a number of
competing nongovernmental standard-setting processes, some of them
industry based and intended to blunt the demands of the FSC. But they
have ended up placing a broad array of forest management operations
under public scrutiny, and appear to be stimulating a gradual rise in standards for acceptable forest management. Thus neighbors, indigenous
groups, laborers, and even various exemplars of biodiversity are gaining an
30. Sample standards include the following: Principle 2. Long-term tenure and use rights
to the land and forest resources shall be clearly defined, documented and legally established.
Principle 3. The legal and customary rights of indigenous peoples to own, use and manage
their lands, territories, and resources shall be recognized and respected. Principle 4. Forest
management operations shall maintain or enhance the long-term social and economic wellbeing of forest workers and local communities. . . . Principle 6. Forest management shall conserve biological diversity and its associated values, water resources, soils, and unique and
fragile ecosystems and landscapes, and, by so doing, maintain the ecological functions and the
forest . . . (Forest Stewardship Council 1993).
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 223
Property Law for Development Policy and Institutional Theory
223
institutionalized right to better treatment by forestry management operations, and that right is being constructed in a global process of dialogue
and contestation. Property holders are gradually coming under a concomitant duty. The processes in which these rights and duties are being
redefined extends well beyond the local polities which have traditionally
been seen as the source of property rights, and again, it is hard to see as
entailed in any way in the original definitions of rights and duties attendant
on property holding.
The kinds of property rights redefinition discussed here can only be
partially accounted for within the frameworks of de Soto and Searle. On
one hand, they are both open to nongovernmentally created rights and
duties, and the FSC process is an example of this. On the other hand, the
process is happening at a global, rather than a local, level. For de Soto, this
at least raises questions of where to look for institutionalized property
rights. Some of them are apparently being negotiated among transnational
communities. For Searle, these processes raise questions about both who
an authorized actor is and what the relevant community is. Authorized
actors in the NAFTA case were created by the national governments. But
it is not clear that those governments had authority to give those actors the
power to redefine property rights within their jurisdictions; indeed it seems
quite unlikely in most cases. Thus, if those actors are exercising that power,
they may be seizing it to some extent, or perhaps creating it, in the course
of doing so.
6. Conclusion
This paper’s discussion of modern property institutions has focused largely
on features that seem not to be well accounted for in Searle’s ontology and
de Soto’s development prescriptions. These include: (1) the tendency of
modern property systems to constrain the available structures of rights
and duties to a limited set of forms, (2) the partial indeterminacy and
changeability of all property rights definitions, (3) the existence of competing decision makers and principles for elaborating property rights in
modern legal systems, (4) the selective incorporation and suppression of
indigenous legal arrangements by modern legal systems, (5) the shifting
and contested boundaries of the institutional systems—the relevant communities—that define and implement property rights, and (6) overarching
these all, a tendency of rights- and code-based models of legal institutions
to underplay or ignore the open-ended and creative elements of institutional processes for adjudicating and elaborating property rights.
This of course has been a selective rendering of property law. A different
one might have focused more on what the perspectives of de Soto and Searle
Mystery of CapitalCRev
224
2/18/08
11:13 AM
Page 224
Errol Meidinger
can teach us about property. Yet, this approach may be the more productive
one in the end. First, of course, it offers Searle and de Soto some material
that might be useful to them in further developing their perspectives. And it
may turn out to be the case that their work will shed significant light on the
appropriate level of fragmentation of property rights, the role of indeterminacy in property rights definitions, and choices among alternative communities in recognizing property rights. That remains to be seen.
Either way, however, the composite picture that emerges from this exercise may indicate some important areas for further development in Searle’s
and de Soto’s perspectives on institutions. Perhaps the most fundamental is
that perspectives which focus on rights and duties as facts tend to draw
attention away from some of the processes involved in creating, maintaining, elaborating, revising, and contesting those facts. If rights and duties are
seen as largely the creation of authorized actors exercising rights and duties
that they already have, we have no account of nonreductive exercises of
power and politics. Normative arguments and contestation are hard to see
as anything other than outcomes. And the process of choice among alternative claims of right will be seen as nothing more than a result of collective acceptance. This will be seriously shortsighted to the degree that that
the institutional facts of rights and duties involve provisional allocations of
the power to act and make arguments in an institutional framework subject
to continuing renegotiation and frequent, sometimes abrupt change.
R E F E R E N C E S
Cases
Johnson v. M’Intosh. 1823. Supreme Court of the United States. 21 U.S. (8 Wheat.)
543.
Metalclad Corp. v. United Mexican States. 2001. Award ICSID Case No.
ARB(AF)/97/1, para. 131 (Aug. 30, 2000). 16 ICSID Rev.-Foreign
Investment L.J. 168, 202.
Mexico v. Metalclad Corp. 2001 BCSC 664 (2001). http://lawsite.ca/IAWJ/metalclad.htm.
Tulk v. Moxhay. 1848. Court of Chancery England. 2 Phillips 774, 41 Eng. Rep
1143.
Articles and Books
Acheson, James M. 1988. The Lobster Gangs of Maine. Durham, NH: University Press of New
England.
Ackerman, Bruce. 1977. Private Property and the Constitution. New Haven, CT: Yale
University Press.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 225
Property Law for Development Policy and Institutional Theory
225
American Law Institute. 1945. Restatement of Property, First. Philadelphia: American Law
Institute.
Arnold, Craig Anthony. 2002. “The Reconstitution of Property: Property as a Web of
Interests.” Harvard Environmental Law Review 26:281–364.
Baker, J. H. 1990. An Introduction to English Legal History. London: Butterworths.
Coase, R. H. 1960. “The Problem of Social Cost.” Journal of Law and Economics 3:1-69.
Cohen, Felix S. 1935. “Transcendental Nonsense and the Functional Approach.” Columbia
Law Review, 35: 809–49.
Cook Walter Wheeler. 1919. Introduction to Fundamental Legal Conceptions as Applied to
Legal Reasoning, by Wesley N. Hohfeld. New Haven: Yale University Press.
Cronon, William. 1983. Changes in the Land: Indians, Colonists, and the Ecology of New
England. New York: Hill and Wang.
de Soto, Hernando. 2000. The Mystery of Capital: Why Capitalism Triumphs in the West and
Fails Everywhere Else. New York: Basic Books.
Demsetz, Harold. 1967. “Toward a Theory of Property Rights.” American Economic Review
(Proceedings) 57:346-359.
Engel, David M. 1978. Code and Custom in a Thai Provincial Court: The Interaction of
Formal and Informal Systems of Justice. Tucson: University of Arizona Press.
Epstein, Richard A. 1995. Simple Rules for a Complex World. Cambridge, MA: Harvard
University Press.
Fortman, Louise. 1995. “Talking Claims: Discursive Strategies in Contesting Property.”
World Development 23:1053–63.
Freyfogle, Eric T. 2002. “The Tragedy of Fragmentation.” Valparaiso University Law Review
36:307–37.
Forest Stewardship Council. 2000. “FSC Principles and Criteria.” Oaxaca, Mexico: Forest
Stewardship Council. http://www.fscoax.org/principal.htm.
Grey, Thomas C. 1980. “The Disintegration of Property.” In J.R. Pennock and J.W.
Chapman, eds., Property. Nomos, 22: 69-81.
Grotius, Hugo. 1625. De Jure Belli ac Pacis Libri Tres. Translated by F. W. Kelsey. New York:
Oceana, 1964.
Heller, Michael A. 1999. “The Boundaries of Private Property.” Yale Law Journal, 108:1163
1223.
Hohfeld, Wesley Newcomb. 1913. “Some Fundamental Legal Conceptions as Applied in
Judicial Reasoning.” Yale Law Journal 23:16–59.
———. 1917. “Fundamental Legal Conceptions as Applied in Judicial Reasoning.” Yale Law
Journal 26:710–70.
Honoré, A. M. 1961. “Ownership.” In Oxford Essays in Jurisprudence: A Collaborative Work,
ed. A. G. Guest, 107–47. Oxford: Oxford University Press.
Hume, David. 1739. A Treatise of Human Nature. London: Dent (Everyman’s), 1911.
King, Winter. 2003. “Illegal settlements and the Impact of Titling Programs.” Harvard
International Law Journal, 44:433–471.
Levmore, Saul. 2003. “Property’s Uneasy Path and Expanding Future.” University of
Chicago Law Review, 70:181-195.
Mystery of CapitalCRev
226
2/18/08
11:13 AM
Page 226
Errol Meidinger
MacCormick, Neil A., and Ota Weinberger. 1986. An Institutional Theory of Law: New
Approaches to Legal Positivism. Dordrecht: D. Reidel.
March, James G., and Johan P. Olsen. 1989. Rediscovering Institutions: the Organizational
Basis of Politics. New York: Free Press.
McSloy, Steven Paul. 1994. Revisiting the “Courts of the Conqueror”: American Indian
Claims Against the United States, American University Law Review 44:537–644.
Meidinger, Errol. 1998. “Laws and Institutions in Cross-Boundary Stewardship.” In
Stewardship Across Boundaries, ed. R. L. Knight and P.B. Landres. Covallo, CA and
Washi: Island Press, pages 87–110.
Merrill, Thomas W., and Henry A. Smith. 2000. “Optimal Standardization in the Law of
Property: The Numerus Clausus Principle.” Yale Law Journal 110:1–70.
Merrill, Thomas W., and Henry E. Smith. 2001. “The Property/Contract Interface.”
Columbia Law Review 101:773–852.
Merryman, John Henry. 1974. “Estate and Ownership: Variations on a Theme by Lawson,”
Tulane Law Review 48:916–45.
Milsom, S. F. C. 1976. The Legal Framework of English Feudalism. Cambridge: Cambridge
University Press.
Mukhopadhyay, Maitrayee. 2001. “Introduction: Women and Property, Women as Property.”
In, eds., Gender Perspectives on Property and Inheritance: A Global Source Book, ed. Sarah
Cummings et al. Oxford: Oxfam.
North, Douglass C. 1990. Institutions, Institutional Change, and Economic Performance.
Cambridge: Cambridge University Press.
Posner, Eric A. 2000. Law and Social Norms. Cambridge, MA: Harvard University Press.
Powell, Walter W., and Paul J. DiMaggio. 1991. The New Institutionalism in Organizational
Analysis. Chicago: University of Chicago Press.
Rose, Carol. 1994. Property and Persuasion: Essays on the History, Theory, and Rhetoric of
Ownership. Boulder: Westview Press.
Rubin, Ed. Forthcoming. “From Property to Market Generating Allocations,” Chapt. 9 in
Rethinking Politics and Law for the Administrative State.
Scott, James C. 1998. Seeing Like a State: How Certain Schemes to Improve the Human
Condition Have Failed. New Haven and London: Yale University Press.
Scott, W. Richard. 1987. “The Adolescence of Institutional Theory.” Administrative Science
Quarterly 32, no. 4: 493–511.
Searle, John R. 1995. The Construction of Social Reality. New York: Free Press.
———. 2003. “Social Ontology and Political Power.” Paper presented to the conference on
the Mystery of Capital and the Social Construction of Reality, Buffalo, NY.
Simpson, A. W. B. 1986. A History of the Land Law. 2nd ed. Oxford: Clarendon Press.
Singer, Joseph William. 2001. Introduction to Property. New York: Aspen Publishers.
Smith, Barry. 2003. “John Searle: From Speech Acts to Social Reality.” In John Searle, ed.
Barry Smith. Cambridge: Cambridge University Press
Smith, Henry E. 2003. “The Language of Property: Form, Context, and Audience.”
Stanford Law Review 55:1105–91.
Stiglitz, Joseph E. 2002. Globalization and Its Discontents. New York: W. W. Norton.
Waldron, Jeremy. 1988. The Right to Private Property. New York: Oxford University Press.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 227
Property Law for Development Policy and Institutional Theory
227
Zaibert, L. A. 1999. “Real Estate as Institutional Fact: Towards a Philosophy of Everyday
Objects.” American Journal of Economics and Sociology 58:273–84.
Zerner, Charles, ed. 2003. Culture and the Question of Rights: Forests, Coasts, and Seas in
Southeast Asia. Durham, NC: Duke University Press.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 228
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 229
The Institutionalization
of Real Property Rights:
The Case of Denmark
11
Erik Stubkjær
1. Introduction
In The Mystery of Capital, Hernando de Soto raises the question of why
capitalism triumphs in the West and fails everywhere else. He points to
“the legal property system, [which] became the staircase that took
[presently developed] nations from the universe of assets in their natural
state to the conceptual universe of capital, where assets can be viewed in
their full potential” (2000, 43–44). De Soto answers this question, in large
part, by pointing to the fact that most of the assets in successful Western
nations have been integrated into one formal legal property system, resulting in what amounts to a single formal representation system for property.
While this integration and formalization of capital in Western nations
occurred slowly and rather unreflectively over the course of several hundred years, the question of just how it came into being has become an
urgent one since the end of the cold war, because we now live in a world
where capitalism appears to be the only serious option for development
(2000, 44, 46, 57). However, such legal property systems are a complex
phenomenon. As de Soto points out, realizing the full economic potential
of property demands “an implicit legal infrastructure hidden deep within
the . . . property system—of which ownership is but the tip of the iceberg.”
The problem, according to de Soto, is that “[t]he Western nations have so
successfully integrated their poor into their economies . . . they have lost
even the memory of how it was done, how the creation of capital began,”
Thanks go to my wife, M.A. in Nordic Philology and Cinema, Lone Stubkjær, born Friisberg,
who through decades of marriage opened my eyes to literary and theological issues. The Rt.
Revd. Henrik Christiansen, Aalborg diocese, pointed out the Danish Conventicler Order of
1741, and commented on a version of the note. Andrew Spear kindly improved the English
of the author. Translations into English are made by the author.
229
Mystery of CapitalCRev
230
2/18/08
11:13 AM
Page 230
Erik Stubkjær
and, to remedy the problems the world is currently facing, “[t]hat history
must be recovered” (2000, 7, 8, 9).
The following offers such a historical inquiry regarding one of the
smaller Western countries: Denmark. This inquiry takes the form both of
a recovering of the “hidden infrastructure” underlying current Danish
property law and an account of how our present property system came into
being. In this chapter, I analyze both the general and economic histories
of this issue from the point of view of a geodetic engineer, and this analysis will in turn lead to a new understanding of the role played by mortgaging in Danish property law after the 1960s, as detailed in section 5.
However, before setting out on the retelling of an aspect of Danish history,
I remind that the events of history can be understood and related to one
another in many ways. Thus some methodological issues are addressed in
section 2.
De Soto considers formalized property systems to be “controlled environments to reduce transaction costs.” He states further, “By representing
economic aspects of the things we own and assembling them into categories that our mind can easily grasp, property documents reduce the cost
of dealing with assets and increase their value commensurately” (2000,
201). This reference to transaction costs is in agreement with the idea of
presenting Danish events within the analytical framework of New
Institutional Economics. The notion of institution is adopted here in relation to the historical aspects of formalized property law to be presented.
The institution of real property rights has been addressed and traced historically, notably by Douglass C. North (1990), and this allows us to put
the outcome of the Danish case in a wider context. As we shall see developed in section 3, Denmark has through some centuries had a uniform
Christian religion and a uniform bureaucratic administration, which on the
explanatory model offered by North are comparable to the situation in
South America, while Danish economic development compares more
directly to what has occurred in North America. The Danish evidence, supplemented with readings of Roman Catholic doctrinal texts, suggests a
modification to North’s model, one pointing to the societal costs of creating associations.1
Section 3 only provides some snapshots of Danish history. In order to
give an account of the development of the Danish formalized property sys1. Francis Fukuyama, in ‘Trust—The Social Virtues and the Creation of Prosperity’,
examines the role of voluntary organizations around the world and notes, among others, “in
certain Latin Catholic countries a relative deficit of intermediate social groups in the area
between the family and large, centralized organizations like the church or the state” (1995,
55). The present chapter is thus new not in pointing to the role of associations for economic
performance, but rather in the way this role is motivated.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 231
The Institutionalization of Real Property Rights
231
tem, we have to provide more details. These are presented in section 4,
which aims at providing information with a bearing on the introduced analytical framework, and section 5, which in more technical terms addresses
the formal property system and mortgaging.
2. Methodology Issues
An institution is understood here in North’s sense as constituting “the
humanly devised constraints that shape human action” (North 1990, 3).
These constraints can be understood as being created through what Searle
has called “collective intentionality” (1995, 23–26). It is assumed here
that either an individual role model or a group functions to provide a
shared social understanding, which is then reinforced by repeated action.
Now, how do these institutions come into being? Searle asserts that “the
creation of institutional facts may proceed without the participants being
conscious that it is happening according to [the form ‘X counts as Y in
C’]” (1995, 47) Thus, “in the very evolution of the institutions the participants need not be consciously aware of the form of the collective intentionality by which they are imposing functions on objects. In the course of
consciously buying, selling, exchanging, etc., they may simply evolve institutional facts” (47).
More subtle factors of institutional change are identified by North
(1990), including the institutional structure of society, which may support
or hamper the wealth-maximizing opportunities of organizations and
other entrepreneurs, and hence economic development. Factors that play
a role here include skills, be it communicative or tacit knowledge, and
incentives. The institutional structure provides various incentives as to
whether skills are developed within its various domains, for example, the
religious or the technological domains. Also, the institutional structure
may vary regarding its degree of toleration for the development of new
knowledge and worldviews. A final factor of development is people’s perception that the structure of rules in the system is fair and just (North
1990, 76).
Factors to look for will thus include education and the existence of
motivations for learning. Regarding whether rules are fair and just, we will
pay attention to their internal structure, for example, whether or not a system of rules involves the occurrence of dual standards.
Since our goal is that of tracing institutional developments in
Denmark, we would benefit here from a more fully articulated developmental model of institutions. One way of developing such a model would
be to employ what has been called institutional analysis and design,
extending from the well-known method of information systems analysis
Mystery of CapitalCRev
232
2/18/08
11:13 AM
Page 232
Erik Stubkjær
and design (see Stubkjær 1999 for a survey). Neither institutional analysis nor institutional design nor the combination is new (Ostrom 1991;
Goodin 1998; Ostrom 2002). While a full investigation of these sources
is outside the scope of this paper, the approach that they offer does help
shed some light on how we should view historical changes in property
institutions.
Research carried out on transitions in Eastern Europe is in agreement
regarding the “invisibility” of institutional change: “It will turn out that
‘design’ [of institutions] is a rare and unlikely mode of change; it is even
less likely that the activity of ‘designing’ will be recognized, acknowledged
and remembered as such” (Offe 1993, 10–11). However, with many reservations and variations, which are omitted here, some suggestions are
indeed offered: “persons (such as Jacek Kuron in Poland), circles and
movements that were publicly credited with the quality of being trustworthy proponents of these ideas [alternatives to communism] in Hungary
and Poland, turned out to be powerful resources in the process of institution building, as they represented, at the round-table talks, in the media
and elsewhere the moral infrastructure and normative meaning of the
order to be built” (Offe 1993, 16). These persons, informal networks, and
associations made “the visible presence of nuclei of an oppositional political culture capable of entering into relations of compromise and competition with the authorities of the old regime [and] turned out to be a
decisive determinant in the process of institution building” (16). The
negotiation of modified institutions was thus based on “the presence of a
model of the new institutional order that is typically not invented on the
spot, but ‘imported’ and suitably adapted from more or less remote points
in time or space. Institutional designs are typically copies, and they are frequently advocated as such” (15).
What can be extracted from these findings is that authorities, social
movements, associations, and their interplay regarding political and institutional issues should be recorded, and that we should look for “models of
new institutional order” in which all of these play a role.
An early effort in reflection on centennial institutional development
was made by the German sociologist Max Weber. His works are complex,
but a recent interpretation by Randal Collins (1986) is available. Two concepts or “ideal types” put forward by Max Weber: bureaucracy and patrimonialism, promote an analysis of the interplay between governance and
property. Weber suggests that the twins bureaucracy and patrimonialism
represent two extremes between which national states fluctuate during
their social and political histories. In bureaucracies, decisions and procedures are rule bound, positions are well-defined, and administrative means
and fees are kept strictly separate from the individual material assets of the
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 233
The Institutionalization of Real Property Rights
233
staff. In contrast, patrimonialism is like bureaucracy in being an organization of administrative staff, but the relations within this organization are
importantly different. In a patrimony, the authority relationship is based
on personal loyalty to the superior or ultimate leader, with all other members of the organization falling beneath the leader in hierarchical fashion.
In such a hierarchy the leader can handle with substantial discretion both
his subordinates and the dependent clients or subjects located outside the
administration. One could say that whereas a staff member in a bureaucracy is the custodian of his position, a staff member in a patrimony operates as the “owner” of his position in the hierarchy. Within patrimonialism,
political rights and economic rights come together, in the sense that political power includes the command of all resources. Property rights or political rights for any group independent of the leader do not technically exist
(cf. Collins 1986, 39).
Since we are interested in the issue of individual ownership, it will be
important to keep track of the development from patrimonialism towards
bureaucracy, which seems to be a precondition for the existence and availability of real property rights. While it seems promising to relate detailed
evidence, such as that from Denmark, to the model of Weber and Collins,
this first survey of the Danish history is not intended to be a strictly
Weberian account.
As for the retelling of Danish history, we have to confine ourselves to
a rather discretionary selection of events and relations, mostly taken from
the fourteen-volume standard publication on the history of Denmark,
Danmarks Historie (hereafter referred to as DH), and occationally from
a short version of Danish history in English, provided through the
Ministry of Foreign Affairs (Jespersen, 2007). Section 5 includes reference to primary sources, namely recordings of assembly deliberations in
1842.
3. Explaining Long-Term Economic Development:
The Americas and Denmark Compared
North compares the long-term economic development of North America
with that of South America in the context of presenting an analytical
framework for explaining such development (1990). The following relates
Danish experiences during the same period with the findings of North and
argues that bureaucracy does not generally hamper economic development
as North seems to suggest. Rather, an alternative explanation can be seen
in the past tendency by the Catholic Church and related establishments to
control the spontaneous creation of organizations.
Mystery of CapitalCRev
234
2/18/08
11:13 AM
Page 234
Erik Stubkjær
3.1. The Economic Development of the Americas and
of Denmark
North notes that there are enormous contrasts between economies, despite
the falling costs of information and technological change. Consequently,
he asks, what accounts for the persistence of societies whose economies are
characterized by poor performance? and what prevents them from adopting the institutions present in more efficient economies? (1990, 92–93).
The following is a brief summary of North’s answers to these questions for
the cases of North and South America, respectively.
The economic development of North America from the 1750s onwards
is characterized by religious diversity, local political control, and the growth
of assemblies, all of which it inherited from Britain. Development was
framed first and foremost by British imperial policy, but within that framework, the colonist entrepreneurs were free to develop, even if the colonists
themselves imposed more restrictions on property rights than did the
mother country (1990, 102).
During the same period of time, the economic development of South
America is characterized by North as involving the conquerors’ imposition
of a “uniform religion and uniform bureaucratic administration on an
already existing agricultural society.” Efforts at reversing this centralized
bureaucracy were partial and quickly negated. South American wars of
independence during the early nineteenth century brought in French- and
U.S.-inspired constitutions, but in spite of that, efforts towards decentralization of powers were unsuccessful after the first years of independence.
In the nineteenth and twentieth centuries, country after country reverted
to “centralized bureaucratic controls and accompanying ideological perceptions of the issues” (1990, 102–3).
Comparing these lines of development with Denmark, it should first be
mentioned that Denmark is extremely small when compared with the
Americas. The distance, both in the literal and figurative sense, from local
political control to centralized bureaucracy is small in Denmark, and thus
it is problematic to infer anything from this aspect.
As regards the growth of assemblies, the Danish development fits with
the reasoning above on their impact. Provisory assemblies of the 1830s
already had some practical impact on real property affairs, as we shall see
developed in section 5, and later in the century associations were created,
which provided for mortgaging and other kinds of economic development.
However, as regards the religious aspect, the Lutheran Denmark had
almost no religious diversity from the time of the Reformation in 1536
through the end of the nineteenth century. The constitutional freedom of
religion from 1849 on brought effects only late in the century, and these
had almost no recordable economic consequences. The development was
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 235
The Institutionalization of Real Property Rights
235
indeed influenced by the Danish version of the Lutheran “uniform religion,” but as described in sections 4.2 to 4.4 below, with an economically
positive outcome. As regards the bureaucracy, historians consider
Denmark to have had a “stable bureaucratic absolutism” from the late seventeenth century on, implying that the king “by grace of God” and with
the help of his advisors, ruled the country in a fairly top-down but also
quasi-rational way, (see section 4.2). The improvement in methods of land
registration during the nineteenth century fits into this general characterization, and Danish governmental administration was primarily a legal affair
until the 1970s, when company management became a model for public
affairs. For the case of Denmark it seems that bureaucracy at least permitted if not fostered an economic development comparable to that of North
America.
To summarize, Denmark had both a uniform religion and a bureaucratic government, which are precisely the factors that North has used to
explain the delayed economic development of South America. Still,
Denmark enjoyed a development largely similar to that of North America.
We thus have to question the role that these two factors actually play in
influencing economic development.
Questioning religious diversity and bureaucracy as relevant factors, we
are facing the problem of explaining economic development in a way other
than that proposed by North. The factor of the growth of assemblies has
so far been taken in the wide sense as including the creation of socially
active associations. In the following I intend to show that North’s reference to religion and bureaucracy can be specified in a way that relates to
the societal costs involved in the spontaneous creation of associations.
These costs were high in South America and other Catholic societies, while
low in Lutheran or mixed countries. The explanatory model offered by
North can thus be modified in a way that reconciles the evidence presented
above and also explains the observed outcome in terms of economic development.
3.2. The Impact of Religion on Development
Before entering into an assessment of the impact of religion, a sketch of
reality perceptions may be relevant. The Roman Catholic and the
Orthodox conceptions of reality are to some degree the same, and to
introduce the issue, I take an example of Orthodox provenance. A
thoughtful newspaper article recounted Russian experiences in the field of
individual property rights in land. The Moscow-based reporter Flemming
Rose notes that even in well-off quarters of towns, where apartments are
individually owned, garbage piles up outside the apartments. Further, local
Mystery of CapitalCRev
236
2/18/08
11:13 AM
Page 236
Erik Stubkjær
roads are neglected, even when neighbors have sufficient material
resources to maintain them properly. An explanation of these phenomena
is offered by professor Alexandr Etkind of the European University in St.
Petersburg. “Behind these phenomena hides a conception that what we do
together in Russia, we do together with the State or through the State, and
when the State does nothing, we do nothing either.” (Rose 2003, 7)
I propose that this norm of behavior is not attributed to the socialist
regimes of the twentieth century, but rather to a certain Christian way of
thinking, a vision of the world held in the Byzantine Empire from the fifth
century on. According to this worldview, executive powers emanate from
God through the church to the world. By “executive powers” I mean
power to act in the right way, according to one’s competencies. The term
“executive powers” is usually used for the management of governmental
affairs, but here it is used in a much wider sense, referring to the government of God that spans all creation (see Sendler 1988, 55–57, on the
Byzantine society, and 169–72 on the doctrine of Pseudo-Dionysos).
Returning to the example, it means that the apartment owners do not care
for joint areas, because nobody possessing the appropriate authority entitled them to do so.
The above interpretation may be substantiated by reference to official
documents of the Roman Catholic Church on the associations of workers. Some of these documents were issued in the context of the general
political battles surrounding trade unions in the early twentieth century.
Within the German Catholic realm, a specific and divisive trade union
controversy (Der deutsche Gewerkschaftsstreit) took place. It largely
addressed the issues of whether workers’ associations should be clerically
led, whether such associations could mix Christians of Catholic and nonCatholic denomination, and what role the Catholic labor movement
might take in the democratic process, including attitudes toward the
“free” workers’ unions, which were perceived at the time to be militantly
atheistic.
A document released by a bishops’ conference in Fulda, 1900
(“Fuldaer Pastorale”), insisted on the operating of the associations on a
strictly religious base (“die unbedingte Notwendigkeit, die Arbeitervereine
auf religiöser Grundlage aufzubauen”).2 Without explicitly insisting on
clerical leadership, it pointed to the idea that Catholic men should consult
2. The insistency on clerical (establishment) leadership was neither a Catholic nor a
German specialty. A Conventicler Act issued in England 1664 forbade religious assemblies of
more than five people outside the auspices of the Church of England. Similar prescripts were
issued in Sweden 1726 and in Denmark. The Danish Conventicler Order of 1741 requested
the parish priest to chair meetings of devout lay people (DH 9:236). However, the
Constitution of 1849 brought freedom of association and of religion.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 237
The Institutionalization of Real Property Rights
237
their mother, the Catholic Church, stressed the obligation of association
leadership to care for religious formation, and advised the leaders to
engage “able and willing helpers” (tüchtige und willige Helfer) among the
laity (Bundesverband 1977, 73, 77). The release of the document was followed by a decade of struggles, because the large majority of Catholic
workers wanted associations without clerical leadership. The pope twelve
years later issued an encyclica to the German bishops, ruling that under
strict conditions the participation of Catholic workers in mixed Christian
associations (“christlichen Gewerkschaften”) could be “tolerated” (“es
könne geduldet und den Katholiken gestattet werden”). Conditions
included that the workers engaged in—and paid to—the “Arbeitervereine”
in parallel (Bundesverband 1977, 84).
According to an interpretation by the Nestor of Roman Catholic social
teaching, Oswald von Nell-Breuning SJ, a real change was instituted by
the encyclica “Pacem in terris” from 1963, which was later corroborated
by the Second Vatican Council. It asserted that the clerics should no
longer patronize the laity, but rather every layperson should take responsibility within his or her professional domain (Bundesverband 1977, 19).
The Council document “Gaudium et spes” from 1965 literally proclaims
the laity to be the authorized estate on secular issues. It calls the laity to
cooperate most readily with those who share the same tasks. The layperson should not expect a specific solution from the spiritual advisor, who
might not have the mission needed. In controversies about the implications of the gospel on a specific issue, no party can claim that its solution
is exclusively supported by Church authority (Second Vatican Council.
Gaudium et spes, paragraph 43). The above excurse into the development
of Catholic social teaching relates well to the Russian example of today.
Also according to Roman Catholic beliefs, authority emanates from God
through the Church. Early in the 1900s, church authorities held that this
implied the leading role of priests in secular issues, as documented above.
By the 1960s, however, the Council document takes up the issue again by
explicitly referring to the different mission and authority of laity and clerics, respectively. In applying the authority of the Church, the fathers of
the Second Vatican Council formally (through “Gaudium et spes”)
empowered the laity to perform the tasks that people of protestant
denominations had been performing for some centuries. Furthermore,
the Second Vatican Council formulated a more elaborate self-conception
of the Church, marked by the keywords “subsistit in.” It implies, in loose
terms, that the light emanating from God is not restricted to work
through the hierarchy and members of the Roman church as a sociological entity. Consequently, according to this self-conception, not only the
Christian laity but also any person “of good will” may participate in the
perfection of creation.
Mystery of CapitalCRev
238
2/18/08
11:13 AM
Page 238
Erik Stubkjær
The above quotations of Catholic doctrine from the opening and
middle of the twentieth century provide evidence for the position that at
least until the first half of the twentieth century, the Catholic belief system generally insisted on providing authoritative approval for societal
changes of any importance. Due to the well-known path dependency,
such past perceptions and behavior patterns are hard to change, even
among those who for various reasons have dissociated themselves from
church circles.
3.3. The Cost of Creating Associations
Returning then to North’s interpretation of economic development, it can
be established that an important factor in explaining the difference
between the Catholic South America and the mixed or Protestant North
America and Denmark is the social costs of creating associations. In the U.S.
from the beginning of the eighteenth century, and in Denmark from the
middle of the nineteenth century, people could spontaneously unite into
associations, voice their demands, and through the associations contribute
to the solving of societal problems by applying domain-specific knowledge
to the modification of institutions. In the Catholic south, such associations
and their intentions tend to be assessed and monitored by the establishment, generally a resource-consuming process, which might well confuse
the original intentions.
This explanation is in accord with the one offered by North as regards
reference to the religious aspect. Transcendental beliefs do matter in economic development. Thus we find a substantial factor of explanation in the
specific conception of reality shared by the Roman Catholic and the
Orthodox Churches until the 1960s, when the Second Vatican Council
restated Roman Catholic doctrine. The restated view allows us to suggest
that the religious factor or power operating in Denmark, South America,
and North America is basically the same. The long-term economic development is different, perhaps primarily because the previous worldview
hampered economic development in the south by curtailing spontaneous
creation of associations. This is again due to the existence of differently
constructed institutions, which is precisely the main message of North’s
model of explanation.
Furthermore, this explanation is consistent with North regarding the
importance of bureaucracy, which appears to have a fairly open definition.
In line with North’s terminology, one might interpret the Catholic south
as a kind of divine (or Byzantine) bureaucracy, where persons affected by
societal problems wait for a person possessing the appropriate authority to
bring about a solution. However, while this interpretation might have
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 239
The Institutionalization of Real Property Rights
239
some explanatory power, it is definitely a use of the term “bureaucracy”
that extends widely from the usual social-science definition provided by
Max Weber. It is indeed deplorable that the term “bureaucracy,” even
within academic circles, carries the pejorative associations of popular usage.
