Has the current crisis destroyed the market’s “property memory systems”?
Hernando de Soto contributed a column to a series, “Capitalism in Crisis”, in the Financial Times (January 31, 2012). Its title is: “Knowledge lies at the heart of western capitalism.” Although he does not mention F. A. Hayek’s pioneering work on knowledge and economics, de Soto makes a valuable contribution to the subject. His focus is the recent loss of knowledge and exact information on the ownership of widely traded economic assets. He sees the loss of knowledge and information as the foundation of the current economic crisis. He emphasizes that it is a “knowledge crisis.”
He notes that in the 19th and 20th centuries capitalism “gave us the best knowledge to explore economic combinations.” He continues:
“The reason credit and capital have contracted for the past five years in the US and Europe is that the knowledge required to identify and join parts profitably has been unwittingly destroyed. The connections between mortgage loans and liquid securities, between non-performing financial derivatives and the organizations that hold them; the non-standardized, scattered records that obscure who holds risks; and the off-balance-sheet accounting that obscures many companies’ health: these all make it harder to trust and hence combine. Until this knowledge system is repaired, neither US nor European capitalism will recover.”
Clear property rights make it possible for anyone who seeks to take risks to combine tangible and intangible assets: property rights “made it possible for investors to locate suppliers, infer value, take risks and combine such simple things – to borrow a famous example – as graphite from Sri Lanka and wood from Oregon into pencils.” Truth was not being told with “nations masking debt as income by swapping it from one currency to another. No wonder institutions and investors have lost confidence in the system.”
Hernando de Soto concludes: “The brilliance of western capitalism lies not in providing a formula for wealth creation but in its property memory systems, which are the result of examining, selecting and validating information about who owns land, labour, credit, capital and technology, how they are connected and how they can be profitably recombined.
“For the past 15 years, the records of western capitalism have been debased, leaving governments without the facts to spot what needs to be fixed and for businesses to know where their risks are. To regain its vitality, western capitalism must bring under the rule of law and public memory hundreds of trillions of dollars now swirling mindlessly out of control in the obscure world of financial innovation.”
Leonard Liggio is a classical liberal author and executive vice president of the Atlas Economic Research Foundation.