Poverty and Property Rights

 

On my first trip to Ethiopia seven years ago, I took along a copy of Hernando de Soto’s book The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. I chose well. De Soto’s treatise on the primacy of property rights in fostering economic development provided a framework for understanding the dysfunction I saw in the slums of Addis Ababa.

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I vividly recall one house call to an HIV patient–we will call her Abebech–who lived in a “moon village,” so named because the hamlet sprouted one night on vacant land earmarked for a sports complex. The authorities blustered but never got around to demolishing the settlement, and so it grew, eventually to thousands of residents. Abebech warmly welcomed me to her house, an eight-by-six foot room with walls of dried mud she rented for $17 per month. Once we got through introductions and the state of her health, I asked what concerned her most.

“The rains will come soon, my roof leaks and I will be very cold,” she said, pointing to patches of sky visible through several quarter-sized holes in the ceiling.

Helpless no more! Finally, something I can fix. I’ll have that roof watertight in under an hour.

My elation at finding myself in the American cultural sweet spot—Problem Solver—evaporated before the translator finished rephrasing my offer into Amharic. I watched with dismay as Abebech’s face fell into a grimace.

“No, no, you can’t do that. If you fix the roof, I will be thrown out of my house!”

Huh? That’s crazy.

No, not crazy; not really—just very very sad. Abebech’s predicament, as de Soto details at length, was the logical consequence of the ownership uncertainty prevailing throughout the developing world. Eventually, with many delays for translation, I worked out the particulars. Abebech’s “landlord” was the man who erected the house. He leveled the ground, planted the eucalyptus framing poles, fashioned walls from sticks and mud, and topped the edifice with a leaky tin and plastic roof. But he had no legal right to the fruit of his labor. Actually, building Abebech’s “unofficial house” was a crime, since it was constructed on public land – and it is all public land in Ethiopia.

Where there is no legally recognized ownership, improvements to property need to pay for themselves instantly, as any personal investment can vanish in a moment. Because nobody knows when the government will get to the “sports complex” page in its five-year-plan, there is no way to amortize the cost of improvements, no valid collateral, and therefore nobody willing to lend money — and no legal recourse to resolve a dispute. Because capital improvements that pay off instantly are rare, very few improvements are ever made. Therefore, a moon village remains a slum in perpetuity, or until it is demolished. If, against all rational calculation, a house is upgraded—say a naïve American doctor happens to visit—the logic of a community without property rights dictates instant monetization. The rent increases today. If the tenant cannot pay, then she and her things are moved out in favor of another.

Abebech was understandably horrified because my solution would actually make her much worse off. She wanted empathy, nothing more.

Two years ago, Abebech’s moon village was leveled. The government gave the residents 72 hours to clear out before the bulldozers arrived.

From an investment standpoint, in Ethiopia as in much of the developing world, today is all there is; there is no tomorrow.

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  1. Sandy Member
    Sandy
    @Sandy

    Without the rule of law, and a firm belief in the principle of equality enunciated in our Declaration of Independence, capitalism is crony capitalism, and it ain’t just in the third world.  In addition, the modern regulatory state can and does wreak havoc on property rights.  The I.R.S.’s seizure of bank accounts “on suspicion” is a recent example.

    • #1
  2. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    (dis)Like.

    • #2
  3. Howellis Inactive
    Howellis
    @ManWiththeAxe

    This problem in it’s Indian version was illustrated in heartbreaking fashion in the book, “A Fine Balance” by Rohinton Mistry. One of the great books. The same situation obtains, even for people of apparent means. Because property ownership is so sketchy residents must rely on protection by gangsters to maintain some sense of permanence in their homes. When that protection evaporates everything is lost.

    A great read with a fascinating cast of characters, atmosphere, and verisimilitude.

    • #3
  4. Vance Richards Member
    Vance Richards
    @VanceRichards

    Which leads one to wonder how much of the world’s poverty is the result of bad, and/or outright corrupt, government policy?

    • #4
  5. Midget Faded Rattlesnake Contributor
    Midget Faded Rattlesnake
    @Midge

    Vance Richards:Which leads one to wonder how much of the world’s poverty is the result of bad, and outright corrupt, government policy?

