Money becomes capital only when used to create value

We should create value by putting money to use; the idea of saving on taxes through tax evasion is not desirable

I hope for a world with many thoughtful wealthy people who use money in meaningful ways

It is easy to equate money with capital, but they are not the same thing. If you stack up 3,000 50,000-won bills in a safe, it is just money. Only when that money is used to create value does it become capital.

After discovering the New World, many European countries invaded the American continent. Spain and Portugal also traveled back and forth to the New World in earnest, seizing gold. They brought back large amounts of gold from South America and piled it up, but strangely, things did not improve compared to before. This is precisely the harm of a mercantilist society.

Mercantilism was an economic policy implemented in the early stages of capitalism for the primitive accumulation of capital, based on the belief that amassing precious metals such as gold and silver would increase national wealth. Under that concept, European countries competed to conquer colonies.

Capitalism emerged when people, realizing that “life does not improve simply by piling up money and gold,” changed their way of thinking while seeking a path to becoming wealthy. In 1776, Adam Smith emphasized production in The Wealth of Nations. As people began to understand the economic idea that value is created through production, and that prosperity follows from it, the full-fledged age of capitalism began.

Capitalism places meaning not in stockpiling money, but in using that money to create value. Suppose someone starts a company with 50 million won. If that money is used to purchase machinery and vehicles to generate income, then the 50 million won is no longer just money; it becomes capital. Whether one invests 10 billion won in bitcoin or buys machines and builds a factory, money plays the role of capital only when it contributes to production and that production returns as value.

When money is used to create value, it generates the means to consume, and that consumption can in turn create additional value. For example, if a truck is used to sell agricultural products or operate a food truck, it is no longer mere consumption but a capital good that creates value.

Those of us living in the age of capitalism must regard ourselves as capitalists and be able to invest our money properly to earn returns. Some people invest in stocks and bonds, while others invest in virtual assets.

When money is deposited in a bank or used to buy bonds and stocks, someone else borrows or uses that money as capital. Even if I do not directly engage in business myself, enabling others to use my money as capital is precisely the capitalist way.

Many people still choose bank deposits to avoid risk. Bank deposit interest rates are very low, but can that still be considered a capital activity? Saving money in a bank is in fact a patriotic act. If someone borrows that money, engages in economic activity, and creates value, then it is unquestionably capital.

These days, safes are reportedly selling well in Korea. Since the issuance of the 50,000-won bill, more people have been keeping cash in safes. The reason is obvious: to give cash to their children without paying gift tax or capital gains tax. Since taxes are far higher than bank interest, this can easily seem like a rational choice, but tax evasion is unquestionably a crime. Some also hide money in safes to create slush funds.

When individuals hoard money, it does not help our economy. In a capitalist society, the more people live by mercantilist thinking, the more productivity declines and the less value is created. The larger the amount, the more that means our society is unable to generate wealth.

Those who hide money in safes are likely people who made large sums by investing somewhere, so the fact that they do not turn that money into capital is a major loss for our society. Because of taxes and slush funds, an underground economy exists everywhere. Some voices criticize the tax system and rationalize such behavior, but we must not forget that it is a crime.

Another investment favored by Koreans is real estate. To give the conclusion first, buying a house is a wise form of investment and a legitimate part of capitalist activity. Clothes are worn for about three years, and cars are driven for about 10 years, while houses are used for about 30 to 70 years. A car is not only a consumer good but also often serves as a capital good, because it can be used for business. A house can create value through rental income. Real estate is much debated these days, but the probability of housing prices collapsing is far lower than the probability of being defrauded out of cash.

It has been 300 years since capitalism began. Rather than piling up money, we should put it to use so that it leads to production and value. A person who has 1 billion won in cash and gold stacked in a safe is not rich. One should use that 1 billion won to create value; the idea of evading taxes to save money is never desirable.

In a capitalist society, we must strive to use money as capital. I hope for a world with many thoughtful wealthy people who use money in meaningful ways.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: 돈을 활용해 가치 창출해야 자본이 된다

Author: Sung-no Choi

Date: 2024-02-22

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=3&idx=26465