The Power of the Poor
 
Documents That Empower Documents are symbols. They represent reality. Whether in ink and paper or bits and bytes, documents create a virtual world unto themselves. Most societies use documents to some degree. But in the developed West, says Hernando de Soto, they’ve become a sophisticated and vital component of wealth creation.

What exactly do they do?

Documents, backed by law, enable us to think of assets in ways that allow property to be more productive. That’s’ because information is the lifeblood of a market economy. Without documents, information about what belongs to whom and how much is where is costly and difficult to access. De Soto says:

The fact that we were able to transfer value, identity, trust, and agreements, onto documents is what actually allowed for a global economy and the wealth we know today, and, more importantly, the capacity to make transactions with people that we have never met.

We take documents, or knowledge by documents, for granted because they surround us. We swim in a world of them and never stop to wonder how important they were to our prosperity.
More importantly, documents are the only ways we can physically represent abstract concepts like relationships–relationships are at the heart of a market economy.

The world seems to be divided into two dimensions; the first includes things, physical things like people, like material objects, and the second is relationships, how people and objects relate to each other. And while the first is obvious and clear, in the second case, relationships — these are invisible. So they have to be concretized in some kind of a message. If the people know each other, that message can be a speech act, it can be verbal. But when you deal in a market economy with so many unknown people every time, you actually need a document to concretize the relationship.

Relationships among people and things in a market economy must somehow be concretized in documents before they can become available around the world. In other words, undocumented assets and people don’t carry the information appropriate for distant people to establish new relationships. A passport might identify someone we want to do business with. A credit card can determine whether we have sufficient credit, and a title proves ownership of a transferable asset. What if you want to make an agreement with someone? If she’s in a distant country, not even a handshake can protect your agreement. You need a legal contract. Thus, these abstractions need legal, enforceable documentation in order to function in a global economy.

Once a house has a legal title, one’s identity is captured in a passport, or the market value of something is recorded in a financial document, we’ve entered a cutting-edge new world of symbols in which information works for us. That means not only that costs of transacting go way down for the parties involved (because the documents can move instead of the actual things themselves), but enormous value can be generated. Such value cannot be unlocked unless goods, services and people have information attached to them.

Consider: How do you capture the essential features of a piece of property? Documents can capture information about, say, real estate that can’t be seen by the naked eye. This makes property titles practical in that they allow people, cheaply and in a very short time, to understand the defining characteristics of an asset:

Because the document is precise, because it reduces uncertainty about what you’re talking about, or what you’re concerned with, it will immediately raise its value.

For example, imagine a building whose value on the market, the legal market, is about $70 million. If I were to tell somebody I was going to sell it to them, and we were about to sign a contract, and they said, “Mr. De Soto, could you please give me the title, the document?”, and I said, “I don’t have that title, but all the neighbors know it’s mine,” this building would no longer be worth, in the market, $70 million. It would probably go down to something like five million dollars, ten million dollars, because those uncertainties are tremendous.

Because documents lower the costs of accessing relevant information and reduce uncertainty about an asset, they help to reveal its true value. You no longer have to bring your cow to market, for example. You can trade the document that represents the cow. Indeed, this is done daily on the world’s great commodity exchanges. You don’t have to spend weeks looking for answers about who actually owns some piece of land, cow, house, or car. Documents, ideally, tell you most everything you need to know. You don’t have to wait for cash to arrive somewhere in order to get something, your credit card can handle the transfer instantly whether in person, over the phone, or on the Web. Documents and systems greatly speed up the process of making transactions.

And that is why documents, if well done, help maximize value creation. That’s how value can accumulate over time as capital and used other investments in the future.

A Powerful, Virtual World

De Soto calls documents “novel” because the West perfected this system of documents only in the last 150 years:

We take documents, or knowledge by documents, for granted because they surround us. We swim in a world of them and never stop to wonder how important they are to our prosperity. They are a novelty that has not been sufficiently studied and we’re not very much aware of their importance.

Was the Industrial Revolution built on paper? De Soto believes that, as the West worked through settling of property and business disputes, the codified set of common law that resulted gave rise to tremendous prosperity. The broad use of legal documents had begun. The West managed to undertake this in a systematic way during the last century and a half. Such a system has meant a giant leap for the portion of mankind that has embraced it.

Without these documents, de Soto believes, there would be no global market. The system allows people simply to have trust across greater distances. Today, however, over four billion people in the world cannot benefit from documents that can be enforced by the law. These billions must rely on the high-cost and limited means of familiarity. Transactions occur through cash and barter. Access to large global markets are denied because there are neither rules nor documents that would give them access. The key to real wealth creation is the ability to transact with those we do not know and may never see.

Property seeds the system by making people accountable and assets fungible, by tracking transactions, and so forth…The connection between capital and modern money runs through property.1

Today, de Soto says, people in developing countries lack access to these empowering documents, much less the legal system that gives them their power. That is why they remain mired in poverty. If leaders change the law that so poor people can easily integrate and trade, they can move from poverty to wealth relatively quickly.
References:
1 de Soto, Hernando. The Mystery of Capital: Why Capitalism Triumphs In the West and Fails Everywhere Else, New York, NY: Basic Books, 2000. p63.