    Corruption makes it sound like it can be fixed. But a legal regime without a workable concept of property rights is worse than corrupt. It is damned by its very nature. Even sinless humans wouldn’t be able to get it to work. The fact that humans also aren’t sinless is just urinary frosting on a very fecal cake.

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  6. Spin Inactive
    Spin
    @Spin

    I love this article because it so clearly articulates that we westerners don’t understand real poverty.  That’s not a criticism of the west.  It’s simply a statement of fact.  I thank God that I don’t truly understand poverty.  But at the same time, it is good for us to have a nuanced explanation of various facets.  Well done.

    • #6
  7. user_51254 Member
    user_51254
    @BereketKelile

    I’m always interested to hear of your travels there, George, and De Soto’s book was a good choice. I have it on my shelf.

    Ethiopia has been taking the China approach to development. Interestingly, I’ve read that the Chinese themselves have advised Ethiopia not to follow their example. The last 10-15 years has seen rapid modernization and a lot of building activity but much of that wealth creation has gone to the few at the top.

    The late Kenneth Minogue said that most of the world is made up of “one-right-order socieies” and I think it’s definitely true of Ethiopia. There isn’t the cultural atmosphere that will lead to liberalization of markets and political institutions and my hope is to see that change within my lifetime.

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  8. DocJay Inactive
    DocJay
    @DocJay

    I sent gifts through a friend to Uganda.  I never use any organization at all because I know that crooks and thieves are all there are in any form of government.

    Here is a 500 count Bactrim given to a remote “hospital” that has a bunch of HIV cases.

    Bactrim

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  9. Look Away Inactive
    Look Away
    @LookAway

    Two wonderful books that focus on the insidious role of corruption perpetuating poverty are “Invisible Wealth” by Arnold Kling and Nick Schulz and a must read: ” The Dictator’s Handbook: Why Bad Behavior is Always Good Politics”.

    I use the Kling and Schultz book for assigned reading to my classes. “The Dictator’s Handbook” is so cynical, yet so correct, I dare not show it to young formative minds or it would crush their idealism, which will be crushed soon enough anyway.

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  10. Ricochet Moderator
    Ricochet
    @OmegaPaladin

    The rule of law and property rights are more important than even democracy.  They are the bedrock of a modern society.

    • #10
  11. SParker Member
    SParker
    @SParker

    Vance Richards:Which leads one to wonder how much of the world’s poverty is the result of bad, and outright corrupt, government policy?

    De Soto argues pretty much all of it.   The US could enjoy the standard of living of Haiti if our ancestors hadn’t come up with the legal structure to keep who owns what straight in the 19th century.  De Soto also says we’ve forgotten the achievement.  Which seems to be correct.

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  12. Ricochet Inactive
    Ricochet
    @Martel

    De Soto’s book is a must read not only for those who want to better understand free markets, but also for those who want to better promote them. There are still a few lefties out there who (despite the awful policies they promote) actually care for the poor. De Soto’s points get through to them.

    The last chapter demonstrates an incredibly naive take on power politics, but still a definite must read.

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  13. Douglas Inactive
    Douglas
    @Douglas

    Ever read about the Costan Rican squatters? Real Estate agents sell rich westerners property there, but often the westerners arrive months later to find out some local has built a shack on the land, and legally, the western owner has no recourse as Costan Rican law actually encourages squatting (so called “Productive Use” laws). Costa Rican law says that if someone is not actively living on or using land, after some period of time, a squatter can come in and set up shop… and can’t be evicted. Eventually, after some years of living there, actual ownership of the land is transferred to the squatter.

    Buying land in the third world is quite often madness and a sinkhole for westerners used to things like titles, deeds, and courts. “Property Rights” are white man’s, bourgeois concept in much of the undeveloped abroad, looked upon with curiosity and contempt, and westerners are seen as suckers ripe for the taking.

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  14. Claire Berlinski Editor
    Claire Berlinski
    @Claire

    Oh, do I recognize this story.

