Friday, January 06, 2006

De Soto versus Polycentric Law

Yesterday I finished reading Hernando De Soto’s The Mystery of Capital. It’s true what they say: the book is really good, and it’s really important. It’s also really repetitive – but I guess it’s okay to belabor good and important points.

I won’t summarize the book’s main argument here; plenty of others have done that (see here, for example). I am more curious to know what advocates of polycentric law, like the fellows over at Catallarchy, think of De Soto’s position. On the one hand, De Soto repeatedly emphasizes a point that polycentrists take to heart: that property rights are not created by governments, but emerge spontaneously in the norms and conventions adopted by groups. De Soto regularly refers to the “social contracts” created by people working together to define and enforce rules for the ownership and transfer of property rights.

On the other hand, De Soto also emphasizes that such spontaneously formed property rights systems are not enough to allow the people of the third world and former communist countries to rise out of poverty. Why? Because these property rights systems are typically local, idiosyncratic, and known only to those who directly participate in them. This prevents their assets from being used effectively as capital. Without clear title that is recognizable on a wider scale, people cannot effectively use their assets to obtain loans, combine with other assets (in different property systems) to form higher-valued combinations, and so on. De Soto therefore stresses the need for governments to stitch together and codify the spontaneously formed property rights systems in order to unify them. Here’s how De Soto puts it (one of the many times he makes this same point):
Without an integrated formal property system, a modern market economy is inconceivable. Had the advanced nations of the West not integrated all representations into one standardized property system and made it accessible to all, they could not have specialized and divided labor to create the expanded market network and capital that have produced their present wealth. The inefficiencies of non-Western markets have a lot to do with the fragmentation of their property arrangements and the unavailability of standard representations. This lack of interaction restricts interaction not only between the legal and the extralegal sector but among the poor themselves. (p. 164)
This poses a challenge to polycentrists, who contend that multiple legal systems can exist side-by-side. They can, but De Soto contends that formal unification is required for sustained and widespread economic growth.

I can see one obvious response that could be made by polycentrists. De Soto’s own work demonstrates that in many cases governments have been the primary impediment to the rationalization of informal property systems. Their very illegality (they exist in contravention of externally imposed property rules and webs of state regulation) stops them from becoming public and known outside small groups, and from linking up to each other. The most important thing government could do would be to get out of the way. I think De Soto’s response would be: yes, but governments can also help. In the United States (he argues in Chapter 5), the stage wasn’t set for widespread economic growth until the government recognized spontaneously formed property systems and acted to integrate them – such as by passing a general mining law that incorporated the claims of independent miners’ organizations. Note that overregulation was not an issue at this point in history, so it’s difficult to argue that government assisted primarily by getting out of the way.

The question, then, is whether polycentric law could, if freed from government impediments, arrive at norms sufficiently uniform and codified that they could be recognized as the basis for capital formation on a grand scale. De Soto’s answer is pretty clearly no; he thinks government must play a positive role in rationalizing property systems. Is he mistaken? If so, where has he gone wrong?


Ari said...

This problem could certainly be solved without a government (or other centralized monopoly organization). The solution would be very similar to the "private protection agencies" mentioned by Nozick and others (indeed, this could be one of the services offered by a protection agency).

Private certification authorities could issue their own property titles. In case of an inter-agency ownership dispute, the agencies could either do battle -- which would be difficult and expensive -- or, more likely, use some method of arbitration. Banks would have an incentive to honor titles issued by certification authorities known to be reliable, and where the property is sufficiently protected -- i.e. it is unlikely to be seized through an ownership dispute or by force.

One might argue (as Nozick does) that one agency inevitably becomes dominant and forms a natural monopoly, but I think one can still imagine it working with multiple agencies.

Glen Whitman said...

Ari, I think you're missing De Soto's point. He would totally concede that "Private certification authorities could issue their own property titles." One chapter includes pictures of the various forms of title documents produced by informal property systems in Haiti, for example. But that doesn't guarantee any degree of linkage or uniformity across systems.

The claim that agencies will choose to submit to arbitration because the costs of violent conflict are too high has always struck me as an anarchist "just so" story. History is filled with examples of agencies -- let's call them states -- that have been perfectly willing to go to war to suppress alternate sources of power.

But let's suppose your story is right; it's still beside the point. De Soto isn't primarily talking about settling *conflicts* among competing property regimes, but about the need to stitch those regimes together so that diverse people can live in the same "representational space," so to speak. That's a different issue, and it strikes as a distinct -- though not necessarily correct -- argument against the polycentric/anarchist position.

Sleep said...

It certainly does seem to be the case that all great commercial legal systems tend to evolve towards uniformity--the Roman Law, the Law Merchant, Admiralty law, the Uniform Commercial Code. This is consistent also with observations that the "Rule of Law" requires certainty, which is eroded by too much local complexity. And, at some point, there does seem to be a limit to how much uniformity one can get simply through the evolution of case law. This may not be a natural limit (in the case of the UCC, it was clearly related to state boundaries and associated jurisdictional boundaries--compare admiralty law, which being the law of the sea escaped some of the limitations of land politics), but it is a real limit nonetheless. I think that this point has been somewhat neglected by classical liberals; we want evolving legal systems, but haven't noticed what they all seem to be evolving towards! Sometimes we seem to want that evolution to stop at a certain stage.