This is deplorable especially from the point of view advocated by de Soto,
which points out the importance of real property rights for economic
development. The “formal representational systems,” which de Soto suggests are the basis for capitalism, cannot exist without common standards
and bureaucratic administration in the Weberian sense (2000, 192).
North, too, agrees that there is a need for “effective judicial systems” and
“the development of the state as a coercive force” (North 1990, 59).
To summarize: aspects of the Danish development of real property
rights can be related to North’s interpretation of the causes of different
economic development in North and South America, respectively. Within
the general framework of North’s explanation, I offer a modification that
reconciles the evidence drawn from the Americas and from Denmark. The
modification is based on a more elaborate understanding of the notion of
bureaucracy and the factors of religion and religious ideology. It suggests
that the economic development of the Roman Catholic south was hampered by a general belief that potential solutions to societal problems
should await clerical or otherwise authorized approval. The societal cost of
this approval stifled entrepreneurial efforts in the south, while the
Protestant north could benefit from the economic creativity of associations
of every kind.
4. The Institutionalization of Real Property Rights
in Denmark
This section provides a more complete account of how the institution of
property rights came into being in Denmark. I use “Denmark” in the narrow sense of the term, as including the major part of Jutland, Funen,
Zealand, and until 1660 also the southernmost part of what is today
Sweden.
4.1. Roman Officialdom
The formalization of real property rights emerged in Denmark during the
eleventh century through the influence of the expanding Roman Catholic
Church. Written documents were foreign to the Danes, whose legal proceedings were primarily oral, but from the south came the document
(diploma) as legal evidence. The oldest diploma known is a deed of gift
Mystery of CapitalCRev
240
2/18/08
11:13 AM
Page 240
Erik Stubkjær
from King Canute to the cathedral in Lund, dated May 21, 1085
(Skautrup 1944, 200). Documents were drawn up in Latin, but interestingly, established Danish technical terms like deed of conveyance (skøde)
and mortgage (pant) are mixed with the Latin texts, possibly due to the
varying skill levels of the scribes involved in their compilation (Skautrup
1944, 205).
Education of scribes took place at cathedral schools, in the context of
cathedral chapters, which were established, for example, in Lund in 1085
and in Ribe in 1145. Clerics also served at the chancellery of the king,
which is known to have been in operation around the twelfth century.
About the same time, the country was divided into dioceses and parishes,
and a church tax, the tithe, was introduced. The tax established a stable
and later formalized relation between users of land and representatives of
the community, a relation that may be considered an aspect of the institution of property rights. An inventory of Danish land (“Kong Valdemars
jordebog, Liber Census Daniæ”), dated 1231, was prepared by the chancellery (Skautrup 1944, 204–5). This inventory might be compared with
the English Domesday book. Late in the period in 1479 a university was
established with papal consent.
Legal rulings regarding the local level took place at the approximately
two hundred court districts, though for a growing number of boroughs
and for church matters, these rulings also took place at the chapters.
Around 1200, records of such rulings were frequent and often related to
one of the kingdom’s three ancient governing assemblies, called “things.”
One thing covering Jutland and Funen lay in the cathedral town of Viborg.
A collection of rules for this thing (Jydske lov, 1241) was prepared by the
bishop Gunner; it differs from the previous by being “given” by the king
and adopted by the thing. Village peasants operated through townships
with own customary rules. Quarrels could be presented to ordinary courts,
which tended to support the township majority opinion.
Transfer of ownership originally was ritualized by the seller putting some
soil on a cloak held by people present, thereby designating the land to be
surrendered, and declaring that ownership be transferred to the buyer
(Buhl 1994, 19f). Gradually, deeds of conveyance were drawn up according to recurrent forms (Skautrup 1947, 16, 72; Buhl 1994, 20–21). From
sixteenth century on the announcement was supplemented with recordings
in chronological thing registers. For transactions within borough boundaries, the town registry served the same purpose. From the seventeenth
century we know that mortgage deeds were recorded as well, and specific
mortgage registers were prescribed.
Did we have real property rights installed already in the fifteenth century? The formal conveyance did transfer rights in land, but as to the impli-
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 241
The Institutionalization of Real Property Rights
241
cations of these rights, we cannot be sure. Exchange of land and other
assets was a way of establishing social relations, including mutual obligations, and the impersonal alienation of an asset is something that emerged
very slowly. Furthermore, although the collections of rules generally
include inheritance rules, we cannot be sure as to what bindings restricted
the dispositions or—in other terms—whether the owner in fact was the
individual person or the family. Inheritance rules generally followed the
Germanic-Nordic pattern of family inheritance. At least for the major land
owners, the nobility, restrictions in dispositions on land were manifest in
order to protect family interests (Danmarks Historie 7:116), but even here
formalization of the family unit came slowly (fixed family names were only
instituted around 1526 (Skautrup 1947, 261). The religious concern for
the individual soul may have opened up a way for greater individualism,
fostered also by the introduction of inheritance by will to allow for donations for religious purposes (Halsall 1998, sect. 4).
Finally, general principles for the adoption of formal rules were only
just beginning to emerge. From 1360 on new kings had to agree to a
Coronation Charter. By the same token, the assembly of lords became the
forum for adoption of new legislation, until absolutism was introduced in
1660.
The model of the Coronation Charter was the English Magna Carta
(1215), which instituted a division of power between the king and the
estates, especially the higher clergy and the nobles. The later versions of
the Danish Coronation Charters included quite specific regulations
regarding the transfer of real property rights between king and estates, and
among the estates as well.
Summarizing the period until sixteenth century, we do find a basis for
formalization: Clerics, who could set up documents according to law; a
legal system, which could proclaim law, but only weakly enforce it; titherelated recordings; cathedral schools and a university; and a Christian
world view with secular implications that would appear only after the
Reformation introduced the Lutheran version of Christianity.
4.2. Lutheran Absolutism
Danish bishops, cathedral chapters, and monasteries were in dialogue with
their counterparts in the Roman Catholic south. However, other than the
containing of royal powers by Coronation charter and clerical officialdom
and education, Catholic practices such as celibacy of priests and formation
of lay people hardly gained a footing in such distant tracts. The Lutheran
reformation came in the early sixteenth century after a period of political
disorganization as a new spiritual power.
Mystery of CapitalCRev
242
2/18/08
11:13 AM
Page 242
Erik Stubkjær
The first Lutheran king, Christian the Third, balancing between the
factions of nobles, the major cities, external powers in Germany and the
Netherlands, and the Catholic clergy, managed to get hold of the country
by force, but then occupied himself with the reestablishment of legal procedures (DH 6: 52–54, 279–82). For example, during the sixteenth century the crown was concerned both to protect the peasants from their
masters (DH, 6: 130, 269, 290) and to consolidate legal prescripts into a
general law book (283). The codification effort succeeded in 1683 with
the adoption of the Danske Lov (Danish Law), well before other European
countries prepared comparable law books, such as Preussisches Landesrecht
of 1794 and the French Code Civil from 1804. By the 1660s absolutism
was introduced. However, royal willfulness was generally balanced by leading advisors and the chancellery.
Church land and church offices, such as cathedral chapters, were taken
over by crown administration without much further change. For example,
the chancellor of the king overtook the full office of the next bishopric
(Roskilde), including responsibility for the university (DH 9:241). Careful
management of crown contracting concerning entailed estates gave the
crown badly needed income. The accounting practice quickly spread
through the whole country. By the late seventeenth century, tax registers
were in place both at the manors and centrally. They mentioned every
holding, copyhold as well as freehold, and its duties. Due to the remarkable Danish ability to maintain continuity, the name of the central register,
Matriklen, today still designates what in other European countries has
come to be called the Cadastre or Land Administration.
The successor to the throne, Frederic the Second, was quite another
character. Nevertheless, he demonstrated how land could be traded in an
entrepreneurial sense. He was fond of hunting, and arranged for scattered
possessions to be consolidated into larger units by means of exchange of
property with the nobility. The nobility followed suit where possible.
Reformation caused a change in higher education, which further supported development towards a state of law and order. Before Reformation,
it was common for young nobility to frequent the university with a view to
eventually taking up clerical positions. However, the university was reorganized, causing it to become increasingly frequented by commoners, who
could now study theology, medicine, or law. This in turn led the youth of
the nobility to travel abroad in order to learn law and other disciplines useful for governmental affairs. This practice remained for centuries (DH
10:40). Arriving home, many volunteered for the chancellor, hoping to
acquire the entailed estate (DH 6:154, 205). Installed there, they were
responsible for the administration of justice at the local level (DH
6:219–20). Sources reveal that the judicial standard in such places could be
high indeed (DH 7:92–93). Rephrasing this within the analytical frame-
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 243
The Institutionalization of Real Property Rights
243
work of North we may say that the changed institutional setting of the
Reformation provided other incentives for career planning, changes which
supported the formalization of rights in general.
Commoners who became priests formed a mediating stratum between
the formal, document-based central administration and the informal village community. They proclaimed the law, be it divine or secular, and in
the later part of this period they also issued information on economic
development. The title of one of many books published during the time:
Agricultural Catechism (1782) is indicative (Skautrup 1953, 100).
The Lutheran church may well have been a “means of indoctrinating
the population with the Lutheran dogma of divinity of authority,” as a
recent Danish historian sarcastically phrases it (Jespersen, 2007). However,
the Lutheran dogma also provided all strata of society with a sense of being
responsible according to law, divine as well as national. This applied to the
king, who generally was charged with the task of providing “happiness” for
his subjects and specifically was admonished in writing to judge impartially
(DH 7:55–56, 59). Worship was performed in the national language, and
as worship attendance became a civil duty, the evangelistic message Sunday
by Sunday was forming the people (DH 8:357). While the model of
Roman Catholic formation of the lay people was confession (Morris 1989:
305f; 489–91), the Danish model became singing. A psalm book of highquality original Danish poetry became popular and has been rehearsed and
sung in school and church right up until the age of TV broadcasts. The
example below is a morning song:
My soul! Be fresh! Enjoy! let sorrow wither,
your bodily perianth is in God’s hand.
This very day He gives me strength and power,
that through my calling and position,
I duly serve my God and Father.
God, join hands with me and grant
the generous Holy Spirit thrive my vocational work.
Bless me, oh Lord, of your might!
If only I today, and every day as well,
in You and in my industry be satisfied!
—Kingo: Nu rinder solen op 1674, verse 4 and 5
It is perhaps more world oriented than the majority of psalms, but it
proclaims the layperson to be a recognized participant in a divine project,
an individual entitled to dispose of his resources. The vitality brought
about by Lutheranism went along with admonitory sermons on obeying
authority: “You have a mortal lord of manor as your master . . . yet later
Mystery of CapitalCRev
244
2/18/08
11:13 AM
Page 244
Erik Stubkjær
an overlord over lords, by the name Jesus Christ,” as an early Lutheran
bishop put it (DH 6:176). The words were directed towards the lower
strata, but Christian the Third, called “the priestly king” (DH 6:306)
abided by the same overlord, thereby reinforcing the legal institutions by
outlawing dual standards. His successors on the throne largely followed
suit in legal-economic affairs, as witnessed by advisors and the chancellery.
By about 1650, 47 percent of the land of the kingdom (not including
boroughs) was under crown administration, including church holdings.
Another 47 percent was owned by the nobility, while about 6 percent was
freehold. The land was structured into about 9000 townships, which were
made up by 920 manors, 70,800 copyholdings, and 4,800 freeholdings
(DH 7:118). Less than 1 percent of the population owned this land.
Interestingly for the further development, freeholdings were unevenly distributed across the country, being most common in periphery areas. In the
duchy of Slesvig, south of the kingdom proper, freeholdings were quite
common and we find a segment of larger peasants, who through generations provided bailiffs and sent their sons to cathedral or borough schools.
Peasants in this area managed to convert villeinage into a cash fee, and in
some townships they started a process to consolidate their share of commonly tilled land into parcels, which they could manage individually with
benefit.
By 1700, do we have real property rights in Denmark? The answer certainly seems affirmative; perhaps one could even say that we had a market
in land, even if a tightly regulated market. Tenant contracts, conveyance
deeds, and mortgages were recorded and enforced, at least in some places,
quite rigorously. However, what is nicely recorded and easily available for
the historian is perhaps only the fraction of peoples with the “best practice.” Still, property rights were far from comprehensive and exclusive.
King, landlord, and tenant were bound to one another by a host of rules,
contracts, and conventions. Finally, to the restrictions in the exercise of
property rights we must add the fact that less than 1 percent of the population actually had owner status.
4.3. The Enlightenment and the Land Reform of the Later
Eighteenth Century
Most people outside of the boroughs were illiterate, so economic development had to come from the upper strata of society. Around the 1750s the
leading advisors of the king had a power that later history dubbed “a government by Excellencies” (DH 9: 304–7, 311). These highborn characters
were self-confident in their position as governors of state affairs and were
convinced that the general welfare of the kingdom was dependent on their
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 245
The Institutionalization of Real Property Rights
245
efforts towards promoting “the common good.” Patrimonialism, the
exploitation of a position for private benefit, did occur in Denmark; however, predominant belief in the existence of congruent worldly and divine
kingdoms may help explain why a commitment to impartial service in
office predominated amongst those in power. Being self-confident in one’s
position was not restricted to the upper strata; the artisans, farmers, priests,
and civil servants of the time all had similar attitudes towards their own
positions. The German word Beruf, literally, vocation or calling, fits the
corresponding Danish term kald, and conveys much better than English
terms like “position” or “occupation” the way in which one’s work is conceptualized in the Christian worldview. However, at this time social mobility was virtually nonexistent. When mobility later emerged with
commoners occupying ever-higher positions in central administration, the
government of the Excellencies was gradually overturned.
The period was characterized by wealth brought about both by international trade and by agricultural experiments that were performed on
some of the manors, first in the duchies south of Denmark, and later on
crown land and noble manors in Zealand. For example, a new surveying
technology, the plane table, was applied in order to measure homogenous
pieces of land. Having valued the yield of every piece, the area of each
piece was carefully computed and parcels of regular shape were demarcated
for every farmer according to his share in the township yield. This radical
change in tilling practice was frequently opposed by the farmers, but the
general experience was that it was beneficial in the economic sense for all
parties. Some farmers became educated, and were identified as role models for their peers by poets writing in the spirit of Rousseau.
Some Excellencies participated in these experiments, bringing about a
public debate on these and similar issues. At the occasion of the king’s
thirty-second birthday in 1755, the general public was invited to prepare
treatises on “every subject that may serve the sustained flourishing of the
country.” The treatises could be handed in anonymously and were published over the course of the following decade (1755–1764). They created
a spirit of curiosity in economic and political affairs among the reading
strata, notably priests and other university-educated officials (DH 9:
334–42). The Royal Danish Agricultural Society of 1769 and other patriotic societies acted as forums of discussion, slowly transforming the “topdown” approach of the absolutist regime into a more participative one. In
terms of the analytical framework, the general institutional structure not
only tolerated, but also promoted the adoption of new knowledge on economic and other affairs.
During and after an interregnum marked by a king who suffered from
mental illness (dementia praecox), common people were able to gain
higher posts in central administration. A bloodless coup d’état installed the
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 246
Erik Stubkjær
246
crown prince Frederic the Sixth as the effective royal ruler until the death
of the insane Christian the Seventh in 1808. On May 13, 1776, shortly after
taking office, Frederic issued an order on the lifting of joint cultivation. The
order was based on previous experiments and further reforms carried out on
crown land, as well as on the debates over and outcomes of previous orders.
However, it introduced a new mechanism. While the former schemes left
the right of initiative with the landlord or—later—with a majority of the
tenants, the initiative was now given to whoever amongst them functioned
most effectively as an entrepreneur. A single tenant of the village was entitled to trigger a quasi-legal process by which his share was extracted from
the joint tilling of the township and consolidated into a few lots. The
process was based on the detailed mapping in scale 1: 4000 and on assessment of yield as described above. However, this individualization did not
imply the granting of ownership; rather, copyhold generally became hereditary and obligations were gradually transformed into cash fees.
The land reform process was conducted by a land surveyor, while the
assessment of yield was done by two village peasants, elected by the villagers themselves. The costs of the process had to be paid by the villagers,
and all township parties had to contribute to the costs, whether they
wanted to extract their share from the community or not. Claims were submitted to a three-person committee, which was chaired by the chief official of the county. The central administration (Rentekammeret) elected the
two other persons from amongst the local judges, higher officials or
nobles. Further claims were resolved by the Rentekammer, except for
claims specifically regarding title, which were to be handled by the ordinary courts. No tenant was forced to leave the cultivation community of
the township, but the ideal solution would be to spread the new production units equally over the township in order to minimize working distances and obtain parcels of regular shape. However, the township
community dealt not only with production matters, but also with other
community affairs according to customary and tacit rules. The desire to
keep close to the old, secure community is still visible across Denmark in
terms of the so-called star allotments, where boundary banks and hedges
radiate from the village center between the old farm houses to the township boundary.
4.3.1. SUMMARIZING
LAND REFORM
THE
FACTORS LEADING
TO
CHANGE
IN THE
What were the factors responsible for change during the land reform? As
suggested above, the widespread belief in two congruent kingdoms, the
worldly and the divine, was a large part of the social background. Thus, the
vocational attitude toward work and position that had been fostered by
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 247
The Institutionalization of Real Property Rights
247
Lutheranism remained, even when the divinity of the absolutist monarch
was questioned by a growing number of people (DH 10:39). Furthermore,
the royal decrees implied that contracts should be kept, even when a party
was not able to defend his rights by his own means and, moreover, that fulfillment of contract ought to be accomplishable by ordinary effort. This
concern was first held by commoners among the civil servants, but was
eventually voiced by the crown prince Frederic the Sixth as well.
It is generally held that the most important change of the reform
period was not the reallotment process, but rather an order given on
August 8, 1787, enforcing the economic rights of tenants in relation to
their landlords. This decree required that the estate of a tenant holding
should be assessed by an independent party at the death of the tenant or
other closure of tenure. The job of this independent party was to determine whether the landlord should be compensated for losses or whether
the estate of the tenant should be paid for improvements (DH 10:74–78).
Further, the fixing of obligations in terms of a cash fee was finally forced
through after several promptings. Governmental committees traveled
across the country, engaging in fierce negotiations with peasants and landlords to establish a fair deal (DH 10:82).
Experience demonstrated that the new organization of the means of
production was effective. This was due not only to the effects of allowing
individuals to till their own land, but also to the fact that resources were
used more efficiently. Landlords themselves benefited from the introduction of new crops and methods of cultivation. Some were prepared to
alienate tenant holdings in order to invest in new equipment. Moreover,
provisions were made for those among the villagers who could not cope
with the new individualism, and who could potentially have fuelled riots,
by the installment of poor-law authorities in 1803 (DH 10, 114–15).
Finally, general education was introduced, and by the 1850s illiteracy was
largely eradicated.
Did we have real property rights by 1800? By all means: About half of
all holdings were acquired by tenants as freeholds (DH 10, 90–91), and by
1850, only 1 percent of land was still in joint cultivation, mostly on moors
and peat soil (Thomsen 1988, 115). An independent, self-sufficient farming class developed, which was able to compete internationally in agricultural products by the end of the nineteenth century.
4.4. The Extension of Real Property Rights to Lower
Social Strata
In Denmark, two quasi-parliamentary advisory assemblies were instituted
by 1835. The assemblies acted as a melting pot for ideas on how to
Mystery of CapitalCRev
248
2/18/08
11:13 AM
Page 248
Erik Stubkjær
improve the kingdom, just as the contributions at the occasion of the
king’s birthday had done almost a century before. The self-conception of
“patriot,” the term preferred over “citizen,” valued a concern for “the
common good” (Damsholt 1997). Apparently, this did not block economic development, but envisaged development in a more collective sense
than that of English liberalism.
During the latter half of the 1800s, the guild system was abolished,
boroughs were expanded through the earthwork bounding the cities, and
industrialization slowly emerged. New railroads winded their way through
the country and in agriculture the effects of the land reform were consolidated. The farmers established associations, such as dairies and bacon factories, in order to process their agricultural products, and in so doing
became competitive in the world market with these products. Although
landlords still played an important role in society, the money economy and
the improvement of education gradually diluted their privileges. During
the first quarter of the 1900s, their entailed property was converted into
“normal” holdings. Many smallholdings were established through this
process, thereby spreading access to real property rights.
By the end of 1800s, industrialization brought strikes and street fights.
The general practice of handling societal problems through associations
operated here as well. By 1899 the workers’ union and the employers’
association reached a general agreement (Hovedaftalen) regarding the
rules of the game, and some years later set up a quasi-legal body
(Arbejdsretten) for the purpose of arbitrating in issues of interpretation of
the agreements. The workers’ union succeeded in keeping a high degree of
organization amongst the workers, including the skilled workforce, which
gave them a tremendous advantage in labor negotiations. Through the
1900s they used this bargaining position to direct a share of the surplus of
production to their members, thereby enabling them to acquire their own
detached houses during and after the economic growth of the 1960s.
Again, access to real property rights was spread, and now to all strata of the
society, thus enabling them to earn their own living. In terms of the analytical framework, the association of workers effected an institutional transaction (Bromley), which redistributed production surplus.
In general, the rise in quality of living conditions may be attributed to
industrialization, scientific and technological developments, and other factors that in principle are available to every country. However, what specifically explains the Danish development, especially the spread of property
rights to a substantial number of inhabitants?
In Denmark, it is fairly common to attribute the “Danish” way of
development to Grundtvig and the cooperative movement (andelsbevægelsen) (see, e.g., Ingemann 2002; for a detailed discussion of the
political economy of Grundtvig, see Ingemann 1997). Grundtvig
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 249
The Institutionalization of Real Property Rights
249
(1783–1872) was a priest, a poet (who contributed to about one third of
psalms of the Danish Psalmbook) and above all a spiritual animator.
Through studies, writings, and speeches he articulated a worldview that
was largely accepted and perpetuated by the following generations. Deeply
involved with Christianity, Grundtvig wrote psalms of tremendous clarity
and depth. However, this very involvement in Christianity made it possible for him to question its central tenants, and to consider possibilities
lying outside the limits that it imposed. He was thus repeatedly in opposition to the established church.
To give an idea of his poetry, I set out a Pentecostal psalm, that is: a
hymn to the Holy Spirit and its effects. The psalm paints through the first
verses a picture of Danish nature, the farmers’ fields and harvest, sun and
birds, forests and meadows:
…
and lovely trickles at our stepthrough the meadow the brooklet of the
flood of life
—Grundtvig, I al sin glans nu stråler solen, verse 3 (1843)
It would have been picturesque, had it not vibrated and eventually
burst into a crescendo of praise that included all tongues, including pagan
and Jewish. Like Kingo, he relates the everyday and the transcendent, but
while “everyday” for Kingo was duty in the presence of the king, for
Grundtvig “everyday” was cultivating the created world, especially the
countryside. Grundtvig raised the questions, what was of value in the
North before Christianity? Did truth only come by Christianity? The
answer he developed through countless drafts was that the mythology of
the North did contain truth and, furthermore, that this truth was a paradigm of the life that the people of the nation were to perform. Having
come to this realization, Grundtvig gave up the “sweet dream” that the
whole Danish people would be “deeply Christianized.” He envisioned
instead the “national spirit” as the uniting bond, as it manifests itself in
language, historical narratives, and mythology (Thanning 1971, 62–74,
66).
Lutheran Christianity was perceived individualistically, as a
“Christianity of penance.” Therefore, it did not answer the questions
raised by societal life, for example, the question of how the work of creation was to be redeemed. Grundtvig echoes the statement of Kingo that
all members of the people “with heart and soul perform their trade, each
in his circle, yet intensely participate in one another’s pursuit, as parts of
one body” (quoted by Thanning 1971, 69). Significantly, however,
Grundtvig replaces Kingo’s hierarchy of God, king, and estates with interrelated circles while conceiving of heart, soul, and compassion for the com-
Mystery of CapitalCRev
250
2/18/08
11:13 AM
Page 250
Erik Stubkjær
mon good as Kingo did. The enemies are the spirits of the (GermanRoman) emperor, the Catholic pope, and rationalistic enlightenment that
kills heart and spirit. The objective was to unfold the Nordic spirit by
empowering each and everyone to perform noble deeds (70, 97–99).
Grundtvig viewed the peasants’ work as the model of a noble deed, a view
which at that time was definitely not the dominant opinion. The former
tenant thus became the key factor of development and hence the task was
to arrange that every Dane could be economically self-sustaining through
ownership. Furthermore, teaching itself should not only convey practical
knowledge, but also lift the heart.
Grundtvig’s gift was twofold. First, he pointed to the existence of legitimate values outside of established Christianity. In so doing he was able to
inspire those who were indifferent or even hostile to the church and related
authorities. Second, he did this in a way that did not offend those who
were comfortable with the more traditional Christian life. The goal of all
of this was to set free and empower the poor so that “few own too much,
and less too little.” Later this program came to fit the interests of members
of the workers’ union in such a way that the workers’ movement became
moderate and political, rather than radical and violent. The social democratic party in a sense took up this idea of pursuing the common good.
Indicatively, the title of its political program in 1934 was “Denmark for the
people.”
Grundtvig developed these ideas in the 1830s, which meant that the
vision he provided was able to fill the institutional vacuum that opened up
during the fairly uneventful collapse of absolutism. The Constitution of
1849 provided, among other rights, freedom of association. This was just
the first occurrence of a correspondence between Grundtvig’s ideas and
historical events. His position that truth could be found outside
Christianity and that it should be pursued for the common good inspired
Danish politics for more than a century, as we shall see detailed in section
5, and the emphasis on the common good made it possible for low-income
families to become home owners.
4.5. Development Factors in the Danish Way of
Institutionalizing Property Rights
How did the formal system of property rights come into being? A number of factors come to mind: (a) impartial service predominated and thus
dual standards were ruled out, (b) resources of the realm were managed
bureaucratically and yet effectively, and (c) the dominant elite actively
defended the rights of the lower strata. These factors are supported by
the following:
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 251
The Institutionalization of Real Property Rights
251
• Roman clerks and bishops brought formalization of agreements in
writing, cathedral schools and universities, subdivision of the realm
into parishes, and the habit of restricting the powers of the king
through coronation charters.
• The pious king, Christian the Third, restored law and order and
installed a Weberian bureaucracy, the Chancellery, after the
Reformation in 1536 in order to manage a substantial part of the
natural resources of the realm: the former church property. He thus
institutionalized what became a path of dependency, which through
centennial revitalization lasted at least to the present age of neo-liberalism and materialism. He, his followers on the throne, and the
surrounding elite ruled out dual standards and in the late 1700s
even insisted that tenant rights be respected long before the notion
of the welfare state was conceived.
• The feudal system implied the existence of unequal social strata.
However, inequality did not imply stagnation: Out of the hierarchical structure came the message that humankind was entitled to
“join hands with God” in pursuing its secular duty. Thus, ordinary
people became more actively involved in societal affairs as a result
of different factors over three centuries: their forced participation in
Lutheran sermons in the late 1600s; the consent of an absolutist
crown prince to a shared effort in search of the common good in
the late 1700s; and general education as well as economically capable societies and associations during the 1800s.
This summary, although provisional in nature, corroborates the emphasis
in the previous section on religion as a determinant factor in long-term
economic performance, as especially factors (a) and (c) above are strongly
motivated by the Christian belief system. One may question whether this
is a valid retelling of Danish history. Though the present author may be
inclined towards religious explanations, the evidence here is either directly
drawn from or is consistent with standard historical scholarship. Historians
of the former half of the twentieth century may be guided by social-democratic (center-left) values and bypass (liberalist) economic thinking, but
they could not invent the noble deeds of the past.
I do not claim that Danes were or are more pious than other people.
First, a similar economic development occurred in neighboring countries.
Next, Denmark is situated at the semi-periphery relative to the shifting
centers: the Netherlands, the British Empire, and the U.S. Through international trade and formation journeys of the young nobles, new ideas and
experiences were easily available, and the restricted size of the country
made it a manageable task to implement them. Furthermore, the Danish
Mystery of CapitalCRev
252
2/18/08
11:13 AM
Page 252
Erik Stubkjær
realm decreased during the period, which in combination with the meritocratic bureaucracy tended to ensure that capable civil servants were implementing royal orders. In sum, unique advantages supported the impact of
the factor of religion.
5. Land Registration and the Role of Mortgaging
Hernando de Soto points to the importance of formalization in terms of
land registration for the purpose of bringing “dead capital” to life through
mortgaging. In the following, I compare this line of reasoning with Danish
evidence of a more administrative-technical nature.
5.1. Procedures and Registration of Transaction in
Real Property
Deeds of conveyance and mortgage had to be announced at governing
assemblies, the “things,” already before the Danish Law of 1683. At that
time, records were established at the courts. After a reading of the deed,
extracts were made in chronological registers of conveyances and of mortgages, respectively. From 1738 on indexes relating names to the chronological entries were introduced and established at every court, and by 1805
it was required that recordings take place at the local courts (Buhl 1994,
19–22).
By 1844 a new cadastre was put into effect for Denmark. It was based
on the maps and recordings of the land reform, duly revised and supplemented. It located and identified practically every parcel in the country and
provided a new basis for taxation. However, the tax base of the old cadastre from 1688 was still kept, as its failure to reflect the real value of the
property units had been taken into account in prices paid by buyers
through the ages. The new cadastre was introduced according to suggestions by the advisory assemblies, which were instituted by 1835.
An assembly proposal made in October 1842 for the purpose of
improving land registration was motivated, among other things, by the fact
that the proposer himself had received an incorrect statement on mortgage
deeds from a local court. He also pointed to the fact that the new cadastre
would make it possible to establish indexes of property units, and proposed
that such indexes be introduced along with the prescription of uniform formats for land registration. Furthermore, he suggested that every document
regarding an immovable entity apply the new cadastral identification.
These proposals “will be as important for the security of property rights as
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 253
The Institutionalization of Real Property Rights
253
for the corroboration of credit in general” (VST, 1842: 768). The resulting act on indexes for conveyance and mortgage registers prescribed that
the indexes were to be introduced only “gradually,” that is, at the discretion of the person in charge (Indenrigsministeriet, 1863. Fr. Ang.
Registrene over Skøde- og Panteprotokollerne, 28. Marts 1845). The
application of the new cadastral identifier was convenient for all and further stressed through a request that the conveyance deed of a subdivided
property unit be annexed with a cadastral map of the property concerned
(Indenrigsministeriet, 1863. Pl. 21. April 1848). This and similar rules
kept the recordings of immovable property in Denmark coordinated from
the 1840s on, even when such recordings were performed by different
authorities (for example, for purposes of taxation, agriculture, or justice).
A reform of the land registration of the local courts was later accomplished
by the Law on conveyancing (Tinglysningsloven) of 1926.
Considering these incidents, and drawing also on details not reported
here, it appears that mortgaging was common by the 1840s, that mortgages were probably recorded with the same degree of perfection as titles,
and that forced sales in case of debt default were practiced. The issue of
credit and mortgaging is mentioned on a par with real property rights in
general in the proposal of 1842, as well as during the deliberations and in
the documents pertaining to this proposal. It appears that both are important, and were, in a sense, perceived as aspects of the same institution of
property rights.
Formalization can be expensive, and in recent years warnings have been
issued against putting too much emphasis on the importance of formalization by means of information technology (Holstein 1996; de Soto 2000,
184–87). Also, in addressing the degree of formalization required in a
given context, Steven Hendrix calls for a “situation-specific examination of
the [conception of] property and design of any property securization plan.
Furthermore, the expenses of titling must be weighted in each given locality against the increased level of security titles provide over existing documents which also evidence ownership rights and interests” (Hendrix 1995,
191; italics in original). A rephrasing of the latter sentence fits the reasoning of the Danish assembly of the 1840s: The assembly majority agreed
that the expenses of establishing indexes of property units had to be
weighted across each registration office against the reduced probability
(increased security) of issuing defective certificates.
Thus, we can conclude that while the formalization that can be provided by information systems is important, it is apparently not the key
issue. However, formalization also tends to exclude person-specific dependencies, and as will be explained further below, it is actually this aspect of
property rights that will normally be the important issue.
Mystery of CapitalCRev
254
2/18/08
11:13 AM
Page 254
Erik Stubkjær
5.2. The Emergence and Role of Mortgage Associations
Mortgaging was not a key factor during the land reform, as the reform was
initially an individualization of cultivation. However, the relief of copyhold
was a political issue and suggestions for mortgage schemes were popular,
frequently combined with requests for some governmental support (DH
11, 356). The government was not in favor of the support for a number of
reasons; including the fear that such support would be misused by some
landlords to charge excessive prices (Møller 1997, 91). Nevertheless, the
tenants gradually gained ownership. By the end of the 1840s the number
of copyholdings was reduced to 21,000. Often, the landlord found it convenient to let a mortgage in the holding be part of the charge. Due to the
existence of such personal relationships, the conditions for the new owner
could thus be more troublesome than a loan offered by an impersonal
enterprise.
