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The Theory of Socialism According to Marx and Mill

John Stuart Mill and Karl Marx both have made a significant impact on the history of Economics. Mill supported the Capitalist movement that was going on during that time whereas Marx detested Capitalism. Mill, having worked as an administrator at East India Company, comprehended the fact that Capitalism, for the most parts, brought about positive outcome for the society. However, having studied Jeremy Bentham, he was also influenced by the Socialist view of Bentham. He believed that socialism should be integrated with classical liberalism in order for the society to maximize happiness and avoid the opposite. On the other hand, Marx had radical views about Capitalism. He believed Capitalism to be a system where the people sowed the seeds of their own destruction. He argued that the Bourgeois will always rule over the proletariats. Therefore, the thesis of my paper discusses the reasoning of Mill towards favoring Socialism combined with Capitalism, and that of Marx looking at Socialism as a temporary step before the society reaches the highest form of economic order, Communism. I shall discuss this through the two economists� view on labour, wages and capital, profit and private property, government intervention and competition and lastly through their views on �revolution�.

Mill gave a special attention to labour in his analysis of economic conditions. Although he believed in the fundamentals of classical economy that there should be division of labour and that trade was beneficial to the society as a whole, he also pointed out some corrections which show his Socialist side. He recognized the class conflict among the landlords and the rest of society. He believed that labour should be allowed to form unions in order to freely demand higher wages and better rights at work. He believed that working hours should be shorter and promoted universal education. Although Adam Smith had briefly touched on different types of labour, Mill distinctly talked about different types of labour according to their contribution, and introduced a social judgment on the types of labour. For instance, he considered women as a part of the productive labour force. Mill was one of the first Economists to give importance to women. He believed in analyzing long run benefit to the society.

�To community at large, the labour and expense of rearing its infant population form a part of the outlay which is a condition of production, and which is to be replaced with increase from the future produce of their labour.�

Marx�s view of labour is similar to Mill in that he promotes well-being of the working class, which he terms �Proletariat�. Although Marx advocated women�s right by arguing for divorce laws so that the bourgeois could not exploit women, what distinguished Marx from Mill was his extremist view on Labour. �The Communists have no need to introduce community of women; it has existed from almost time immemorial.� He believed that the society was divided into two major classes, the bourgeois and the proletariat, and that the proletariat was ruled by bourgeois. He believed the proletariat class to be the forces of production, and the one that ultimately affects the relations of production, which then causes the need for change in the society. He argued that as people form unions or get education in the Capitalist society, it causes changes in forces of production, and hence, this change should be accompanied by a transition to Socialism, and further changes in the orientation of labour would bring the economy into Communist state. Thus under Capitalism, Marx describes necessity of change in labour organization as follows:

�The laborer becomes a cheaper commodity the more commodities he creates. With the increase in value of the world of things arises in direct proportion the decrease of value of human beings. Labor does not only produce commodities, it produces itself and the laborer as a commodity and in relation to the level at which it produces commodities. The objectification of labor manifests itself so much as a loss of objects, that the laborer is robbed of the most necessary objects, not only to maintain his own life, but even objects to labor with. Indeed, labor itself becomes an object, which only with the greatest effort and with random interruptions can be acquired. Appropriation of objects manifests itself so much as estrangement, that, the more objects the laborer produces, the fewer he can own and so he plunges deeper under the mastery of his product: capital.�

Mill and Marx�s view of wages and capital also distinguishes them. Mill believed that wages depend upon capital and the proportion of population (the number of labouring class ). He believed that the demand and supply of labour determined the wage of the labour. Moreover, his socialist view of wages is clearly stated in the following lines:

�Wages, like other things, may be regulated either by competition or by customs. In this country there are few kinds of labour of which the remuneration would not be lower than it is, if the employer took the full advantage of competition.�

Therefore, one can immediately see that he believes in fundamentals of capitalism by saying that competition is the principal regulator of wages, but custom and individual characters are the modifying circumstances for wage of labor. Moreover, Mill believed wages to remain in the general rate (long run equilibrium) unless there is a change in the amount of capital or the number of labouring force. Therefore, we see that Mill established a direct relation with Wages, and agreed on this theory with Ricardo. In addition to this, he said that capital is the accumulated stock of the products of labor. After discussing such aspects and manifestation of capital, such as fixed versus circulating capital, Mill examined the social forms of production, such as cooperation, combination of labor, production on a small and large scale, and the increase of labor, which results in the increase of capital as well as production.

