Monday, November 18, 2002

Hernando de Soto's, "The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else," and Lawrence Lessig’s “The Future of Ideas: The Fate of the Commons in a Connected World” are both worth reading, and have complementary messages in terms of K4D.

De Soto’s work discusses “property” and its transformation into “capital.” While poor people in poor countries often have community-acknowledged rights to hold and work property, they often do not have legal title to that property; often they can not sell property that they own and more often they can not borrow against it. Their societies lack institutions that allow such transactions. The modern public corporation (a prototypical institution of the capitalistic society) is not an option for the poor in developing nations. De Soto shows how poorly economies work without these institutions that allow capital to be created from property.

I recently read that the average ratio of price of corporations to book value of corporations in the U.S. is 2.8. The book value should be a reasonable approximation of the value of the physical and financial assets of the corporation. Thus the intangibles owned by corporations contribute much more to the public valuation of corporations than do their physical assets. The corporation and the stock market are institutions that create capital out of intangible property.

Lessig’s book focuses on how the open nature of the Internet has been instrumental in promoting innovation, and how beneficial that burst of innovation has been. Thus the protocols that allowed transmission of information were available to all; Internet server software and other Internet software were open source; and the source coding for Internet pages could be viewed, copied and adapted freely. Lessig shows how some firms now seek to change the institutional framework of the Internet in ways that would move the Net from a commons to a controlled environment. Societies choose whether the Internet will be primarily a commons or primarily controlled (be it by market or government forces). The relevant national policies will indirectly affect both the rate of investment in the Internet and the rate of innovation around the Internet. He councils that we seek balance, and do so through an informed debate on these policies. He fears that few of us or our policy makers understand the nature of the issues underlying the debate we should be having.

De Soto’s book tends to focus on real estate and physical property, but his point is perhaps even more relevant to knowledge. The institutions that provide intellectual property rights are evolving quickly in developed nations, but poor people in poor countries have very little possibility of exercising rights over their intellectual property, and still less chance of utilizing such property as capital. Lessig’s book recognizes the value of providing (physical and intellectual) property rights to encourage people to invest in the creation of infrastructure and the development of innovations. But it also recognizes that for non-rivalrous goods (e.g. goods such as scientific knowledge where one person’s use does not diminish the value of the goods to others) a well-functioning commons seems to best promote innovation. Indeed, modern scientific institutions are perhaps an appropriate prototypical model for some aspects of the knowledge economy.

I think both Lessig and de Soto would agree that institution building and good policies are needed if developing nations are to better utilize K4D. Moreover, as we develop the technologies to embody knowledge in new ways, and as we make innovation a greater priority, institutions must also change. I think both Lessig and de Soto would agree that there is need for a serious policy debate on the appropriate institutionalizations for the development of knowledge societies in the Third World. Both would probably agree that innovation and stimulation of investment are both important, and that there is an appropriate balance between controlled economic spaces and commons. The devil is of course lie in the details: just where that balance is to be struck, what form the institutions and policies should take, and how should they be achieved/built?

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