A mortgage association was established in 1796 for house owners of
the city of Copenhagen. A lasting principle of this effort was that the direct
contact between a mortgagor in need of money and a mortgagee was
avoided and replaced by the mediation of an association. The association
issued mortgage bonds, which were secured by mortgage deeds, and sold
the mortgage bonds at the Exchange (which had been in operation since
the 1600s). While this arrangement is normally seen as the start of mortgaging in Denmark, the actual procedure was generally quite complicated,
and most importantly it was not yet available to the farmers. A public
debate on the issue resulted in the establishment of mortgage associations
for Danish landowners (Møller 1997, 89; on present practices, see
Moody’s 2002). English liberalism did enter into the debate, but it was the
cooperative movement, marked by men like Robert Owen, that apparently
best suited the Danish “patriotic” attitude to economic affairs. The
Constitution of 1849 allowed for the free establishment of associations,
and this lead to the passing in 1851 of a statute law, which provided a
framework for the existence of regional associations with rather specialized
portfolios. In the following years a number of these mortgage associations
popped up as well as savings banks for peasants. The cadastral identification of property units and the fairly well-kept land registers provided a
robust basis for the mortgage business. A recent account of the role of
mortgage associations over a two-hundred-year period offers the following
survey:
Møller et al. find the cooperative mortgaging scheme most relevant
during the 1800s. The society in that period made the transition from a
barter economy to a money economy. The mortgage associations were able
to compensate for defects of the capital market in terms of monopolies,
asymmetry of information, and lack of public control, and this was much
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 255
The Institutionalization of Real Property Rights
Year
Savingbanks
Banks
Mortgageassociations
1840
3
0
5
1880
30
12
28
1920
21
56
36
1960
19
27
36
1994
67
255
118
Deposits in banks, saving banks, and mortgage banks (percent of gross factor incomes).
From Møller 1997, 61.
less needed during the 1900s. Generally, they warn against attributing too
much importance to the fact that mortgage loans were provided by associations as opposed to other organizational structures, as alternative lending opportunities in terms of saving banks and ordinary banks were
available during later periods.
Perhaps one could suggest that mortgaging gained its most significant
role for property development during the period 1960–80, where the
number of owners of detached houses expanded to include low-income
families with stable incomes.
1600s: Crown owned about half, nobility the other half (~2000 persons out of 600,000)
1800s: Of the 60,000 farms, about half were acquired by tenants as
freeholds
2001: 1,130,241 detached houses and farm houses, owned by individuals (out of 5.3 million)
The mortgaging scheme was robust across social strata as it was not
generally dependent on the creditworthiness of the mortgagor, aside from
whether or not the mortgagor had a stable income. This made housing
construction cheaper, as banks were prepared to supply young prospective
homeowners with temporary loans that enabled them to complete the
building process all at once, because the loan would be returned by the
proceeds of the subsequent mortgage. Finally, it assisted manifestly in making Danish urban planning and development a quasi-rational process, as
the hypercautious mortgage associations requested a certificate (from chartered surveyors) that the intended construction was in due accord with
public as well as private restrictions (spatial plans, easements, etc.). As the
Mystery of CapitalCRev
2/18/08
256
11:13 AM
Page 256
Erik Stubkjær
majority of people were dependent on mortgage loans, the same majority
was forced to subscribe to mortgage conditions and thus to spatial planning measures (Stubkjær 2001).
Summarizing this section, mortgaging existed in Denmark well before
and during the land reform. It is reported to have enhanced the landlord’s
investment in equipment, but was not mentioned as a prerequisite or active
element of the land reform. Moreover, mortgaging as an impersonal and
bureaucratic/formalized activity, a clear benefit for new owners, appeared
only a few generations after the land reform. Danish economists find that
the cooperative style of Danish mortgage associations fit the values and
needs of nineteenth-century Denmark better than a more market-oriented
scheme. The impersonal mortgaging scheme financed the widespread
extension of real property rights after the 1960s and contributed to a successful urban development. The effects of mortgaging on economic development (of the construction sector) are recorded only after the 1960s. The
specific importance of mortgaging for general economic development is
thus not corroborated by the Danish evidence, but this does not imply that
mortgaging was not of importance.
6. Conclusion
The Danish evidence confirms the attention Hernando de Soto has called
to the importance of a “staircase” of real property rights for the humbler
members of society. In Denmark, a small and in many respects homogenous country, it took well over two hundred years of more or less conscious efforts to expand real property rights to a substantial fraction of the
humbler strata. The development from about 1750, the “construction” of
the staircase, took its point of departure from a governmental and judicial
structure that had already been bureaucratic in the positive Weberian sense
for about two centuries and that retained this quality throughout the
period under investigation here. Development was supported by the fact
that basic notions like “the common good” and the idea that work is a
vocation remained constantly meaningful and inspiring, while the context
of these notions moved from divine absolutism via participation in redeeming the created world to a Social Democratic “Denmark for the people.”
The Danish evidence, however, only partly supports de Soto’s concern
for the formalized property system as a development factor, perhaps due to
the clean bureaucracy that was at work from the start. The institution of
property rights was indeed further formalized throughout the period, but
the formalization came along the road. Formalization did make a difference as it introduced an impartial party, the not-for-profit mortgage associations, between mortgagor and mortgagee.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 257
The Institutionalization of Real Property Rights
257
This Danish evidence was put into an international perspective by relating it, in section 3, to Douglass C. North’s model of long-term economic
development. Some of the factors of development identified by North
were discussed. Uniform Christian religion and uniform bureaucratic
administration ruled both in Denmark and in South America, but these
factors do not unconditionally hamper economic development. The difference in economic development between Denmark and South America
has here been related to the Christian proclamation of the competency of
the layperson and of the occurrence of true values outside the established
church, which in Denmark took place some hundred years before it
became part of the Roman Catholic doctrine that prevails in South
America.3
The paper suggests that North’s model of explanation, with its focus
on socially constructed institutions, holds not only for the Americas, but
for Denmark and perhaps other Northern European kingdoms as well. The
difference in economic development between Denmark and South
America was related to the Christian proclamation of the competency of
the layperson and the social costs of creating associations. Within the context of the hegemony of liberal capitalism, this retelling from Denmark
offers an alternative, as the “shared intentionality” of the parties of the
Danish society was not directed at economic utility, but at “the common
good.” More specifically, it was directed at a conception of real property
rights that implied a strong concern for common affairs outside the individual unit of exclusive property rights. In business terms, the stakeholder
view widely overruled the shareholder view. Factors of development furthermore include considering work a vocation, and actively defending the
rights of the lower strata. These norms all fit within the Christian worldview and were in fact derived from this world view during decisive parts of
the period.
Mention is made, that both Grundtvig and later the Second Vatican
Council played a role in pointing to the existence of legitimate values outside of established Christianity. Moreover, Grundtvig conceives members
of national societies as “parts of one body.” He thereby again anticipates
events, such as an emerging concern for “the body metaphor for society.”
(Jomo and Reinert 2005, ix).
The cord of institutional change that we have followed through
Danish history has a core made of information systems: Pergament diplomas and heavy ledgers at the outset, computer systems today. Paperwork
3. While the pope in 1922 welcomed the movement “Catholic Action” and other initiatives of “the laity . . . when, united with their pastors and their bishops,” still in 1928, the
Church considered itself “a perfect society” with corresponding duties for social affairs (Pius
XI, 1922, paragraph 54, 58; 1928, paragraph 6).
Mystery of CapitalCRev
258
2/18/08
11:13 AM
Page 258
Erik Stubkjær
comprised the base for the institution of real property rights, and cadastral work further specified the relations required for the formation of
Searle’s hierarchy of status functions. Through centuries, careful recording of facts, agreements, and decisions based on publicly known rules
made the economic aspect of life more predictable and hence more prosperous. Generally, through the centuries, work was considered a calling
and because of that, bureaucracy did not constrain the creative among
the bureaucrats.
R E F E R E N C E S
Buhl, Lars, Asbjørn Grathe, Knud Lund, and Hans Willumsen, eds. 1994. Knud Illum:
Tinglysning [Land law and registration] Jurist- og økonomforbundets Forlag, Kbh.
Bundesverband der Katholischen Arbeitnehmer-Bewegung Deutschlands. 1977. Texte zur
katholischen Soziallehre [Documents on Catholic social doctrine] Die sozialen
Rundschreiben der Päpste und andere kirchliche Dokumente [Social encyclica of the
popes and other eclestiastic documents]. 4. Auflage.
Damsholt, Tine. 1997. Fædrelandskærlighed og borgerånd [Patriotic love and civic spirit].
Uddannelse nr.7/97. Copenhagen: Undervisningsministeriet.
de Soto, Hernando. 2000. The Mystery of Capital: Why Capitalism Triumphs in the West and
Fails Everywhere Else. London: Bantam.
Danmarks Historie (DH) [history of Denmark]. 3rd ed. Edited by Hal Koch and John
Danstrup. Copenhagen: Politikens forlag. 14 vols. 1977–78 . A short Danish history in
English is available at http://www.denmark.dk/en/menu/AboutDenmark/History/.
Goodin, R. E., ed. 1998. The Theory of Institutional Design. Cambridge: Cambridge University
Press.
Halsall, Paul. 1998. Frederick I Barbarossa: Affirmation of the Right of a Priest to Make a Will,
1165. http://www.fordham.edu/halsall/source/1165Prstwill.html.
Hendrix, S. E. 1995. “Myths of Property Rights.” Arizona Journal of International and
Comparative Law 12, no. 2: 183–223.
Holstein, L. 1996. “Towards Best Practice from World Bank Experience in Land Titling and
Registration.” Paper, presented at the International Conference on Land Tenure and
Administration, Orlando, Florida, November 1996. http://www.surv.ufl.edu/publications/land_conf96/HolsteinPD.PDF.
Ingemann, Jan Holm. 1997. “Note om N S F Grundtvigs politisk-økonomiske forestilling”
[A note on N. S. F. Grundtvig’s conception of political economy]. Arbejdspapirer,
Institut for Økonomi, Politik og Forvaltning, 1997.
Ingemann, Jan Holm. 2002. “Agricultural Policy.” In Consensus, Cooperation and Conflict:
The Policy Making Process in Denmark, ed. H. Jørgensen, 210–31. London: Edmund
Elgar.
Jensen, Hans. 1936. Dansk jordpolitik 1757–1919. Vol 1. Copenhagen: Gyldendal.
Jespersen, Knud J. V. 2007. “Reformation and Absolutism: The Spiritual life.” Ministry of
Foreign Affairs in Denmark, About Denmark, History. http://www.denmark.dk/en/
menu/AboutDenmark/History/ReformationAbsolutism/TheSpiritualLife/
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 259
The Institutionalization of Real Property Rights
259
Jomo, K. S., and Erik S. Reinert. 2005. The Origins of Development Economics: How Schools
of Economic Thought Have Addressed Development. New Delhi: Tulika, and London: Zed
Books.
Moody’s Investors Service. Danish Mortgage Bonds (Realkreditobligationer): Highly Secure
Financial Instruments. Accessed 5/21/2002. http://www.realkreditraadet
.dk/C1256A76002DE477/webDocsByID/
C0D6483B31198637C1256BC000358163/.
Morris, Colin. 1989. The Papal Monarchy: The Western Church from 1050 to 1250. Oxford:
Clarendon.
Møller, Michael og Niels Chr. Nielsen. 1997. Dansk realkredit gennem 200 år [Danish mortgage through 200 years]. Copenhagen: BRFkredit.
North, Douglass C. 2002. Institutions, Institutional Change and Economic Performance.
Cambridge: Cambridge University Press.
Offe, Claus. 1993. “Designing Institutions for East European Transitions.” Public Lecture
No. 9. Budapest: Collegium Budapest/Institute for Advanced Study. http://www.colbud.hu/main/PubArchive/PL/PL09-Offe.pdf.
Ostrom, E. 1991. “Rational Choice Theory and Institutional Analysis: Towards
Complementarity.” American Political Science Review 85, no. 1: 238–43.
Ostrom, E. 2002. “Institutional Analysis and Design.” Micro. syllabus for workshop in political theory and policy analysis. http://www.ipsonet.org/syllabi/elinor-ostrom.pdf.
Pius XI. 1928. Encyclical Mortalium Animos [On religious unity]. January 6.
http://www.fordham.edu/halsall/mod/1928pius11-mortan.html.
Pius XI. 1922. Encyclical Ubi Arcano Dei Consilio [On the peace of Christ in his kingdom].
December 23. http://www.papalencyclicals.net/Pius11/P11ARCAN.HTM.
Rose, Flemming. 2003. “Ideologisk debat: Kapitalismens filosof” [Ideological debate: The
philosopher of capitalism (Ayn Rand)]. Morgenavisen Jyllands-Posten, 11 June.
Searle, John R. 1995. The Construction of Social Reality. London: Penguin.
Second Vatican Council. 1965. Gaudium et Spes [Dogmatic constitution on the church in the
modern world], 7 December.
Sendler, E. 1988. The Icon: Images of the Invisible. Oakwood Publications. Originally published 1981 in French by Editions Desclee de Brouwer, Paris.
Skautrup, Peter. 1944–1953. Det danske sprogs historie (The history of Danish language). 3
vols. Copenhagen: Gyldendal.
Stubkjær, E. 1999. “Cadastral Research: Issues and Approaches.” Kart og Plan 59, no. 3:
267–78.
———. 2001. “Spatial, Socio-economic Units and Societal Needs: Danish Experiences in a
Theoretical Context.” In Life and Motion of Socio-Economic Units, ed. A. U. Frank, J.
Raper, and J. P. Cheylan, 265–79. No. 8 in the GISDATA series. London: Taylor and
Francis.
Thanning, Kai. 1971. For menneskelivets skyld—Grundtvigs opgør med sig selv [For the sake
of human life—Grundtvig’s self-encounter]. Copenhagen: Gyldendal.
Thomsen, Carl. 1988. De danske landboreformer i u-landsperspektiv [The Danish land reforms
in a third world perspective] Bol og By 1988, no. 2: 107–30. Odense: Landbohistorisk
Selskab.
Viborg Stænder Tidende (VST). 1834–1849 [Tidings of the Viborg Assembly]
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 260
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 261
A Case for Simple Laws
Andrew U. Frank
12
Postscript by Carlos Alejandro Cabrera Del Valle
1. Introduction
In an article with the title “The Economist versus the Terrorist” the
Economist stated about Hernandez de Soto: “he believes that most poor people, given the chance to participate fairly in the capitalist system, would do so
rather than stay outside” (2003). Why laws of ownership in land, land registration, and mortgages are not used and do not have the effects they have in
developed countries is the question I will try to answer in this chapter.
Laws are not enough to produce the desired benefits of transformation
of wealth in capital. Laws are blueprints for others to use; only if they are
used do they produce benefits. The conversion of wealth represented in
land and improvements of the land—the buildings and other installations,
the infrastructure, and so forth—into capital requires that several actors
understand the law and use it. When we concentrate on land, we find that
capitalization requires a cooperation of land registration, banking system,
and courts of law. For effective utilization of the opportunities afforded by
the law a general level of understanding of legal issues are necessary; the
legal system must correspond in complexity to general education and legal
knowledge available. Checking that the rules are in place is not sufficient;
one must also investigate which other legal or social rules make it difficult
to use the positive rules of the law.
I concentrate here on land and land ownership because these are the
major assets of a country where much of its wealth is concentrated. Land
(and the buildings on it) is a primary production factor and its capitalization in developed countries is often an order of magnitude larger than the
GNP. Once this wealth is unleashed, resources for massive investment
become available and development can be financed.
The chapter is structured as follows. The next section details de
Soto’s idea of transformation of wealth into capital. It details the chain
261
Mystery of CapitalCRev
262
2/18/08
11:13 AM
Page 262
Andrew U. Frank
of participants necessary to effectuate this transformation and details the
obstacles which are often added to the path, increasing the cost of capitalization. Section 3 describes the “social construction of reality” of John Searle
and its contribution to the formation of capital. Section 4 then describes capitalization and its practices, and section 5 lists the impediments typically
found. Section 6 assesses the cost of complex legal rules for the developed and
the third world. The last section suggests methods to advance the process of
capital formation in third world countries, reviewing the European history.
2. De Soto’s Concept of Capitalization
De Soto has pointed out eloquently that the poor countries of the third
world are very rich but lack methods to transform this wealth into capital
that then can be used to fuel economic development (de Soto 2000).
2.1. Risk as an Impediment to Capitalization
De Soto observed two cities in Peru separated by a river: one of the two
cities was prosperous, contained many multistory buildings, where shops
were installed on the ground floor. The other city was essentially a shantytown, with most commerce organized as street vendors. The differences
between the two cities were striking, but effectively the only institutional
difference found was that one had a working system of land registration and
the other not. In the town with the working land registration, people felt
secured in their property rights in land and were able and willing to invest
in improvements on the land. They built substantial buildings to house family dwellings and opened shops and made further longer-term investment in
equipment. Such activities create employment opportunities and start the
cycle of economic prosperity. In the town without registration of title to
land, people felt insecure and were not willing to make long-term investments in fixed assets like buildings and installations. People tried to eke out
a living with short-term investments in mobile equipment, which has lower
economic yields and does not lead to prosperity (de Soto 1989).
2.2. An Economic Theory with Transaction Cost
The tale of the two cities demonstrates a simple aspect of economic reality:
the high cost of risk, which is not sufficiently considered in many social
projects. Classical economic theory of free markets, going back to Adam
Smith (1776), assumes three basic simplifications:
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 263
A Case for Simple Laws
263
• Transaction costs are zero; the cost of buying and selling are negligible.
• All participants in the market have complete information about all
other transactions; specifically they know the quantities and prices
obtained by other sellers and buyers.
• No market participant has the power (or the market volume) to
influence the market.
These assumptions are clearly simplifications and perhaps realized in a
farmers’ market; they are not encountered in important markets today.
These assumptions are necessary to construct a powerful theory in which
substantial laws obtain. Markets lead to prices that balance the offer and
the demand, and the price of goods equals their production cost and their
utility; overall, ideal markets lead to optimal common wealth— the socalled Pareto optimality (Samuelson 1992).
Real markets have transaction costs, and Douglass North has shown that
the classical theory can be extended (North 1997). In a transaction several
types of risks are involved: risks with obtaining the goods in the correct
quantity or quality and their usability for the intended purpose, risks in the
assumption about the future and the value of the goods later, and so forth.
Risk is reduced by institutions. North uses the term “institution” to
describe the aggregate of legal and social rules, customs, and business traditions that regulate the economy. For example, marriage and ownership of
land are institutions in this sense, but so are insurance, stock exchange, and
the law in general. Institutions consist of rules and procedures to execute
and enforce them. North argues that societies develop institutions to
reduce cost of transaction. This makes the economy more effective and
allows development, through reinvestment of the saved expenditures, and
ultimately leads to a higher standard of living. North (1966) and
Eggertsson (1990) give numerous examples of how the development of
institutions leads to economic development; they also contrast comparable
economies and argue that differences in the institutions explain the differences in their economic development. The example of the two cities by de
Soto fits well in this schema of explanations: the registration of ownership
of land reduces the risk involved with investing in land and the cost of realestate transaction, and therefore improves allocation of (land) resources.
2.3. De Soto’s Argument for Capitalization
A standard explanation for the lack of development in third-world countries is their lack of capital to pay for investments. De Soto starts with the
Mystery of CapitalCRev
264
2/18/08
11:13 AM
Page 264
Andrew U. Frank
observation that the poor countries of the world have enormous wealth
accumulated in their land, buildings, and infrastructure. He assesses with
detailed surveys the aggregate value of land and buildings and the resulting figures are astonishingly high. The accumulation of investments of
labor to improve the land and make it more productive over long periods
of time have created substantial wealth, which is much larger than the
often-discussed debts of the poor countries of the third world.
De Soto through his novel observations concludes that it is not wealth
that is lacking in countries with low standards of living and low productivity. Comparing with the developed world where higher, but not substantially higher, levels of wealth can be found, he identifies the lack of capital
as the major limitation. Capital is created in the developed world by bringing the existing value fixed in land and improvements on land into the capital market. The investment fixed in land and buildings can be “liquefied”
and reconverted in capital that can be invested again. This reduces the need
to import capital from other countries with all the dependencies it creates.
Development can be fueled by the improved allocation of capital to
productive investments. This can be compared with the historic development in Europe during the seventeenth, eighteenth, and nineteenth centuries. The center shifted from England, then to the Netherlands, and
finally to Germany. This shift can be explained by an improvement of the
respective capital markets, which started with a primitive form of capital
markets in England.
One might ask where the capital comes from. My tentative answer is
the need for the transfer of value earned earlier in life towards old age. In
traditional societies, “insurance” for old age is founded in social institutions, primarily in the family. Money earned earlier in life is invested in raising children who then have an obligation towards their parents when they
are old. Investment can be made in improving the farm, which is then
worked by a son who has an obligation to support the older generation.
Both methods allow investing early life earnings to pay for old age, but
include risk and are not always possible. Modern societies have created
insurance, pension, and retirement funds, which are savings productively
employed and later repaid to and consumed by retirees. Capital is put to
the most effective use.
Countries in the third world lack opportunities for secure investments,
other than in the family or the narrow social group of trust. Capital cannot be invested locally and must be exported to the global capital markets
of the developed world; capital is not available locally, where needed. The
inefficiency of the capital markets in the developing world is one of the
major impediments to development. It is often estimated that export—
often clandestine and even illegal—and import of capital for third-world
countries are of the same order of magnitude.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 265
A Case for Simple Laws
265
One could argue here that development outside of capital markets is
desirable and start a discussion of the shortcomings of the capitalist system.
Amartya Sen has argued convincingly for the importance of the freedom
to trade and markets as part of fundamental human freedom (Sen 2000).
De Soto argues for the conversion of the wealth found in land and buildings to capital that can be used effectively for further economic development. This is a very specific but important part of economic freedom.
3. John Searle’s Social Construction of Reality:
The Mechanism to Convert Wealth in Capital
The conversion of physically existing wealth to capital is through social
institutions. A piece of land that can be used for agricultural production
or a building that contains apartments for families to live in is valuable as
a means of production and has value as such. It is useful to separate here
the difference between the cost of producing something and the productive value of the same object. In perfect markets, cost and value are
the same. In our imperfect world, unwise investments with have high
cost and little productive value in the end are possible and, unfortunately,
frequent.
The market value of an object is—roughly speaking—its productive
value minus the transaction cost. If the transaction cost is not zero, trade
will only occur if the difference in the benefit from the current owner to
the new owner is larger than the transaction cost. If transaction cost is
high, inefficient allocations remain for long period. This can be seen in
countries—like Austria—with inefficient markets for rental apartments,
where large, old apartments are occupied by elderly single persons. The
cost of changing to a modern, easier, and smaller apartment is much higher
than the improvement in the living situation is worth; often the rent for
the new, smaller apartment is higher than for the old, large one!
Markets for physical objects in small quantities are simple: I give you
the pound of apples and you give me the money. Risk is small: you can
observe me weighing the apples, inspect the quality before the purchase
and we exchange goods against money, no risk for me not to be paid. Such
markets work all the world over quite effectively.
Trading in land is more difficult: how can I make sure that the purported seller is really the owner, how to ascertain the boundaries of the
land, what other rights and easements may reduce the value of the land?
Risk is high, resulting in high cost of transaction and imperfect markets.
Land registration is the institution created to reduce this risk: in its
most developed form, the buyer is guaranteed, by the registry or a separate
title insurance, that the seller is the true owner and also guaranteed owner-
Mystery of CapitalCRev
266
2/18/08
11:13 AM
Page 266
Andrew U. Frank
ship through registration or title insurance; maps included in the registry
guarantee the boundaries based on accurate surveying by professionals
(Schoenenberger 1976). Such an arrangement reduces risk for buyer and
seller, reduces transaction cost, and leads to efficient markets.
Land registration as an institution creates social reality exactly as Searle
describes (Searle 1995). The brute fact of possession of land that can be
plowed or where animals can graze or possession of the family dwelling is
socially reified as a property right; property rights are created by actions
and exist in documents. Searle uses the formula: “X counts as Y in the context Z.” The document counts as the property right. Inscription as an
owner of parcel A on a page in the land registry counts as ownership of the
parcel A in the context of, say, Switzerland and its civil code. In this context, property—a concept of the law—includes physical possession and use
of the land and the buildings on it; I obtain property to have asocially sanctioned possession that I can defend against intruders and ask society to
help me defend.
Land registration as an institution creates documents that count as
ownership or other rights in the context of the law. These documents are
valuable because they give the socially created right to a physical valuable
object. Land registration connects a written document to a valuable brute
fact, namely, possession of land. This link consists of two steps:
• the social institution of ownership, which is a sanctioned form of
brute possession;
• the documents that establish my ownership.
Land registration reduces risk of possession of land, reduces its cost, and
simplifies its buying and selling.
Legal ownership reduces my cost of defending my possession against
intruders and others who intend to take it away from me by force. Because
society will help me against adverse actions, I need not invest heavily in
walls, constant surveillance, and armed guards; I can rely on the courts and
the police force to keep me safe from intruders.
Documented ownership of the physical land is vested in a document,
which makes transfer much less costly. This is better visible in a commodity exchange, for example, the Chicago market in pork bellies: in lieu of
exchanging actual physical pork bellies, trading is in contracts to deliver or
accept a fixed amount of pork bellies of a standard quality at a fixed time.
Only the paper documents, the contracts, are exchanged, which reduces
cost of trading enormously! Nowadays, not even documents are
exchanged, but rights to buy or sell are electronically added or subtracted
from accounts.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 267
A Case for Simple Laws
267
The legal system is part of the social construction of reality. The legal
realm creates a parallel “world,” where the brute facts, such as physical
possession of land, are transferred to abstract concepts, which are then
documented. This transfer to the realm of documents and business
processes organized by law is prerequisite for the conversion of brute valuable objects that have value for the physical production process to the
realm of capital.
4. Capitalization of Land and Its Improvements
Capitalization of land is completely achieved not only by registered ownership—albeit this is an important step—but also in the possibility of
obtaining credit, that is, new money, against the value existing in the land.
If I own a valuable piece of land, I can obtain money from others because
they are certain that I will pay back my debts. If I default on my obligations, the creditor will take the land from me and sell it to be paid. This
institution is typically called mortgage. A debt is secured by a piece of land
against the risk of my not paying back what I owe; this reduces the risk of
the lender greatly, assuming that the land has a lasting value.
The legal institution of mortgage creates a link between a personal debt
and a piece of land, the value of which guarantees the repayment of the
debt. This link is in the realm of documents: the land must be legally
owned and documented. In countries where this institution is established,
mortgage credit is often obtained for a very low cost, making such credits
often half the price of a business or consumer credit. Often the credit is less
expensive than what is gained annually by appreciation of real estate in a
developing economy, and owning land bought with borrowed money is a
good investment.
In countries where mortgage is a well-established institution, most
buildings are used as collateral, or guarantee, for credit. Often the credit is
used to improve the land or the building—for renovation of buildings, irrigation systems, and other improvements that would be difficult to finance
otherwise. The functioning capital market provides the money.
Mortgages are part of the capital market. Traditionally banks were
restricted to investing savings of private people into secure loans—government loans or loans secured by mortgages. The legislator was of the opinion that land could not lose its value, and therefore the investment would
be of extremely low risk, a chain of reasoning which is usually justified.
Savings and mortgages are important for people to save money—that
is, transfer value or consumption—from one time in their live to another:
we save during the productive part of our lives to finance the same standard of living when we are older and retired with no productive income.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 268
Andrew U. Frank
268
Such savings are converted by the finance markets into productive capital
instead of saved under the mattress for lack of secure and productive
investment.
5. Impediments to Capitalization of Land
There are numerous impediments to the effective use of land registration
to achieve the capitalization of the wealth accumulated in land. They can
be related to the law, the organization of the registration of land and mortgages, the organization of the capital markets, or the foreclosure process.
5.1. Legal Institutions
The legal institution of private ownership of land can be missing; this was
typically the case in socialist countries, where all land belonged to the state.
The institution of lending against interest can be missing—often due to
religious restrictions, in, for example, Muslim countries. Whenever private
ownership of land and lending against interest is legally constructed, then
it seems that mortgage—a debt secured by ownership right in land—is also
defined.
The construction of mortgage is not sufficient; the law must also define
procedures for “foreclosure,” the termination of the loan agreement when
the debtor does not pay, and the taking of the land by the creditor. In general, the legal organizations necessary for capitalization of land are available
in developing countries, but they are not used.
5.2. Organization of Registration
Many of the impediments restricting capitalization of the wealth in land are
organizational. They are either related to the ownership of land or to the
risk and cost of land-related transactions.
5.2.1. BURDENS
ON
LEGAL OWNERSHIP
OF
LAND
The legislature in every country I have knowledge of has succumbed to
the temptation to connect obligations with the ownership of land. The
extension of the rights flowing from ownership is limited, for example,
through planning laws. Such laws restrict the type and size of buildings
one can build on the land, how one can use the land, and so forth. Such
restrictions are often distributed over several laws that are difficult to
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 269
A Case for Simple Laws
269
obtain and uncertainly applied, but affect the value of the land. This
increases the risk in the assessment of the value of the land for securing
a debt.
The legislator also attaches multiple taxes to land, for example, fees for
infrastructure built by the community, but often just general-purpose
taxes. Taxing land is attractive to legislators because if the owner does not
pay the taxes, the tax debt is converted in a lien, a debt secured by the
property, similar to a mortgage. Such liens are created by law and need not
be documented in a land registry. Many countries allow such liens to
emerge not only for tax debts, but also for debts to public utilities as water
or electricity, debts to tradesmen for work contributed to improve the
land, and so forth. A buyer must research what liens exist because they
reduce the value of the land; this increases the risk when assessing the value
of the land.
5.2.2. RESTRICTIONS
ON
TRANSACTIONS
IN
LAND
The transaction itself, rather than the ownership of land, is another good
candidate for taxation. It is a situation where the parties have cash in hand
and the state wants its share. Taxes are often defined by law for several
authorities, each of which computes the tax on different bases, and paid
to different agencies.
Rules intended to improve agrarian exploitation of the land are notorious. They might limit the smallest size of a parcel and restrict subdivision,
give preemptive rights to next in kin or neighbors when a piece of land is
sold, and so forth. This increases the risk associated with a transaction,
delays the execution until all agreements are documented, and increases
cost.
The simple procedures of registering a transfer of ownership in land or
erecting a mortage can be made into burdensome, costly, and time-consuming operations. In Ecuador during the 80s there were five taxes as well
as several agreements regarding preemptive rights of neighbors, next in
kin, and the agrarian reform commission to satisfy before a transfer of land
could be registered. In consequence, most transaction went unregistered,
taking these parcels out of the “legal” realm into the informal (practically,
transfers were cleverly constructed as adverse possession so that the restrictions on transfer of ownership would not apply).
The situation is similarly burdensome in developed countries. A realestate transfer of ownership in Austria may still not registered, a year after
signing a contract. Such costs can be borne in a developed society with an
already highly capitalized real-estate market, but they are prohibitive in
developing countries.
Mystery of CapitalCRev
2/18/08
270
11:13 AM
Page 270
Andrew U. Frank
5.3. Organization of Capital Markets
Land registries convert brute possession of land into documented ownership in the legal realm. To convert documented ownership into capital
depends on the capital markets, the banks, and their organization. Banks
collect money from people who have money that they do not use for consumption now but intend to save for later; banks loan the savings to these
who need money to pay for present consumption. Interest is paid that
compensates for delayed consumption and inflation. Mortgages secured by
land seem a safe investment, as land should participate in the inflationary
rise of prices.
Banking systems in any country are a prime target for operations serving political and personal interests and are therefore heavily regulated.
Often the banking system is nationalized or partially nationalized. A population’s trust in national banks is often low. Bank procedures, whether
nationalized or not, are often as bureaucratic as the worst public administration.
Banks are not everywhere prepared to give loans secured by land
against low interest rates to the large number of small owners; folklore has
it—internationally—that it is easier to swindle a bank out of ten million
euros than to obtain a credit of 10 thousand euros, even secured by land.
Large commercial credits are more prestigious internally in a bank and
consumer credits pay higher fees than mortgages.
Banks are justified in arguing that mortgage credits are cumbersome
and have high risk, because the numerous organizational burdens are connected to legal ownership of land, and that land as a security is of little
commercial value when the debtor defaults (see next subsection). It is
therefore not sufficient to create new banks to overcome the banking system’s organizational resistance, because the newly created organization will
be hurt by the same impediments; rather, it is necessary to overcome the
impediments.
5.4. Foreclosure
If the debtor does not pay back the debt when agreed, the creditor has the
right to obtain the security. If a debt is secured with a mortgage on land,
the creditor can demand that the land be sold and the debt be paid; the
previous owner receives the remainder if the proceeds amount to more
than the amount owed.
Foreclosure is a complex legal procedure, where multiple interests must
be balanced. There is the interest of the current owner and his family: a
family can lose its home through foreclosure, and social arguments have
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 271
A Case for Simple Laws
271
added multiple restrictions on the process. There is also the interest of the
creditor who wants the money paid back as soon as possible. There are also
the interests of other parties linked to the land—next of kin, neighbors,
those affected by agrarian reform; it should not be possible to circumvent
these restrictions through the foreclosure procedure.
