Our president as well as ministers and civic organizations have clearly demonstrated their firm determination to root out speculation and this must have helped the public conclude that speculation has negative impacts on the national economy. Such an idea will be more reinforced when high officials are removed from their posts due to alleged implication in speculation. On the contrary, the media's report that economic depression resulted from lack of investment may have inculcated people with the idea that investment is good but speculation is bad.

Is indeed speculation bad while investment always good? First of all, let's take a look at clear definition of investment and speculation in economic terms. Academically speaking, investment is differentiated from speculation according to its purpose: investment is an activity of purchasing goods as one's property in order to gain profits or future utility. But speculation is for only capital gains. For example, if a consumer buys audio system, a worth of several million won, to enjoy music, it is an investment. The same can be said for a businessman who bought the audio system to improve productivity of his employees by playing music at the workplace. If someone, however, wants to enjoy profits from the difference between the purchase price and the selling price, that is speculation.

Only heaven knows

Purchasing the same product can be either investment or speculation depending on its purpose. For instance, buying a lot of 100,000 pyong can be 'investment in real estate' if it's for family grave sites (the pursuit of utility) but also can be 'real-estate speculation' if the land serves to gain a profit margin. If a businessman buys a lot of 100,000 pyong to build a factory, it's 'investment in real estate' but can be also 'real-estate speculation' if he had intention to resell for a margin.

Buying stocks can be 'stock investment' if the purchase aims at creating value added through the ownership of a company but can be also 'stock speculation' if the purchaser has intention to resell the stocks for a margin. If someone buys a famous painting to appreciate (utility) the work, he's 'investing in the painting' but if he buys the piece of art to resell, expecting the margin, he's 'speculating in the painting'.

Of course, consumers can have both purposes. For instance, if a businessman buys a lot of 100,000 pyong, though he needs only 30,000 pyong to build a factory and uses the remaining 70,000 pyong to resell in case the real estate prices rise due to the effects of building the factory, it can be said he invested the 30,000 pyong in real estate but speculated 70,000 pyong. The same can be said for a person who bought a painting. He may have bought the painting to enjoy while he owns it but also may expect some profit from reselling the piece of art. In that case, he had both two purposes.

Whether or not it's speculation is determined by the purpose of the purchase and it's almost impossible that the third party reads what's inside of an individual's mind. Though someone insists he bought land to build a house to live in after retirement, it's impossible to discern the truth of the statement. Though he had that purpose in the first place, he may change his mind later or find a better site for a new house and thus resell the land. Indeed, only heaven knows it's speculation or not.

Despite arduous efforts, therefore, the government can not eradicate real estate-speculation. Thus, it's not unusual at all people involved in real estate scandal say they bought the land to build a house for themselves. How awkward it would be if the government condemns someone who builds a house outside of his hometown for speculation as we live in this global world?

Is investment all good for an individual?

Everybody strives to tell speculation from investment because people have a strong belief that investment is desirable but speculation isn't. Ask someone who bought land for family grave site or to build a house if the purchase wasn't real estate-speculation. Without fail, he will get angry. Economic science, however, doesn't agree with such dichotomy saying only investment is beneficial to economy.

To begin with, think of whom individual investment benefits. An individual will decide to invest in something only when he can expect the corresponding utility or profits. Hence, the investment can't be bad for the individual, for he's expecting good results. Granted, not always such expectation is realized. Though an investor expects profits, the investment can produce bad results, too. And that doesn't mean it is justifiable to say investment is bad.

Individual investment can be good or bad from the government's point of view. Compare the case of someone inherited a lot of 100,000 pyong but decided to sell the land, concluding it was not very useful for him and buy factories with that of a person who buys the same amount of land for family grave sites. As long as the buying and selling of real estate occurred according to their free will, gains from exchange occurs because it's a positive-sum game, eventually increasing the utility of the land.

Nevertheless, individual investment can't always benefit the national economy. In case someone purchases (as an investment) a machine to manufacture drugs, the parties who sold and bought the machine will make profits but the investment will result in drug addicts bringing detrimental results to the society. In particular, if an investment made with third parties' savings fails, the investment will cause great loss to the national economy. Korea's foreign exchange crisis is a good example, for large corporations' reckless investment led to astronomical economic loss.