In contrast to this, Marx viewed wages and capital in an extremist view. He believed that labourers earn the least amount of wage for the amount of work they do. As they become more productive, they get less and less for the amount of work they do. Marx believed that the price of the commodity is composed of wages, rent and surplus profit. He argues that in order for the wages to increase, and the labour to be better off; the rent and surplus profit should also come to working class. The rent and surplus would go to the proletariat only when they were allowed to own the capital. This is his reasoning to promote ownership of capital in the country be controlled by the Proletariat. Therefore, he establishes the relation that labour and capital compliment each-other, and therefore, the capital should be used to create a better life for labourers.
�And so, the bourgeoisie and its economists maintain that the interest of the capitalist and of the laborer is the same. And in fact, so they are! The worker perishes if capital does not keep him busy. Capital perishes if it does not exploit labor-power, which, in order to exploit, it must buy. The more quickly the capital destined for production � the productive capital � increases, the more prosperous industry is, the more the bourgeoisie enriches itself, the better business gets, so many more workers does the capitalist need, so much the dearer does the worker sell himself. The fastest possible growth of productive capital is, therefore, the indispensable condition for a tolerable life to the laborer.�

Among the proposal of Communist beliefs, Karl Marx and Engels clearly state: �Centralisation of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly.� Once again, Marx seems to claim the formation of unions, or institutions to lobby for increase in wages, and lower the surplus profit for the bourgeois (Mill�s proposal of socialism into capitalism) as a step towards reaching the perfect state. His claim is that once labour forms such unions, all must unite as one to take the capital in the hands of the state, and hence, maximize the happiness for the proletariat. This state, he called, Communism.

We further discuss profit and private property in order to see the different views of Mill and Marx. Mill agreed that property can be owned privately, and that this allows the rent to be lower since the landlords compete among themselves. However, Mill feels that there should be some form of control by the government so that the landlords do not exploit the labourers.


�If private property were adopted, we must presume that it would be accompanied by none of the initial inequalities and injustice which obstruct the beneficial operation of the principle in old society�..�

Mill goes on to talk that even if complete public ownership was appointed in the society, �the division of profit might be either that of complete equality, or of apportionment to the necessities or deserts of individuals, in whatever manner might be conformable to the ideas of justice of policy prevailing in the community.� Therefore, once again, we see that he brings out the idea that how profit is divided in either privatized market or a centralized government depends upon the social ideas, culture, and what is believed to be right by the society. As far as private property is concerned, Mill believes that humans are in control of private property.

�In the social state, in every state except total solitude, any disposal whatever of them can only take place by the consent of society or rather of those dispose of its active force...the distribution of the wealth therefore depends on the laws of the society.�

Mill argues that the methods employed to distribute wealth, and hence decide how much private property is held, is through trial and error. He states that if people are allowed to own private property, then people will have more incentive to work because they would be the owners. He believes that society should be set up in a way that everyone gets to control a certain amount of property, even though not everyone can have equal amounts.

As opposed to this, Marx�s view of profit and private property is extreme. He believes that a Bourgeoisie is nothing but a lazy pig who tries to make profit from the work of the Proletariat. �But does wage labour create any property for the labourer? Not a bit.� He, therefore, argues that the surplus amount gained from produce does not go to the labourers who deserve it, but goes to Capitalists who exploit wage labour. Moreover, Marx argued that private property is useless because it only supports Bourgeois. He therefore argues that the concept of private property should not even exist in the society. In fact his proposal as a Communist is �abolition of property in land.�

�You are horrified at our intending to do away with private property. But in your existing society, private property is already done away with for nine-tenths of the population; its existence for the few is solely due to its non-existence in the hands of those nine-tenths. You reproach us; therefore, with intending to do away with a form of property, the necessary condition for whose existence is the non-existence of any property for the immense majority of society.�

Therefore, one can almost see that Marx would have considered Mill�s step as anti-thesis on the existing Capitalist society, and ultimately his step as the theory. Therefore, Mill�s Socialism is seen as a step towards Communism by Marx.
The next topics to be discussed are Government Intervention and Competition in order to differentiate the views of Mill and Marx. Mill believed that government intervention and competition were both very important aspect of a fair society. Mill recognized the fact that perfect competition had its flaws. Despite this, he still favored Competition compared to a society where people do not have to compete. He also argued that competition, overall, is for the betterment of the society. This is also one primary area where he directly talks against the extreme Socialists, and points out that although he favors socialism to a certain extent, he would not agree with extremist point in this one.
�But while I agree and sympathize with Socialist in this practical portion of their aims, I utterly dissent from the most conspicuous and vehement part of their teaching, their declamations against competition� They forget, too, that with the exception of competition among labourers, all other competition is for the benefit of the labourers, by cheapening the articles they consume�But if competition has its evils, it prevents greater evils.�

As far as government is concerned, Mill recognizes that there should be limitations as to how much of interference there should be from the government upon a society and a business. He discussed how most people thought the role of the government is to prevent and suppress force and fraud. One can argue, that by mention of force, Mill pointed against Monopoly, and by fraud, he meant that no individual shall do wrong onto another.