    One of the reasons US democracy-promotion efforts are generally such a failure, I suspect, is that they focus on end-stage democracy (Political parties! Debates! Parliaments! Elections! Freedom of expression!)–failing to grasp that none of this will work without property rights and a mechanism for enforcing them.

    I’m a great fan of de Soto, too.

    • #14
  15. CuriousKevmo Member
    CuriousKevmo
    @CuriousKevmo

    Midget Faded Rattlesnake:

     just urinary frosting on a very fecal cake.

    Now that is poetic.  Nice.

    • #15
  16. Douglas Inactive
    Douglas
    @Douglas

    SParker:

    Vance Richards:Which leads one to wonder how much of the world’s poverty is the result of bad, and outright corrupt, government policy?

    De Soto argues pretty much all of it. The US could enjoy the standard of living of Haiti if our ancestors hadn’t come up with the legal structure to keep who owns what straight in the 19th century. De Soto also says we’ve forgotten the achievement. Which seems to be correct.

    Policy follows culture, and things like property rights are a part of western culture, and seen as alien in other cultures. It’s not just a matter of getting countries to pass property rights laws. That would be relatively easy. As long as the native culture is hostile to these ideas, nothing is going to change.

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  17. George Savage Contributor
    George Savage
    @GeorgeSavage

    Claire Berlinski:Oh, do I recognize this story.

    One of the reasons US democracy-promotion efforts are generally such a failure, I suspect, is that they focus on end-stage democracy (Political parties! Debates! Parliaments! Elections! Freedom of expression!)–failing to grasp that none of this will work without property rights and a mechanism for enforcing them.

    I’m a great fan of de Soto, too.

    You make an excellent point.  A bundle of unalienable rights must be secured for democracy to work the way westerners expect.  A fundamental respect for property is non-negotiable.

    While attending medical school in Boston many years ago, the problem of the popular will unconstrained by respect for others’ property presented itself in the form of a flyer in the foyer of my walk-up apartment building advocating a vote in favor of rent control.

    “Vote Yourself a Rent Reduction!”

    The other side of the proposition:  “Help yourself to your landlord’s property” was a point I made at a public meeting that night.  And you know what?  Even in liberal Boston amongst an audience of tenants, by framing the issue appropriately, I wound up with a round of applause (but the rent control ordinance passed anyway).

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  18. Mendel Inactive
    Mendel
    @Mendel

    To echo Douglas’ comment above, I think we focus too much on the top-down aspect of property rights and not enough on the cultural understanding of ownership.

    Our property rights laws in the west were preceded by centuries of individuals exerting their own perceived rights of ownership, codified or not. That grassroots cultural mentality is more important than any law: any state will only have so much enforcement power; it is our mutual respect of each others’ property which contributes the lion’s share to our peaceful coexistence.

    That’s not to say that enacting property rights wouldn’t make a huge difference, or that all people do not possess some innate sense of ownership over their property. But simply rewriting the laws, even with robust enforcement, will sadly not be sufficient to bring order to many of these countries.

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  19. Mendel Inactive
    Mendel
    @Mendel

    And kudos to Dr. Savage for his commitment to his fellow man.

    Here in the pharmaceutical sector in Silicon Valley, his and his company’s names are praised and referenced constantly. That a man of his stature would still feel excitement at the possibility of patching a hole in a poor woman’s tin roof in Ethiopia restores some of my faith in mankind.

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  20. Mario the Gator Inactive
    Mario the Gator
    @Pelayo

    Without property rights, we cannot trust that actions we take today will benefit us economically in the future.  I recently watched this video called “The Secret Powers of Time”. It illustrates how being “Future Oriented” is important as a predictor of success in life.  Here is a link if anyone is interested: https://www.youtube.com/watch?v=A3oIiH7BLmg

    • #20
  21. Spin Inactive
    Spin
    @Spin

    Claire Berlinski:Oh, do I recognize this story.

    One of the reasons US democracy-promotion efforts are generally such a failure, I suspect, is that they focus on end-stage democracy (Political parties! Debates! Parliaments! Elections! Freedom of expression!)–failing to grasp that none of this will work without property rights and a mechanism for enforcing them.

    I’m a great fan of de Soto, too.

