microfinance and the mystery of capital

I was struck in a student seminar this week when we were talking about microfinance. I was discussing the underlying assumption, noted in a previous devlog, that behind microfinance is the idea that every poor person is a budding entrepreneur waiting to be unleashed so that they could accumulate. What struck me, as I was saying it, was the relationship between this assumption and the ideas of Hernando de Soto, the widely-lauded author of The Mystery of Capital. De Soto's basic proposition is very straightforward: poor people are not poor. Rather, poor people lack effective and enforceable ownership of the resources that they use to construct a livelihood. Therefore, according to de Soto, the most important policy response to poverty should be to vest property rights amongst the poor in those assets that they use, day in and day out, to manage, but which they do not own. Property rights are the key out of poverty.

Property rights are the way out of poverty, though, for what reason, according to de Soto? The reason is that people with property can get loans, their incentives to accumulate are stronger, and they have a deeper need to make sure that their assets are used in the best possible way. In other words, according to de Soto, poor people are petty entrepreneurs waiting to be unleashed, and all that is required to unleash them is giving them vested ownership in the things that they already use, day in and day out.

For both the microfinance industry and de Soto, then, poor people make the best possible choices they can, given the circumstances they face. Alter the circumstances--by giving them a loan, or by giving them an asset--and their choice set will change, in the effort by them to accumulate using their latent entrepreneurial abilities. Both approaches are, then, deeply neo-classical in their approach to international development issues. People are not structurally subordinate for systemic reasons; they are simply making choices that could be made better by altering their circumstances. That the poverty of some is built on the wealth of others is something that these approaches do not accept.