�Again, however wide a scope we may allow to the doctrine that individuals are the proper guardians of their own interests, and that government owes nothing to them but to them but to save them from being interfered with by other people, the doctrine can never be applicable to any persons but those who are capable of acting in their own behalf. �Can it make over the interests of one person to the control of another, and be excused from supervision, or from holding the person thus trusted, responsible for the discharge of the trust?�

It is unclear as to what exactly Mill thinks about government intervention, and to what extent he favored such intervention. However, it is clear to us that Mill did indeed support a limited form of intervention.

Marx�s view on Competition and Government Intervention is contrasting to the one of Mill. Competition is a big part of a Capitalist society, and therefore Marx saw it as a hindrance to the ideal society. When humans loose touch with their humane side and are concerned with only earning higher profits, Competition is an excuse they use in order to exploit labour. Competition also made labour wages cheaper. In my opinion, Marx saw a lopsided picture of the economy, and refused to acknowledge that competition made rent cheaper for the labourers as well. He also failed to see labourers as consumers. Marx did, however, agree that competition decreases the profit for the capitalists, and eventually should shift the wealth to the Proletarians.

�The battle of competition is fought by cheapening the commodities. The cheapness of the commodities depends, ceteris paribus, on the production of labour, and this again on the scale of production. Therefore, the larger capitalists beat the smaller.�

According to Marx, the government intervention should be obvious in the society. While Mill believed that government should intervene in a few selected issues in the society, Marx took this socialist view one more step and say that government should provide for those who cannot afford or act. Moreover, Marx seems to give importance to education, minimum wages and other such benefits. As a communist idol he considers this Socialist approach a step towards the goal of a state-ruled society. He also believed in extension of factories and instruments of production owned by the state. Therefore, he ultimately says that everything should be state controlled, and then only can everyone be better off in the society.

Lastly, we compare the view of Mill and Marx towards revolution in order to bring out their socialist and communist side respectively. Moreover, we also analyze their thoughts on each other�s philosophy to truly bring about the distinction between these two economists. Mill rejected the idea of revolution. He argued that a revolution is a change of government effected by force, whether it is by a popular revolt or by a military usurpation. Mill, being a socialist, believed that political and economic questions are solved with a maximum agreement among men if they are dealt with in a factual, empirical spirit. Marx, on the other hand, believed that he was constructing a political language which was intended to empower the working class. He believed that it was necessarily for people to act on solidarity, and that force is necessary in order to take over the current system which was suppressive. Thus, �the communists disdain to conceal their views and aims. They openly declare that their ends can be attained only by the forcible overthrow of all existing social conditions. Let the ruling class tremble at communist revolution.�

Mill speaks against Communism. He points out the fact that communism was influenced by Socialism, but was taken to an extreme. He points out that when a Communist government promotes equal education for everyone, the work given to all labour would not produce the efficient results.

�A contest, who can do most for the common good, is not the kind of competition which Socialists repudiate. To what extent, therefore, the energy of labour would be diminished by Communism, or whether in the long run it would be diminished at all, must be undecided question.�

Moreover, how would the standards of measuring different kind of labour be decided in the Communist society, and who would do lower work, and who would do the higher work. Who decides that? These are the question Mill raised in opposition to Communism. He said that �communism exists only in ideas.� He also states that compared to the Capitalist society, if communism tries to balance the power, it would be as but �dust in the balance.�

Marx, on the other hand, argued that Socialism existed in different meanings for different classes of the society. It started with �Feudal Socialism�, where the bourgeoisie tried to show that it was good for the society to give power to them from the traditional Landlords or Kings. This gave rise to �Petty-Bourgeois Socialism.� This is where the small peasant proprietors become a class between the Bourgeois and the Proletariat. Marx argues that both these Socialism has proven fatal to the society. �It proved, incontrovertibly, the disastrous effects of machinery and division of labour, and the concentration of capital in a few hands�� Therefore, Marx argued that the true Socialism was that of German Socialist movement, which was eventually led to Communism in the country.