    Said differently, how to you get someone to vote that has to walk two miles, one way, to get water, that probably has bacteria anyway, for their wife, who is suffering from AIDS?

    • #21
  22. Midget Faded Rattlesnake Contributor
    Midget Faded Rattlesnake
    @Midge

    Mendel:To echo Douglas’ comment above, I think we focus too much on the top-down aspect of property rights and not enough on the cultural understanding of ownership.

    Our property rights laws in the west were preceded by centuries of individuals exerting their own perceived rights of ownership, codified or not. That grassroots cultural mentality is more important than any law: any state will only have so much enforcement power; it is our mutual respect of each others’ property which contributes the lion’s share to our peaceful coexistence.

    That’s not to say that enacting property rights wouldn’t make a huge difference, or that all people do not possess some innate sense of ownership over their property. But simply rewriting the laws, even with robust enforcement, will sadly not be sufficient to bring order to many of these countries.

    As de Soto points out, though, the problem that a lot of these places have isn’t that there is no cultural understanding of property and ownership, but that the governments in power refuse to recognize the customs of ownership that the people already have. Thus, the bottom-up customs defining property, ownership, and trade are kept (one might suspect deliberately kept) outside the “bell jar” of government-approved activity.

    De Soto’s slogan is “lift the bell jar”. Maybe de Soto’s a bit optimistic, but I think those saying “the real problem is that brown people have no ownership customs” are also being way too pessimistic.

    • #22
  23. Zafar Member
    Zafar
    @Zafar

    Midget Faded Rattlesnake:

     the problem that a lot of these places have isn’t that there is no cultural understanding of property and ownership, but that the governments in power refuse to recognize the customs of ownership that the people already have. Thus, the bottom-up customs defining property, ownership, and trade are kept (one might suspect deliberately kept) outside the “bell jar” of government-approved activity.

    A lot of the developing world is at some stage of the equivalent of the Highland Clearances.

    Land as private property is a pretty much inevitable result in most situations, and that will unlock a lot of economic potential, but whose private property and why are questions that are important, and which shape the politics of these countries.

    • #23
  24. George Savage Contributor
    George Savage
    @GeorgeSavage

    Mendel:And kudos to Dr. Savage for his commitment to his fellow man.

    Here in the pharmaceutical sector in Silicon Valley, his and his company’s names are praised and referenced constantly. That a man of his stature would still feel excitement at the possibility of patching a hole in a poor woman’s tin roof in Ethiopia restores some of my faith in mankind.

    Mendel, many thanks for the kind comments.  I try to push the immensity of global poverty out of mind and focus on doing the little tiny bit that I can.

    And I get to meet some truly wonderful people.

    • #24
  25. George Savage Contributor
    George Savage
    @GeorgeSavage

    Midget Faded Rattlesnake:

    Mendel:To echo Douglas’ comment above, I think we focus too much on the top-down aspect of property rights and not enough on the cultural understanding of ownership.

    Our property rights laws in the west were preceded by centuries of individuals exerting their own perceived rights of ownership, codified or not. That grassroots cultural mentality is more important than any law: any state will only have so much enforcement power; it is our mutual respect of each others’ property which contributes the lion’s share to our peaceful coexistence.

    That’s not to say that enacting property rights wouldn’t make a huge difference, or that all people do not possess some innate sense of ownership over their property. But simply rewriting the laws, even with robust enforcement, will sadly not be sufficient to bring order to many of these countries.

    As de Soto points out, though, the problem that a lot of these places have isn’t that there is no cultural understanding of property and ownership, but that the governments in power refuse to recognize the customs of ownership that the people already have. Thus, the bottom-up customs defining property, ownership, and trade are kept (one might suspect deliberately kept) outside the “bell jar” of government-approved activity.

    De Soto’s slogan is “lift the bell jar”. Maybe de Soto’s a bit optimistic, but I think those saying “the real problem is that brown people have no ownership customs” are also being way too pessimistic.