If the foreclosure procedure does not lead within a reasonable time to
repayment of the debt to the bank, banks will not consider mortgage credit
a viable line of business. From the bank’s point of view, the risks are:
• The land has no market value; this may occur in countries where
markets for agriculture products are depressed or swamped by
imports, and therefore demand for agricultural land is nil. For
example, I have encountered this situation in the Baltic states in the
mid-1990s.
• There is no organized market for land, and sale is difficult and takes
a long time; the bank ends up owning the land as a nonsellable
asset.
• Procedures in foreclosure are costly and the bank must advance the
cost; the more social restraints and restrictions for public interests
are built into the foreclosure process, the higher the risk for the
creditor, the higher the cost, and the longer the delays.
• Foreclosure is typically a procedure involving the court system,
which may not be capable of diligent procedures due to complex
procedural laws, overburdening, and understaffing. For example, in
Italy, court procedures typically go on for years before a decision is
rendered.
The development of the court system in Europe in the late nineteenth
and early twentieth century has created a social expectation that debts are
always paid without delays. Foreclosure and other enforcement procedures
are rare, because they are swift and have a foreseeable outcome with a high
price for the offender. Therefore, people pay whenever possible before
foreclosure procedures start. This custom permits credit at a low cost to
the creditor.
The expectation that debts are promptly paid is not universal. Reports
from those doing business in the People’s Republic of China point out that
collecting outstanding debts is a major problem for foreign firms
(Blackman 2000). The same is in my experience true for most of South
America. In large parts of the world, there are no effective court procedures to enforce payment of debts or other contractual agreements; this is
not to say that there are no legal procedures, but the practical observation
is that enforcing the payment of debts is not feasible for ordinary business.
Mystery of CapitalCRev
272
2/18/08
11:13 AM
Page 272
Andrew U. Frank
In contrast, mortgages are very common in Hong Kong; I deduce that the
Hong Kong legal and court system is patterned after the English system,
with effective, low-cost, and low-risk property registration, well-regulated
banking, and swift foreclosure procedures.
6. Complexity of Rules
The concept of giving credit against a security and using ownership of land
and buildings as security is simple enough. De Soto describes it as the liberation of the wealth existing in land, buildings, and other improvements, creating capital that can be used to finance the development process in
third-world countries. The principle is certainly correct; for example, I would
argue that the rapid development of Spain in the last part of the twentieth
century was financed by individual higher revaluations of real estate, which
then was mortgaged to pay for renovation and other improvements.
What is limiting this process? It is the cost of converting the wealth into
capital. There are not only the fees for registration, the taxes associated
with the mortgage, and the bank fees, but also the total cost to the person
initiating the process. The risk associated or perceived to be associated with
a business translates to cost. The effort necessary to obtain information
about the process, the risks involved, and so forth is a cost. Information
reduces risk; lack of information is perceived as a risk. The cost resulting
from risk makes it unlikely that the process of transforming wealth into
capital will be initiated.
The amount of knowledge necessary to understand the construction
“mortgage” and the processes involved is substantial. There are not only
the rules of civil code regarding ownership, security for debt, and so forth
(which in the Swiss civil code are about twenty-one pages of readable legal
text), but also the procedures of foreclosure, with their limitations. The
substantial set of rules of public law, agrarian reform laws, and urban planning must be evaluated as well. In many countries, the legislature has
decided that a seller must obtain professional advice to mortgage real estate
property—a testament to the complexity of the process, and an often-disproportionate addition to the cost, since laws restrict who can provide such
advice. The legislature would have been better advised to reduce the complexity of laws and make the procedures comprehensible to the layperson.
7. How to Advance Capitalization of Real Estate
De Soto has asked whether we should suggest that developing countries
follow our present-day methods, which may or may not be appropriate for
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 273
A Case for Simple Laws
273
their situations. He points out that we have forgotten how we got to our
current system in the course of our development. I see three concrete
points:
• Rules in the nineteenth and early twentieth century in continental
Europe were simpler and could be understood by most citizens.
• Self-help groups organized to give and obtain mutual credit.
• There is a social compact that calls for orderly administration and
for citizens to obey the law.
It is necessary to review the history of the mortgage system in Europe to
understand how it evolved.
The institution of mortgage resulted from Roman law combined with
the Germanic-law tradition of registration of real-estate ownership, which
included registration of transfer and registration of contracts. It was originally described in few articles in the widely-translated Napoleonic code
that formed the base for most European and South American civil laws.
Foreclosure laws were originally equally simple, and were a step up from
medieval customs of exposing or dunking debtors who had not paid. That
is, if you did not pay, your valuables—especially your land—were seized
and auctioned off, with the proceeds going to the creditor. This is documented in literature of the nineteenth century, where mortgage and foreclosure are regular themes described in simple lay terms (see descriptions
in the novels of Gotthelf, Balzac, Zola, etc.). The rules were simple—credit
secured by land and swift foreclosure when not paid—and generally understood.
The banking system evolved to provide mortgages to small owners—
mostly in a process of self-help in rural and urban communities (Stubkjaer
2004). Later, the same lines of business were also offered by the large commercial banks. Savings and Loan Associations were constructed as self-help
in a social group where members where known to each other; this permitted to assess the risk involved with a loan—which remained related to the
person’s abilities and business conduct, even if secured by real estate—and
to use the institution in a socially responsible way. When the system
became commercialized and anonymous, potential for abuse emerged, as
demonstrated by the bank failures of the 1970s and 80s in the southern
states of the U.S.A.
European countries and the U.S.A. benefited enormously from these
institutions, which provided credit for reasonable terms. In comparison,
loans in many countries are usurious, bearing interest rates of 10–20 percent per month. Mortages could be used to finance not only improvements
to land for agricultural purposes, but also the construction of single-
Mystery of CapitalCRev
274
2/18/08
11:13 AM
Page 274
Andrew U. Frank
family dwellings. Over time, the institutions were refined to improve the
flow of capital with a secondary market for mortgages. Foreclosure laws
were improved to prevent abuse by lenders and became more socially
aware but at the same time less effective for the creditor and thus more
costly for the regular debtor. A host of social restrictions was attached to
the land to improve agriculture, to be fair to neighbors and to the next of
kin; all these rules made it less predictable how mortgages would work and
increased risk. This is most likely a good example of the “law of unintended
consequences”: a law usually does not have the effects that the lawmaker
intends; sometimes it has exactly the contrary effects. The refinement of
the laws regarding land and mortgages increased risks for all parties
involved, increased the requirement for accurate information and up-todate knowledge of the often-changing laws, and in consequence increased
cost.
In developed countries where a firm base of understanding of the basic
mechanism of mortgage together with a high level of document-oriented
culture are available, no detrimental effects obtained. If we export today’s
elaborate law systems of developed countries to the third world—as it is
often done in development projects (I admit that I was technical advisor to
one!)—the effect is not the desired one, because the legal foundation is not
sufficient that a working land market and mortgage system develops. The
related institutions (courts, banks, etc.) cannot cope with the complexity
of these developed laws and the fine distinctions that are the result of a
hundred years of experience. It is necessary to create simple laws appropriate for the situation, considering the technology used in agriculture and
the traditions of inheritance and neighborhoods, and restrict the complexity of the law to principles that can be communicated to the users, that is,
the citizens. Laws that are understood only by specialists do not recommend themselves.
Third-world countries seem not to lack mortgage and foreclosure laws.
What they lack is the application of these laws in a form that puts them in
reach of the farmers and small entrepreneurs who need the capital for
development of small enterprises. Not only the cost and the procedural difficulties but also the intellectual difficulty to understand the current highly
developed systems makes them unobtainable for normal citizens. De
Soto’s current position seems to favor the construction of a parallel system
of simple laws, as it has evolved in the informal sector of third-world countries (de Soto 1989). The revision and simplification of the current complex systems with highly technical rules of law seems not to be a viable
path—too large are the vested interests of the legal profession and the
administrations. This is not a situation without precedence: the banking
system developed in the thirteenth and fourteenth century as an initiative
of the private sector; one could say “informally.” One might even advance
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 275
A Case for Simple Laws
275
the hypothesis that many institutions of civil law were created in self-help
cooperative-like groups before the rules that these groups developed
became official law.
8. Conclusion
De Soto has pointed out that exporting the legal institutions of developed
countries to the third world is not successful. The lack of capital in thirdworld countries is due neither to a lack of wealth accumulated in land and
buildings, nor for want of legal institutions like land registration and mortgage laws, nor, probably, for a lack of savings. What is missing is an effective use of these institutions. Complex laws are perhaps appropriate for
developed countries, but a major impediment to institutions defined by
citizens of countries with lower levels of formal education and less experience with today’s “document culture.” This culture cannot be achieved
through the application of rules the persons concerned cannot understand.
We have forgotten how our legal system evolved from simple principles—the Roman law, captured in the Digestes—before it reached today’s
complexity. Research to identify the “simple core” of a legal system is necessary. The historical development of legal institutions from simple rules to
the complex constructions we have today can inspire such research. I
believe that such “simple laws” could also benefit the developed countries,
where complexity of law has probably passed the optimal point. The core
of land ownership and mortgage credit is simple. A person possesses a plot
of land with determined boundary and is its registered owner. The owner
can use the land as security for a loan to guarantee his repayment of a loan:
if I do not repay the loan as agreed then the creditor can use the land to
get repaid.
Not only are legal institutions necessary, but also a full set of customs
must develop to achieve capitalization of the wealth in the land and its
improvements. That is, banks must offer mortgage credit and the courts
must be prepared to deal with defaulting debtors. The European and U.S.
tradition points to self-help groups that initially organized mutual credit in
Savings and Loan Associations, where reliance was not exclusively on the
legal rules, but on simple rules laid down by the associations and social
control of the debtors; giving loans to people well known in a face-to-face
community is much less risky than the anonymous, standardized commercial bank proceedings of today.
The European experience justifies de Soto’s skepticism that the established administration and the legal system are capable to provide the capitalization of the smallholders necessary for the development of a country.
European history demonstrates the self-help group that uses simple rules
Mystery of CapitalCRev
276
2/18/08
11:13 AM
Page 276
Andrew U. Frank
that can be understood by the participants; in today’s parlance one says
that these first mutual credit organizations were “informal.” Looking for
solutions in the informal sector in third-world countries may be the path
to the future.
I conclude with an observation of an Egyptian student of mine, confirming my position from a different perspective. He said that effective and
functioning courts are necessary today for the middle class. The upper social
strata know how to use them for their advantage and the poor cannot use
them because the cost is too high. In reverse: without effective court systems, the ability of the poor to become middle class is not possible.
P O S T S C R I P T
Postscript to Andrew Frank: A Case for Simple Laws
Carlos Alejandro Cabrera Del Valle
Director, National Cadastre
Guatemala, Central America
Professor Frank began his presentation by showing the importance of
the connection between philosophy and the institutional world. He takes
the ontology of social reality from Professor Searle, and shows us how useful they can be in understanding, for example, systems of property rights.
He indicates that in many countries there are laws and procedures
related to the property, the registry and mortgages, banks and credit,
which while in place, apparently are seldom used. In cases such as
Guatemala and other Central American countries, Professor Frank certainly is correct in terms of absolute percentages. Why are these laws and
procedures not used?
Professor Frank considers that the principal reason is that they are very
expensive to apply, in both monetary and nonmonetary terms. There are
also other costs, in that certain laws and institutions, far from alleviating
the costs of acquiring actual rights, may in fact make such acquisition more
difficult. Another group of laws seek to obviate the misuse of those already
established, and these provide in practice even more barriers to acquisition.
Here again we find that Frank has hit the nail on the head not only for
developing countries but also for many cases in the developed world.
On the other hand, it seems that the misuse of the established laws
derives from the lack of effectiveness of the institutions that are involved in
maintaining them (such as banks).
And finally, in a third phase, there are the courts, that regulate the margins of error in social transactions. These, too, create a new constructed
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 277
A Case for Simple Laws
277
reality, and its manner of being intertwined with the others explains in
good part the structures of social understanding created in different societies to promote or suppress development.
Professor Frank asserts that it is indeed difficult to know where the collective understanding for the execution of a norm is born, because it is also
clear that in many developed countries, the laws have become very complicated, the associated institutions have weakened, and the legal order has
been reduced. However, the collective behavior nonetheless allows for
interactions on a variety of levels that generate conditions that allow real
capital flows.
I have had the opportunity to read several papers by Professors Searle
and Frank and by Hernando de Soto. It is difficult not to agree with much
of what they say, not just on the theoretical aspects of the constructions of
reality which arise from collective understandings of the laws and institutions, but also of the real abyss that exists between the rich and poor
nations.
In the case of my own work, which focuses on the cadastre and land
registration in the developing country of Guatemala, I wish to present
some ideas that I believe would help to supplement the previous ones that
I consider fundamental in the construction of this new interpretation. I
only want to refer to the Central American societies, although I believe
that my remarks apply at the Latin American level as well.
It is important to remember that our societies have a deep history. That
history explains the construction of the modern state and has left ancestral
roots that are revealed in many of its collective behaviors. How this has
happened is of course not completely clear, and in many cases the history
was not documented. However, the fact that it has not been documented
does not mean that its effects cannot be noticed many years later.
There are discontinuities in the social constructions of the various collective organizations involved. Politically and economically, we are societies
formed by truncated initiatives. This means that the social cost of establishing norms based on these initiatives is difficult to measure in terms of
any single scale.
In 1823, the third year of its independence, the Federation of Central
American Countries held its first legislative assembly. At that very first
assembly, laws establishing a cadastre were passed. More than 180 years
later, none of the countries involved has achieved a fully operating and
complete cadastre. Neither have any of these countries been able to establish a solid base for the rights of property, which is not even established at
the constitutional level. If we have not created the conditions for the use
and enjoyment of the property rights, then we have also not created the
conditions for a market economy based on the circulation and generation
of capital.
Mystery of CapitalCRev
278
2/18/08
11:13 AM
Page 278
Andrew U. Frank
The topic is neither linear nor simple. Many countries do not find the
path to development, and the main reason is that in the construction of the
state and of its relationship to society they created an institutional reality
different to that which they intended to build. The construction of social
reality, the scaffolding that allows the transformation of abstract capital
into real capital, cannot obviate the history of the countries.
The countries of Central America are Western countries, and many
people believe in the market economy. We also have laws that protect private property and institutions that promote capitalist development. But
how many of us really believe that we have this, and how many of us trust
it?
I also know that a good percentage of the lawyers of Guatemala have
never read the Civil Code, nor the more than two thousand laws that are
effective in my country. For example, many people ignore the importance
of the right of property, and they consider social security as a privilege of
the few. There are thousands who do not understand the rigidity of the tax
system, nor how it is structured and why it is so difficult to pay taxes. Even
though many people are illiterate, we like to show off our education system. It is certain that the laws are not understandable, and therefore the
institutions that accompany them are very weak.
Many developing countries, including ours, need to be reinvented; we
need to look for a window in history to redraw social and institutional reality. This must be based on an understanding of the most rural as well as the
urban dimensions of our countries. On this new base, we should elaborate
a new social construction that reflects our collective vision.
Without this new interpretation of who we are as countries or societies, it will be difficult to rejuvenate capital. There won’t be successful
market economies. It will not be possible to have an effective social contract or to achieve synergy with the necessary scaffolding of laws to support the economy.
Let me finish by telling you that in my country, we are currently discussing the modernization of the laws for registration of property and for
the cadastre in order to regularize the market for land transactions.
Concern has been raised by the political, economic, and academic sectors
in the country regarding whether the registration effort and cadastre can
be economically sustainable. We are determined to explain to them the
benefits of having a modern system of registration and cadastre, and we
have only one concern: Is our country “economically sustainable”?
When we are delivering property titles in Guatemala, we try to explain
to the people the value of being owners. A radio provides a good analogy.
The physical radio without energy (batteries or electricity) is only a piece
of plastic, iron, or aluminum, just that—dead material. But when you put
batteries into the radio or connect it to the mains, then this radio gives you
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 279
A Case for Simple Laws
279
a lot of things: You can receive music, news, poetry, speeches, even theatre.
You get enormous benefits from being connected to the radio system.
When you get these, of course, it doesn’t really matter to you how it
works, as long as it does work. The same happens with land: Land is inert
material, but the title to property is the energy, and the institutional reality of land registration is the radio system.
I think Professor Frank’s contribution begins where Hernando De
Soto’s book leaves off—The Mystery of Capital. Implementing a property
system that creates capital is a political challenge, because it involves getting in touch with people, grasping the social contract, and overhauling the
legal system.
To meet this challenge, we need a sound philosophy of information,
and we need to use it to create a cadastral regularization system that is able
to guarantee property rights and to represent them in an information system. This will provide the basis for modeling, understanding, and transforming the reality of land in Guatemala and elsewhere.
R E F E R E N C E S
Blackman, C. 2000. China Business: The rules of the game. Crows Nest, NSW
Australia: Allen and Unwin.
de Soto, H. 1989. The Other Path. New York: HarperCollins.
de Soto, H. 2000. The Mystery of Capital. New York: Basic Books.
“The Economist versus the Terrorist.” 2003. Economist, January 30.
Eggertsson, T. 1990. Economic Behavior and Institutions. Cambridge: Cambridge
University Press.
North, D. C. 1966. The Economic Growth of the United States 1790–1860. New
York: W. W. Norton.
North, D. C. 1997. Institutions, Institutional Change and Economic Performance.
Cambridge: Cambridge University Press.
Samuelson, P. 1992. “Updating the Copyright Look and Feel Lawsuits“
Communication of the ACM 35, no. 9: 25–31.
Schoenenberger, W. 1976. Schweizerisches Zivilgesetzbuch. Zurich: Schulthess
Polygraphischer Verlag AG.
Searle, J. R. 1995. The Construction of Social Reality. New York: Free Press.
Sen, A. 2000. Development as Freedom. New York: Anchor Books.
Smith, A. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations
(German translation published 1978). München: Deutscher Taschenbuch
Verlag Klassik.
Stubkjaer, E. 2004. Contribution to the de Soto/Searle workshop 2003.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 280
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 281
Sovereigns, Squatters, and
Property Rights: From
Guano Islands to the Moon
13
David R. Koepsell
1. Introduction
The law of territoriality, sovereignty, and individual property rights has
evolved greatly in the last two hundred years. These areas of law illustrate
clearly the nature of laws as social objects. The fact of possession of a parcel is what John Searle would call a brute fact. An individual occupies a certain physical space. With the development first of notions of a sovereign,
who in the Anglo tradition holds primary title to land, and later the conflicts among various competing sovereigns who each claim title to newly
discovered lands, various new legal and social artifacts have grown and
come to be recognized to varying degrees in “international law” or settled
by resort to force.
Ordinarily, legal systems establishing property rights over land have
been governmentally created monopolies owing their origin to some claim
of sovereignty, and some expression of ownership by a sovereign in possession. Property rights in the Anglo-American tradition emerge by a sovereign or its agent’s monopolistic control by acts or indicia of ownership,
such as fence-building, planting, or improvement of the land. Hernando
de Soto’s book The Mystery of Capital (2000) nicely summarizes the developments and refinement of the U.S. real-property regime. Of particular
interest is the recognition, unique in the U.S., of squatting as a legal means
of establishing priority of ownership over a parcel. In fact, as we shall see,
squatting has not only been perfected in the U.S. as a means of individual
attainment of title over other, even more perfect claims, but it has come
also to be institutionalized as a means by which a sovereign may come to
claim legal ownership through its agents and to recognize and pass title in
newly discovered territories (Groos 1948), which are automatically
annexed through its agents, in such cases as Guano Islands and even the
Earth’s Moon.
281
Mystery of CapitalCRev
282
2/18/08
11:13 AM
Page 282
David R. Koepsell
2. The Three Historical Means to Legal Title
While we take the notion of sovereignty and territoriality for granted, its
emergence as the primary recognized means of claim by nation-states to
land is relatively recent. Up through the medieval period, sovereigns’
claims were based more or less solely on possession by ongoing and continuous force, with many levels of conflicting feudal claims each expressing
some different source of legitimacy. In 1648, the Treaty of Westphalia
established for the first time the modern notion of territorially based
national or state sovereignty. With this treaty emerged the conception of
the state as the ultimate territorial entity, with sole power to acknowledge
claims within it and to broker or settle by force the claims of other sovereigns. The central concept of the Treaty of Westphalia is the notion of territoriality. From this basis, the notion of international law, by which states
came eventually (sometimes) to recognize the claims of other states, slowly
emerged. The Westphalian model grew over the course of the eighteenth
and nineteenth centuries in the Western world. The central view of this
model is that a sovereign state has “exclusive sovereignty and jurisdiction
throughout the full extent of its territory [and] No state can, by its laws,
directly affect, bind, or regulate property beyond its own territory, or control persons that do not reside within it, whether they be native-born subjects or not” (Wheaton 1866). By a certain amount of common agreement
among Western (“civilized”) states, this notion of sovereignty was
extended only to a select group or states and cultures. Thus, colonization
and empire-building were simultaneously justified and accepted.
Territories could be annexed by force from non-Westphalian states, and
colonized without recognizing the statehood of less-developed (nonChristian) polities.
For individuals within states, there were and are three major means to
gaining legal possession: (1) by deed from the sovereign, (2) by deed from
the previous owner, or (3) by adverse possession (later recognized by the
sovereign). In many ways, legal individual possession and ownership tracks
the means by which sovereigns themselves express their territoriality in the
post-Westphalian West. For individuals, these three methods may result in
ownership of a parcel in “fee simple”: providing the owner with all the
benefits accruing to a property owner under the dominion of the sovereign, subject only to the laws, rules, or regulations that may prevent certain acts to or dispositions of land. The first two means of individual
ownership of land occur by means of complex “cadastral” systems whereby
the title to the land is recorded by the sovereign. Adverse possession is
essentially how a “squatter” may come to legally own land. Depending
upon the jurisdiction, the squatter comes to be the legitimate owner of a
property by the open, notorious, and adverse possession of lands that are
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 283
Sovereigns, Squatters, and Property Rights
283
not originally his. But eventually, even squatters must have their right
recorded by a sovereign.
These “squatters’ rights” shall be the primary focus of this chapter, in
relation particularly to certain legal anomalies created specifically by sovereigns regarding such rights. As de Soto recognizes, recognition of squatters’ rights is unique in the West, at least to the degree and extent which
such rights have come to be recognized in U.S. law, and suggest something about economic efficiency that is also expressed in the anomalous
laws, particularly the U.S. “Guano Acts” discussed herein.
3. Squatters and Sovereigns
Squatters’ rights to parcels are typically defined by the extent to which an
individual squatter can establish indicia of ownership. Inasmuch as property rights over land might be “natural” as opposed to positive, they are
defined by the degree to which an occupier of land may reasonably assert
his ownership, through improvement, delineation, and other such indicia
of ownership, despite a lack of actual title. The extent to which a squatter
has asserted ownership through such indicia typically defines the extent to
which a squatter may come to be legitimately recognized eventually, and
legally, as the true owner of the parcel against all other claims. There are
parallels to these indicia of ownership in the post-Westphalian world of territoriality and sovereignty.
Sovereigns come into possession (and “legal” ownership following the
customs generally recognized after the Treaty of Westphalia) by (1) treaty,
(2) war, or (3) fiat. In the case of treaties, lands are agreed to be owned by
a particular sovereign by the other signatories of the treaty. In the case of
war, lands are taken by the victor from the prior owner, and the occupation eventually (usually) comes to be recognized by the international community as legitimate ownership. In the case of fiat ownership, unoccupied
lands are taken by virtue of the sovereign’s exercise of dominion over the
lands without regard to formal initial recognition of that ownership by
other sovereigns.
In Anglo-American common law, the sovereign is held to be the primary title owner, and in the West, the sovereign retains at all times the
right of eminent domain against any individual title owner subordinate to
the sovereign’s necessity to claim title. In this way, all other owners of
parcels are subordinate to the sovereign and all legal title must flow from
the legal recognition by the sovereign of the possessor’s just ownership
rights.
In many ways, the most interesting means by which sovereigns come
into possession is by fiat. In fact, most of the Western lands of the United
Mystery of CapitalCRev
284
2/18/08
11:13 AM
Page 284
David R. Koepsell
States were taken by wars or treaties, such as the Treaty of Guadalupe
Hidalgo, or by the Louisiana Purchase. Through both of these expansions,
the United States assumed primary title to certain lands, and recognized in
so doing prior individual land claims asserted as against the possessory sovereign. In these cases, the lands taken were contiguous to lands already
owned. The allegedly “natural” rights of the sovereign over contiguous
lands are expressed in a Supreme Court decision from 1842:
The laws of nature and nations establish the following propositions, pertinent
to this questions: 1. Every nation is a proprietor [owner] as well of the rivers
and seas as of the lands within its territorial limits. Vattel 120, 266. 2. The sea
itself, to a certain extent, and for certain purposes, may be appropriated and
become exclusive property as well as the land. Vattel 127, 287; Ruth. Book 1,
ch. 5, p. 76, 3. 3. The nation may dispose of the property in its possession, as
it pleases; may lawfully alienate or mortgage it. Vattel 117, 261–2. 4. The
nation may invest the sovereign with the title to its property, and thus confer
upon him the rights to alienate or mortgage it. Vattel 117, 261–2. The laws of
England establish the following propositions material to this point: 1. the common law of England vests in the king the title to all public property. [further
citations omitted] Matin v. Waddell’s Lessee 1842.
Ordinarily, the territorial limits of a sovereign are defined either by geography or by treaty. Geography, for instance, defines the eastern and western borders of the United States (apart from Hawaii, Puerto Rico, other
island territories, and Alaska, recognized by treaties or purchase), and
treaties define the northern and southern borders following armed conflicts. Treaties also define the territorial limits or legal jurisdiction of sovereigns over the seas. For a long time, three miles from the shore was
recognized as the territorial border of a sovereign with a shoreline. This
was “cannonball” distance. Now, the territorial limits recognized by the
UN extend to as much as two hundred miles out to sea.
4. Territories and Strategic Minerals
Special rights and privileges of a sovereign over strategic minerals and
deposits within a state’s territories have long been acknowledged by some
states to take precedence over rights retained by the title owner. In much
of Europe, such rights and privileges flow from the same basis as the right
of eminent domain. French law, for instance, made mines found on private
property the domain of the state, which could grant owners or others the
right to extract minerals from them. Similarly, in Spain, mines on either
public or private land were the property of the Crown. However, in
Germany and England, the title owner of the land had the original right to
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 285
Sovereigns, Squatters, and Property Rights
285
dispose of its strategic minerals and deposits however he saw fit.
“Therefore, if a man grants all his lands, he grants thereby all his mines of
metal and other fossils, his woods, his waters, and his houses, as well as his
fields and meadows” (Blackstone 1766, 18).
In the mid-nineteenth century, a number of states began to address
strategic deposits of nitrates on what are commonly called “guano
islands.” The U.S. was the most comprehensive, and also one of the first
states to deal with such deposits by offering certain rights in exchange for
territoriality.
Guano Islands: Sovereign as Squatter
In the mid-nineteenth century, the U.S. adopted a law that would significantly alter the means by which it could acquire certain territories.
Essentially, it laid claim to a whole category of islands based not upon
their geographical position or any other treaty, but based instead upon
the mineral composition of any undiscovered island and certain other
conditions. The Guano Islands Act of 1856 established the United
States’ claim to any so-called guano island upon which any American citizen may set foot, and which is not otherwise occupied or laid-claim to,
and which has any “deposit of guano” (48 U.S. Code, chap. 8, 1411 et.
seq.). This odd example reveals how sovereigns may take possession of
lands by fiat.
Notably, the Guano Islands Act necessitates entrepreneurial activity by
a citizen taking possession of a guano island. It grants him, in return for
possession and legal title, profits from the extraction of guano from the
island. While the U.S. becomes the territorial sovereign, without necessity
for formal occupation, the possessor becomes the parcel owner simply by
virtue of “improving” the island by exploiting the natural, strategic
resource. This sort of improvement is akin to the indicia of ownership
which granted tens of thousands of early American squatter legitimate title
to lands in the continental U.S. (de Soto 2000, 113–15).
Besides granting land to squatters in the contiguous American states—
noted by de Soto as essential to the entrepreneurial role of land in the U.S.,
the state has also granted title to possessors who have at various times
exploited other strategic minerals in existing U.S. territories. For instance,
in the western states, title has been granted to possessors (including squatters) who discovered gold. But this sort of grant, in existing territories, is
qualitatively different from the Guano Islands Act, which empowers any
citizen to act in the place of a sovereign in claiming new territory on behalf
of the sovereign. It replaces war or treaty as a means of territorial expansion, and recognizes the same productive value of improvement in light of
Mystery of CapitalCRev
286
2/18/08
11:13 AM
Page 286
David R. Koepsell
natural resources in entitling one to possess and own land by title, with the
recognition of a sovereign.
In contrast, Germans who settled the island of Nauru, which then
became a German protectorate, discovered guano deposits and began
exploiting them on behalf of themselves. Until 1906, German mining law
gave to the state exclusive right of possession and disposal of minerals, but
excluded phosphate (guano). In 1905, the law was changed to give the
exclusive right of mining guano in this Marshall Islands protectorate to the
state through the Jaluit Company. Ultimately, the state therefore took the
right to exploit minerals, specifically phosphate, away from those who should
have been recognized as title owners, and transferred it to the state by way
of a private company (MacSporran 1995, 7). In net effect, the German ex
post facto grant reduced the rights and incentive of private would-be possessors to discover and exploit new guano islands. On the other hand, the U.S.
experiment led to a number of acquisitions by guano entrepreneurs.
5. The Strange Case of Navassa
In 1857, the United States claimed possession of the uninhabited island of
Navassa, between Haiti and Jamaica, pursuant to the Guano Islands Act.
As it turned out, the sea captain who thought he had discovered guano on
the island was mistaken. What he had in fact discovered was phosphorite,
of which nearly a million tons were promptly mined from the island by the
Navassa Phosphate Company based in Baltimore. Mining operations there
ceased by the time of the Spanish-American War, although the island still
comes under the flag of the U.S. The U.S. Coast Guard maintained a lighthouse on Navassa until 1997, but abandoned it when the prevalence of
global positioning systems replaced the usefulness of lighthouses. Haiti has
asserted an adverse claim to Navassa, and it seems likely that, given the
means by which the U.S. came into accidental possession of the island and
its current failure to continue to occupy it, Haiti’s claim may yet prevail if
pursued.
The Guano Islands Act and the case of Navassa underscore some interesting issues concerning the means by which sovereigns come into possession of territories and maintain their claims. Specifically, the class of
strategically important islands were claimed by a mechanism which
amounts to fiat ownership, rather than by war or treaty, and claims were
asserted even prior to the sovereign’s actual occupation or possession
through the act of a citizen agent based only on the presence of a certain
substance on such an island. It is interesting to note that these claims have
not, by and large, resulted in major confrontation between sovereigns
vying for possession of guano islands. There were no “Guano Wars.”
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 287
Sovereigns, Squatters, and Property Rights
287
Beyond mere recognition of and encouraging entrepreneurial squatters’
rights, the Guano Islands Act was the official institutionalization of squatters’ rights in the U.S. and by the U.S.
6. Natural versus Positive Monopolies
De Soto’s reflection on the emergence of squatting as a bona fide means of
legitimate property ownership in the U.S. and governmental acceptance of
this previously illegal act emphasizes the largely entrepreneurial role of
property owners in the U.S. as opposed to elsewhere. I contend that the
distinction between land patents (state-created monopoly rights over carefully delineated parcels) and “squatters’ rights” is analogous to the distinction between intellectual property patents and trade secrets.
Natural monopolies arise not due to some government-sponsored
right or positive law, but rather through the mere assertion of possessory
interest over some resource. Natural monopolies are what Searle would call
“brute facts,” not social objects. The only natural monopoly that might be
extended over ideas, for instance, is via secretiveness, recognized in the
common law as “trade secrets.” Similarly, my possession by occupation of
a particular parcel, or a piece of movable property, to the exclusion of all
others, gives me a natural monopoly over the resource, until my factual
possession or occupation is displaced by some other.
In many ways, property rights flow from the brute facts of possession.
Thus, we often hear that “possession is nine-tenths of the law” and this is
actually so in regard to conflicting claims of possession over most movable
property, and in some cases, real property as well. The layers of property
claims by sovereigns, title owners, and other possessors in interest are artifacts of social reality.
Sovereignty as a social object is the exertion by a political unit of a
monopoly over land by virtue of some consensual right of primary or ultimate ownership by the sovereign. All other subordinate rights to land flow
from the sovereign’s monopoly where recognized. In fact, the name for
the monopoly power of intellectual property patents owes its etymology to
“land patents,” which are state-created monopolies over land granted by
sovereigns to citizens. Eventually, the Crown began to grant “letters
patent” to individuals wishing to express and protect certain ideas as well.