Therefore, in my opinion, Mill�s ideas and theories are clearly a bridge to that of Ricardo, Smith and Marx. Marx was an extremist who believed that Communism should be reached through any medium, precisely the reason for failure of this theory. Mill�s theory balances out capitalism and socialism, which most societies practice now, without any major conflict. In my opinion, Marx contradicted his own theory at the end. He believed that due to changes in society, the on-going ruling government changed from Feudalism to Capitalism. He agreed that Capitalism would change into Socialism, but he assumed that once the society reaches Communism, the society stops to change. In this manner, Marx failed to predict the long term changes in future, and presented his point of their through a narrow stance. Therefore, I would agree with Mill as far as the theory of Socialism is concerned, in that, the government needs to help mold the Capitalist environment into helping everyone, and not just the ruling class.






BIBLIOGRAPHY:
1. The Communist Manifesto, Karl Marx
2. Principles of Political Economy, John Stuart Mill
3. The Letters of John Stuart Mill
4. Marxist Socialism, Shlomo Avineri
5. Utilitarianism and Other Essays, J.S Mill and Jeremy Bentham

   [ posted by Anastasia @ 07:13 PM ] | Viewed: 2030 times [ Feedback]

Adam Smith � Theory of Trade and Government Intervention into Free Trade

Adam Smith, also known as the Father of Economics, was born in Scotland. Two of his books �The Theory of the Moral Sentiment� and �The Wealth of Nations� have made a tremendous impact on the economic behavior of the countries in the world. At the time when Mercantilist had the government completely woven under their spell, Adam Smith appeared as an imperialist through the promotion of Internationalism and the anti-England of policy and thought. In his book �The Wealth of Nations,� Smith discussed the issues of production of labor, the theory of division of labor, the changes in price, capital, profit accumulation and the nature of market economy. In discussing the above, he explicitly refuted against mercantilism, and promoted free trade. The thesis of my paper talks about Adam Smith�s view on mercantilism and trade, government intervention, and his rationalization into free trade.

In order to understand Smith�s opinion about trade, one must understand the basic ideas of mercantilist view of his time. Mercantilists viewed the wealth of the nation to be fixed. Hence, any increase in wealth and economic power of one nation resulted at the expense of the other. Therefore, they believed that the government should regulate the economy so that the workers would get a low wage for a cheaper production. The domestic consumption should be minimized so that more goods could be exported to collect gold and silver. About this, Smith wrote:

�In the meantime one of the principal effects of those discoveries (America and of the sea route to the East Indies) has been to raise the mercantile system to a degree of splendour and glory which it could have never otherwise have attained to. It is the object of that system to enrich a great nation rather by trade and manufactures than by the improvement and cultivation of land, rather by the industry of the towns than by that of the country.�

Adam Smith completely debated the mercantilist argument, saying that the wealth of the nation is not gold and silver, but it is the skill and the productivity of the labor. Hence the land and labor of the country should be used to produce goods rather than just bringing in goods as an intermediary to trade with little profit. Moreover, Adam Smith defined the role of production as consumption, and not the collection of bullion as the popular belief used to be. He suggested that the major focus of the country should be to consume more, and hence more production and availability of more goods is better for the country. In order for this to happen, Smith promoted the policy of Laissez Faire which he explained by means of his �invisible hand doctrine.�
��.every individual necessarily labours to render the annual revenue of the society as great he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own again, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.�


Smith was profoundly religious, and saw that the �invisible hand� as the mechanism by which a benevolent God administered a universe in which human happiness was maximized. He believed that God had created humans with a nature that leads them to act a certain way, and in this case, to maximize their own utility. He also believed that the world as we know is pretty perfect and everyone is equally happy. Despite equal happiness, the human nature leads us to think that we would be happier if we were wealthier. This leads us to struggle to become wealthier, thus increasing the sum total of human happiness through the mechanisms of exchange and division of labor. There is one important thing that one should note when analyzing Smith�s �Invisible Hand Doctrine�, and it is that moral norms are necessary for such a system to work, that in order for exchange to proceed, contracts must be enforceable, people must have good access to information about the products and services available, and the rule of law must hold. After the assumption of the perfect society, Smith thus advocates his views about trade, and this is where his Laissez Faire Doctrine stands out.