    Absolutely right, MFR.  Abebech felt a duty to pay her rent every month to the man who built the house.  She and her neighbors all just believed that this was a correct way to behave.  When she leaves her house–there are no locks–her possessions are relatively safe.  Her community acknowledges that, at least for the moment, this is her house.  Formalization of this status would go a long way to fostering development.

    But it is unplanned.  And central planners really become invested in their creations.  An example:  This year we shifted our work to Suki, an outlying district of Addis where many have moved after being displaced from development downtown.  Suki is hilly and the nearest “water pipe” is a considerable distance downslope.  So many residents fill their water jugs in the nearby fetid stream and suffer the predictable consequences:  dysentery, typhoid fever, and intestinal parasites, among other maladies.

    Water is heavy.  You should see the biceps on even the slightest Ethiopian woman in Suki.  The standard container is a yellow 20 liter jerry can, and the women of the neighborhood labor uphill to their homes carrying two at a time–and remember that Addis is 7,500 feet above sea level.  Burros can carry four such cans, but you need money to hire a beast.

    Ethiopia ACT is trying to gain permission to install a large water tank for the neighborhood.  This will allow trucks to deliver relatively clean water–you still want to use disinfecting tablets–for the residents’ use.  However, Suki is an “unofficial community.”  If the government allows services to be placed, then they will need to acknowledge that the neighborhood of 50,000 actually exists.  And Suki isn’t part of the plan, at least not yet.

    Negotiations are ongoing.  Hopefully, the water tank goes in before my next visit.

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  26. Ricochet Inactive
    Ricochet
    @Martel

    Mendel:To echo Douglas’ comment above, I think we focus too much on the top-down aspect of property rights and not enough on the cultural understanding of ownership.

    […]

    That’s not to say that enacting property rights wouldn’t make a huge difference, or that all people do not possess some innate sense of ownership over their property. But simply rewriting the laws, even with robust enforcement, will sadly not be sufficient to bring order to many of these countries.

    Regarding the first paragraph, much of current urban poverty even here in the States results from governments and cultures failing to comprehend the value of property rights.  I read Off the Books by Venkatesh (a study of the underground economy in Chicago) immediately after Mystery of Capital and the juxtaposition was stark, as if every valuable lesson had been unlearned by both the people and the government.  The problems they have in Ethiopia?  Get ready for them here.

    Reading Venkatesh’s book gave me an invaluable understanding of how people function here in America almost entirely off the economic grid:  no property, no capital, barter as means of exchange.  Moreover, it showed me that there are people in those neighborhoods who almost get it, that if we made an effort to show people how certain policies destroy their cities some of them would respond.

    Those two books in tandem helped me argue for free markets effectively with people who normally despise everything Republican.

    It can be done.

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  27. Midget Faded Rattlesnake Contributor
    Midget Faded Rattlesnake
    @Midge

    Martel:

    Regarding the first paragraph, much of current urban poverty even here in the States results from governments and cultures failing to comprehend the value of property rights. I read Off the Books by Venkatesh (a study of the underground economy in Chicago) immediately after Mystery of Capital and the juxtaposition was stark, as if every valuable lesson had been unlearned by both the people and the government. The problems they have in Ethiopia? Get ready for them here.

    Reading Venkatesh’s book gave me an invaluable understanding of how people function here in America almost entirely off the economic grid: no property, no capital, barter as means of exchange. Moreover, it showed me that there are people in those neighborhoods who almost get it, that if we made an effort to show people how certain policies destroy their cities some of them would respond.

    Yeah, I read “Off the Books”, too. And was (for whatever reason) furious that it did not contain more systematic economic analyses. (Which means the book must have impressed me greatly – I don’t get mad at unimpressive things.)

    If we want to convince conservatives that American bureaucracy deprives the poor of carrots, we need more numbers, not just the moving stories. Those people in those neighborhoods who almost get it will continue to not get it if conservatives, the self-identified champions of free markets, insist that displays of sympathy are too Leftist. More data, however, will give conservatives permission to feel, I think.

    • #27
  28. Claire Berlinski Editor
    Claire Berlinski
    @Claire

    George Savage:

    However, Suki is an “unofficial community.” If the government allows services to be placed, then they will need to acknowledge that the neighborhood of 50,000 actually exists. And Suki isn’t part of the plan, at least not yet.Negotiations are ongoing. Hopefully, the water tank goes in before my next visit.

