Ask not only why property is good, but also how to make it good

PROPERLY titled and recorded assets in huge "public memory institutions" gave today’s developed countries much of their growth. I don’t believe an economy can grow if it doesn’t record and classify — in rule-bound and publicly accessible registries, titles, balance sheets and statements of account — all the knowledge available relevant to the economic situation of people and the assets they control, whether they are intangible (stocks, commercial paper, deeds, ledgers, contracts, patents, companies or promissory notes), or tangible (land, buildings, boats, machines, animals and books). Knowing who owned and owed what and where and under which circumstances made it possible for buyers and investors to infer value and take a risk.

But what does "public memory" have to do with knowledge? Plenty. Knowledge is essentially a memory-based process, which involves selecting, categorising and storing the knowledge we need. Knowledge increases incrementally, forcing us to understand and validate each additional input obtained so as to decide which one is important to our welfare and worth remembering, how it should be written up and packaged, in what context it should be described and how it should be stored so as to be easily retrieved. What we know about the economy and the importance of its components is what we can remember about it, by looking at the records and seeing how various parts relate to one another.

Look around you in South Africa and elsewhere and you will see that everything of economic value that honest wealthy people and businesses own is documented and recorded in a public memory system. They are able to hold, transfer, assess and certify the value of their assets only through documents that have been recorded and legally authenticated by a public system of rules, procedures and standards. Ensuring that the relationship between those documents and the assets and situations they describe is never debased is what produces the trust that allows credit and capital to flow and markets to work.

In the West, the invention of such public memory institutions precipitated a revolution no less significant than the one set off by the invention of the personal computer. Nations and businesses were obliged to decide what knowledge was important to remember regarding property and transactions; then to assemble, prioritise, and write it up in statements that describe the asset and the economic context in which it finds itself — so what is stated can be measured, compared, certified by an accountable authority and tested for truth. The final product is a new form of knowledge: "economic facts".

But most memory recording systems, especially those pertaining to giving land to poor blacks, have been failures. The reason has to do with property experts having forgotten the old art of selecting knowledge and converting it into economic facts. This through six different processes:

• Assembling. Extracting raw knowledge from people and assembling it into congruent statements. Upstream, this requires procedures to entice people to provide and continually update the information the market needs to infer the truth about their assets and their economic circumstances; and downstream, procedures to transform and fit that knowledge into standardised and validated documents recorded in such a way that everything has its place.

• Contextualising. When an asset is recorded, all the dispersed data that depicts its situation has to be picked and organised so that the asset can be seen in the context of the relationships that determine its economic value and identify the interests that control it. Why such a broad picture? Why not just describe the asset itself? Because from Aristotle right up to today’s global positioning system in your car, we have learned that humans rarely understand anything unless it is placed within the context of the relationships that exist.

• Networking. All the dispersed islands of knowledge that refer to the asset have to be pulled together. A memory system is not a mere warehouse of data certifying the existence of single, isolated assets. It is a factory of facts for facilitating the knowledge entrepreneurs need to combine assets, skills, technologies and finance into complex and increasingly valuable products. Entrepreneurs need to know who owns what and how these ownership rights relate to other interests, potential claims and benefits.

That is why today public memory systems not only record, for example, that a certain house is located between the rock and the stream and that it belongs to John, but also that he shares ownership with his wife, that it shelters a small cotton gin, and that the neighbouring farmer has an easement to cross the land with his cows. The memory system also documents that the house is the underlying asset that furnishes the guarantee for a subprime mortgage; was originally financed by someone who covered his risk by selling an interest to a third party; is the address at which mortgages can be foreclosed, where debts, rates and taxes are collected, where certain deliveries are made; and is also the liable terminal from which energy, water, sewage, telephone, cable TV and internet services can be controlled and procedures initiated when bills are not paid. Like other public memory systems, balance sheets also evolved from simple records that helped companies keep track of their accounts into sources of knowledge that provided all concerned with facts about their financial condition in the context of their relationships to other interests.

• Externalising. As the complexity of the market increases, the facts produced by memory systems laws must provide knowledge and the means to protect not only the rights of the owners or parties to a transaction involving the assets but also to third parties — erga omnes, as the law says, "towards everyone"— who might suffer any side effects that the contract might cause. These memory systems gradually produced facts that were useful to all legal interests and relationships directly or indirectly linked to an asset or a liability — whether credit or debt, vested or contingent, expectant, inchoate or consummate, potential or unliquidated — and thereby helped ensure that paper, including mortgages and financial instruments, would move in step with the general interest, rather than only serving the parties to a deal. This is how, over time, comprehensive statements of fact provided by memory systems undercut the secret prerogatives typical of royal, feudal and mercantilist aristocracies, who were accountable to no one but themselves and did business without regard to externalities.

• Standardising and verifying. Every fact is established in a written statement and in accordance with standard rules so that it can be compared, measured and tested for truth. All documents have to indicate a "verifiable" source that can be certified by an accountable authority.

• Implementing. The knowledge contained in the statement must be capable of being acted upon immediately without need for much additional research. Such "actionable" knowledge also has to be inscribed concisely and in a way that is easy to track so that the underlying asset that anchors the fact to the physical world is never lost.

A paper that says you own something doesn’t give you growth: a whole bunch of bankers in Western Europe, from Greece to Spain, own lots of paper that is worthless because it wasn’t well issued. You see, property isn’t as much about tagging assets as it is about relating people to each other so they can combine talents, things, and ideas together. Maybe the next time someone invites me to South Africa, my hosts shouldn’t just ask why property is good, but how to make it good.

Article by: Hernando De Soto - www.bdlive.co.za


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