Both land patents and intellectual property patents continue to exist as
institutions, and continue to be recognized as monopolies granted exclusively by sovereigns:
The patenting process is essentially a judgement [sic] of the Land Office tribunal, serving as documentary evidence that:
Mystery of CapitalCRev
288
2/18/08
11:13 AM
Page 288
David R. Koepsell
Legitimate national obligations (compliance with international treaties and
extinguishment of Indian occupancy) have been discharged so that national
“interest” in the property can be quitclaimed;
The courts held that the operation of a patent as a deed was of the nature
of a quitclaim to any interest as the United States possessed in the land; Beard
v. Federy, 70 U.S. 478, 3 Wall, 478, 18 L.Ed. 88. A patent to land of the
United States constituted a full conveyance of title out of the United States;
McArthur v. Brue, 67 So. 249, 250, 190 Ala. 563. The issuance of a patent
divested the government of all authority and control over the land; Moore v.
Robbins, Ill. 96 U.S. 530, 24 L.Ed. 848.
A patent passes to the patentee all interest of the United States, whatever it
may have been, in everything connected with the soil and in fact everything
embraced within the meaning of the term “land”; Damon v. Hawaii, 194 U.S.
154, 48 L.Ed. 916, 24 S.Ct. 617; Energy Transp. Systems, Inc. v. Union P. R.
Co., (DC Wyo) 435 F. Supp. 313, 60 OGR 427, aff’d (CA10 Wyo) 606 F.2d
934 [further citations omitted].
From the British Crown’s first issuance of letters Patent to land patents in
the U.S., it has been the exclusive dominion of the sovereign to extend this
form of artificial monopoly to both ideas and land, for the purpose of
encouraging improvements and innovations. It is a bargain struck between
the sovereign and subject that creates an exclusive control not otherwise
established by any brute fact.
Artificial monopolies are not necessarily efficient, as they are granted
despite market forces in the hopes of generating new modes of creation,
new markets, and innovation. The Guano Islands Act, and other recognitions of squatters’ rights whereby the benefits of improvement and
exploitation of natural resources are rewarded via an ex post facto grant,
indicate a market-driven efficiency that patents otherwise granted do not
recognize or reward. De Soto notes the rise in entrepreneurial activity in
states that grant to squatters some form of legal title despite their adverse
possession against title owners or sovereigns. His work has resulted in a
general liberalization and spread of squatters’ rights regimes in third-world
countries wishing to expand markets and increase ownership. The efficiency of natural monopolies is encouraged by such governmental grants,
following some sort of possession and improvement.
7. The Efficiency of Natural Monopolies
Artificial monopolies, created by positive law and granted or enforced by
governments, are not necessarily efficient. They are granted without regard
to market forces, and endure irrespective of those same forces. In intellectual property, patents are routinely granted for new and inventive products
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 289
Sovereigns, Squatters, and Property Rights
289
or processes, although those new and inventive products or processes may
not have a market, and may never in fact enter the stream of commerce.
The patent itself has become a valuable form of property, because of the
strong and exclusive nature of the monopoly granted, so that a company
may be valued not necessarily by what it makes or sells, but by the perceived value of the intellectual property it may be sitting upon.
As I have argued in The Ontology of Cyberspace, patents are in many
ways a drag on the economy, slowing the movement to market of new and
innovative technologies, and ultimately unnecessary as a means to promote
innovation. Rather, given new technologies, innovators may reap huge
rewards by speedier innovation, and getting more quickly to market, even
without governmentally created monopolies (see Koepsell 2000, 108–10).
So, too may the government-sponsored monopolies of land patents be
a drag on economies. This fact is implicit in the willingness of U.S. jurisdictions to accept squatters’ rights as valid, where land has been improved
and other indicia of ownership asserted. Much like the potential economic
benefit of a laissez faire world without governmentally created monopolies
over intellectual property, a “squatters’ regime” recognizes that government sponsored monopolies over land, which divvies up parcel without
regard to the prospective owner’s ability to usefully improve the land, may
not always be the most efficient use of a limited resource.
The Guano Islands Act mixes the role of bona fide possession and
improvement with an ex post facto grant of governmental legitimacy. As
opposed to the usual course of a sovereign’s initial assertion of territoriality, the Guano Islands Act affords a guano entrepreneur the profits of his
or her exploitation of a newly discovered resource in exchange for a later
grant by the sovereign of title. It is a rare form of expansion of territoriality, which accomplishes expansion not by war or treaty, but by fiat, driven
by the value of private entrepreneurs willing to undertake the risk of exploration where a government lacks resources, time, will, or capital.
De Soto’s thesis is that the expansion of individual, private property
rights to those willing to undertake entrepreneurial activities, improve upon
land, and feed the engines of economies frees up hidden capital otherwise
unrecognized due to complex, outdated cadastral systems. Those systems
that are unwilling to recognize the value and role of adverse possession, as
with the German example of the guano island of Nauru, will ill-serve the
release of this hidden capital, and will suppress innovation and growth.
8. The Future of Institutionalized Squatters’ Rights
The monopoly exerted by the sovereign may be defined legally as among
equal sovereigns (as in treaties), or may be taken by war, or may be asserted
Mystery of CapitalCRev
290
2/18/08
11:13 AM
Page 290
David R. Koepsell
by fiat, as in the case of the Guano Islands Acts. The former method is particularly important for the future of exploitation not of Guano Islands, but
rather of outer space. For instance, the U.S. and most other major nations
refused to sign the “Agreement Governing the Activities of States on the
Moon and Other Celestial Bodies,” 1984 (The Moon Treaty). The U.S.
Senate’s refusal to ratify means that the Moon Treaty’s provisions are not
“the law of the land” in U.S. courts, and therefore need not inhibit the
actions of U.S. citizens or legislators. In this brave new age of privately
funded space exploration, the U.S. could further encourage the entrepreneurial exploitation of the Moon and other celestial bodies by passing an
interplanetary version of the Guano Islands Act (which remains good law,
though we won’t be finding guano on the moon), which would authorize
private individuals to take and improve the Moon and other such bodies,
and increase our territory strategically, and exponentially.
R E F E R E N C E S
Blackstone, William. 1766. Commentaries on the Laws of England. Bk 2. Oxford.
de Soto, Hernando. 2000. The Mystery of Capital. New York: Basic Books.
Groos, Leo. 1948. “The Peace of Westphalia, 1648–1948.” American Journal of
International Law 42, no. 20.
Koepsell, David. 2000. The Ontology of Cyberspace. Chicago: Open Court.
MacSporran, Peter. 1995. “Land Ownership and Control in Nauru.” Murdoch
University Electronic Journal of Law 2, no. 2.
Matin v. Waddell’s Lessee. 1842. 41 U.S. 367.
Wheaton, Henry. 1866. Elements of International Law. 8th ed. Sec. 78.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 291
The Property Rights
Prescription: Urban
Migrants versus Rural
Customary Land Tenure
in the Developing World
14
Jon D. Unruh
1. Introduction
Significant attention is currently focused on the economic potential of
undocumented property held by poor people in developing countries.1
Such property (especially land) is characterized as being occupied and used
but not formally owned, and is thought to amount to a considerable sum
of capital—a total much larger than all foreign investments in and assistance to the developing world in recent decades. This notion of undocumented property, which is strongly advocated by Hernando de Soto
(2000), suggests that given the existence of such vast resources, the possibility of documenting them with individualized formal titles has the potential to produce substantial economic benefits. Further, recognizing the
value of this already existing but undocumented capital suggests that
developing countries would do well to begin the process of fostering economic growth at home, rather than first seeking aid from abroad. This idea
is caught up with two issues. The first concerns land and its potential to be
used as collateral, while the second and more fundamental issue is that of
law and legal institutions. The issue of law is more fundamental because
those who informally occupy and use capital are very frequently unable to
prove ownership by way of the formal titles that lending, credit, and other
civil institutions require.
The legal problem concerns the ongoing disconnect between formal
state law and the informal customary or traditional law that governs how
a great deal of the world’s poor intersect with property. The former allows
assets to be fungible and thus to be used by individuals for purposes of
exchange in the open market. The latter, however, has evolved under a
1. Portions of this chapter initially appeared in Land Use Policy 19 (2002): 275–76.
291
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 292
Jon D. Unruh
292
different tenurial logic: specifically the logic of maintaining the communal
and familial ties to land that provide for personal safety and ensure personal
and communal access to essential resources, often in physically, socially,
and politically risky environments (Unruh 2002a). An important distinction lacking in the poverty–property rights argument is that the benefits of
informal or traditional law described here are most robust in functioning
rural tenure systems, and are weakest in informal urban tenure systems.
Whereas formal law is created by legislation, customary laws and associated
rights are created by “ad hoc arrangements that develop to meet the variety of situations in which people find themselves” (Riddell 1982) and are
thus backed by what Riddell (1982) calls “law-in-action.” Searle also notes
this distinction in the way in which “institutional facts” are created,
namely, the deliberate act of legislation versus the roles of “natural evolution” and “collective intentionality” (Searle 1995).
The solution to the legal problem offered by de Soto is to formalize
customarily held land and property so as to unleash the economic potential latent in the “dead capital” (de Soto 2000) that is bound up in such
informally held property.
However, this chapter argues that there is a fundamental distinction
between intact, functioning rural customary tenure systems and the disrupted informal property rights arrangements pursued by those who have
migrated to cities, and that recognizing this distinction brings to light
some important limits to de Soto’s poverty–property rights argument.
2. The Nature of the Disconnect
2.1. The Rural Domain
2.1.1. THE UTILITY
OF
RURAL CUSTOMARY TENURE SYSTEMS
Much about the poverty–property rights argument focuses on what customary tenure systems do not do—hence the label “dead capital” (de Soto
2000)—and the relevance of Searle’s (1995) discussion of partial representation. However, customary tenure systems are very effective at accomplishing certain goals. An examination of the rural tenure domain reveals a
number of aspects that are critically important in their utility.
First, a primary reason for the gulf between formal and customary
tenure regimes is the very different purposes for which each is designed.
Significant components of customary tenure are bound up with notions of
property rights that facilitate risk reduction at the group level. This contrasts sharply with the goal of formal tenure regimes, which is that of mak-
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 293
The Property Rights Prescription
293
ing capital accessible to and usable by the individual, something that essentially promotes risk taking. When land is treated as a commodity it exists
separately from group-based institutions that focus on ensuring the availability and security of essential resources such as food. In the reduced form
of a commodity, land can easily be bought, sold, and used as collateral, and
in societies where this occurs successfully one can still separately acquire
forms of security and insurance.
While much importance is placed on the “invisible” aspects of the capital–property rights nexus (de Soto 2000), equally invisible and useful are
the operative aspects of rural land tenure regimes. These aspects standardly
provide for important forms of security and insurance, as well as contribute
to a sense of identity, under circumstances that are very risky (e.g., Unruh
1998). That these aspects are bound tightly together for participants in
customary tenure regimes is a good example of what Searle (1995) calls
the Background, insofar as the connections are largely taken for granted by
participants within customary tenure systems.
The creation in rural areas of formal property systems and institutions,
along with alternative provisions for personal security and insurance,
would go a long way in enabling and promoting risk taking, as well as
awareness of the opportunities associated with land that can be used as a
commodity. However, not only are these arrangements variably available,
expensive, corrupt, and beyond the financial and educational means of
most in the developing world (where they are not lacking altogether), they
can also be quite difficult to put together for whole populations, requiring
the use of more resources than many countries are able to afford (Unruh
2002a). Additionally, moving from community- or lineage-held land in
rural areas to individually held land in the form of a commodity would in
many cases destroy the institutions that have traditionally provided security
and insurance.
Second, in developing countries with scarce financial resources and low
administrative capacity, land administered by rural customary tenure systems occurs at no cost to the state. This is especially important for countries unable to bear the cost of such administrative activity—particularly
where titles, registries, and enforcement would be needed over large areas.
Third, there is the idea of homeland or home territory, where identity
based attachments to land can run very deep for very uneconomic reasons
(see Shipton 1994). While the Middle East is an acute example of this,
there are many others. Such identification with land is not only about
where one does belong, but also frequently about where one does not
belong. Identity-based attachments to land(s) are pervasive over large portions of the developing world, and will not be changed by legislation in
national capitals without considerable tumult.
Mystery of CapitalCRev
2/18/08
Page 294
Jon D. Unruh
294
2.1.2.TITLING
11:13 AM
OF
SMALLHOLDER LANDS
Recognition by the international development community of the discrepancy between customary and national tenure systems and the problems
that result has led to attempts to bring small-scale landholders into national
tenure systems, or to link the two systems through titling of smallholder
land. Numerous experiences, however, have revealed that giving title to
small scale agriculturalists neither brings them into the national tenure systtem nor links the two (e.g., Bruce, Migot-Adholla, and Atherton 1994;
Lemel 1988; Roth, Cochrane, and Kisamba-Mugerwa 1994; Roth, Unruh
and Barrows 1994; Golan 1994, Migot Adholla, Benneh, and Atsu 1994;
Wade 1988; Bromley and Cernea 1989; Leonard 1986).
As an artifact of a system that smallholders can have little understanding of, title can quickly lose its value if not updated when land, or portions
of a piece of land, are transacted, given away, or inherited (Bruce, MigotAdholla, and Atherton 1994). There is extensive evidence that systematic
titling exercises for rural smallholders are followed by widespread failures
to register transfers and successions (Bruce, Migot-Adholla, and Atherton
1994; Shipton 1994). The accuracy of registry records made at considerable cost is lost as the position on the ground—and in the minds of the
local people—eventually diverges from that on the register. This is because
most rural smallholders, even after receiving title, do not do the things that
titling seeks to empower them to do, such as selling or mortgaging their
land without consulting family or neighbors. Use of those powers would
go against important cultural norms that are responsible for the functioning of the customary tenure system, and would disrupt relationships fundamental to risk reduction, security, and insurance (Bruce, Migot-Adholla,
and Atherton 1994).
Similarly, the problem of alienability applies to the presumed connection between title and credit—since it is the possibility of foreclosing on
the mortgaged land and realizing its value in the market that drives offers
of credit (Platteau 1992). Despite the effort, hopes, and assumptions of
economic development planners, rural land in developing nations is seldom just a commodity. In fact, some tenure policies that seek to make land
marketable have instead made it the center of tremendous conflict
(Shipton 1994).
While the freehold mortgage system is a primary strategic aim of many
development planners, it remains extremely problematic in areas settled by
lineages (Bruce, Migot-Adholla, and Atherton 1994). The presence of
sacred graves or kin on and around the land of loan defaulters often
inhibits creditors’ attempts at seizure. Further, the act of seizure by creditors is perceived by some lineages as an act of war (Shipton 1994).
Disputes over mortgaged land can also frequently be violent (Verdier and
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 295
The Property Rights Prescription
295
Rochegude 1986; Shipton 1994). This of course discourages creditors
from offering credit in the first place. Bruce, Migot-Adholla, and Atherton
(1994) have come to the conclusion that these norms cannot be legislated
out of existence, even where land policy reform is followed up with costly
and extensive cadastral survey and registration. In land titling programs,
market logic never simply shuts out political and cultural reason (Shipton
1994). And even if smallholders attempt to pursue title change, local-level
state institutions (such as a land registry) in the developing world can have
very limited capacity to process, record, and communicate to a central registry the details of a land transfer, if such local institutions even exist. The
costs of such title change or transfer are thus frequently borne by the smallholder, who for numerous reasons does not or cannot follow through with
such transfer (Bruce, Migot-Adholla, and Atherton 1994).
While a primary objective of titling efforts can be to provide increased
tenure security, individual title for rural smallholders does not necessarily
accomplish this. Land tenure security, defined as the degree of control over
land resources that an owner possesses, plays a crucial role in the functioning and development of third-world agriculture. However, actual
tenure security is based upon much more than labels and artifacts such as
documented title. Such documents must represent both a system of rules
and a capacity to use and enforce the property rights those rules guarantee. The system must be understood, accessible to and, importantly,
viewed as legitimate by, not only the holder of the document, but also
those who may wish to make claim against it. Such a system must also be
connected to local social, cultural, and biophysical realities. Attempts to
substitute rural customary entitlement with state titles can actually reduce
tenure security in some cases by creating confusion, of which those more
powerfully placed can take advantage (Bruce, Migot-Adholla, and
Atherton 1994). Where state titling is welcome locally in rural areas, it is
often as a defense against dispossession by other arms of the state, or by
those acting for themselves under the state’s aegis (Shipton 1994).
Further, titling under a weak state tenure system—as such systems frequently are in much of the developing world, particularly in rural areas—
rarely provides meaningful security (Bruce, Migot-Adholla, and Atherton
1994).
There is also the problem of what exactly is being titled. If land currently under cultivation is titled, then this creates difficulties in systems of
swidden fallow agriculture, and/or where community common lands are
used for a number of purposes such as gathering fuel wood, extracting
minor forest products, and grazing. Shipton (1994) notes that when dealing with the administration of land the question of who controls the “language,” and the “translations” of reality regarding how land is dealt with
and divided (demarcations, transfers, inheritance, access, etc.) becomes
Mystery of CapitalCRev
296
2/18/08
11:13 AM
Page 296
Jon D. Unruh
critically important (also Murphy 2003). Such control legitimizes or delegitimizes units of aggregation, kinds of rights, transactions, rituals, and
ways of land use (Shipton 1994). While titling presently cultivated smallholder land may make areas available to be granted as concessions (commons, fallow land), in aggregate this becomes a problem when small-scale
agriculturalists are no longer able to feed themselves.
2.2.The Migrant Domain
2.2.1.RECONFIGURED SOCIAL RELATIONS
The primary explanation for the disconnect between formal and informal
legal domains is that formal law in much of the developing world has little
to do with what most people are actually doing “on the ground” (de Soto
2000, Economist 2001). In countries afflicted by this problem, there can be
little opportunity or willingness on the part of the state to formalize the
actual customs and norms that contribute to the determination of rights
and obligations about land. In this regard, the way in which American formal property law evolved over time to reflect actual processes of land use,
claim, and dispute is thought to be an important example of successful
integration of the informal and formal legal systems (Economist 2001). The
American example, however, captures a primary problem in the
capital–property rights argument. How the American pioneer intersected
with lands and how this system evolved into or merged with formal law is
much less relevant to the situation of developing countries than is how the
property rights systems of Native Americans intersected with formal law,
however “evolving” the latter might have been. With significantly different
conceptual foundations, customary law and formal law in developing
countries (the latter usually inherited from European colonial law) have
less to do with each other than the “on the ground” activities that migrants
and settlers around the world have employed (and still employ in places
such as Brazil) that have managed to merge successfully with subsequent
formal law (Unruh 2002a).
Migration profoundly changes relationships between people, especially
migration that results from severe circumstances (e.g., food insecurity,
resource scarcity, conflict, economic and political insecurity). Separation of
people from established home areas and ways of land use and tenure can
be the first and most dramatic step toward the development of a changed
approach to land rights. Physical separation changes, terminates, or puts on
hold prevailing social rights and obligations connected to land and property. This is especially true in cases where actual occupation, social position,
or membership forms the basis for or a significant aspect of claim and use
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 297
The Property Rights Prescription
297
rights. The socio-spatial repercussions and subsequent reduction in the relevance of specific customary administration, enforcement, and other property-related institutions, norms, and obligations result in altered
relationships between people, land areas, land uses, agricultural production
systems, and population patterns. In essence, migration and its repercussions for small-scale rural landholders reconfigure the network of social
relations upon which all land tenure systems depend.
2.2.2. ALTERNATIVES SOUGHT
For migrants arriving in destination locations, land, even if only for residential use, must be sought and secured. However, this usually occurs in
the context of an approach to access, use, and claim quite different from
what prevailed in the migrants’ rural home area. This issue is often exacerbated by a change in social status, as rural community members become dislocatees, migrants, squatters, female-headed households, and refugees in
new locations. In a migration context securing legitimate property rights
becomes significantly problematic, as migrants must accept, emphasize,
modify, and derive new notions of legitimacy that allow secure access to and
use of property.
The possession of evidence to prove and therefore secure claim and
right of access to property is a fundamental feature of all land tenure systems. It is also a particular difficulty in urban migrant circumstances. Rural
customary tenure systems contain a wide variety of informal evidence that
derives its legitimacy from customary social and cultural features (Unruh
2002b). During the course of migration, especially to urban areas, such
evidence and legitimacy of evidence either disappear or are subject to considerable change. This is primarily due to the role that community plays in
determining what evidence is legitimate (Unruh 1997). One example of
this phenomenon occurred in Mozambique subsequent to the RENAMO
conflict. In this situation land rights for the customary tenure system were
bound up in historical features of community interaction, therefore migration resulted in a pronounced shift in what counted as legitimate evidence
of ownership. As a result customary “social” evidence such as testimony,
community and lineage membership, and history of occupation, were
greatly devalued. At the same time, alternative forms of evidence such as
physical occupation greatly increased in value (Unruh 2001). Such situations are often optimal for titling.
The goal of acquiring what is perceived to be legitimate evidence is, of
course, to prove that one has a claim to property and to secure that claim.
But tenure security can play a dualistic and unwieldy role in migrant locations. On the one hand, tenure insecurity in destination locations for
migrants can be a significant attractor. Amacher et al. 1998 found that land
Mystery of CapitalCRev
298
2/18/08
11:13 AM
Page 298
Jon D. Unruh
tenure insecurity was a primary factor in the selection of destination sites
by migrants in the Philippines, with similar examples elsewhere in Asia.
Migration destinations in this context are often places where the state has
neglected development of land tenure systems, or where other forms of
neglect, instability, or confusion have caused tenure insecurity (Amacher et
al. 1998; Myers 1997). Such insecurity has created opportunities for new
migrants to arrive and make a claim to property. Such situations are seen
as attractive for migrants in that they represent the possibility for pursuing
various forms of claim for themselves in a fluid institutional environment,
however temporary or unofficial (Amacher et al. 1998; Unruh 1995b).
The initial migrant search for locations possessing a high degree of tenure
insecurity is, however, usually followed by a concerted search for tenure
security once claims have been made (Amarcher et al. 1998).
The search for widely accepted, legitimate proof of claim and possession
of property in a physical, political, and socioeconomic environment that is
new and unfamiliar is an important driver in the search for alternative ways
of configuring property rights, and an important factor in the acceptability
of alternatives. This search and acceptance can be particularly robust when
multiple forms of insecurity (personal, economic, food) function as compounding influences—an important consideration given that most migrants
are poor and lack the means to provide for near-term security (Ghimire
1994). Thus the ways in which settlers and migrants intersect with land are
very much more amenable to the institution of formal law than are in-place,
functioning indigenous rural tenure regimes. In many instances—including
the American example—migrants can share, or come to share, a tenurial
logic similar to that reflected in state law because the state itself has facilitated settlement. As a result, the sociocultural distance is smaller, and formal and informal institutions can be mutually supportive.
3. Attempts at Connecting Formal and Customary
Property Law
3.1. Uniform Codes from Customary Law?
At this point in history, the problem for developing countries is larger than
just that of fashioning customary notions of property into a set of uniformly enforceable laws along the lines of the capital–property rights argument. It is also the dilemma of attempting to connect in a meaningful way
in-place, formal, European-derived property laws2 and the customary laws
2. Which won’t be going out the door any time soon given how they are favored by
urban elites.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 299
The Property Rights Prescription
299
and activities that are tied up with ongoing social relations about land—
laws and customs which function to fulfill important social needs in rural
areas that individualized title alone cannot similarly fulfill. Further, any
“translation” of local reality into formal law must also have some continued meaning in customary law. The reason for this is that if only the rules
of customary law are incorporated into formal law, and not how and for
whom such rules operate, then the formal construction will most likely lose
meaning and hence legitimacy in customary practice.
Such translation can be difficult insofar as the perceived necessity to
preserve the integrity of the document in matters relating to property leads
to the inability of many formal property systems to deal effectively with
“parol” or oral evidence as proof of ownership and as a factor in resolving
disputes. Of course, verbal or testimonial evidence is in most cases all that
customary communities in developing countries possess. Further, it cannot
always be assumed that important aspects of customary law regarding
property can simply be “translated” into the formalized uniform laws that
service the operationalization of capital, insofar as this is not what these
rules were originally designed to do. A further consideration is that when
a uniform enforceable code is to be derived out of the laws or norms of different customary groups (and in some countries a great many different
groups), this will certainly mean that some or all groups will be expected
to give up their primary evidence for right of access to rural lands, namely,
membership in a lineage with claims to specific real estate.
In addition, attempts to incorporate aspects of indigenous tenure
regimes into formal law have found that customary law can often be fluid,
including, for example, capricious decision-making by leadership. This feature of informal rural tenure regimes is in part a response to the fluid
nature of the social, economic, political, and biophysical variables that surround them. A fluidity suggesting that those who do well must be able to
rapidly adapt, requiring changeability in certain aspects of property rights
to be at a premium. The goals of formalized property laws are of course
otherwise. Such laws are much less subject to change, hence their predictability, wide application, and value in operationalizing capital and other
aspects of property associated with land as a commodity.
3.2. Changes in Formal Law?
To move from rural property tied essentially to a sense of identity based on
community, lineage, and geography to something based primarily on the
individual that is able to create and take advantage of capital as we
presently understand it would be a significantly long and arduous process.
What will be needed in the end are not just attempts at formalizing aspects
Mystery of CapitalCRev
300
2/18/08
11:13 AM
Page 300
Jon D. Unruh
of customary law, but also a change in the concepts dear to formal law,
such as the integrity of the document and the static nature of rules.
There is ongoing experimentation in certain African countries where
attempts are being made to bridge the disconnect between customary and
formal law concerning land tenure by making fundamental changes in formal law. The Mozambican Land Commission has, as part of the peace
process in the 1990s, rewritten its legislation concerning land rights in
order to accommodate the reintegration of approximately six million people who were displaced by the war. This process has involved making significant changes in formal property law in order to make it intersect more
successfully with customary law. These changes have primarily had to do
with increasing the admissibility of customary evidence, such as parol evidence, and with relaxing the primary role of the document as singularly
valuable evidence in relation to property issues (Unruh 2001). In Zambia,
the government-funded Law Development Commission has reworked its
Commonwealth mandate to examine specifically the intersection between
customary law and state law, with land tenure being a primary focus. In this
case, studies are carried out by the Commission on specific tenure problems, and recommendations are provided to parliament regarding necessary changes in formal law, sometimes including fundamental concepts of
formal law. In post-conflict East Timor new formal property rights laws are
being proposed after significant research into customary land tenure, laws
admitting parol, and other customary evidence to be considered in cases
involving claim, possession, and restitution.
In a highly significant book entitled Searching for Land Tenure Security
in Africa edited by Bruce and Migot-Adholla (1994), eight research projects in seven countries together with a comprehensiv literature review
approached the question of land tenure security in African agriculture.
Given the problems associated with attempting to replace customary
tenure with formal tenure systems, the authors come to the conclusion that
there must be a movement away from the “replacement paradigm,”
according to which customary tenure systems are to be replaced by formal
state tenure systems, and towards an “adaptation paradigm.” Such an
adaptation approach requires a legal and administrative environment that
is supportive of the evolutionary nature of change in customary practice,
and also requires a clear acknowledgement of the legal applicability and
enforceability of customary tenure rules (Bruce, Migot-Adholla, and
Atherton 1994). Bruce, Migot-Adholla, and Atherton (1994) highlight
that a certain amount is known about the process of transformation in customary land tenure systems, including the centrality of conflict resolution
in that process (also Moore 1986; Rose 1992). They also point out that
there is a need to look at “how and on what terms formal recognition of
indigenous land tenure rules is most effective, and how dispute settlement
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 301
The Property Rights Prescription
301
mechanisms can best be framed to facilitate the process of legal evolution”
(Bruce, Migot-Adholla, and Atherton 1994).
4. Urban Migrant Settlements and the Prescription
De Soto’s approach found its initial application in Lima’s slums, and
potential for such an approach remains strongest in the informal urban
domain. The world’s urban population is expected to more than double by
2025, to over five billion, with 90 percent of this increase to occur in the
developing world (Global Environmental Outlook 2000). This “urbanization of poverty” occurs concurrently with deteriorating conditions for the
urban poor, weak local government structures, weak administrative capacity, and inadequate practices and concepts of urban governance (UN
Habitat 2001). But as large successful cities have demonstrated, urbanization does not cause impoverization, but rather poorly managed urbanization that leads to marginalization and increasing costs of living (UN
Habitat 2001). However, the reality is that governments in the developing
world are unprepared and under-resourced to properly manage the scale of
the phenomenon, which will exacerbate the unsustainable and unstable
character of the growth. As a result we are very unlikely to see an infusion
of resources into the informal urban settlements of developing countries
that will in any way match the scale of the problems emanating from these
locations. In this context the argument for unleashing the capital, entrepreneurship, and innovation associated with formalized private property is
strongest, and where policy change along the lines of the de Soto prescription will be most effective. However, while the temptation to view the
approach as a magic bullet can be strong, considerable caution is warranted
in applying the prescription to all customary tenure regimes, particularly in
the rural domain where intact, functioning tenure systems serve important
needs, and where substantial differences will require that evolution occur
at a different rate.
The connection between urban and rural tenure systems occurs via
migration, an event whereby many connections with rural tenure systems
are disrupted or severed, and new arrangements in urban areas must be
sought. Searle’s contribution is significant here. The continued functioning of institutional facts requires that “a significant number of members of
the relevant community must continue to recognize and accept the existence of such facts” (Searle 1995, 117). Migration from intact, functioning rural tenure systems to chaotic, fluid urban tenure systems disrupts this
recognition and acceptance, in a way similar to Searle’s own property
rights example regarding how the existence of institutional facts is discontinued: “The moment, for example, that all or most of the members of a
Mystery of CapitalCRev
302
2/18/08
11:13 AM
Page 302
Jon D. Unruh
society refuse to acknowledge property rights, as in a revolution or other
upheaval, property rights cease to exist in that society” (117). The lack of
effective property rights in migrant urban settlements then makes adoption
of alternatives much easier. But at the same time, where intact rural tenure
systems continue to provide benefits to participants, there will be considerable resistance to the imposition of new designs.
A final note on the relevance of property rights and de Soto’s prescription to one of today’s primary issues. The problems resulting from nonparticipation in the benefits of successful urbanization exist in their most
acute form in the informal, impoverished urban settlements of the developing world. This is to a large degree due to the simultaneous exposure
and lack of concrete access to the positive aspects of the globalizing economy, along with the physical size and concentrated nature of such slums.
Processes of impoverization and marginalization deepen economic
inequities and disparities in access to resources. Such an arrangement then
fuels notions among some segments of the poor that increasing wealth for
some is provided for by the impoverization of others. This population is
arguably among the most vulnerable to forms of extremism, and policies
that seek to address this vulnerability will need to examine specifics. One
of the more interesting discussions of specifics is de Soto’s earlier book The
Other Path: The Economic Answer to Terrorism (1989, reprinted in 2002),
in which the first topic addressed in the introduction is migration, where
de Soto articulates the Peruvian experience with migration from rural to
urban areas.
R E F E R E N C E S
Amacher G. S., W. Cruz, D. Gerbner, and W. F. Hyde. 1998. “Environmental
Motivations for Migration: Population Pressure, Poverty and Deforestation in
the Philippines.” Land Economics 74:92–101.
Bromley, D. W., and M. M. Cernea. 1989. “The Management of Common Property
Natural Resources: Some Conceptual and Operational Fallacies.” Paper presented for the World Bank Ninth Agricultural Symposium, Washington DC.
Bruce, J. W., and S. E. Migot-Adholla, eds. 1994. Searching for Land Tenure
Security in Africa. Dubuque, IA: World Bank / Kendall/Hunt.
Bruce, J. W., and S. E. Migot-Adholla, and J. Atherton. 1994. “The Findings and
Their Policy Implications: Institutional Adaptation or Replacement?” In Bruce
and MigotAdholla, Searching for Land Tenure Security in Africa.
Carter, M., K. D. Wiebe, and B. Blarel. 1994. “Tenure Security for Whom?
Differential Effects of Land Policy in Kenya.” In Bruce and Migot-Adholla ,
Searching for Land Tenure Security in Africa.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 303
The Property Rights Prescription
303
de Soto, H. 1989. The Other Path: The Economic Answer to Terrorism. Repr. 2002.
New York: Basic Books.
———. 2000. The Mystery of Capital: Why Capitalism Triumphs in the West and
Fails Everywhere Else. New York: Basic Books.
Economist. 2001. “Poverty and Property Rights,” 31 March 2001. U.S. edition.
Global Environmental Outlook 2000. London: Earthscan Publications, 1999.
Ghimire, K. 1994. “Refugees and Deforestation.” International Migration
32:561–69.
Golan, E. H. 1994. “Land Tenure Reform in the Peanut Basin of Senegal.” In
Bruce and MigotAdholla, Searching for Land Tenure Security in Africa.
Griffiths, J. 1986. “What is Legal Pluralism?” Journal of Legal Pluralism 24:1–52.
Lemel, H. 1988. “Land Titling: Conceptual, Empirical and Policy Issues.” Land
Use Policy 5:273–90.
Leonard, D. K. 1986. “Putting the farmer in control: building agricultural institutions.” In Strategies for African Development, edited by R. J. Berg and J. S.
Whitaker. Berkeley: University of California Press.