Mercantilism brought about improper allocation of resources. The fundamental problem that Smith pointed out in mercantilism was the fact that the merchants had manipulated the King to employ his money into helping merchants of the country bring in raw produce from foreign countries. Although Smith was pro-trade, he didn�t agree that the labor of Great Britain was being employed into manufacturing only. He observed that the sole purpose of the labor was to add �value� into raw materials by working for the forced minimum wage. The goods were then exported it to some foreign country in order to gain profit for the merchant and the King. He saw that it was doing little justice to the productive capacity of the laborers. After that, countries started focusing in self-sufficiency, and tried to do everything themselves in order to produce at the cheapest, and then export it so that the profit is more. This according to Adam Smith was the worst thing an economy could do because the productive capacity is much higher if trade was allowed.

Moreover, Mercantilist operate to keep commerce, labor, or capital from following the channels in which they would otherwise go, or they cause inefficiency because they attract to a particular species of industry a greater share of the factors than would ordinarily be employed in it. He cites the example of the pin industry, where if one man was to do all part of the process, he would make 20 pins a day, but when the task was divided, they made 200 pins a day. If the economy as a whole did this it would be beneficial for the society because the goods would be abundant, and they would be able to trade it with each other to fulfill their needs and wants. This is also known as his �Absolute Advantage� theory.

�The natural advantages which one country has over another in producing particular commodities are sometimes so great, that it is acknowledged by all the world to be in vain to struggle with them�..But if there would be a manifest absurdity in turning towards any employment, thirty times more of the capital and industry of the country, than would be necessary to purchase from foreign countries an equal quantity of the commodities wanted, there must be an absurdity, though not altogether so glaring, yet exactly of the same king, in turning towards any such employment a thirtieth, or even a three hundredth part more of either��it will always be more advantageous for the latter, rather to buy of the former than to make.�

Adam Smith thus believed that in order for the absolute advantage to take place in the economy, there should be �abolition of existing systems of governmental regulation, though [Adam Smith] nowhere brings the several items in the program together.� Smith advocates four major reforms when it comes to the rules of the government that should be changed. He believes that there should be free choice of occupations by abolishing apprenticeship regulations and settlement laws. There should be free trade in land through the repeal of laws establishing entails, primogenitures and other restrictions on the free transfer of land by gift, devise or sale. There should be internal free trade which should be established through removal of local customs taxes. Lastly, Smith believes that free trade in foreign commerce by abolishing duties, bounties, and prohibitions of the merchantilistic regime and the trading monopolies of the chartered companies.

Adam Smith revolted against the government intervention mainly because of his argument, as previously stated, that the wealth of nations depends upon the productivity of labor and the proportion of laborers who are usefully or productively employed. He recognized the serious conflicts between private interest and the public interest in the market. If the government puts on restrictions, or supports one particular industry through import restrictions, then the companies become unproductive due to lack of competition. They will know that whatever they are doing will be enough for them to profit, or to reach the breakeven point. Hence, they will not come up with new technology or better production method in order to stay competitive in the market. Smith argued that the trade allows the division of labor and specialization, which further increases the productivity of labor, therefore providing an opportunity to increase the wealth of the nation. Smith also introduced the concept of increasing returns as labor becomes more and more specialized in its task.
�When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men�s labour as he has occasion for.�

Smith then argues about the monopolistic power and its negative effect on the country. Monopoly occurs due to government intervention. This occurs when one company controls the entire industry. Often, governments support one large company in order to support the industry. Since there will be one dominant supplier in the country, they can raise the price of the commodity more than the real price of the commodity. Hence, there is improper market occurring in the country. Smith also points out that the monopolists act in their own interest, and not for the benefit of the country. For example, he talks about the monopoly in the corn market, where the monopolist might destroy part of the crop in order to gain extraordinary profits on the crop.
�People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. [The cord dealer, on the whole, performs a useful service, but because of his] excess of avarice he does not perform it perfectly. [The merchant exporter sometimes finds it to his interest, when dearth prevails both at home and abroad], very much to aggravate the calamities of the dearth, [at home by exporting corn].

Lastly, Smith argues for free trade and lack of government intervention by discussing the determinants of the price of the commodity. Smith said that the price of a commodity is determined by the rent of the land, the wage of the laborers, and the profit to the merchants. Smith argues that the rent of the land and the wage of the laborers are pretty stable. When there is government intervention that protects the merchants it gives them the power to raise their profit. This leads to extraordinary prices for the commodities. Conversely, when there is no government intervention, the society works in balance, the society can revolt against higher prices for a commodity by choosing its substitute in the market. Therefore, this controls the merchants from exorbitantly raising the profits.