Is speculation bad for an individual or a nation?

If an individual purchases real estate for the purpose of speculation (for a profit margin), it can't be bad for the individual; otherwise, he won't speculate in real estate. Granted, he can either make profits or not. And that doesn't mean it is justifiable to say speculation is bad for him.

Individual speculation can either beneficial or detrimental to national economy. Individuals or corporations speculate in order for margins but they do so at personal risk. Taking a risk can produce positive results for national economy because that can offer an alternative to people who want to avoid a risk.

At the foreign exchange market, speculators take the risk caused by fluctuation of foreign exchange and thus exporters or importers can avoid risks. As a result, they can be fully committed to their business without worrying about risks.

Farmers take a risk of price fluctuation, too. The cabbage price fell to \500 last year and some farmers can't help but plow the field before harvest. But the price sometimes rises to \2,000. Thus, taking the risk is a great challenge for them. However, if there is a market that guarantees farmers sell their crops in advance at prices covering production costs with normal profits, they will be able to avoid the risk and fully engaged in farming. To make it possible, there should be speculator who willingly take the risk for future margins.

Speculation also contributes to stabilizing prices. For instance, if speculators buy rice in the fall, when prices are low, and resell the rice in the spring, when prices are high, a plunge or a sudden rise in the rice price can be prevented. This enables customers to buy and farmers to sell rice at stable prices.

Speculation is possible in the stock market because stocks are issued and allowed to resell. If stocks of small- and medium-sized companies can't be traded, the stocks will be hardly target of speculation. But when speculation is possible at a circulation market, companies are free from the burden of paying monthly principal and interests and can finance production facility by issuing stocks. Without the stock market, that is, if reselling stocks is not allowed, people will hesitate to buy stocks, for they have to keep the stocks, which has no expiration date, forever. This indicates allowing speculation in the market enables liquidity of stocks and generates the demands for newly issued stocks. As a result, companies can secure funds more easily. In turn, this stimulates enterprises' investment, which is conducive to the national economy.

Nevertheless, not all speculation is beneficial. Rather, it can cause price fluctuation, especially real estate prices. If the demand for real estate in popular areas grows though the goods are difficult to be supplied in a short period, the prices will skyrocket far beyond its utility (intrinsic value of the goods). In this case bandwagon effect can be caused, for more people will be tempted to buy the real estate, targeting the increasing profit margins. This phenomenon cause relative deprivation and social conflict.

At some point, however, speculator may realize the prices are way too inflated compared to its utility and begin to resell the goods. Then the prices will plunge and people who owned the goods to the last will experience great loss. In turn, the unstabilized prices can wreck havoc on the economy. Our real estate market went through this every 10 years, proving not all speculation is desirable.

Speculation by illegal practice

Economic bubble is unavoidable in the market economy where speculation is allowed and freedom of choice for goods or services are guaranteed within the legal system. While such limitation is intrinsic to our economic system, berating people who expect gains from speculation for being a moral offender will be by no means effective.

Speculation in the market economy, where freedom of choice is protected within the legal system, is natural commercial transaction. We should not consider such legal business deals morally wrong. In the atmosphere unfavorable for speculation, all the people can't help but lie they invested in real estate even though it was indeed speculation.

At present the public has a stereotyped idea that investment is good while speculation is bad because maybe they experienced negative effects of real-estate speculation or it's hard to know the undesirable effects of investment. From now on, however, we have to realize not all investment should be welcomed and not all speculation should be rooted out.

The government should concentrate its efforts on eradicating speculation based on illegal practice or inside information, not all forms of speculation. In fact, ministers who called for resignation were involved in illegal practice or used inside information rather than simply purchasing real estate.

It's commendable that the government arranges a system designed to swiftly respond to symptoms of real-estate speculation developing in some areas. But it should always keep in mind that such efforts not always succeed or produce better results for the market. Governmental interference in the market may worsen the problems or end up with 'government failure', causing a great deal of costs.

Son, Jungsik (A professor of Hanyang University, jsonny@hanyang.ac.kr)

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