[ Tiffany Peacock. Image: Oliver Hammond ]

Wealth and status

In The Theory of Moral Sentiments, Adam Smith recognized that people value wealth not only for the goods and services that it allows them to procure, but also for the impression that it makes upon others. He noted the tendency for prosperous individuals to display their wealth, whereas the less fortunate make no similar efforts to display their poverty.

"It is the vanity, not the ease, or the pleasure, which interests us. But vanity is always founded upon the belief of our being the object of attention and approbation. The rich man glories in his riches, because he feels that they naturally draw upon him the attention of the world, and that mankind are disposed to go along with him in all those agreeable emotions with which the advantages of his situation so readily inspire him. At the thought of this, his heart seems to swell and dilate itself within him, and he is fonder of his wealth, upon this account, than for all the other advantages it procures him."

Adam Smith (1759; I.3.2)

Today, we tend to view displays of wealth as status signals, but Smith attempted a different explanation. He attributes the preferential display of wealth over poverty to an asymmetry in the human capacity for empathy: "It is because mankind are disposed to sympathize more entirely with our joy than with our sorrow, that we make parade of our riches, and conceal our poverty."

John Stuart Mill took a more modern view of this phenomemon, treating it directly as social signalling. In his 1848 textbook Principles of Political Economy, Mill noted that

"a great portion of the expenses of the higher and middle classes in most countries, and the greatest in this, is not incurred for the sake of the pleasure afforded by the things on which the money is spent, but from regard to opinion, and an idea that certain expenses are expected from them, as an appendage of station"

John Stuart Mill (1848)

From this, Mill went on to conclude (reasonably enough) that these goods are particularly good candidates for taxation, pointing out that increasing the price doesn't make status goods any less desirable: "When a thing is bought not for its use but for its costliness, cheapness is no recommendation....a tax on the article is really paid by nobody: it is a creation of public revenue by which nobody loses."

While Mill acknowledged that people invest in status signals, he stopped short of a complete economic theory of status signalling; for examaple, he has little to say about what sorts of commodities will be effective as status goods. In the late nineteenth century, the economist and sociologist Thorstein Veblen addressed this problem directly in his viciously satirical Theory of the Leisure Class (1899). Like Smith and Mills, Veblen recognized the importance of consumption not for its own sake but what it signals about the consumer. While wealth may initially serve as a signal (or, more technically, an amplifier) of efficiency, Veblen argues that over time it becomes a virtue in its own right:

The possession of wealth, which was at the outset valued simply as an evidence of efficiency, becomes, in popular apprehension, itself a meritorious act. Wealth is now itself intrinsically honourable and confers honour on its possessor.

Thorstein Veblen (1899, Ch. 1)

Where Veblen went beyond Smith and Mills was exploring the ways in which individuals could effectively signal wealth, and how the aim of signalling wealth influences cultural behavior.