Economics 160 Fall 2015

Term Paper 1
Author: Daniel Ibarra
California State University Northridge

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INTRODUCTION
A common belief about achieving success is that in order to do it, you can mimic the same technique used by those who have
already achieved that same desired success before you. In this case, the desired success is prosperity and wealth to the nations
determined in attaining it. Those who are to be mimicked are the developed nations who have seen their economies grow to great
heights over the years and are witnessing the prosperity and wealth that the mimickers, third world countries, have long desired. Upon
applying their technique of instilling a capitalist economy however, many third world countries have failed to witness this same level
of success. Economist Hernando De Soto believes to have found the reason behind this sway of results which has to do with the
capitalist economy conflicting with another problem that is still clogging third world economic advancement, and expresses his
findings in his book The Mystery of Capital. Aside from these findings, Financial Times reporter Richard McGregor describes in his
book The Party, how Communist China managed to reach enormous economic success while utilizing capitalism to the extent
placed by its dictatorship.

SECTION 1
Capitalism has brought along with it prosperity to just about all nations willing to adopt its ways. Simply instilling a capitalist
economy into a country however, is not always enough to deliver the great prosperity seen in Western nations. The difference between
capitalism in developed nations and capitalism in third world countries like most of South and Central America, is that in the
developed nations, people are not prevented from increasing capital due to the absence of a functioning legal system. According to De
Soto, what the poor lack is easy access to the property mechanisms that could legally fix the economic potential of their assets so
they could be used to produce, secure or guarantee greater value in the extended market (De Soto, 48), meaning that granting people
ownership over what is ultimately theirs through legal property rights, is necessary for a capitalist economy to produce wealth.
Without an actual title to their possessions, the people of third world countries cannot turn their assets of dead capital into liquid
capital, despite being a part of a capitalist economy. Formal property laws would permit more transactions and thus an increase in
national capital. De Soto adds how its worked before and not too long ago with the United States where they granted property through
informal means, otherwise known as squatting, to settlers that mad shelter before the US had a formal representational system.
Ultimately, De Soto believes that aside from mimicking the capitalist economy of developed nations, third world countries should also
look into mimicking their laws so that they may relieve themselves of the burden of poverty.

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SECTION 2
Communist China displays characteristics of both a capitalist economy and a non-capitalist economy. According to
McGregor In a comparatively short space of time, the Party has presided over an epic migration of farmers from the countryside to
the cities; an explosion in private ownership of houses, cars, businesses, and shares; the creation of a middle class twice the size of
the population of the United Kingdom; and lifting out of poverty of hundreds of millions of people (McGregor, 28). This provides
proof that China does instill some aspects of a capitalist economy. They allow for private ownership which permits the growth of
capital for the individuals as well as the nation. McGregor also states that The Party has adapted remarkably to the growth of the
private sector, learning how to keep enough of a distance from entrepreneurs to allow them to thrive, while ensuring they do not have
the chance to organize into a rival center of power. But it is not enough for the Party to control government and business in China. To
stay in power, the Party has long known it must control the story of China as well (McGregor, 228). Although China is not allowing
entrepreneurs enough space to organize into a rival center of power, they are allowing them enough room thrive and thus increase
capital. This capitalistic method has allowed their economy to boom immensely over a short period of time. The Chinese economy at
times displays characteristics that are not capitalist. According to McGregor, After coming to power in 1949, the party closed private
businesses and confiscated their assets. Over time, they criminalized private commercial activity, although the execution of the policy
waxed and waned with political cycles and in different regions (McGregor, 197). Disallowing their people of attaining their assets
produces dead capital. The Chinese people need to be allowed property of their in this instance to make the economy work and grow.
McGregor also states that After more than three decades of market reforms, Chinese companies still come in all manner of guises and
trade under an array of different business registrations to accommodate prevailing political pressures. They can be fully state-owned,
collectively owned or co-operatives; or limited liability companies, with diversified share registers split between both public and
private owners (McGregor, 203). Again, by disallowing businesses and companies full ownership of what is ultimately theirs, they
cannot provide their maximum potential at adding capital to the economy. Non-capitalistic approaches are often times more forceful as
China tends to demonstrate. Communist China does display the granting of property rights in some instances and to an extent that
doesnt jeopardize their authority over the nation. McGregor states that In response, party interests have promoted private companies
as an engine of employment and reined them in when they have grown too big; invited entrepreneurs to join the Party, while
intimidating and jailing business leaders who fall foul of it; and supported more secure property rights, while muddying the rules
surrounding ownership of companies, assets and land (McGregor, 197). China is in no way against the idea of boosting their
economy. They are willing enough to allow individuals property rights to avoid dead capital, though they do not grant property to a
degree anywhere near a threat to their dictatorship. This is a part of the reason why Chinas Communist party is still intact today. They
adapt to different situations and assure their dictatorship is not at risk. They allow the presence of capitalism but they do not let it
overpower their authority.

SECTION 3
In my opinion, the dictators in Communist China will be successful in using a capitalist system to produce prosperity while
denying Milton Friedmans thesis that prosperity will create individual freedom and the end to dictatorship. According to McGregor,
The Chinese communist system is, in many ways, rotten, costly, corrupt and often dysfunctional. The financial crisis has added a
dangerous dash of hubris to the mix. But the system has also proved to be flexible and protean enough to absorb everything that has
been thrown at it, to the surprise and horror of many in the west (McGregor, 273). McGregor believes that for the foreseeable future,
China will continue to strive on its own terms. China has always adapted during changing times to keep its Communist party in office.
Even when the Soviet Union broke apart after the Russian party broke apart, Chinas authority stayed intact. McGregor provides the
reason being that while the Russian party did not improve the lives of its people and tried to fix it too early or too late, China managed
to alter its authority to suit its people while remaining Communist. China has always managed to pull itself up when it seems closest to
collapse. As soon as prosperity begins to excite thoughts of individual freedom, China will most likely find a way to suppress them
and remain a dictatorship as theyve always had. Milton Friedmans thesis has its credibility but up to this point, Communist China
has been successful in using a capitalist economy to produce prosperity in contradiction of that thesis. They have even risen high
enough in economic terms to overtake the United States as the worlds largest economy.

CONCLUSION
To achieve success, it is intelligent to mimic the technique used by those who have already achieved that success. That is
what third world countries have tried to do by instilling capitalism into their economies. They hope to achieve the same economic
prosperity seen by nations such as the United States. The only reason they have been unsuccessful up to this point is because their
countries do not have the formal laws in place to prevent dead capital. Individuals are to make transactions but only among those
around them because of the lacking of a title to their property. This results in dead capital that could result in the change they are
looking for should they attain these necessary property rights. De Soto does a good job outlining this issue in his book The Mystery
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of Capital. Richard McGregors book The Party, is also quite descriptive in describing the secrets behind the success of Communist
China in their economy. China runs a through a strict Communist party though has managed to thrive in terms of its economy by
intertwining capitalism into its ways. Despite allowing capitalism into their nation, they apply it only to an extent as they are very
cautious of the fact that individuals may someday gain enough prosperity to desire individual freedom.

REFERENCES
De Soto, Hernando. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic
Books, 2000. Print.
McGregor, Richard. The Party: The Secret World of China's Communist Rulers. , 2010. Print.

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