Migot Adholla, S. E., G. Benneh, F. Place, and S. Atsu. 1994. “Land, Tenure
Security and Productivity in Ghana.” In Bruce and Migot-Adholla, Searching
for Land Tenure Security in Ghana.”
Moore, S. F. 1986. Social Facts and Fabrications: ‘Customary’ Law on Kilimanjaro,
1880–1980. Cambridge: Cambridge University Press.
Murphy, P. 2003. Evidence, Proof, and Facts. Oxford: Oxford University Press.
Myers, N. 1997. “Environmental Refugees.” Population and Environment 19:167–82.
Platteau, J. P. 1992. “Land Reform and Structural Adjustment in Sub-Saharan
Africa: Controversies and Guidelines.” FAO Economic and Social Paper no.
107. Food and Agricultural Organizations of the United Nations.
Riddell, J. C. 1982. “Land Tenure Issues in West African Livestock and Range
Development Projects.” Land Tenure Center Research Paper no. 77, Land
Tenure Center, Madison, Wisconsin.
Rose, L. L. 1992. The Politics of Harmony: Land Dispute Strategies in Swaziland.
Cambridge: Cambridge University Press.
Roth, M., J. Cochrane, and W. Kisamba Mugerwa.1994. “Tenure Security, Credit
Use, and Farm Investment in the Rujumbura Pilot Land Registration Scheme,
Uganda.” In Bruce and Migot-Adholla, Searching for Land Tenure Security in
Africa.
Roth, M., J. Unruh, and R. Barrows. 1994. “Land Registration, Tenure Security,
Credit Use, and Investment in the Shaebelle Region of Somalia.” In Bruce and
MigotAdholla, Searching for Land Tenure Security in Africa.
Searle, J. 1995. The Construction of Social Reality. New York: Free Press.
Shipton, P. 1994. “Land and Culture in Tropical Africa: Soils, Symbols, and the
Metaphysics of the Mundane.” Annual Review of Anthropology 23: 347–77.
Mystery of CapitalCRev
304
2/18/08
11:13 AM
Page 304
Jon D. Unruh
UN Habitat. 2001. The Global Campaign For Secure Tenure: Implementing the
HABITAT Agenda. Nairobi, UN-HABITAT, http://www.unchs.org/
tenure/tenure.htm.
Unruh, J. D. 1995a. “The Relationship between Indigenous Pastoralist Resource
Tenure and State Tenure in Somalia.” GeoJournal 36:19–26.
———. 1995b. “Post-conflict Recovery of African Agriculture: The Role Of
‘Critical Resource’ Tenure.” Ambio 24:343–50.
———. 1997. “Post-Conflict Recovery of African Agriculture: Critical Resource
Tenure in Mozambique.” Ph.D. Dissertation.
———. 1998. “Land Tenure and Identity Change in Postwar Mozambique.”
GeoJournal 46: 89–99.
———. 2001. “Postwar Land Dispute Resolution: Land Tenure and the Peace
Process in Mozambique.” International Journal of World Peace 18, no. 3
(September): 3–30.
———. 2002a. “Poverty and Property Rights in the Developing World: Not as
Simple as We Would Like.” Land Use Policy 19: 275–76.
———. 2002b. “Land Dispute Resolution in Mozambique: Evidence and
Institutions of Agroforestry Technology Adoption.” In Innovation in Natural
Resource Management: The Role of Property Rights and Collective Action in
Developing Countries, edited by R. Meinzen-Dick, A. Mcculloch, F. Place, and
B. Swallow. London: Johns Hopkins University Press.
Verdier, R., and A. Rochegude. 1986. Systemes Fonciers a la Ville et au Village:
Afrique Noire Francophone. Paris: L’Harmattan.
Wade, R. 1988. Village Republic—Economic Conditions for Collective Action in
South India. Cambridge: Cambridge University Press.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 305
Geographic Regions as
Brute Facts, Social Facts,
and Institutional Facts
15
Daniel R. Montello
1. What Are Geographic Regions?
Geographic regions (henceforth, regions for short) are spatially extended
pieces of (near) earth surface that share some aspect of similarity across
their extents. The most fundamental aspect of similarity shared within a
region is “locational similarity”—proximity. But regions nearly always
share common thematic content or activity too. That is, regions are
defined not just spatially but according to the human and natural entities
or processes occurring there. Regionalization is spatial categorization, and
importantly, this spatiality is literal rather than metaphorical, as it is with
most other category systems. The modifier “geographic” implies a region
of space that is prototypically two-dimensional (though often bumpy or
uneven) and at or near the earth surface. Volumetric exceptions exist
underground and in the atmosphere, but they are rare given the geographer’s interest in the earth as the home of human habitation. Also because
of the human-centered focus of geography, the human and natural themes
that provide content for regions are usually phenomena at human-centered
spatial and temporal scales?not too fast or small, not too slow or large
(Montello 2001).
The fact that geographic regions typically encompass places that are
close together is interesting and conceptually nontrivial because it leads
to a generalization about the shape of regions. Regions tend to be
Thanks to Andrew Frank, Mike Goodchild, Violet Gray, and David Mark for regional conversations and observations. An earlier version of this paper was presented on April 14 at the
Multi-Disciplinary Workshop, “The Mystery of Capital and the Construction of Social
Reality,” held April 12–15, 2003, at SUNY Buffalo. I am grateful for the organizers’ invitation to attend and the financial support they provided. I also thank participants at the workshop and two anonymous reviewers for insightful comments.
305
Mystery of CapitalCRev
306
2/18/08
11:13 AM
Page 306
Daniel R. Montello
“compact”?spatially contiguous and unfragmented areas that extend
roughly equally in all directions (i.e., roughly circular).1 This locational similarity within regions arises for an intriguing variety of reasons. In fact, closer
places are more similar, on average. This principle (famously called the
“First Law of Geography” by Tobler 1970) holds true as a generalization
because more interaction occurs between closer places, which in turn holds
true because interaction (movement of air masses, distribution of newspapers) has less “friction” (air pressure, delivery cost) to overcome between
closer places. But people also tend to perceive and conceive of closer things
as being more similar. A lower-level perceptual example is provided by the
Gestalt law of proximity as a basis for figural organization in visual perception; a more high-level cognitive example is provided by the tendency people have to interpret closer graphic elements as representing more similar
entities in graphical spatializations of databases?the “distance-similarity
metaphor” (Fabrikant, Montello, and Mark 2006; Montello et al. 2003).
It’s also been shown that people care more about closer objects and events
(Ekman and Bratfisch 1965). Furthermore, compact regions are more useful intellectually and administratively. The efficiency of resource distribution
in compact countries as compared to elongated, prorupt, or fragmented
countries provides a clear example of the latter. “Remote” means away from
the rest of a region; severe remoteness does not occur in compact regions.
The notion that regions are naturally or rationally compact, at the very least
contiguous, was in fact expressed during mid-twentieth-century debates in
the U.S. in opposition to giving statehood to Alaska and Hawaii (Jones
1959). This notion is also reflected in laws about the proper design of electoral districts and legal challenges over the acceptability of noncompact
“gerrymandered” districts (Forest 2001).
As a subset of categorical thinking, regional thinking is fundamental to
the human conceptualization of built and natural landscapes; the universal
verbal labeling of places and features on the earth reflects this. It has been
fundamental specifically to geographers, too. In the intellectual toolbox of
the geographer, the concept of regions has been one of the basic tools?a
standard claw hammer rather than a cooper’s howel. The region concept
has always provided service to geographers, whether they worked primarily in natural language, formal language, or spatial language.2 It has helped
1. The tendency toward compactness is strictly true only on an isotropic plain, a flat twodimensional surface that has no barrier or facilitation to interaction differentially in different
directions. On the real earth, oceans, mountains, uneven population distributions, transportation networks, and so on lead to nonisotropic surfaces that help create noncompact
regions. However, the modifications these factors impose on compactness can be accounted
for analytically in order to predict more accurately actual region shapes (e.g., Haggett 2001).
2. Aside from the fact that geographic regions concern scales of human activities on the
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 307
Geographic Regions as Brute Facts, Social Facts, and Institutional 307
geographers describe their domain of interest, the (near) earth surface that
supports its natural and human phenomena; it has also helped geographers
in their attempts to achieve the other traditional scientific goals of prediction, explanation, and control (Tobler [1973] discussed an analogy
between regionalization and time-series analysis, pointing out how in both
cases continua are discretized for statistical analysis). Regions still serve
these functions and will likely continue to do so, even in the digital world
of the Internet, virtual reality, and geographic information systems;
Stubkjaer (2001) provides several examples that show how the advent of
digital geographic information systems make an understanding of the
ontology of regions even more important. Still today, Kimble’s (1951)
claim that geography is the “study of regions” is viable (his criticisms concerning the lack of agreement about specific region identities notwithstanding).
The ontology of geographic regions may be further articulated by
considering a taxonomy of region types (originally presented in Montello
2003), a taxonomy that incorporates and hopefully clarifies traditional
conceptualizations of regions by academic geographers. The taxonomy is
based on the information and procedures that people, including geographers, use to identify the regions. The taxonomy consists of four types3 of
geographic regions: administrative, thematic, functional, and cognitive.
Administrative regions are created by legal or political action, by decree or
negotiation. These include regions based on property ownership (i.e.,
cadastral regions or “real estate”) as well as regions based on bureaucratic
or governmental control, such as census tracts, provinces, and countries.
Thematic regions are formed by the systematic measurement and mapping
of one or more observable content variables or themes; those based on
more than one theme are multivariate thematic regions. Thematic
regions express where particular entities or properties exist, whether natural (rainfall, pine trees) or human (languages, crops) in origin.
Functional regions are based on patterns of interaction across space (and
time) between separate locations on the earth. Spatial interaction is the
movement of matter or energy from place to place: people, commodities,
water, seeds, earthquake tremors. Patterns in transmitted matter or energy
earth’s surface, I do not intend to restrict the term “region” to a specific scale. Geographers
have often spoken of a “regional scale” (e.g., Meyer et al. 1992; Richardson 1992; Stubkjaer
2001), a term meant to exclude smaller entities like places and larger entities like continents.
I consider all of these entities to be examples of regions.
3. People commonly use the same region label at different times to refer to different
types of regions, a phenomena that might be termed region polysemy. For example, the name
“California” is typically used to refer to an administrative region but at other times could refer
to a thematic region, a functional region, or a cognitive region (a “California state of mind”).
Mystery of CapitalCRev
308
2/18/08
11:13 AM
Page 308
Daniel R. Montello
can encode information, the basis for communication, which is thus a form
of spatial interaction. As with thematic regions, multivariate functional
regions may be based on a combination of more than one type of interaction. Finally, cognitive regions are produced by people’s informal perceptions and conceptions of the earth surface, based on direct experience,
maps, hearsay, and so forth. Examples include downtown and the Midwest
(as these concepts are used informally by lay people); another would be our
special meeting place in the woods out back.
2. Boundaries and the Ontological Status of Regions
The nature of the boundary between the inside and outside of regions is
central to an ontological exposition of regions (Jones 1959; Kristof
1959).4 Boundaries are prototypically thought of as lines but often are not
lines. Instead, they are two-dimensional bands or “transition zones.” The
two-dimensionality of region boundaries is usually due to their vagueness
(Mark and Csillag 1989). Vagueness means that a boundary is less than
absolutely precise in its second dimension; a perfectly precise region
boundary is a one-dimensional line. A variety of near synonyms for vagueness include imprecision, indeterminacy, ill-boundedness, gradation, error,
uncertainty, and fuzziness. There are several potential causes for boundary
vagueness:
a) measurement error or imprecision (measurement vagueness)
b) boundary changes over time (temporal vagueness)
c) alternative variable combinations in multivariate regions (multivariate vagueness)
d) disagreement about boundary locations (contested vagueness)
e) fundamentally vague concepts of reality (conceptual vagueness)
These are quite distinct causes of vagueness, with very different practical and philosophical implications (e.g., Burrough and Frank 1996). With
respect to the ontology of regions, two distinctions suggested by this list
are perhaps most important. One is between contested vagueness, which
4. Kristof (1959) reviews the once-lively history of academic discussions about the concepts of boundaries and frontiers. They are related but definitely distinct. Frontiers are necessarily two-dimensional zones of transition between thematic, functional, or cognitive
regions. The term has typically connoted the leading face of an expanding hinterland; it
derives from the French “front,” meaning forehead. This suggests the source of terms like
“outback” and “back country,” except that whether a particular territory is considered
“front” or “back” country” is not always consistent.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 309
Geographic Regions as Brute Facts, Social Facts, and Institutional 309
allows single persons or groups to identify regions with precise boundaries
(just not the same ones), and the other causes, which produce “universally
held” vagueness (time leads to universally held vagueness whenever a sufficient interval of time to allow boundary changes has elapsed). A second
critically important distinction in the list is between the first four causes
and the last, conceptual vagueness. The first four may always or typically
lead to vagueness in practice even though they need not in theory.
Conceptual vagueness, in contrast, necessarily leads to vagueness even in
theory.
The four types of regions from the taxonomy tend to differ in the
extent and nature of their boundary vagueness. For example, all four
region types, not just administrative regions, may have boundaries that
are vague in the contested sense, though only contested vagueness over
administrative boundaries tends to lead to war. In contrast, only administrative regions typically have boundaries that are conceptually precise.
And this is not just an invention of modern Western thinking; Jones
(1959) cites several anthropological instances of hunter-gatherers precisely demarcating their territories with fences or rivers or other markers.
This suggests the special status of administrative regions. For the other
three region types, the degree to which places on earth have the region’s
characteristic property or properties typically varies more or less continuously, and only a partially arbitrary decision can locate boundaries. For
example, it would be impossible in practice to ever measure all of the natural variables relevant to defining an ecosystem region at every location
at the same moment in time with perfect accuracy and precision, and if
you could, you would not get a completely contiguous region anyway.
But precisely delimiting an ecosystem region cannot generally be done
even in theory. The ecosystem region is simply not defined precisely
enough as a concept to produce crisp boundaries, whatever the measurement fantasies entertained. Similarly, cognitive and functional regions are
typically fundamentally vague, with every crisp representation a fiction to
some extent. There is not in principle, let alone in fact, a precise boundary around the Bible Belt or the region where people receive the London
Times (there must be at least one person in almost every corner of the
world, not just in the Commonwealth, that receives that paper). This is
not to say there is no transition in reality corresponding to the boundaries of these regions, only that the transition which really exists is really
not sharp. Nor does boundary vagueness nullify the fact that the utility
of region systems depends in part on their correspondence to states of
the real world. I revisit the question of the reality-correspondence of
regions below.
Administrative regions are thus unusual in being the only one of the
four region types that typically has potentially precise boundaries (see
Mystery of CapitalCRev
310
2/18/08
11:13 AM
Page 310
Daniel R. Montello
Couclelis 1992; Frank 1996; Smith 1995).5 But the potential precision of
their boundaries does not absolutely distinguish region types. What might
distinguish them more clearly is the structure of their membership functions. Administrative regions are special in the uniformity of their membership functions. Every place inside of New York State (considered as an
administrative region) is completely in New York State; no places outside
of New York State are in New York State at all in this sense. Uniform membership functions are characteristic of administrative regions, even those
having boundaries of non-zero width, but quite unusual among other
region types. The special character of administrative region boundaries has
been the focus of a series of papers by Smith and his colleagues (e.g., Smith
1995; Smith and Varzi 1997). Smith contrasts bona fide boundaries,
boundaries that correspond to real physical discontinuities existing independently of human intentional acts, with fiat boundaries, boundaries that
exist only because of human intentional acts. This is quite similar to an old
distinction by geographers between “natural” and “artificial” administrative boundaries (e.g., Jones 1959). In the former case, natural features
such as rivers or mountaintops provide a basis for the placement of administrative boundaries. In the latter case, boundaries are surveyed in the
world or “drawn on a map” in a manner that does not directly correspond
to any real transition in the world. The distinction between bona fide and
fiat boundaries does not, in fact, correspond well to that between administrative and nonadministrative regions, insofar as only administrative
regions have fiat boundaries (according to Smith), but not all administrative regions have fiat boundaries (i.e., some have bona fide natural boundaries or a combination of the two). In Montello (2003), I argued that the
fiat/bona fide distinction is overdrawn in the context of geographic
regions, primarily because all administrative boundaries, whether marked
by rivers or not, are identified as a product of human intentionality. This
leads to questions about the role of intentionality and the mind-body
problem in the ontology of regions.
3. Brute Facts, Social Facts, Institutional Facts
In The Construction of Social Reality, the philosopher John Searle (1995)
distinguishes brute facts from social facts (see also Smith and Searle 2003).
Brute facts are facts independent of human intentionality, often but not
5. To be exact, administrative regions have boundaries that can be made as precise as they
need to be for a particular purpose, which has often been relatively imprecise in practice
(Kristof 1959). There are numerous administrative boundaries in the world that are vague,
but only because no one has yet cared to make them precise.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 311
Geographic Regions as Brute Facts, Social Facts, and Institutional 311
always facts about physical reality. A stone is a brute fact, as is a cloud, but
so is an automobile, even though its genesis as an automobile is anthropic.
In contrast, social facts fundamentally depend on human intentionality for
their existence. An exposition of the ontology of regions is a social fact, as
is a gathering of scholars discussing ontology at a conference (though a
spatial agglomeration of humans is a brute fact). One may note a further
distinction between social facts that are idiosyncratic to an individual person’s cognition and those that are shared among a collection of individuals. Thus, social facts might better be termed “intentional facts,” which can
be further subdivided into “individual” and “collective” intentional facts
(Smith 2003). Intentionality, in the specific philosophical sense meant
here, concerns the fact that certain entities apparently have the property of
“aboutness” or “directedness” (Dennett and Haugeland 1987; Searle
1983; Siewert 2002). That is, they necessarily refer to some object or
event, actual or imagined, outside themselves. To many scholars, intentionality has been seen as a defining property of mental states. An example
would be a belief that a region of some type exists?the belief is about something outside itself, in this case a portion of the earth’s surface.
In much of his writing, Searle is particularly interested in a subset of
social facts he calls institutional facts. These are collective social facts that
have deontic powers resulting from the assignment of status functions,
functions that create obligations, rights, and duties. Deontic refers to the
modal logic of obligation and permissibility—what one may or may not
do, or ought or ought not do. Classic examples of institutional facts are
money and legal codes. A cadastral region (i.e., real estate) is a good example of an institutional fact. Land ownership conveys certain obligations and
permissions on its owners. Philosophically, this is interesting because the
status functions of real estate derive from a social contract, not from any
physical reality such as a barbed-wire fence surrounding the perimeter
(although such a fence may well be in place).
Thus, when we consider the identity of geographic regions as brute
facts, social facts, or institutional facts, we see that administrative regions
(including cadastral regions) are clearly not only collective intentional
(social) facts but also institutional facts. Their institutional nature makes
administrative regions different than other region types. Searle’s (1995)
heuristic formulation for the definition of institutional facts—X counts as
Y in context C—applies to administrative regions. This seems true no matter whether the boundaries that designate such regions are, in Smith’s
terms, fiat or bona fide or some combination. In his reply to Smith (Smith
and Searle 2003), Searle questions Smith’s claim that there are fiat administrative boundaries that are not brute facts. On the surface, Smith’s claim
appears quite correct. Administrative boundaries often exist that are not
directly marked in any way in the world. For example, the Law of the Seas
Mystery of CapitalCRev
312
2/18/08
11:13 AM
Page 312
Daniel R. Montello
recognizes “ocean economic zones” as (administrative) regions that extend
offshore from sovereign lands. Dominion over these zones is an institutional fact lacking physical reality or markers. Another example is provided
by so-called geometric boundaries, fiat boundaries that are “artificially”
straight, quite common for administrative boundaries in many parts of the
U.S. (Jones 1959 claims that the papal line of demarcation in South
America was the first one). As I argued at greater length in Montello
(2003), however, the fiat or “brute-free” nature of boundaries should not
be exaggerated. Administrative boundaries are always located relative to
some brute fact; even administrative boundaries that are unmarked by
physical objects are identified by surveying from other marker objects or
from absolute coordinate systems based on physical aspects of the earth’s
geodesy, such as the equator, the Greenwich Observatory, the edge of a
landmass, or satellite positions and signals.
In contrast to Searle’s doubts, I have more concern about Smith’s claim
that any administrative boundaries are solely brute facts, even if he were
correct to claim that some are not brute facts. In fact, even when physical
features mark administrative boundaries (quite common at various times
and places), or have served historical roles in establishing boundaries, the
features are generally not the boundaries, only markers for the boundaries.
“The boundary . . . has no life of its own, not even a material existence.
Boundary stones are not the boundary itself . . . only its visible symbols”
(Kristof 1959, 272). The area in the American Southwest known as Four
Corners exemplifies this point nicely. This location, where the boundaries
of four states meet at a point, is marked on the ground with a plaque showing four borderline segments. Although tourists are seemingly impelled to
straddle these line segments, they are not in fact the boundaries—they
denote the boundaries. When a vandal moved the plaque several feet on
January 25th of 2004, Reuter’s news service reported that “a debate has
ensued as to whether this means the state borders have been shifted.” The
story does not make clear whether this debate is uninformed or tongue-incheek.
What about other geographic regions, what kinds of “facts” are they?
Thematic and functional regions perhaps seem to be examples of brute
facts only. But that is not the case, because these types of regions are always
created as a product of human intentionality. The common existence of
multivariate vagueness makes this clear; different maps of vegetation
regions vary because different vegetation scientists (such as biogeographers) choose to include different themes, and measure them differently,
in their definitions and delineations of the regions. Thematic and functional regions definitely are about something, namely the earth surface, so
they are intentional (social) facts. At the same time, they have a physical,
brute reality.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 313
Geographic Regions as Brute Facts, Social Facts, and Institutional 313
Cognitive regions too are clearly intentional facts. As we noted above,
intentional facts may be individual or collective; similarly, cognitive regions
may be quite idiosyncratic or shared across a collection of individuals.6
“The Bible Belt” is relatively shared; “my special place where I daydream
by the river” is relatively idiosyncratic. Of course, the two blend into one
another: Aggregated individual cognition helps make culture, and instantiated cultural cognition helps make individual minds. But whether individual or social, recognizing the intentional nature of cognitive regions
does not deny that they too depend on physical brute facts about the earth
surface, not just human ideas. Reality is a major basis for human experience
and conceptual structure. The bend in the river that makes my spot so apt
for its purpose is really there.
Recognizing the role of intentionality in the identification of geographic regions is critical to understanding their ontology. Intentionality
confers the property of semiotic reference, defined and understood either
idiosyncratically by an individual person or socially by a collection of individuals. Semiotics is the study of sign systems (Berger 1999; MacEachren
1995; Sebeok 2001). According to Peirce’s conceptualization, sign systems consist of sign-vehicles (marks, patterns, physical objects, or events),
interpretants (concepts, semantic interpretations), and referents (real or
imagined entities or properties that are connected to the interpretant by
the sign-vehicle). Alternatively, the conceptualization of semiotics provided by Saussure referred only to sign-vehicles, which he called signifiers,
and interpretants, which he called signifieds; in other words, he omitted
the referent.
All geographic regions are thus, in part, semiotic entities. This is clear
in the case of administrative regions. Searle uses the term “status indicator” to refer to outward signs of deontic status; these are sign-vehicles for
institutional facts (“Private property—No Trespassing” is a good example). This is reminiscent of Peirce’s term “legisign,” the case wherein a law
acts as a sign-vehicle. But thematic, functional, and cognitive regions are
also semiotic. The property of intentionality, not the property of deontic
reference, makes regions semiotic entities. Intentionality creates a mapping
of social facts onto brute facts; this mapping can be many to one, one to
one, or one to many. Furthermore, using Searle’s terminology, there are
freestanding “Y-terms” that are themselves sign-vehicles but with referents
that are not brute facts (though it is likely that all such freestanding terms
can ultimately be connected to brute facts, real or imagined). An example
would be small red hexagons on a map that stand for stop signs at street
6. Cognitive regions shared by cultural subgroups of nonexperts have traditionally been
called vernacular regions.
Mystery of CapitalCRev
314
2/18/08
11:13 AM
Page 314
Daniel R. Montello
corners, which are themselves sign-vehicles. But geographic regions do not
involve freestanding Y-terms, because real regions (not imaginary or literary regions) refer to parts of the earth’s surface.
4. Conclusions: Regions as Social Facts and Brute Facts
Above, I described a taxonomy of geographic regions said to be based on
the way regions are identified. One might instead say the taxonomy is
based on the way regions are created. Such a usage points to the semiotic
identity of regions. But this is not say that regions, even administrative or
cognitive regions, are merely conceptualizations. They are also brute facts.
Real estate is made of soil and rock as well as deontic prerogative. To ask
whether regions are brute facts or intentional facts is misleading (see the
exchange in Smith and Searle 2003). It creates paradoxes by insisting on a
dualism in which social or even institutional facts are claimed to be exclusively physical truths or conceptual truths.7 All geographic regions are the
product of mind-body interactionism (a swineherd and an accountant discussed this further in Montello 2003). They are not just idealistic entities,
nor naively realistic entities, but semiotically realistic entities. Semiotic realism requires sentient intentionality in a real world of differentiated physical reality.
Even administrative regions always refer to a brute reality.
Administrative regions are special in being the one type of region that is
institutional, as Searle defines it, but that does not make them idealistic
chimera. It is true that the physicality of administrative regions (or any
other type of region) is not a sufficient condition for their identification,
but it is a necessary condition. Intentionality leads to alternative regionalizations of the same piece of earth surface, but there is still only one “tract
o’ land.” Regions exist in laws and regulations, in minds and cultures, and
in the real world that must ultimately be a concern of an animal species that
has a natural existence.
7. A good argument can be made that there really are no pure brute facts as Searle defines
them. A stone, a cloud, and a tree obviously have physical, intention-independent existence—
but not as a stone, a cloud, or a tree per se. Only human intentionality uses the property of
size to distinguish a stone from a sand grain or a mountain. Without human intentionality
(including perception), thresholds in the continuously varying density of water droplets in the
atmosphere would not appear as the boundaries of discrete clouds. In the context of regions,
Kristof stated it thusly: “Not only boundaries but all limits ascribed to an area . . . are always
subjective. They are defined anthropocentrically” (1959, 276–77).
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 315
Geographic Regions as Brute Facts, Social Facts, and Institutional 315
R E F E R E N C E S
Berger, A. A. 1999. Signs in Contemporary Culture: An Introduction to Semiotics.
2nd ed. Salem, WI: Sheffield Pub. Co.
Burrough, P. A., and A. U. Frank, eds. 1996. Geographic Objects with Indeterminate
Boundaries. London: Taylor & Francis.
Couclelis, H. 1992. “People Manipulate Objects (but Cultivate Fields): Beyond the
Raster-Vector Debate in GIS.” In Theories and Methods of Spatio-Temporal
Reasoning in Geographic Space, edited by A. U. Frank, I. Campari, and U.
Formentini, 65–77. Lecture Notes in Computer Science 639. Berlin: SpringerVerlag.
Dennett, D. C., and J. C. Haugeland. 1987. “Intentionality.” In The Oxford
Companion to Mind, ed. R. L. Gregory, 383–86. Oxford University Press.
Ekman, G., and O. Bratfisch. 1965. “Subjective Distance and Emotional
Involvement: A Psychological Mechanism.” Acta Psychologica 24:430–37.
Fabrikant, S. I., D. R. Montello, and D. M. Mark. 2006. “The Distance-Similarity
Metaphor in Region-Display Spatializations.” IEEE Computer Graphics and
Applications 26:34–44. Special Issue on “Exploring Geovisualization,” edited
by T.-M. Rhyne, A. MacEachren, and J. Dykes.
Forest, B. 2001. “Mapping Democracy: Racial Identity and the Quandary of
Political Representation.” Annals of the Association of American Geographers
91:143–66.
Frank, A. U. 1996. “The Prevalence of Objects with Sharp Boundaries in GIS.” In
Geographic Objects with Indeterminate Boundaries, edited by P. A. Burrough
and A. U. Frank, 29–40. London: Taylor & Francis.
Haggett, P. 2001. Geography: A Global Synthesis. Harlow, U.K.: Prentice-Hall.
Jones, S. B. 1959. “Boundary Concepts in the Setting of Place and Time.” Annals
of the Association of American Geographers 49:241–55.
Kimble, G. H. T. 1951. The Inadequacy of the Regional Concept. In London
Essays in Geography, edited by L. D. Stamp and S. W. Woolridge, 151–74.
Cambridge, MA: Harvard University Press.
Kristof, L. K. D. 1959. “The Nature of Frontiers and Boundaries.” Annals of the
Association of American Geographers 49:269–82.
MacEachren, A. M. 1995. How Maps Work: Representation, Visualization, and
Design. New York: Guilford Press.
Mark, D. M., and F. Csillag. 1989. “The Nature of Boundaries on ‘Area-Class’
Maps.” Cartographica 26:65–78.
Meyer, W. B., D. B. Gregory, B. L., Turner, and P. F. McDowell. 1992. “The
Local-Global Continuum.” In Geography’s Inner Worlds: Pervasive Themes in
Contemporary American Geography, edited by R. F. Abler, M. G. Marcus, and
J. M. Olson, 255–79. New Brunswick, NJ: Rutgers University Press.
Montello, D. R. 2001. “Scale, in Geography.” In International Encyclopedia of the
Social and Behavioral Sciences, edited by N. J. Smelser and P. B. Baltes,
Mystery of CapitalCRev
316
2/18/08
11:13 AM
Page 316
Daniel R. Montello
13501–4. Oxford: Pergamon Press.
———. 2003. “Regions in Geography: Process and Content.” In Foundations of
Geographic Information Science, edited by M. Duckham, M. F. Goodchild, and
M. F. Worboys, 173–89. London: Taylor & Francis.
Montello, D. R., S. I. Fabrikant, M. Ruocco, and R. S. Middleton. 2003. “Testing
the First Law of Cognitive Geography on Point-Display Spatializations.” In
Spatial Information Theory: Foundations of Geographic Information Science,
edited by W. Kuhn, M. F. Worboys, and S. Timpf, 335–51. Proceedings of
COSIT ’03. Lecture Notes in Computer Science 2825. Berlin: Springer.
Richardson, B. C. 1992. “Places and Regions.” In Geography’s Inner Worlds:
Pervasive Themes in Contemporary American Geography, edited by R. F. Abler,
M. G. Marcus, and J. M. Olson, 27–49. New Brunswick, NJ: Rutgers
University Press.
Searle, J. R. 1983. Intentionality: An Essay in the Philosophy of Mind. Cambridge:
Cambridge University Press.
———. 1995. The Construction of Social Reality. New York: Free Press.
Sebeok, T. A. 2001. Signs: An Introduction to Semiotics. 2nd ed. Toronto:
University of Toronto Press.
Siewert, C. 2002. “Consciousness and Intentionality.” In The Stanford
Encyclopedia of Philosophy, ed. E. N. Zalta. Fall 2002 ed. http://plato.stanford.edu/archives/fall2002/entries/consciousness-intentionality/.
Smith, B. 1995. “On Drawing Lines on a Map.” In Spatial Information Theory: A
Theoretical Basis for GIS, edited by A. U. Frank and W. Kuhn, 475–84.
Proceedings of COSIT ’95. Lecture Notes in Computer Science 988. Berlin:
Springer-Verlag.
———. 2003. “John Searle: From Speech Acts to Social Reality.” In John Searle,
edited by B. Smith. Cambridge: Cambridge University Press.
Smith, B., and J. Searle. 2003. “The Construction of Social Reality: An Exchange.”
American Journal of Economics and Sociology 62:285–309.
Smith, B., and A. C. Varzi. 1997. Fiat and Bona Fide Boundaries: Towards an
Ontology of Spatially Extended Objects. In Spatial Information Theory: A
Theoretical Basis for GIS, edited by A. U. Frank and W. Kuhn, 103–19.
Proceedings of COSIT ’97. Lecture Notes in Computer Science 1329. Berlin:
Springer-Verlag.
Stubkjaer, E. 2001. “Spatial, Socio-economic Units and Societal Needs—Danish
Experiences in a Theoretical Context.” In Life and Motion of Socio-economic
Units, edited by A. U. Frank, J. Raper, and J.-P. Cheylan, 265–79. London:
Taylor & Francis.
Tobler, W. R. 1970. “A Computer Model Simulating Urban Growth in the Detroit
Region.” Economic Geography 46:234–40.
——–—. 1973. “Regional Analysis: Time Series Extended to Two Dimensions.”
Geographica Polonica 25:103–6.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 317
Collective Intentionality,
Documentation, and
Real Estate
16
Dan Fitzpatrick
1. Introduction
Real estate transactions, as opposed to other kinds of economic transactions, such as purchasing an item in a store, have a number of salient features, the more notable of which are that all the facets of such transactions
are gone into in great detail and in writing. (For the moment I am referring solely to real estate transactions in formal legal systems). The reasons
for going into great detail are fairly obvious; in very general terms, real
estate transactions are often complex and it is important that each side
understands exactly what is being exchanged and under what terms. And
the same reasons could be given for putting it all in writing. But I argue
that writing plays a further role in such transactions in that the signing of
documentation is often tantamount to completing a real estate transaction.
