Yesterday, the Nobel Prize in economics went to Robert Engle and Clive Granger for developing statistical tools to analyze time-series data. Next year, if justice has a pulse, the name issued from Sweden will be that of Peruvian economist Hernando de Soto.
A talented and vivacious man who dominates rooms with his good will, de Soto is an economist whose research has unprecedented potential to improve the plight of the world’s impoverished. Unlike most modern economists, de Soto has eschewed an addiction to producing statistically significant data based on rarely significant assumptions. He has taken to heart the challenge by 1986 Nobel Prize winner James Buchanan that economics has lost its way by replacing reason and humanity with the misleading cloak of scientific and mathematical objectivity. But more important, de Soto offers hope to the billions facing poverty on a daily basis.
De Soto has joined a growing number of academics who are ushering in an unexpected renaissance for property rights after centuries of disrepute as the bane of those influenced by the Rousseaus and Marxes of the world. The impact of property on software development, biotechnology, entertainment, protection of the environment, and civil liberties, and a host of other arenas, place property rights front and center for cutting-edge academics. But it is back in the real world, in particular the third world, where property-rights research is most urgently needed. This brings us back to Hernando de Soto.
Avoiding the failures of the historic top-down, macro-development model, de Soto has explored a different path. He is bringing to life the old micro-adage about teaching a man to fish instead of giving that man a fish. As his most recent work, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else explained, Western systems are built upon a bedrock of property rights. Without this basic system of property, and the capitalism built on it, those stuck in the third world are cut off from capital markets, cut off from investment, and cut off from doing business with anyone beyond their immediate kith and kin. They have no officially recognized property that can be offered as collateral.
In development economics, the macro-economic work of 1998 Nobel winner Amartya Sen and possible future winner Jeffrey Sachs established the importance of democracy, free markets, and a rule of law to economic success and human well being, but it failed to accomplish what the Third World really needs. It failed to explain how one builds that democracy, those free markets, and a rule of law.
De Soto’s micro-approach provides the answer. By identifying on-the-ground owners of property and then documenting the ownership in a manner that banks and other lending institutions recognize, de Soto’s research is offering real hope for the world’s poor. His approach demonstrates why attempts to impose top-down, cookie-cutter molds of democracy on other countries (as Sachs has attempted to do) will fail again and again without basic property rights. Property rights provide the foundation for pouring the concrete blocks on which democracy and the rule of law rest.
Anyone who has met de Soto or heard him speak understands that he is a man rich in humility and conviction, which tracks with one who has learned his lessons the hard way. De Soto has tried the Sachs and Sen macro-approach. His attempts to invigorate his home country of Peru by working with then President (now exiled) Alberto Fujimori ended with a reality check that only politics can supply. As Fujimori came to realize that de Soto’s reforms would put more power in the hands of its citizens at the expense of his cronies, and as de Soto began to see Fujimori’s authoritarian side, the two men abandoned one another. From that experience, de Soto decided that if he was going to get his hands dirty, it was going to be in the streets where dirty hands lifted the underprivileged, not in the halls of capital buildings where dirty hands held them down.
De Soto learned well. He and his researchers at the Institute for Liberty and Democracy now work on the ground level, where a successful capitalist society begins. Approaching municipalities and local citizen groups, de Soto partners with mayors and local leaders, rather than national governments, to determine who really owns the corner building and then to document that ownership in the local courthouse. As de Soto often explains, the person the dog doesn’t growl at on the front step generally has the best claim. De Soto still brings his message to world leaders, but no longer to elicit their support so much as to ensure they will not quash the silent, nonviolent revolution which he is fomenting.
Last year, when Vernon Smith won the Prize for pioneering experimental economics, it was hard to imagine a brighter mind on the Swedish mantle, but if de Soto won, it would be hard to imagine a bigger heart. No one can accuse de Soto of sitting in an ivory tower. Few academics do work where the stakes are higher–for both the world’s poor and for capitalism.
As de Soto articulated in the PBS documentary Commanding Heights, the world’s poor need to be shown how to make capitalism work or capitalist societies will endure a revolt that no one will enjoy. When people are unhappy and rebel against a system, he explains, it doesn’t matter if there is no Kremlin organizing a revolt, the poor will find another locus of power very, very quickly. De Soto is working hard to make sure the poor don’t have to seek that other locus.
Perhaps the economics prize is indeed wrong for de Soto. Given the present orientation in economics towards macro-theorists who ponder ideas increasingly detached from the real world, a Nobel in economics might send the wrong signal about de Soto’s lifework. Another annual award might, in fact, be more apropos. If de Soto won that other award, he would join the ranks of revolutionaries more similar in tone: Martin Luther King, Mother Teresa, and Lech Walesa. His message resonates at a frequency closer to theirs than to the hollow buzz of computers calculating regressions.
Of course, I’m talking about the Nobel Prize for peace.