    George, how many branches of the government and how many officials need to sign off on this for it to happen? Who’s negotiating with whom? Does the negotiation process get hung up at a low bureaucratic level or a high one? Is it the kind of thing where the right payoff could make it happen faster? Are the negotiators forbidden from doing that? Are the negotiators locals or Americans?

    I don’t know anything about how this works in Ethiopia, but in other places, I’ve noticed a tendency for American aid organizations to be (predictably) terrific at the things Americans do well–logistics, healing the sick, patching roofs, building wells–and deficient in the skills Americans (happily) rarely get a chance to practice–bribing the right people, figuring out who’s really running things, understanding what those people really want in exchange for giving you permission to be useful, and understanding exactly what these people are saying to you between the lines.

    I remember speaking to a top guy at–well, probably best not to say, but a very large and well-known American aid organization–who was just beside himself because the Turks weren’t giving them permission to load and unload supplies at the airport they needed to use. He was telling me that the bureaucracy was insane, he couldn’t figure out why they were making this so complicated, he’d been working on getting permission to fly this stuff in for months, he just couldn’t figure out what the problem was. When he told me this, I stared at him in incredulity–he couldn’t figure out why the Turks were acting like this, and I couldn’t figure out why he was surprised, why he was taking what they were saying at face value, and why he hadn’t just asked someone who might know how things there work.

    It hadn’t occurred to him–and no one had told him–that the problem would go away if they figured out some way to take their name off the supplies and let the government stamp “courtesy of the Turkish government” on them. That simple. (The AKP would never allow themselves to be humiliated by accepting foreign aid, because their whole schtick is that they’ve turned Turkey into a donor nation, not an aid case, and if the stuff is designated for Syria–as it probably was–they want control over the “We’re the ones who are bringing aid here” message.) Failing that, they’d never give them permission to use the airport, and they would never just say what they wanted outright, either–they would torment him with bureaucracy and waste his time forever instead of just saying no.

    He didn’t really believe me when I told him that, which is unfortunate, although I’m sure they’ve figured it out by now. But this is the sort of thing you need to figure out fast if your objective is, in fact, to get lifesaving food and medicine where it’s supposed to go.

    This was a very big and well-known organization, so I was shocked that he didn’t think in those terms. I figured they’d have a specialist–or even a full division–devoted to figuring these kinds of things out. By definition, places that need aid are places that are politically screwed up and not at all like home, so you’d think they’d not only be unsurprised by problems like this, but that they’d prioritize figuring out the precise way screwed-up places are screwed up, and how to work around it. These kinds of problems would obviously be an issue everywhere they work, although the specifics would vary from country to country and region to region and probably village to village, so it’s not as if you can just put it in the handbook.

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  29. George Savage Contributor
    George Savage
    @GeorgeSavage

    Claire, Ethiopia ACT’s staff is mainly Ethiopian–a big help when dealing with officaldom. The man leading negotiations with the government is a well-respected nurse and public health expert, formerly senior in the country’s premiere hospital. Relations are so good that the government also requests help from Ethiopia ACT on a regular basis.

    But everything takes a lot of time.

    And there are some comical misunderstandings. One shipment of children’s animal-shaped vitamins was held up because the customs officials were convinced that veterinary products were being foisted on Ethiopian children.

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  30. She Member
    She
    @She

    Property rights, like charity, begin at home.

    What the US Declaration of Independence established, for a while, in this country, at least, was that every individual had an unalienable core of God-given rights within him, and that those rights could not be taken away by any man.  Essentially, it established what Moms today like to call ‘boundaries,’ and that within those boundaries, I own myself.

    In some cases, the execution of this marvelous document was clearly flawed.  But the sentiment is unique.   And the outcomes were amazing.

    This is a wonderful post that demonstrates, in a concrete way, just how difficult it is to adapt to, follow, or even begin to understand, a mindset that could not be more different from ours.

    And why so many of our ‘humanitarian’ and ‘nation-building’ efforts fail.

    • #30
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