Adam Smith is the father of economics, in that he saw a broad spectrum which no one else of his time saw. He believed that the policy for international trade should be the same as that of the free trade at home. Trade should take place based on the absolute advantage each country has in comparison to that of the other country. If one country is better at making pins, and the other one is better at making cloth, then they should each specialize in pins and cloth respectively, and trade in order to benefit each other. There should be no government intervention in the country. Although he came up with the idea of specialization and division of labor, he failed to see that the division of labor impairs the intelligence, enterprise, marital courage, and moral character of the laborers. Smith had much sympathy for the laborers and farmers, but he had little trust in the government. He recognized some of the exceptions where perhaps the intervention of the government was needed, but he refused to acknowledge that there are both positive and negative sides to having a government intervention in any case. Although Adam Smith advocated laissez faire, and free trade with extensive historical examples, he did recognize the fact that this highly depends upon the circumstances the country is in. His historical examples, and depth of knowledge has made Smith, the greatest contributor in the history of Economics, and this particular theory of laissez faire and free trade has sculpted today�s world in the mold Smith advocated.





REFERENCES:
1. The Wealth of Nations, Adam Smith, Penguin Press
2. Adam Smith and Laissez Faire, The Journal of Political Economy, Jacob Viner, JSTOR

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An Analysis of Why Capitalism Doesn�t Work for Developing Countries?


The Mystery of Capital (de Soto)

Heterodox economics refers to the school of thought which do not confirm to the mainstream paradigm of neoclassical economics. This school of thought tries to focus on the dynamics of an economy, and claims to explain the more complex phenomenon of an economy. Hernando De Soto (De Soto), a Peruvian is one of the heterodox economists who has time and again tried to explain informal economies. He claims that the poor people are the solution, not the problem. In his book, The Mystery of Capital, De Soto tries to explain why capitalism has not worked for the Third World and Communist nations. He claims that the major problem with such economies is the lack of proper legal system that should be present for the economy to realize its full potentials. Moreover, De Soto claims that the concept of �Capital�, as explained by Smith, and perceived by the West, has not been understood by the Third World. The thesis of my paper analyzes De Soto�s theory and its validity. I shall also discuss whether there are additional factors involved in the failure of capitalism in the Third World.

De Soto starts by the necessity for the Third World countries to realize the problem of what he calls �extralegal� economy. De Soto, like classical economists, favors capitalism. �Capitalism stands alone as the only feasible way to rationally organize a modern economy.� He then goes on to explain that the triumph of capitalism only in the West could be a recipe for economic and political disaster. �If the Third World and former communist nations cannot escape the influence of the West, neither can the West disentangle itself from them.� De Soto claims that lack of information and skills to utilize the concept of capitalism in the Third World people and culture are not adequate explanations to the failure of capitalism. He claims that the major stumbling block that keeps the rest of the world from benefiting from capitalism is its inability to produce capital, and this inability is to be blamed at the legal system of the country. He claims that the idea of capital is difficult to grasp because one knows it exists but cannot see.

He explains his theory of lack of understanding of capitalism, firstly by explaining the missing information problem in Third World countries. De Soto says that 80% of the population of the Third World country led their lives in extralegal economy. De Soto goes on to explain how extralegal economies existed. When technical revolution occurred, most people had rising wages in the cities. Recognizing the lucrative offer, more people moved into the city. Moreover, there was an increase of population due to increasing sophistication in medical science. Therefore, due to too much movement into the city, there existed shantytowns, and hence occured, unplanned constructions. �4.7 Million Egyptians have chosen to build their houses illegally�It is very nearly as difficult to stay legal as it is to become legal.� De Soto claims that most people stay illegal because the cost of staying legal is more than benefits of becoming legal. De Soto emphasizes the importance of the governments to recognize such an economy, and how the government should try to legalize it. �Undercapitalized sectors throughout the Third World buzz with hard work and ingenuity.� When people buy lands, and don�t inform the registry office, the exchange economy becomes constrained and sluggish. And hence, there is a start of the extralegal sector.

De Soto then talks about the �Dead Capital� syndrome that occurs because although the poor people own the capital, there is no way they can invest, or do anything productive with it. �Dead capital, virtual mountains of it, lines the streets of every developing and former communist country. In Peru, 53% of city dwellers and 81% of people in the countryside live in extralegal dwellings.� Therefore, De Soto claims, as opposed to the popular belief of Economists, �international poverty� is not accurately viewed. �By our calculations, the total value of the real estate help but not legally owned by the poor of the Third World and former communist nation is at least $9.3 trillion.� He claims that this asset is ready to be used, and to be transformed into capital.