To some, this claim might appear to be simply obvious; certainly, on its
own, it might not appear to be a controversial one. However, it contradicts
a consequence that follows from Searle’s well-known account of social and
institutional facts. This consequence is that the signing of documentation,
on its own, does not mean that a transaction has actually taken place; this
is because, according to Searle’s account, only when the relevant form of
collective intentionality is present in the heads of all participants can there
be said to be an institutional fact, such as the completion of a real estate
transaction. In addition to this, I argue that Searle’s account needs substantial elaboration, enrichment, or refinement in order to deal with specific problems that his theory encounters with respect to real estate. To
illustrate precisely how these issues arise I will first of all provide a brief
outline of the relevant features of Searle’s account.
For Searle, all social facts (including institutional facts) involve collective intentionality (Searle 1995, 26). By intentionality Searle means “that
property of many mental states and events by which they are directed at or
317
Mystery of CapitalCRev
318
2/18/08
11:13 AM
Page 318
Dan Fitzpatrick
about or of objects and states of affairs in the world” (Searle 1983, 1). For
Searle, human beings and some animals “have the capacity for collective
intentionality. By this I mean not only that they engage in cooperative
behavior but that they share intentional states, such as beliefs, desires and
intentions” (1995, 23). These shared collectively intentional states take the
form of the first person plural, as in “we intend,” “we accept” or “we
believe” and cannot be reduced to states of individual intentionality, such
as “I intend,” “I accept” or “I believe” plus something else; in fact, Searle
claims that collective intentionality is a biological primitive (1995, 24–25).
But one aspect that collective intentionality does share with individual
intentionality is that both are subject to his “brain in a vat” condition,
according to which, “Each of our beliefs must be possible for a being who
is a brain in a vat because each of us is precisely a brain in a vat; the vat is
the skull and the ‘messages’ coming in are coming in by way of impacts on
the nervous system” (1983, 230). The impact that this condition has on
Searle’s version of collective intentionality is best illustrated by the example he uses of a ballet in a park (1990, 402–3). This example involves two
contrasting cases; in the first case, people in a public park are each moving
independently towards a structure at the centre of the park so as to shelter
from a storm that is threatening. Each individual’s intentions are entirely
independent and are not collective. Whereas in the contrasting case the
park is taken over by a corp de ballet and their moving towards the building at the center of the park is part of their performance. Viewed externally,
and if we take it that the movements in both cases are identical, there is
nothing to distinguish either case from the other. Therefore, what distinguishes the first case from the second must be internal to each individual,
according to Searle’s view; since the second case involves collective intentionality and the first does not, each individual’s intentionality in the second case is collective and must be internal, in the head. This example of
the ballet in the park is intended to illustrate that, with respect to any
instance of behavior, it is impossible to say, when viewed externally,
whether it involves collective intentionality or not.
In keeping with Searle’s account of collective intentionality and his
view that all social and institutional facts (and this includes economic transactions) involve collective intentionality, all the usual behavior involved in
engaging in an economic transaction, such as signing documents, handshakes, uttering certain words and sentences, and so on, when viewed
externally, does not amount to actually engaging in an economic transaction if the appropriate collective intentionality is not present in the heads
of all the relevant parties involved. This is also applicable to real estate
transactions where, though all the usual and expected behavior such as
signing documents and issuing written undertakings takes place, all relevant parties do not posses the appropriate collective intentionality in each
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 319
Collective Intentionality, Documentation, and Real Estate
319
of their heads respectively, and therefore no actual real estate transaction
can be said to take place. Elsewhere I have argued against this position on
the basis that it introduces an element of privacy into such transactions that
is utterly incompatible with the need for public accessibility of the conditions on the basis of which we take social and economic facts to obtain
(Fitzpatrick 2003). But here I want to raise some further issues with
respect to this alleged primacy of intentionality over behavior in real estate
transactions. I will argue that, in the case of real estate transactions or ownership in developed formal legal systems, often the only collective intentionality involved, if any, is some sort of generalized and vague collective
acceptance of certain aspects of the law. Only in extralegal scenarios, as
described by de Soto, must collective intentionality in the form of collective beliefs or acceptance be directly involved in real estate ownership or
transactions along the lines of Searle’s account. I will also argue that
Searle’s ballet in the park example illicitly separates intentionality from
behavior and takes intentionality to be of paramount importance, over and
above or in isolation from behavior. I show that this privileging of intentionality encounters insurmountable problems when it comes to real estate
transactions.
2. Real Estate Ownership and Collective Intentionality
In order to proceed further with the discussion concerning what role collective intentionality plays, if any, in real estate transactions and ownership,
some further examination of Searle’s account is required. According to his
account, in addition to collective intentionality, two other ingredients must
be present in the case of any institutional fact, namely, constitutive rules
and status functions. Typically, a status function is collectively assigned to
an object, according to Searle, thereby allowing that object to then take on
the new function of standing for or representing something else. For
instance, to use Searle’s own example, “We impose the [status] function of
‘value’ on the substance gold because we desire to possess that kind of substance” (1995, 42). Gold takes on a new status to which the function
“value” is assigned, according to this view. This leads us to the second
component in his account, constitutive rules, which can be stated in the
form of a formula, “X counts as Y in C.” According to Searle, in effect, a
status function is collectively imposed on the X term in a certain context C
whereby it now counts as Y and this Y term now “names something more
than the sheer physical features of the object named by the X term” (1995,
44). Of course an additional status function can be imposed on a preexisting one, where the X term already refers to a preexisting institutional fact,
but this need not detain us here. Is it possible to apply this account to own-
Mystery of CapitalCRev
320
2/18/08
11:13 AM
Page 320
Dan Fitzpatrick
ership of a piece of real estate? On the face of it, this might appear to be
relatively straightforward. Simplifying a little by leaving aside the issue of
whether collective intentionality is necessary for the existence of landed
property (Smith and Zaibert 2001, 171), the social fact of Jim owning a
piece of real estate is explained, according to Searle’s formula, as a piece of
real estate (X) counts as Jim’s property (Y) in a certain context (C). But
what is the context referred to here?
I am presuming that what Searle means here by context are those contextual elements that are most pertinent to the makeup of institutional
facts. So sometimes the most pertinent element in respect to real estate
ownership might be the context of local opinion or local collective intentionality; on other occasions it might be the relevant legal context. While
it is clear that the status function that is imposed on the piece of real estate
is, in this case, Jim’s ownership of the land, what is not clear is the role that
collective intentionality is supposed to play in the application of the formula, X counts as Y in C, to such scenarios when the C term refers to a
context where a developed formal legal system is in operation. The problem is that, in such formal legal contexts, it is not the case that the status
function of Jim’s ownership is conferred upon the piece of land simply by
the collective acceptance or beliefs of those acquainted with the property
in the way that Searle claims for other institutional facts, such as that a certain piece of paper is a dollar bill because it is collectively accepted and
believed to be so.
To set this point out clearly I want to draw an important distinction
between a generalized form of collective intentionality, whereby the whole
population or significant groups collectively accept or agree on some general social or institutional facts, and a more specific form of collective intentionality whereby individuals or groups accept or agree on some specific
instances of institutional facts. There is both a normative element and an
empirical element in the argument I am presenting here; I will first present
the empirical observation which concerns formal legal (as opposed to
extralegal) contexts that are found in developed legal systems—the normative element comes later.
In formal legal contexts there is usually some sort of general if vague
collective acceptance by the population of certain aspects of the law; in
such contexts it is generally accepted that:
• One can own land and buildings.
• When a court makes a ruling, then that ruling is binding unless an
appeal is lodged.
• If a court ruling is not obeyed, then the disobedient persons may
face sanctions of some sort.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 321
Collective Intentionality, Documentation, and Real Estate
321
There may be additional points of law that are generally accepted in a
vague sort of way, or it might be argued that I am making too strong a
claim concerning the beliefs or knowledge of the average person concerning the legal system, but these concerns need not detain us here. The
empirical point I am drawing out here is that, at least with respect to the
ownership of a particular parcel of land or a piece of real estate, the question regarding who owns it is not settled merely by the collective beliefs or
acceptance by those acquainted with the property. Only in those extralegal
scenarios described by de Soto might such collective beliefs or acceptance
be relied upon. But in a scenario that is not extralegal, although those
acquainted with the property might collectively accept or believe that the
land in question is owned by Jim, this would be a false belief if, in actual
fact, the land is owned by Joan. In formal legal contexts, the ownership of
real estate is usually settled by the examination of documentation, checking registers, and so on. When there is an apparent doubt or when documentation is missing or otherwise faulty, legal advice can be taken and
sometimes a court is asked to settle the issue. But in formal legal contexts,
ownership of real estate does not normally require any collective acceptance or belief on the part of those immediately acquainted with the property beyond a vague generalized acceptance of certain aspects of the law.1
Of course the general acceptance of some aspects of the law as it relates
to real estate, in conjunction with some additional information, might lead
those who were acquainted with a property to correct their mistaken
beliefs at a later stage. But the point is that the proper role of collective
intentionality with respect to the institutional facts concerning real estate
is at the generalized level. The collective acceptance of the ownership of a
piece of property in formal legal contexts is primarily rooted in the vague
generalized collective acceptance of some aspects of the law, documentation, and rulings of the court system. In such formal legal contexts,
whether or not those acquainted with the property originally thought that
the property was owned by another party is neither here nor there.
This brings out one of the problems associated with property in
extralegal scenarios, as outlined by de Soto, and leads up to the normative
point I want to make. If all there is to property ownership is collective
1. Such vague generalized acceptance in this context may spell additional problems for
Searle’s account of social facts to the extent that it might be argued that such acceptance may
not amount to intentionality. Such collective acceptance may simply reflect some level of
ignorance or indifference or even some unthinking acceptance that falls short of a mental state
as such. If acceptance of a social fact can be interpreted at least on occasion as arising from
some sort of lack of awareness (in the way that some people may be unaware of specific rules
of language that they still actually unthinkingly follow), then it is not clear exactly how this
falls into the category of intentionality as it indicates more the lack of a mental state in the
individual rather than the presence of one.
Mystery of CapitalCRev
322
2/18/08
11:13 AM
Page 322
Dan Fitzpatrick
acceptance by those acquainted with a specific piece of real estate, such
ownership is likely to be unstable because of the tendency of local collective opinions or beliefs to change with the passage of time. Also, collective
views concerning the ownership of a specific piece of property at any one
time might diverge at a later stage. Such views might be informed by all
sorts of informational inputs; a certain person seen working on the property might be assumed by neighbors to be the true owner. Or the eldest
son of the original owner might be taken by the younger generation to be
the true owner. But if there is no single collectively accepted owner in such
circumstances, then who is the true owner? If we are to have clarity of title
of real estate, we had better ensure access to legal mechanisms that are generally accepted by the population; for the reasons I have just given, such
legal mechanisms in conjunction with a generalized collective acceptance
of those legal mechanisms are superior to a local collective acceptance of
specific instances of ownership when it comes to generating clarity of title.
In addition, de Soto has shown that when ownership rights are not
recorded and documented, “these assets cannot be readily turned into capital, cannot be traded outside of narrow local circles where people know
and trust each other, cannot be used as collateral for a loan and cannot be
used as a share against an investment” (de Soto 2001, 6). In effect, Searle’s
account of social facts is only directly applicable to real estate ownership in
the case of informal legal contexts; in formal legal contexts, his account
leaves too much out to be applicable to specific instances of real estate
ownership. At best, in formal legal contexts, his account would have to be
severely watered down in that it could only be applied in a very general way
to real estate ownership; in other words, his formula could be applied as
follows: it is generally or collectively believed or accepted by the population at large that all (or most) land and buildings (X) count as property
(i.e., are owned by some agency or someone or other) (Y) in this formal
legal framework (C). But there may even be difficulties with this much
weaker and more general claim, as I discuss below.
3. Division of Linguistic Labor and Collective
Intentionality
To what extent can we even rely on such a generalized acceptance of certain aspects of the law when it is not even clear what such a generalized
acceptance might amount to? As I stated above, for there to be a particular social or institutional fact, according to Searle, the appropriate collective intentionality must be present within the heads of all parties
concerned. So, according to Searle’s account, it would have to be the case
that each relevant member of the population shared the same generalized
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 323
Collective Intentionality, Documentation, and Real Estate
323
collective intentionality, that is, some set of generalized beliefs or acceptances concerning ownership or transactions as well as certain additional
aspects of the law such as those set out above. (Perhaps here the term “relevant” could be said to refer to all those capable of being involved in a real
estate transaction or ownership of real estate.) But even this might be open
to doubt, as it is perfectly possible for a formal legal system of property
ownership and trading to operate even when the population at large is
largely ignorant of the legal system as it is applied to real estate. The relevant generalized collective intentionality required by the general population need only be of the vaguest form indeed, and it is unlikely that the
same collective acceptances or beliefs are shared by even large sections of
the population. In fact many of these collective beliefs or acceptances
might be false. But then how it is possible for the formal legal system of
real estate or the real estate market to function in the face of so much ignorance of the relevant parts of the law?
Generally speaking, many of our social systems operate quite well even
though relatively few individuals understand or know how those systems
work. For instance, many employees in large corporations do not know
exactly how the corporation’s production systems operate or even how
their products are produced. But the division of labor in such corporations
is such that as long as even a small number do know how these systems
work, and everyone else carries out their own tasks according to certain
standards, the companies’ products and production methods are safe and
productive. There is also a division of labor in society with respect to real
estate in formal legal contexts in that as long as lawyers are in a position to
interpret and communicate the relevant parts of property law to their
clients, judges are able to properly arbitrate, and officials authorize and
register property, the property system continues to function and real estate
can be owned and transferred. This notion of a social division of labor has
a strong resemblance to Putnam’s concept of division of linguistic labor
(Putnam 1975, 227ff.); in fact, it is meant as a generalization of Putnam’s
concept on the basis that language use is also a social activity. Therefore, a
linguistic division of labor is also a social division of labor.
According to Putnam, while many individuals within a linguistic community might use a certain term, often they have to turn to an expert in
the relevant field for the full explication of the term or the ways of distinguishing it from other terms. For instance, we can all use the term “gold”
and talk with a certain degree of facility about gold even though we might
have huge gaps in our knowledge concerning gold. For instance, we might
be totally unaware how to reliably discern whether something is or is not
gold; this latter task we leave to scientific experts. The same also holds in
the case of various legal terms or concepts in relation to real estate. While
ordinary individuals can use the term “ownership” in their daily lives with-
Mystery of CapitalCRev
324
2/18/08
11:13 AM
Page 324
Dan Fitzpatrick
out much difficulty, this does not mean that they are aware of all the legal
implications, rights, or nuances with respect to ownership, especially as it
relates to real estate. While ordinary individuals may talk about buying or
selling real estate, they do not usually understand all that is involved in the
transfer of property title. For that they invariably have to rely on that special subclass of experts, the legal profession.
Consistent with his brain in a vat condition, Searle rejects Putnam’s linguistic division of labor to the extent that it implies semantic externalism,
namely the view that at least the meanings of some components of intentional or mental states are not contained entirely within the head. To illustrate this I want to briefly examine Searle’s rejection of what are known as
de re beliefs. According to Searle, de re beliefs “are relations between believers and objects; for them, if the world were different in certain ways, the
beliefs themselves would be different even though what is in the head
remains unchanged” (1983, 209). But Searle claims that de re beliefs in this
sense are impossible because they are not consistent with his brain in a vat
condition; they would not be completely contained in the head. Although
Searle’s brain in a vat condition rules out de re beliefs in the sense just mentioned, it must be emphasized, however, that Searle does not deny that
some beliefs are about real people, things, or states of affairs. He allows that
we can choose to use the term “de re” to describe those beliefs so as to distinguish them from beliefs that are not about or directed at real people,
things or states of affairs. But this minimal sense of de re does not allow that
beliefs can be individuated or identified by anything outside the head. So,
Putnam’s division of linguistic labor cannot be allowed because this would
mean that certain beliefs inside one’s head would be constituted by something outside ones head. All beliefs are de dicto, according to Searle,
because all intentional states “are entirely constituted by their Intentional
content and psychological mode, both of which are in the head” (1983,
208). Beliefs are necessarily de dicto because they are independent of how
the world actually is, according to this view. De re beliefs, in the special and
minimal sense allowed by Searle, form a subset of de dicto beliefs.
Searle’s rejection of Putnam’s notion of a division of linguistic labor
does not mean that he must reject the possibility of a division of social
labor in every sense. It is perfectly possible for Searle to allow for a version of the social division of labor without compromising his brain in a
vat condition in that he can allow that large groups or the population
generally collectively accept that certain individuals are specialists in a
certain respect.2 For instance, he can claim that people can collectively
2. Here I am constructing the sort of argument that I would expect Searle to make
although I am not aware of him actually making this argument in any of his writings.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 325
Collective Intentionality, Documentation, and Real Estate
325
accept that certain individuals are specialists in property law or collectively accept the rulings of certain individuals, such as judges, in relation
to issues concerning real estate. But given that linguistic activity forms
a subcategory of social activity, this places Searle in a seemingly paradoxical position; he cannot accept social divisions of labor that happen
to be linguistic even though it is perfectly possible for him to accept all
other social divisions of labor. One way for Searle to resolve this would
be to claim that he can also accept linguistic divisions of labor as long as
they do not carry externalist implications. For instance, whether we are
talking about gold or property title, we can collectively accept that there
are experts who have a more informed notion of these terms and it is to
them we turn when we require a full explication of the terms in question just as long as we accept that our own beliefs are not individuated,
identified, or constituted by anything outside the head. Therefore, following this line of reasoning, the meanings of these terms, as contained
inside the heads of nonexperts, are not the same or are not connected
or continuous with the meanings of these terms within the heads of
experts. This topic is the subject of much debate in philosophy; I will
have to curtail this part of the discussion here as further examination of
this point properly belongs to the wider debate in the philosophy of language and meaning.
4. Real Estate Transactions and Collective
Intentionality
Even though, in the case of property ownership, collective intentionality
seems to be restricted to a vague generalized acceptance of certain aspects
of the law, might there not be a role for Searle’s account of institutional
facts to play in some of the specifics of real estate transactions, at least in
relation to the transacting parties? On the face of it, Searle’s formula appears
to be applicable in that signing relevant documentation (X) counts as completing a real estate transaction (Y) in formal legal contexts (C). The status
function of legal document is imposed on the piece of paper with the relevant markings on it. But what role does collective intentionality play in such
real estate transactions with respect to the transacting parties? Applying
Searle’s account, each party would have to have the same we-intention in
relation to the transaction. But if one is operating with a generalized acceptance of the law by all parties in conjunction with a division of linguistic
labor, then does there have to be the entertainment of we-intentions by all
parties with respect to the particular transaction as such? It is true that each
party intends to part with something in exchange for something else and is
prepared to make undertakings to the other party and sign documents, and
Mystery of CapitalCRev
326
2/18/08
11:13 AM
Page 326
Dan Fitzpatrick
so on. But must each party entertain a we-intention in addition to that? I
argue that all that is required in such scenarios is the generalized collective
acceptance of the law (even if this only amounts to each being prepared to
accept the law just as long as everyone else accepts it) plus some I-intentions
along the lines of, “I intend to provide an undertaking to the other party”
or “I intend to hand over a sum of money just as long as the other party
hands over the title to the property.”
The problem with Searle’s account of institutional facts, as illustrated
by his ballet in the park example, is that, when it comes to social acts, it
artificially separates off intentionality from behavior and then privileges
the role of collective intentionality. My claim is that, at least in the case
of real estate transactions in formal legal contexts, intentionality (collective or otherwise) should not be taken to be of utmost importance over
and above or in isolation from behavior, such as the uttering of documents and the signing or otherwise making meaningful marks on a page,
in other words, the documentation of a real estate transaction. The
problem with intentions is that, taken in isolation from behavior, they
can be impossible to discern. One way to get clear about this issue is to
examine what happens when something goes wrong with a real estate
transaction.
Normally, in developed legal systems, when something goes wrong
with a transaction, one of the parties takes the other to court. The court
will usually review and examine the available evidence to establish
whether there had ever been a bone fide transaction. If any defendant
were legally allowed to claim that, despite his signing the relevant contracts and other undertakings and otherwise behaving as if he were willingly entering into the transaction (and I take it that there are no
mitigating factors such as mental illness or duress), he still had not entertained the relevant intentions or intentionality to enter into the real
estate transaction and therefore should not be bound by the terms of the
contract, then it would not be possible to enforce such contracts. What
this amounts to is that it is the actions of signing and issuing documents
that take precedence here. In this sense, issuing and signing documents
is tantamount to purchasing or selling a piece of real estate because such
actions are taken to be the intention (or at least indicative of the intention) to be bound by the conditions of the contract, to take on the commitments involved. It is of course possible to bring such documents or
actions into question but this requires some basis, such as allegations of
trickery, coercion, or incapacity. I am not suggesting that intentions are
irrelevant, nor that courts merely restrict their activities to verifying who
made which mark on a page; it is well known that courts examine and
interpret evidence as to the intentions of parties to transactions as well as
various contextual matters.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 327
Collective Intentionality, Documentation, and Real Estate
327
5. Real Estate and Documentation
In formal legal contexts, signed documentation (which usually has to be
registered at some government agency or otherwise executed depending
on the legal system) is the cornerstone of the real estate transaction for
another reason. Here, I want to borrow a concept from the art world to
illustrate this point. Experts in the art world are often called in to establish
whether a work of art is genuine. Often the expert turns to what is known
as the provenance of the work of art in question. This can take a number
of forms depending on the circumstances. A very strong provenance will
usually include documentation relating to the transfer of the work of art
from the original artist to an original purchaser as well as documentation
reflecting subsequent purchases of the same work of art. To ensure that an
artwork is the one that was originally transferred, it is useful if paperwork
exists documenting each subsequent transfer from the original owner to
the current one. In this way, such a complete provenance can also help to
establish whether the individual claiming to be the current owner is in fact
the rightful owner. Documentation plays the same role in the case of real
estate, in that it forms the provenance of a property with respect to ownership. Just as in the art world, ideally all provenances would be complete
and impregnable to doubt, so too would all documentation with respect
to real estate ownership.3 Invariably one element in the creation of such a
provenance or paper trail is the registration of changes in property title or
changes of interest with the relevant government agency; this creates a further element of stability and transparency in the creation of the kind of
paper trail that is required for a complete provenance. As de Soto points
out, in informal legal contexts the paper trail or chain of title “is blurry at
best to the outsider” and the absence of such a provenance forces local
people in such contexts to “have strong, clear and detailed understandings
among themselves of who owns what today” (2001, 194).
This links us to a point that Searle makes regarding the persistence of
speech acts. Searle points out that a speech act, such as a promise issued on
Tuesday, creates an obligation that exists long after the utterance has been
made (Smith and Searle 2003, 305). This point also holds for institutional
facts such as contracts in real estate transactions. In such cases, the commitments undertaken and rights bestowed when entering into such a contract also persist long after such contracts are signed. The crucial point
3. Although there is a similarity between provenance in the art world and documentation
in real estate, provenance can only begin when the artist has stopped working on the work
of art whereas the beginning of documentation with respect to real estate is often arbitrarily
set by government or by some legal authority, sometimes by the setting up of a land registry
or by some other means.
Mystery of CapitalCRev
2/18/08
328
11:13 AM
Page 328
Dan Fitzpatrick
with respect to such real estate transactions is that the commitments undertaken and rights bestowed can be recognized in the future, for as long as
they persist. The existence of documentation ensures this. De Soto demonstrates the importance of documentation in contemporary capitalism
where it is not enough that one can ensure security of tenure; it is also
important that others, especially potential lenders or future creditors, can
satisfy themselves that tenure is indeed secure.
6. Conclusion
The difficulty encountered with Searle’s account of social and institutional
reality as applied to real estate is that, while it is more applicable to informal legal contexts, its claims do not cohere with real estate ownership and
transactions in formal legal contexts. An important distinction between
these contexts is that, as de Soto points out, the formal property system is
diachronic in that it allows outsiders to examine the paper trail of ownership and property rights whereas the informal system is synchronic in that
ownership can only be discerned through fieldwork, such as talking to local
people, learning about local property arrangements, approaching both
extralegal authorities and legal authorities, and so on (2001, 194). This
diachronic-synchronic distinction brings out an important point when dealing with institutional facts, which is that not all institutional facts are such
that they can immediately come into existence simply because those
involved collectively accept the institutional fact in question or collectively
intend or accept the imposition of a status function. A problem I see with
Searle’s account of institutional facts, at least as it is applied to real estate, is
that, despite various references he makes to historical developments with
respect to certain institutional facts such as the evolution of money from
pieces of gold to dollar bills (1995, 41–42), his account of specific institutional facts, such as “Jim owns this land,” turns out to be applicable only to
largely synchronic contexts because of the elevated role he attributes to collective intentionality in the formation and maintenance of institutional facts.
The point about real estate ownership and transfer in diachronic contexts,
such as formal legal contexts, is that collective intentionality plays a minor
role (and in some instances arguably hardly any role at all) in the form of
some sort of vague generalized acceptance of some aspects of the law.
But then, arguably, almost no institutional facts are purely synchronic.
By virtue of something being an institution, even a novel one, it must
have arisen from something else within a preexisting institutional or
social context, and all such contexts involve a history. To return to the
real estate context, it is remarkable that even in extralegal contexts, many
property owners have some sort of documentation, however limited, to
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 329
Collective Intentionality, Documentation, and Real Estate
329
link themselves to their property. According to de Soto, “Everywhere we
have been in the world, most extra-legals have some physical artefact to
represent and substantiate their claim to property” (2001, 195). Where
there is documentation, there is the possibility of a paper trail and therefore the emergence of some basic diachronic element even within extralegal contexts.
Documentation is important in all economic matters relating to ownership and economic exchange. It allows for longevity in relation to ownership
and transactions and the recording of complex transactions. In fact, the
invention of the first primitive writing systems, the earliest form of
cuneiform script, is now believed to have occurred in response to the economic requirements, specifically to account for payments in the form of goods
(Schmandt-Besserat, 1996). But, historically speaking, the most important
side effect of documentation, especially in relation to real estate, is that it
opened the way for a new kind of economic system, a system based on capital, on being able to capitalize a property by using it as collateral, to lease a
property, to buy a share in a property, and so forth. As De Soto puts it,
Capital is born by representing in writing—in a title, a security, a contract and
other such records—the most economically and socially useful qualities about the
asset. This is where potential value is first described and registered. (2001, 48).
R E F E R E N C E S
Cohen, Philip R., Jerry Morgan, and Martha E. Pollack, eds. 1990. Intentions in
Communication. Cambridge, MA: MIT Press.
de Soto, Hernando. 2001. The Mystery of Capital: Why Capital Triumphs in the
West and Fails Everywhere Else. London: Black Swan Books.
Fitzpatrick, Dan. 2003. “Searle and Collective Intentionality: The Self-Defeating
Nature of Internalism with Respect to Social Facts.” American Journal of
Economics and Sociology 62, no. 1: 45–66.
Fitzpatrick, Dan. 2006. “Putting the Brakes on Vehicle Externalism: Two
Economic Examples.” In Economics and the Mind, edited by Mark White and
Barbera Montero. Oxford: Routledge.
Putnam, Hilary. 1975. “The Meaning of Meaning.” In Mind, Language and
Reality, vol. 2 of Philosophical Papers, 215–71. Cambridge: Cambridge
University Press.
Schmandt-Besserat, Denise. 1996. How Writing Came About. Austin: University of
Texas Press.
Searle, John. 1983. Intentionality: An Essay in the Philosophy of Mind. Cambridge:
Cambridge University Press.
Mystery of CapitalCRev
330
2/18/08
11:13 AM
Page 330
Dan Fitzpatrick
———. 1990. “Collective Intentions and Actions.” In Cohen, Morgan, and
Pollack, Intentions in Communication, 401–15.
———. 1995. The Construction of Social Reality. London: Allen Lane / Penguin
Press.
Smith, Barry, and Leo Zaibert. 2001. “The Metaphysics of Real Estate.” Topoi
20:161–72.
Smith, Barry, and John Searle. 2003. “The Construction of Social Reality: An
Exchange.” American Journal of Economics and Sociology 62, no. 1: 283–309.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 331
Real Institutions, and Really
Legitimate Institutions
17
Eric Palmer
Introduction
This essay develops a thesis regarding the manner through which social
institutions such as property come to be, and a second thesis regarding
how such institutions ought to be legitimated. The two theses, outlined
below, are in need of explication largely because of the entrenched influence of an erroneous reading of social contract theory concerning the historical origins of the state. In part 1, I introduce that error, which yields a
pair of myths:
Myth 1: Government precedes and underwrites both the reality and
the legitimacy of all other social institutions,
Myth 2: People’s choices alone generate social institutions.
I will argue that both Hernando de Soto and John Searle work effectively
to counter the basic error and the first myth, though both remain in thrall
to the second. With the error and myths examined, I proceed in parts 2
and 3 to present two central theses about institutions:
Thesis 1: The construction of social institutions can be understood
clearly only if that topic is distinguished from the topic of their normative status, or legitimacy.
Thesis 2: The normative status of such institutions can be understood
properly only if their legitimacy is distinguished from the legitimacy
of government.
With the distinction of Thesis 1 in place, an informative socio-technical
account of the construction of institutions can be formulated with little
331
Mystery of CapitalCRev
332
2/18/08
11:13 AM
Page 332
Eric Palmer
ado. This allows for clarity concerning how institutions might be legitimated (Thesis 2), and consequently, how legitimation can proceed. Some
fundamentals of legitimation from a Kantian perspective are outlined in
part 3.
This chapter, then, is philosophy presented in the tradition of clarification of conceptual fuzziness—concerning our mixing of the ideas of the
legal and the real in social institutions – and of promoting clear presentation in ethics by disentangling the idea of the legal from the politically
legitimate and the ethically legitimate. It is intended for a broad audience
as a caution against the tendency to think along the lines of Myth 1, and
as a tool for developing clear distinctions between the socially real and the
really legitimate. It also offers to philosophers in particular a significant
argument in social ontology in its treatment of Myth 2 (see section 2.1).
1. Avoiding a Hobbesian Error
Thomas Hobbes conceived of government as composed of and justified by
a social contract: an agreement of individuals to live in peace and to form
a confederacy of government to improve their “nasty, brutish and short”
lives. The familiar fiction he presents is of “a covenant of every man with
every man,” each to give up his legitimate right to self-government by
handing over his right, and practically also his strength, to a legislative,
judicial, and police force that the men form among themselves (Hobbes
1996, 109).
Hobbes mentions a “covenant” of each with all, and the process of
generating this covenant is, I think, often envisioned as a first meeting of
individuals that ultimately generates the state. It is a meeting that, so far as
we know from history, has never taken place, and such a meeting is not
clearly suggested by Hobbes, or by Locke.1 Nevertheless, both agree that
some process to erect or recognize the sovereign must somehow take
place; and Rousseau would have us convene just such a meeting regularly,
in an assembly of all citizens to re-affirm the foundations of government
(Rousseau 1997, III sec. 8).
The culturally familiar story about an original covenant, I believe, has
been very significant. It has since led to a myth that pervades much political discussion: that government, as the original exit from the state of
1. Though the precise extent to which Hobbes wished his construction to be treated as
representative of history is open to debate, he certainly insisted that the state of nature is a
genuine historical possibility which has existed in some places and times, and that the commonwealth can arise only through covenant (65, 89). For Locke similarly, see the Second
Treatise of Civil Government (1988, sec. 86–90).
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 333
Real Institutions, and Really Legitimate Institutions
333
nature, is the mother of all other legitimate political institutions. This myth
may help to foster another one, more general and almost as prevalent: the
view that legitimate political institutions are ultimately grounded in the
free choices of existing people, the fundamental “selves” that we have or
that we are, prior to politics.
From a historical perspective, these are certainly myths—there is no
evidence for their reality—and from a philosophical perspective, the myths
cloud more helpful analyses of sovereignty and legitimacy that have been
readily available since Kant, as I will argue below. Myths do have sociological and so historical impact, however. The two myths play their parts
today: I will consider a few current examples.
Regarding the first myth, a pair of cases from the documents of two
U.S. public-interest political concerns is illustrative. The Women’s
International League for Peace and Freedom (WILPF) launched the
“Challenge Corporate Power, Assert the People’s Rights” campaign in the
summer of 2002 (2002a). I take their slogan to suggest a fundamental,
and vague, priority of people and their choices. Similarly, the National
Lawyers’ Guild (NLG) suggests, “In a democratic society, living human
beings are sovereign and are the basis of all government authority” (2003).
The latter claim, if concerning legitimacy of authority, is, I believe, true.
The claim is a misleading formulation, however. It is questionable as a matter of fact (and the Women’s International League [2002b] makes a similar dubious maneuver). The social contract theorists are not the only
constituency that argues that sovereignty is surrendered by individuals to
government: many legal dictionaries assert the same, as do all governments
with an executive branch, including democratic ones (e.g., Martin 1998,
“Sovereignty”). The principle of state sovereignty that is reflected in international law similarly suggests otherwise.
