“Without property rights, no other rights are possible.” – Ayn Rand

Property rights are fundamental to human welfare and Canada is blessed with an extensive property system that has enabled a powerful, robust and productive capitalism.

As Hernando de Soto explains in The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else however, capital is not merely property. Capital is property empowered. The people of third world and developing economies all have property, and lots of it. However, their property is what he calls dead capital. It is off the books, black market and extralegal property. Hence its owners are not able to turn their property into productive capital.

Capital, as he explains it, is not a thing, a tangible property, but an idea. Adam Smith, he notes, said that property must be fixed. What Smith meant, de Soto believes, is that “capital is not the accumulated stock of assets but the potential it holds to deploy new production.” (page 42)

He quotes Adam Smith on this with respect to money, noting that money in and of itself is not capital. Said Smith, “the gold and silver money, which circulates in any country, may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a pile of either.” (page 43)

Or as de Soto puts it, “useful as it is, money cannot fix in any way the abstract potential of a particular asset in order to convert it into capital.” (page 44)

Think of property, he says, as an engineer would see a lake. The engineer sees beyond the lake in its natural state and sees the potential for creating energy. “The challenge for the engineer is finding out how he can create a process that allows him to convert and fix this potential into a form that can be used to do additional work.” (page 44)

The formal property systems in the West, developed slowly and refined over a course of centuries, “produce six effects that allow their citizens to generate capital”. (page 49) These are effects not available in third world and developing economies.

These six effects are:

  1. Fixing the Economic Potential of Assets – by this he means that property is represented in formal titles, securities, contracts and other records. “The moment you focus your attention on the title of a house, for example, and not the house itself, you have automatically stepped from the material world into the conceptual universe where capital lives.” (page 50)
  2. Integrating Dispersed Information into One System – this is harder to grasp, but he means that all property in Western societies are on record and information about the property can be retrieved quickly and easily. In third world countries, the vast majority of people are barred from the formal property system and hold their property extra-legally. Most of the capital in such economies is dead capital. It exists in the real world, but it has not been fixed.
  3. Making People Accountable – by this he means that with formal fixed title, “formal property created individuals from masses” (page 54). Freed from restrictive communal relationships to recognize their property, individuals with property are traceable and locatable. They lose their anonymity in the masses (a downside) but they can now obtain credit, and they can engage in contracts because creditors can track them down and impose sanctions for default. Some privacy is lost, but the ability to wield more financial clout is gained.
  4. Making Assets Fungible – remember what was noted earlier, that titles are representations of physical assets, not the assets themselves. “Fungible” according to the dictionary, means mutually interchangeable. “Unlike physical assets,” says de Soto, “representations are easily combined, divided, mobilized, and used to stimulate business deals.” (page 56) For example, you can mortgage your house to get capital to start a business. You don’t actually trade your house. You trade a right to a title. You don’t have to move out of the house or let someone else move in. The physical asset remains as yours unless you default on the contract.
  5. Networking People – “By making assets fungible, by attaching owners to assets, assets to addresses, and ownership to enforcement, and making information on the history of assets and owners easily accessible, formal property systems converted the citizens of the West into a network of identifiable and accountable business agents.” (page 58)
  6. Protecting Transactions – “all the property records (titles, deeds, securities, and contracts that describe the economically significant aspects of assets) are continually tracked and protected as they travel through space and time”. (page 61)

De Soto, of course goes into more detail than I have encapsulated here. And he goes into a fascinating history of how the property system developed in the West, with a specific look at the old American West where squatting played a significant role. And he looks at the informal property systems of the third world that run in tandem with the formal but inadequate systems of their governments.

The point of all this is, that although property rights are not included in the Canadian Charter of Rights and Freedoms, property rights do exist in Canada. Virtually all housing and businesses are owned within the formal property system. They have these qualities that make them not just property, but capital. It is what accounts for our prosperity as a nation. It is the goose that lays the golden egg.

This article originally appeared on my blog, The Jolly Libertarian on Aug. 30, 2015.