De Soto then moves on to talk about the lack of concept as a problem that occurs in the Third World, mainly, the mystery of Capital. He uses it to explain why capitalism fails in the Third World and former Communist nations. De Soto blames the West for having forgotten how they changed assets into capitals, and hence, their inability to teach the Third World countries how to do so. He emphasizes the importance of distinguishing physical assets from the real capital. Real capital is that part of country�s assets that initiates surplus production and increases productivity. De Soto also refers to Smith and Marx when he explains this idea.

�Smith emphasized one point that is at the very heart of the mystery we are trying to solve: For accumulated assets to become active capital and put additional production in motion, they must be fixed and realized in some particular subject �which lasts for some time at least after that labour is past. It is, as it were, a certain quantity of labour stocked and stored up to be employed, if necessary, upon some other occasion.�

De Soto claims that the concept of capital is not recognized by Third World countries. Third World countries are infamous for inflating their economies with money, while not being able to generate much capital. Bringing dead capital into life requires a process for fixing an asset�s economic potential into a form that can be used to initiate additional production. For instance, the land owned by people in the Flavelas of Brazil cannot be used for collateral because it has not been registered with the government. Ownership changes hand so fast, that when an investor wants to purchase such lands, he doesn�t bother to go through the legal procedures either. Therefore, all the income of the economy is being highly minimized.

Moreover, De Soto moves on to emphasize that the system of private property ownership as a way to recognize capital was discovered by the West. It is the formal property that provides the process, the forms, and the rules that �fixes� assets in a condition that allows us to realize them as active capital. He moves on to explain the some effects of Formal Property System that worked for the West, but which the Third World countries have not yet discovered. Firstly, capital is born by representing the asset in writing. The description should contain economically and socially useful concept as opposed to mere visual description of the asset. Oftentimes, no papers exist for such provisions in Third World. In the West, one person from one country can buy lands based on the title, without having to physically go there. Secondly, such representation of writing needs to be integrated into one major formal system. In the Third World, dozens of organizations have this, but not a single concrete system exists. In the West, the asset can be evaluated and exchanged easily due to such a formal system. Lastly, De Soto points out the fact that releasing owners from restrictive local arrangements and bringing them into a more integrated legal system facilitates accountability. The authorities are able to learn about legal infractions and dishonored contracts. In my opinion, this is one major important issue Third World countries have to deal with. Legitimizing business deals and winning the confidence of investors remains a challenge for most Third World countries to this day.

De Soto moves on to explain the mystery of political awareness that Third World countries should solve. He explains the concept of Braudel�s Bell Jar in the society. He also looks at the reason why the Governments do not realize the concept and existence of bell jar. The concept looks at the fact that the legal society, which is very small in proportion to the extralegal, is inside the bell jar. The extralegal sector, outside the bell jar, cannot enter the legal sector due to political and legal system. �The failure of the legal order to keep pace with this astonishing economic and social upheaval has forced the new migrants to invent extralegal substitutes for established law�.the migrants in the developing world can deal only with people they know and trust.� A legal failure that prevents enterprising people from negotiating with strangers defaults the division of labor and fastens would-be entrepreneurs to smaller circles of specialization and low productivity. I agree with De Soto in the limited productivity forced by lack of supportive legal system, and that the political leaders of the country need to realize that legalizing such sectors is the key step to leading their countries towards developments. Moreover, De Soto emphasizes that political blindness consists of being unaware that the growth of the extralegal sector and the breakdown of the existing legal order in the Third World are ultimately due to a gigantic movement away from life organized on a small scale toward one organized in a larger context.