Noting such vagueness is not mere pedantry. At this point of the discussion, a brief explanation for the broader audience regarding the purpose
in philosophy of conceptual clarification is in order. I find the work of both
of these organizations to be worth examination, and particularly, I find the
formulation of purpose in the NLG Constitution to be quite clear: “[The
NLG is] an organization of lawyers . . . in the service of the people, to the
end that human rights shall be regarded as more sacred than property
interests. . . .” The errors I have noted are minor, but they are also persistent. They are examples of vagueness in the way people express themselves,
and they appear even when writers are at their best, composing carefully
drafted documents. Therefore, the errors may reflect a persistent patch of
vagueness concerning sovereignty. I suggest that misleading background
assumptions about the sources of sovereignty may be responsible for the
vagueness. Highlighting those assumptions should serve to make them less
prevalent, and that is the general point of this sort of effort in philosophy.
Mystery of CapitalCRev
334
2/18/08
11:13 AM
Page 334
Eric Palmer
On to Myth 2: William Meyers, David Korten, and many others concerned to change the political landscape frequently write of corporate personhood as a “legal fiction” (Meyers 2000; Korten 1999, 75). But the law
plays little role in determining the actual status of some business, and the
work of the Institute for Liberty and Democracy provides good evidence
regarding the extralegal reality and robustness of business entities.
Furthermore, de Soto’s Mystery of Capital makes a strong case that we
should not expect, or even desire, that institutions related to property and
business develop simply and solely through the auspices of legislation and
the interpretation of legislation in courts. De Soto argues that the historical development of property in U.S. law did not fit that pattern, and that
the government also did not always do an excellent job, for its part, when
it did take charge of the development of the property system during the
westward expansion. De Soto is persuasive in his suggestion that extralegal
dimensions to development have their merits (de Soto 2000, 126–27).
De Soto also discovers an important sociological phenomenon: many
of us, and politicians in particular, are unaware of the role and extent of
nonlegal but socially real business activity. He analyzes that neglect as
partly the result of our inability to recognize how legality has developed
historically, and as partly the product of small-mindedness of government
officials, who see extralegal development simply as antisocial illegality, and
not as necessary problem solving in difficult circumstances (73–75, 88). I
would like to suggest that the contractarian story has also played a large
cultural role in allowing government officials and others to neglect the
extralegal business sector. It is not just that they are unaware of history: I
think they have an origins story in their minds, about how legitimate institutions should be set up, that turns the eyes away from history. The social
contract story, then, may be the root cause of the symptoms that de Soto
points to.
To dispel the myths and more clearly answer the question, “What
makes real property real?” we must start by distinguishing between the
social reality and constitution of an institution and its political or moral
legitimacy, as the U.S. critics noted above have not done. History can tell
us much about the social reality of the institutions of politics; what Hobbes
was concerned to explain was instead the rational basis of political legitimacy. He turned to a formulation in terms of a “compact” that was easily
misread as a historical claim. It was left to Kant to show that there is no
reason for linking the ideal of government with the story of its historical
generation, if the ideal of legitimacy alone is what is to be understood.2
2. See the discussion of this turn in Kant found in Gierke 1913. Kant is not entirely innocent of the error of unnecessary mythical historicizing. See the vaguely historicist language in
Kant, Toward Perpetual Peace (1998b, 335).
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 335
Real Institutions, and Really Legitimate Institutions
335
Kant steers us away from the error of thinking of people as entities somehow prior and institutions as somehow posterior to the political situations
enveloping them. Instead, we are pointed to a conceptual division between
a world of facts (in which history occurs) and a kingdom of ends.
Legitimacy concerns ends, motives, and purposes; historical events are only
accidental, or are symptomatic of legitimacy: by themselves, they will
always provide us with a faulty analysis of legitimacy.
Part 1 of this chapter has introduced the division between the real
world (the world of facts) and the realm of legitimacy (the kingdom of
ends). Part 2 considers description of the world of facts in further detail;
part 3 concerns that world’s relation to the kingdom of ends.
2. What Makes a Social Institution Real
Kant has provided us a distinction between facts and ends, and that division allows us to return in clarity to the world of facts. Real social institutions produce irreducible social facts, as Peter French has argued (1984),
and are the Y term (the institutional facts) in Searle’s (1995) familiar formulation, “X counts as Y in [context] C.” But how do real social institutions such as property or corporations come to be constituted?
It should become apparent that for each thing there will be a different
historical story, but we can probably speak truly of types of stories for some
groups of things. There is an open-ended variety of stories about how land
is made into property, and many of the stories are quite obvious. Here are
several particularly diverse ones:
1. Land is made property by fiat. In the past, kings and other political leaders have claimed lands outright, and would-be kings have made
claims to lands, then pursued those claims against others through war.
Landed kings have also made claims to other lands, often allowing vassals
that subjugate the people of those lands to govern the lands in the kings’
names. Minor variants on the same process continue today; see the contribution of David Koepsell to this volume for a particularly unusual one.
2. Land is made property by enclosure. This is a particularly vivid
case, where land is “staked.” This is often accomplished under the fiat of a
regime, and sometimes requires document filing or an enclosing fence to
establish the boundaries of the stake. Other times, the staking itself plays
its role in the creation of the political regime. In such cases, good fences
literally make good neighbors.
3. Land is made property by agreement. Antarctica’s territorial division is an especially clear example of this case; war settlement is another.
Mystery of CapitalCRev
336
2/18/08
11:13 AM
Page 336
Eric Palmer
The point of this rather bland recitation is to illustrate that we can consider how property is made without addressing—without even touching
upon—the question of how it is made legitimate. The three stories of property creation briefly recounted above are one-sided and limited, of course:
they may neglect competing stories concerning the subjugated, the
nomadic, and the voiceless, respectively. Those sociological and historical
counterstories are likely to also be a part of any reasonably informative
account of the construction of social reality.
How property is made is a sociological matter, or more precisely, a
socio-technical one, for in the second case, the physical technology of the
fence plays its particularly obvious role. If we wish to study how property
is made from land, I doubt that we can do better than to follow the lead
of Bruno Latour in the sociology of science, or the research work of the
Institute for Liberty and Democracy, to study the numerous processes of
consolidation of property claims.
2.1. The Social Significance of Technical Structures
The example of staking property leads me to offer a small criticism of both
Searle and de Soto. Both seem to be less impressed than they should be by
the significance of physical objects in the construction of social reality, and
they show it in different but linked ways: they both promote the contribution of the mind to social reality to the neglect of things material instantiation, such as the surveying stake, that plays a fundamental, functional
role in practically all social institutions.
As a warm up, consider the institutional significance of the speed
bump, a particularly vivid example of what Bruno Latour dubs “sociotechnical” objects.3 There are at least two obvious ways to turn dangerous
speeders into good citizens in the neighborhood of a school zone. One is
to spend $100,000 or so per year on a police officer and the infrastructure
necessary to support the officer, in order to solve the problem for an eighthour day; another is to lay a lump of asphalt for cost and maintenance of,
say, $200 per year. The effects of the two solutions are not exactly the
same, of course, yet they both reconfigure social reality in substantial and
similar ways; thus, it is no wonder that some English refer to speed bumps
as “sleeping policemen.” The physical properties of speed bumps, coupled
with the speech acts necessary for their judicious placement, can yield social
order: the invented technology refashions social institutions, alters the
economy, and so forth.
3. See Latour 1994. The example of the speed bump is his own, though the elaboration
is mine.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 337
Real Institutions, and Really Legitimate Institutions
337
Both of these authors, however, greatly downplay the contribution of
the material to social institutions. De Soto attributes an importance to
written law that generally discounts the significance of technological
regimes:
It is law that detaches and fixes the economic potential of assets as a value separate from the material assets themselves and allows humans to discover and
realize that potential. It is law that connects assets into financial and investment
circuits. And it is the representation of assets fixed in legal property documents
that gives them the power to create surplus value.
Lifting the bell jar, then, is principally a legal challenge. . . . (157)
Yet it is law and physical fact together that make the speed bump effective.
Law allows speed ordinances and the mobilization of city workers’ crews,
but design and brute substance carry the rest of the burden. Similarly, the
things of first importance when we speak of real property should doubtless
include stakes and surveyors as well as law, for thousands of years past right
to the present. More recent technologies will include the barking dogs that
demark boundaries noted by de Soto (2000, 153) and global positioning
systems. These are themselves bound up in law also: a wooden stake is
rarely acceptable; humane laws affect the activities of many barking dogs,
and so allow them to mark boundaries effectively; and a global positioning
system requires a maintenance contract. It may be the case that de Soto,
for his part, has found that the problem has been, practically, “a legal challenge.” It would be misleading, however, to suggest that such matters are
fundamentally legal: they are at least as much socio-technical.
Furthermore, the choice among and development of technological
regimes is crucial to what law can speak of, particularly with regard to real
property. One who treats de Soto’s lesson too narrowly may neglect the
importance of the appropriate infrastructure of banking, including the
willingness of bankers to offer mortgages (see Andrew Frank’s chapter in
this volume). Technological innovations, such as global information systems, may also play their roles in solving the problem of social order (see
Eric Stubkjaer’s chapter in this volume). Innovation in both these respects
will alter the language that lawyers, courts, and legislature can use in their
work, by antecedently altering the real structure of social institutions.
I have similar concerns with John Searle’s discounting of the important
role of physical objects and technology. He misleads us towards mentalism
when he writes: “In a sense there are things that exist only because we
believe them to exist. I am thinking of things like money, property, governments, and marriages” (1995, 1). In a sense, of course, Searle is correct, but only in a very loose sense, as he ignores the socio-technical
component in these and other “status functions” that are generated in
social reality. Money, which is one of Searle’s most developed examples,
Mystery of CapitalCRev
338
2/18/08
11:13 AM
Page 338
Eric Palmer
requires a technology, such as counters, as Searle briefly acknowledges but
does not consider carefully. We simply could not get by on our “beliefs”
alone here—it could not practically work for the sort of institution that is
in place. The same goes for the other institutions in his list, at least in the
forms that those institutions take today. One might be able to decide and
keep in one’s head who is the leader of a group, but governments of the
sort with which we are acquainted require much more socio-technical
apparatus, encompassing voting machines as well as supreme courts to
override them. Similarly, technologies such as paint and paper, in wedding
portraits and parish registers, have served their roles in the development of
the institution of marriage.4
My suggestion is that, as de Soto was too focused upon law, Searle is
similarly too mentalist in his quick adoption of these examples: he gives too
little credit to the social significance of things within the construction of
social reality. A more suitable example to make Searle’s point about the
conventional nature of social reality would be a simple verbal promise
between friends. This may qualify as a social fact, and perhaps an institution, along the lines that Searle suggests. But it is also an exceptional case
that we should not take as the basis for other social institutions, such as
government: for such a model of agreement might underwrite the common and troubling historical interpretation of Hobbes’ “covenant of every
man with every man.”
Further detail concerning the case of money will show a point that is
already implicit in the examples discussed two paragraphs above: that physical technology actually plays a determinative role in setting social function.
Searle does allow a place for physical technology: he allows that money uses
physical technology, and he states that football touchdowns, for example,
are not executed simply by declaration (1995, 55). He also writes of the
“agentive functions” in social reality of objects with particular physical
properties. He gives credit to the structures of screwdrivers and the “sheer
physics” of tall fences, for example (20, 39). Searle passes over any such
acknowledgement for the institutions of marriage and government, however, and as social institutions become more enfolded in human cooperation, he is less inclined to note technology’s contribution to the social
product. Searle writes, “In the extreme case, the status function may be
attached to an entity whose physical structure is only arbitrarily related to
the performance of the function,” and he uses money as his example (41).
In the case of money, Searle’s acknowledgement of debt to technical
reality is miserly indeed, for he writes: “just about any sort of substance can
4. See the discussion of the social and legal significance of wedding portraits in Panofsky
1953. Thanks go to Carolyn Butler Palmer for this example.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 339
Real Institutions, and Really Legitimate Institutions
339
be money, but money has to exist in some physical form or other. Money
can be bits of metal, slips of paper, wampum, or entries in books. . . . Most
money is now in the form of magnetic traces on computer disks. It does
not matter what the form is as long as it can function as money, but money
must come in some physical form or other” (1995, 34–35). Here Searle
presents a partial analysis of the importance of physical facts to social institutions. But he downgrades the physical matter by suggesting that the
form of money hardly matters, and actually becomes arbitrary over the
course of institutional development, so long as the stuff “can function as
money.” Searle does not allow that what the physical constitution of the
counters is plays a great role in determining what constitutes the function
itself and in shaping social reality.
Money isn’t what it used to be. As everyone is aware, it has become
electromagnetic for good, nonarbitrary reasons concerning efficient transfer. But that change has also altered its social role and its function significantly. Particularly, the volumes of currency made available for transfer in
electronic form have allowed for a specific importance of currency traders
to international economics. Governments of developing countries, in
efforts to attract stable foreign investment, have used available funds to
artificially stabilize the values of their currencies. Large sales of currencies
gained a functional use in traders’ eyes—particularly in Asian currencies in
the late 1990s—once the traders recognized that they could exhaust the
national reserves dedicated to propping prices. Traders sold borrowed currency, exhausted the government’s prop, subsequently pushed down the
value of the currency, and then bought it back at profit (Saludo and Lopez
1997). Collusion among money traders as well as large-scale borrowing
and selling done for such functional purposes are now carefully restricted
and legislated in international markets by those with opposed purposes. So,
the new medium for money had unintended social effects, and it also
altered money’s (and law’s) function: once the traders understood those
effects, money was functionally different, since it could be used in a new
way to draw profits.
The physical structure of money has also been exploited for quite
opposed purposes. According to Plutarch, the ruler and social engineer
Lycurgus introduced iron, at very high weights per unit, as the exclusive
legal currency in Sparta. By this means Lycurgus reduced theft, crippled
external trade deliberately, and consequently, attacked luxury among
wealthy citizens. Money lost many of its specific functions as a medium
of exchange, then, as a consequence of Lycurgus’s choice of physical
technology:
The iron money, after all, could not be exported elsewhere in Greece, and was
considered a joke there, not an object of value. Consequently it was impossible
Mystery of CapitalCRev
340
2/18/08
11:13 AM
Page 340
Eric Palmer
to buy any shoddy foreign goods, and no cargo of merchandise would enter the
harbours, no teacher of rhetoric trod Laconian soil, no begging seer, no pomp,
no maker of gold or silver ornaments—because there was no coined money.
Thus gradually cut off from the things that animate and feed it, luxury atrophied of its own accord.5
In Searle’s analysis of function, it is necessary that the practical effects
of the physical technology be recognized by someone for them to actually
be functional: functional, as opposed to brute fact (such as, “greenbacks
make my wallet this thick . . .”) and as opposed to unintended consequence (the unintended devastation that currency traders can wreak).
Nevertheless, I conclude: First, these brute facts and unintended consequences have great roles in the construction of social reality, even if they
are not functional because they were not intended to arise. Second, regarding function: The mental work of belief and agreement that Searle highlights is one of a pair of components that makes for almost every social
institution, but the specific physical technology involved is as important a
component for shaping the functional product. Because it so shapes function, it is misleading to view these institutions as existing “only because we
believe them to exist.” This is as true of money, governments, and marriages as it is of speed bumps.
Searle’s view, that it is often a matter of “convention”6 when we tie
technologies to status functions—a view that de Soto’s writing about law
suggests he might share—is misleading. We cannot choose whatever specific physical technology we like: we choose among those we find to be
available or can make available through technological development. A
more helpful claim, albeit a metaphorical one, would be that we do not
choose technologies; instead, we enlist nature in our causes, and nature
also has its say in the construction of social reality. Daniel Dennett’s claim
that “We learn . . . how to spread our minds out in the world,” gets us part
way to the realization that many of our institutions fundamentally depend
on material instantiation (Dennett 1996, 139). Dennett does not, however, make it obvious that the world will play a further significant role by
aiding or frustrating, and altering, our efforts. The technology we use will
usually have unintended effects that contribute to social reality, as we have
found with voting machines recently, and it will also shape the functions
that we can impose with its use, as the money example suggests.
5. Plutarch 1988. Richard Talbert (translator and editor of Plutarch 1988) mentions that
Plutarch’s reporting in this instance, as elsewhere, is largely, but not perfectly accurate; see
17n1.
6. See Searle 1995, 49, 56, for reiterations of the strong conventionalist position laid out
at 41–42.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 341
Real Institutions, and Really Legitimate Institutions
341
Consequently, Searle’s (2003) recent retreat to the view that credit and
electronic cash are each only “representations of money,” laying direct
weight, presumably, on bills and coin, makes matters worse, and the problem clearer: if the technology plays a role in determining functions, the
technology must play its part in constituting what the social institution
“money” is.
Section 2.1 has provided a detour into social ontology. It presents the
cautionary lesson that physical infrastructure plays a fundamental role in
the construction of social reality. Its lesson may be added to the general
point of part 2, in which I have attempted to defend the claim that the
construction of institutions can be studied without reference to legitimacy.
I have argued that the legitimacy of institutions is a matter entirely separate from their construction: we must consider each separately to consider
them clearly. I have also gestured at a philosophical distinction that supports this separation: the division between the world of facts and the kingdom of ends, as presented by Kant.7 Now, what more can I say about
legitimacy?
3. Real Institutions, and Really Legitimate Institutions
Kant’s division between the world of facts and the kingdom of ends
remains an extremely useful idea for understanding legitimacy, and I think
it is a particularly appropriate one to promote for the concerns of the interdisciplinary conference that spawned this volume. I will elaborate upon its
implications to close this chapter, focusing upon Kant’s development of
the division.
I should briefly note that variant conceptions of justice are also currently on offer, as are discussions that analyze both the concept and the
application of the idea of a “kingdom of ends” (on the latter, see Korsgaard
1996). There are well-subscribed contemporary ethical approaches, such
as virtue ethics, that do not explicitly countenance the concept, or at least,
do not use it as the main tool for determining legitimacy (see, e.g., the
writings of Martha Nussbaum). There are others that allow for such treat-
7. I will stick with Kant’s term “kingdom” here, rather than other possible descriptors
(community, democracy, discourse community, etc.) because I maintain that each capable
individual remains sovereign over his, her, or its ethical choice. Kant’s view agrees with this,
but adds an extra layer that is not intended here, since he assumed a continuing role for
monarchy in the development of ethical progress in a cosmopolitan context (see Toward
Perpetual Peace). Other authors have modified that extra layer, and in doing so, have unfortunately altered the specific character of individual ethical sovereignty: see, e.g., Christine
Korsgaard’s (1996) reference to the “legislative citizen” (xii).
Mystery of CapitalCRev
342
2/18/08
11:13 AM
Page 342
Eric Palmer
ment, but will disagree with Kant as to what in the world qualifies as an
end; for example, arguing that we should include some nonhuman animals,
and exclude some human animals (e.g., seriously brain-damaged ones; see
the writings of Peter Singer). Recent work in the Kantian tradition also
digs into analysis of the conditions under which treatment of individuals as
ends is appropriate; for example, considering the participatory conditions
required for legitimate adjudication among those who are ends (see writing of John Rawls and of Jürgen Habermas).
What in general can we say about the relation of the real to the legitimate, where these are conceived as, respectively, the historical world of
facts and the normative kingdom of ends? First, a caveat about what legitimacy is not. It is not a feature that may be gathered from the study of history, but it is reasonable to hold nonetheless that a historical story
concerning facts can be told about how one comes to maintain a view concerning what the kingdom of ends is. The historical story might, for example, include intellectual discussion, such as is briefly reviewed in the
preceding paragraph. A socio-technical story of the development of any
account of legitimacy may also be told, much like the ones briefly mentioned above regarding the constitution of real property.8 But no such stories will in any way serve as a normative basis for a legitimacy claim. I may
write all I like about what Kant and Rawls wrote, and a sociologist might
write all he or she likes about the facts and causes of my education. Both
of these discussions may bring up ideas for consideration, but neither will
move us a step toward explaining what makes a real institution really legitimate in addition.
Legitimacy is distinct from the historical, then, but it is also clear that
they have some relation. This suggests a point that is rather basic, but very
important for establishing a clear characterization of the relation between
the factual and the normative: we can learn about what works from experience, without also committing ourselves to the idea that we can learn
what is good from experience. Here is how Kant expresses the relation:
Nor could one give worse advice to morality than by wanting to derive it from
examples. For, every example of it represented to me must itself first be
appraised in accordance with principles of morality, as to whether it is also worthy to serve as an original example, that is, as a model; it can by no means
authoritatively provide the concept of morality. Even the Holy One of the
Gospel must first be compared with our ideal of moral perfection before he is
cognized as such. . . (Kant 1998b, 63)
8. The demand that the normative is also historical reflects recent argument, by sociologists of science, that all scientific study must be explainable sociologically, in principle. See
Harry Collins 1981.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 343
Real Institutions, and Really Legitimate Institutions
343
Few would doubt that history, presented as facts and causes, does provide us with useful evidence that is in some way relevant to consideration
regarding legitimacy. Once again, I think it is helpful to simply introduce
Kant’s succinct treatment of this point: “Imitation has no place at all in
matters of morality, and examples serve only for encouragement, that is,
they put beyond doubt the practicability of what the law commands and
make intuitive what the practical rule expresses more generally, but they
can never justify setting aside their true original, which lies in reason, and
guiding oneself by examples” (Kant 1998b, 63).
What, then, is the relation between fact and end? In the first section, I
loosely referred to the relation as “symptomatic”: what has happened, and
what will happen in the world of facts, shows the symptoms of what is
unseen but relevant in the kingdom of ends. I have brought in Kant’s discussions of ideals and examples as a first step toward further precision. A
second step is offered by G. E. Moore, in his discussion of the naturalistic
fallacy. Because this is a paper addressed to an audience not exclusively of
philosophers, a swift introduction to this fallacy may be helpful.
The vexed relation of event to ethical norm was discussed in a particularly clear way by G. E. Moore a century ago. Moore joined with Kant in
the view that facts about the world and the basis for ethical norms, including legitimacy, must be distinguished. Moore did not envision a category
that might be referred to as a kingdom of ends; rather, here is how he put
their relation: “Ethics aims at discovering what are those other properties
belonging to all things which are good. But far too many philosophers
have thought that when they named those other properties they were actually defining good . . .” (1988, 10). Moore coined the phrase “naturalistic
fallacy” to clearly label the mistake of maintaining that norms can simply
be other facts about natural objects—that they are a feature of objects in
experience. Moore’s treatment of the relation is a particularly careful and
convincing one: it does not suggest that there is a distinct Platonic Realm
of Goodness from which natural objects draw their goodness; rather, some
natural objects happen also to have the (nonnatural, ethical) feature of
goodness.
The root division between the historical world of facts and the normative kingdom of ends remains clear, then. This essay has been concerned
with characterizing that division clearly, particularly with respect to institutions. It is an essay in conceptual clarification, and has not been concerned with explaining which institutions are in fact legitimate, and why. It
is an effort preliminary to that one: we must be clear on the concepts
before we can proceed clearly with the substance.
Mystery of CapitalCRev
344
2/18/08
11:13 AM
Page 344
Eric Palmer
R E F E R E N C E S
Collins, Harry. 1981. “What Is TRASP? The Radical Programme as a
Methodological Imperative.” Philosophy of the Social Sciences 11:215–24.
Dennett, Daniel. 1996. Kinds of Minds. New York: Basic Books.
de Soto, Hernando. 2000. The Mystery of Capital. New York: Basic Books.
French, Peter. 1984. Collective and Corporate Responsibility. New York: Columbia
University Press.
Gierke, Otto. 1913. Natural Law and the Theory of Society. Translated by E. Barker.
Cambridge: Cambridge University Press.
Hobbes, Thomas. 1994. Leviathan. Edited by Edwin Curley. Indianapolis:
Hackett. (Original work published 1651.)
Kant, Immanuel. 1998a. Groundwork of the Metaphysics of Morals. In Immanuel
Kant: Practical Philosophy, edited and translated by Mary J. Gregor and Allen
Wood. Cambridge Edition of the Works of Immanuel Kant in Translation.
Cambridge: Cambridge University Press. (Original work published 1785.)
Kant, Immanuel. 1998b. Toward Perpetual Peace. In Immanuel Kant: Practical
Philosophy, edited and translated by Mary J. Gregor and Allen Wood.
Cambridge Edition of the Works of Immanuel Kant in Translation. Cambridge:
Cambridge University Press. (Original work published 1795.)
Korsgaard, Christine. 1996. Creating the Kingdom of Ends. Cambridge:
Cambridge University Press.
Korten, David. 1999. The Post-Corporate World. West Hartford: Kumarian.
Latour, Bruno. 1994. “On Technical Mediation—Philosophy, Sociology,
Genealogy.” Common Knowledge 3, no. 2: 29–64.
Locke, John. 1988. “Second Treatise of Civil Government.” In Two Treatises on
Government, edited by Laslett, Geuss, and Skinner. Cambridge: Cambridge
University Press. (Original work published 1690.)
Martin, Elizabeth A. 1998. “Sovereignty.” A Dictionary of Law. Oxford: Oxford
University Press.
Meyers, William. 2000. “The Santa Clara Blues: Corporate Personhood vs.
Democracy.” III Publishing. http://www.iiipublishing.com/afd/santaclara.html
(accessed October 2, 2004).
Moore, G. E. 1988. Principia Ethica. Buffalo, NY: Prometheus Books.
National Lawyers‘ Guild. 2003. NLG Committee on Corporations, the
Constitution and Human Rights. http://www.nlg.org/programs/corporations.htm (accessed October 2, 2004).
Panofsky, Erwin. 1953. Early Netherlandish Painting. Cambridge, MA: Harvard
University Press.
Plutarch. 1988. Plutarch on Sparta. Translated by Richard Talbert. London:
Penguin. (Original work written ca. 100 CE)
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 345
Real Institutions, and Really Legitimate Institutions
345
Rousseau, Jean J. 1997. The Social Contract. In The Social Contract and Other
Later Political Writings, edited by Gourevitch, Geuss, and Skinner. Cambridge:
Cambridge University Press. (Original work published 1762.)
Saludo, Ricardo, and Antonio Lopez. 1997. “As Speculators Reign Supreme, How
Safe Is Your Country’s Money?” Asiaweek. July 25. http://www.asiaweek
.com/asiaweek/97/0725/cs1.html (accessed October 2, 2004).
Searle, John and Barry Smith. 2003. “The Construction of Social Reality: an
Exchange.” American Journal of Economics and Sociology 62, no. 1 (January).
Searle, John. 1995. The Construction of Social Reality. New York: Free Press.
Women’s International League for Peace and Freedom. 2002a. “Challenge
Corporate Power, Assert the People’s Rights.” http://www.wilpf.org/section/campaign/CPOWER.htm (accessed October 2, 2004).
Women’s International League for Peace and Freedom. 2002b. “Abolish
Corporate Personhood Organizing Packet.” http://www.wilpf.org/section/
campaign/CPOWER_abolish.htm (accessed October 2, 2004).
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 346
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 347
Contributors
Serguey Braguinsky is Assistant Professor at the Economics Department at SUNY
Buffalo.He was born and raised in the former Soviet Union and graduated from
Moscow State University. His PhD degree in economics is from Keio University in
Japan and his career includes ten years of research and teaching economics in a
Japanese public university.
Serguey’s research interests are in economics of institutions, entrepreneurship,
and Schumpeterian growth. Serguey has an extensive list of scholarly books and
articles published in the U.S., Japan, and Russia.
Dan Fitzpatrick is Senior Advisor to CEPSTA, the Centre for Policy Studies and
Analysis at the University of Social Science and Analysis, Vietnam National
University, Hanoi. He is also consultant to private sector businesses and to development projects in SE Asia. His academic research interests include business
ethics, economic and social reality, the origins of money and issues to do
with economic development. He is Research Fellow at the University of
Hertfordshire, UK.
Ingvar Johansson is since March 2008 Professor Emeritus of Theoretical
Philosophy at Umeå University (Sweden). From summer 2002 to his formal retirement, he worked at the Institute for Formal Ontology and Medical Information
Science (Germany). He is author of the books A Critique of Karl Popper’s
Methodology (1975) and Ontological Investigations (1989; 2004), as well as journal
papers in many different areas of philosophy. Recently, he has with a co-author
published the textbook Medicine & Philosophy: A Twenty-First Century
Introduction (2008).
David Koepsell, JD, PhD, is a Research Assistant Professor at the University at
Buffalo, New York. He has written and published numerous articles, and a number of books, on philosophy, law, ethics, and ontology. Dr. Koepsell directs the
university’s campus-wide Research Ethics course, and is involved in developing and
teaching in the Graduate Education department’s new master’s certificate program
entitled “Science and the Public.” He also developed a course at UB entitled “Law
347
Mystery of CapitalCRev
348
2/18/08
11:13 AM
Page 348
Contributors
and Technology” in the Social Sciences Interdisciplinary program. David’s research
interests focus on the nexus of ethics, law, and science. His website is http://www
.davidkoepsell.com.
Daniel R. Montello is Professor of Geography and Affiliated Professor of
Psychology at the University of California, Santa Barbara. He has published widely
in the areas of spatial, environmental, and geographic perception, cognition, and
behavior. He and Paul C. Sutton authored An Introduction to Scientific Research
Methods in Human Geography (2006, SAGE), and he co-edits the journal Spatial
Cognition and Computation.
Josef Moural teaches philosophy at Purkynje University, Ústí nad Labem (Czech
Republic). He has taught previously at Charles University (Prague), King’s College
(London), and University of California, Berkeley. His main areas of research are
ancient philosohy (Plato, scepticism), modern philosophy (Descartes, Hume), phenomenology (late Husserl, early Heidegger, Patoãka), and Searle’s theory of institutions. He co-authored a history of modern philosophy (in Czech) and published
translations (into Czech) of Hume, Kant, and Tugendhat.
Eric Palmer is Associate Professor of Philosophy at Allegheny College, in
Pennsylvania. His research focuses upon binding corporate activity ethically, especially in the context of globalization. He argues that libertarian positions regarding
corporate responsibility can be viewed through the lens of Amartya Sen’s capability approach to development, which consequently indicates specific duties for
multinational corporations. His most recent work in that area is “Corporate
Responsibility and Freedom,” in Controversies in International Corporate
Responsibility, ed. John Hooker, Philosophy Documentation Center, 2007
(25–34). Much of his writing may be accessed at http://webpub.allegheny.edu/
employee/e/epalmer/paperfile/papers.html.
Jeremy Shearmur is Reader in Philosophy in the School of Humanities, Australian
National University. He is the author of Hayek and After and The Political
Thought of Karl Popper, and his edition (with Piers Turner) of Karl Popper’s After
The Open Society came out in 2008. His primary fields of research are social and
political philosophy and the philosophy of the social sciences.
Erik Stubkjær is Professor of Land Registration/Cadastre at the Department of
Development and Planning, Aalborg University, Denmark. University teaching in
this domain emerged due to the need of the profession of chartered surveyors.
Stubkjær’s steady research focus has been to articulate theoretical foundations of
the European cadastres through a number of articles and book chapters. During
2001–2005, he chaired the Management Committee of the research activity
Modelling Real Property Transactions, which coordinated research in eleven
European countries and was supported by the EU’s ESF/COST scheme as activity
G9. During 1996–99, he coordinated a EU Phare/ TEMPUS project (S-JEP
11001-96), regarding the restructuring of the study programs of the Department
of Geodesy, Faculty of Civil and Geodetic Engineering, University of Ljubljana,
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 349
Contributors
349
Slovenia. He is member and former chairman of the Programme Committee of the
Scandinavian Research Conference on Geographical Information Science.
Jon Unruh is a Professor of Geography at McGill University in Montreal. His
research and policy work over the past twenty years has dealt with post-conflict land
and property rights in the developing world, and the intersection of land tenure
and environmental change. His past endeavors have focused on conflict resolution,
land policy and law, restitution, legal pluralism, approaches to reconciling customary and formal tenure systems, and agriculture in postwar and peace-building scenarios. His experience includes work in Liberia, Somalia, Mozambique, East
Timor, Sierra Leone, Zanzibar, Ethiopia, Uganda, Madagascar, and Colombia.
Gloria Zúñiga y Postigo teaches analytic philosophy at Grand Valley State
University in Michigan. She studied with Barry Smith at the University at Buffalo
and John Searle at U. C. Berkeley, and collaborated with Hernando de Soto at the
ILD in Lima, Peru, on the development of ontologies of landed property. Her
work draws from Austrian philosophy and realist phenomenology. She is presently
completing a book on the ontology of value. Her chief research interest is social
ontology and her work in this direction includes ontologies of economics, information systems, and aesthetic objects, moral realism, and personhood. Some representative publications are: “Ethical Concerns About the European Union’s Four
Freedoms: Toward an Ontology of Powers and their Relations to Moral Values,”
Business Ethics and Corporate Social Responsibility (2006): 53–69; “An Ontology of
Dignity,” Metaphysica 5 (2004): 115–31; “What Is Economic Personalism?: A
Phenomenological Analysis,” Journal of Markets & Morality 4: 151–175; and “An
Ontology of Economic Objects,” American Journal of Economics and Sociology 58:
299–312.
Mystery of CapitalCRev
2/18/08
11:13 AM
Page 350