De Soto merely touches on the problem of international trade in this section. �When migrants move from developing and former communist countries to advanced nations, well-developed institutions eventually absorb them into a networked property system that helps them produce surplus value.� I feel that De Soto should have put more research into this particular arena. This is one problem most developing countries are facing today. Most of their educated and skilled countrymen are pulled by U.S., Canada and eastern European countries through migration and skilled visa programs. More people have abandoned Third World countries, and the demographics have resulted in more skewed ness towards ageing and dependant population. De Soto does not address this problem as to why the Third World Countries have not been able to move forward in the corporate battlefield.
De Soto, after having promoted capitalism thus far, moves on to bring some of his Marxist beliefs. �These extralegal systems, in my opinion, constitute the most important rebellion against the status quo in the history of developing countries since their independence...� He said that the biggest rivals of the extralegal sector is the government itself, and since the extralegal sector is so large, the government is not able to fight against it. Therefore, when people get frustrated with the system, they will fight back. Most governments have realized this, and De Soto claims, have started recognizing such extralegal sectors. Eventually, all governments will have to compromise and legalize the extralegal sectors, but the question of timing is the key mantra for a Third World country�s success claims De Soto. This mixture of capitalistic and Marxist belief makes De Soto a truly heterodox economist. However, De Soto does not back up this argument with any factual evidence. He discusses the history of United States, but the West has always been, and for a long time shall continue to be, different than the Third World countries. Therefore, in my opinion, the evidence in the West cannot convince the rest of the world.
In the last section of his book, De Soto enlightens the readers with the failure of legal system, and some of the misconceptions one operates with in the Third World countries. The misconceptions De Soto talks about are as follows:
1. People stay in the extralegal sector in order to avoid paying taxes.
2. Enacting mandatory law on property is sufficient, and governments can ignore the costs of compliance with that law;
3. Existing extralegal arrangements or �social contracts� can be ignored.
4. People�s conventions on how they hold their assets, both legal and extralegal can be changed without high-level political leadership.

De Soto moves on to discuss these misconceptions. He mentions that according to his research, the cost of lack of insurance, the potential market the businesses could make the cost greater than the tax they could avoid. He also points out that the challenge today in most non-western countries is not to put all the nation�s land and buildings into the same map, but to integrate the formal legal conventions inside the bell jar with the extralegal sector outside the jar. De Soto emphasizes that no major legal change has gone without major political responsibility. De Soto explains this through the �meta-rights� theory, where he claims that the citizens should get the right to the property rights. �The demand for codification is a demand of the people to be released from the mystery and uncertainty of unwritten or even of case law.�
Overall, I think De Soto points out a very important arena that most Economists had not explored, or bothered to think about. His view on the legal system, the lack of strong political stance is something we can observe in every Third World country. For example, Zimbabwe, Nepal, and Liberia � all these countries are going through a strong revolution in an effort to unite all sectors of their divided economy. However, some of the claims De Soto makes is questionable. De Soto gives the illusion of rigorous study, but gives no proof. He does attach some charts, but with no explanation of what those charts say. For instance, he never says how he and his team determined whether a building was formal or informal. Moreover, according to Table 2.1 in his book, the calculation assumes that 85% of urban dwellers are informal. This percentage is much higher than that in three of the four countries for which De Soto provides detail- Peru (53%), the Philippines (57%), and Haiti (68%) . Only in Egypt is the number higher (92%). This is a classic example of how statistics can lie in one�s analysis.
In the countries that De Soto studied and came up with the solutions, one must ask, why did he choose such countries? Each of the country De Soto studied (Haiti not included), has the second or third highest level of informal activity in its respective region. This makes them ideal countries for De Soto to study. But it makes them less ideal countries from which to extrapolate estimates of informal activities or assets in other countries. Moreover, the policies, or the level of explanation De Soto gives has been that for the governments that have somewhat come in terms with the informal sectors. De Soto nowhere talks about countries like Liberia, or Libya to discuss what those kinds of Third World countries should do.
Another point where De Soto�s argument can be debated over is that he clearly dismisses the cultural orientation of the country, and people�s mind set as something secondary which has nothing to do with why Capitalism did not work there. In most Third World countries, Capitalism is a western idea which represents the idea of �Social Darwinism.� What people do not understand is, only if they are productive and the best will they reap the benefits of the society. Moreover, the East has always valued stability and certainty in standard of living. Capital economy is an anarchic chaos, constantly threatened by mass unemployment, stagnation, and collapse. For the present, advanced capitalist countries maintain prosperity by military spending and foreign dumping. This is something Third World countries oppose. Moreover, such countries see a lot of Multinationals penetrate their country, and reap profits while their domestic firms are forced out of the market. De Soto fails to see all these prejudices which lies in the Third World populations� mind.
Overall, De Soto�s book �The Mystery of Capitalism� is a good one, in that it focuses on the major issue of lack of good integrative legal systems in the Third World countries. This comes out to be true in general. However, De Soto should take other factors into consideration, and also include some Eastern countries in his research to get a concrete result.

BIBLIOGRAPHY:

1. De Soto, The Mystery of Capital, 2000
2. H. Alger & S. Legree, �Capitalism� East and West, 1961
3. www.redflag.org, Capitalism�s Agenda for Poverty in Africa.

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