The Primal Ache
What Adam Smith Knew about Inequality
May 23, 2012
May 23, 2012
6 Min read time
What Adam Smith Knew about Inequality
Near the end of Liar’s Poker, Michael Lewis’s indispensable memoir of his time as a bond salesman at Salomon Brothers in the late 1980s, Lewis describes the emotional merry-go-round of receiving his first year-end bonus. Together with his salary, he’s earned $90,000, more than any 26-year old he knows, more than his father at his age, and as much as any other first-year banker at the firm. Lewis is ecstatic—“Ha! I was rich”—until the carousel clicks into gear. He begins thinking about all the money he’s made for Salomon and how much more others around him are taking home. Before long his bonus seems more like a poke in the eye than a pat on the back. “By the standards of our monopoly money business, ninety grand was like being on welfare,” he says. “I felt cheated, genuinely indignant. How else could I feel?”
Lewis learned one of the central lessons of wealth and wealth creation: being wealthy and feeling rich are often inversely correlated. In a room full of rich men, only one doesn’t feel poor by comparison.
This lesson is often overlooked in the ongoing debate over income inequality. Just as people at the top of the income curve conflate being poor with looking impoverished, those as the bottom conflate being wealthy with feeling like Richie Rich. Confusion on either side breeds contempt, while obscuring the felt consequences of inequality, which in an affluent society can be a matter not only of material need but also of bitterness over one’s relative position.
Adam Smith understood this. The author of The Wealth of Nations regarded human beings as creatures of appraisal and ambition. Smith believed that whether we are busy trading gossip or exchanging goods, we are constantly sizing up the world around us in order to guarantee our safety and improve our place. Our measurements, as such, are not made according to some universal set of standards. We are each other’s yardsticks, and we hate it when we don’t come out ahead.
This is to say that we long to get the better of inequality, no matter our present state. For Smith, this helps to explain the phenomenon—perplexing to some, enraging to others, but familiar to us all—of people who already have a lot and still desperately want more. “The homely and vulgar proverb, that the eye is larger than the belly, never was more fully verified than with regard to him,” Smith says of the wealthy landlord. “The capacity of his stomach bears no proportion to the immensity of his desires.” The eye, here, is synonymous with the imagination, which, unlike the belly, is always unbounded. This is where our dreams reside, and Smith knew that even the wildest among them has an alarming tendency to grow, especially when it is on the cusp of being satisfied.
It’s better to be poor in Mississippi than rich in Mogadishu, though by the same logic, it’s also better to be unemployed in Holland than working class in Harlem.
As an economic matter, the broader consequences of our insatiability are largely beneficial. The desire to get ahead compels people to work far harder than they would if their only concern were to get by. But while the striver’s instinct benefits society (yes, Smith is a trickle-down economist), the excessive effort can seem something of a waste. “In his heart,” Smith says, the wealthy man, at the end of his life, “curses ambition, and vainly regrets the ease and the indolence of youth, pleasures which are fled for ever, and which he has foolishly sacrificed for what, when he has got it, can afford him no real satisfaction.”
What he has sacrificed for is distinction—not to keep up with the Joneses but to ensure that they struggle to keep up with him. People are an intensely competitive lot, and while Smith was not so cynical as to predict Gore Vidal’s famous quip, “Whenever a friend succeeds, a little something in me dies,” he was not so far behind. For Smith, the virtue of a thriving society is the defect of a common vice: envy. We see what others have, and we want it for ourselves. What redeems our envy is that our effort to gain for ourselves what others already have doesn’t take the form of theft or repossession but instead is channeled into lawful exchanges that, over time, grow the wealth of a nation.
This is the invisible hand in action, and it provides the social promise of Smith’s work. But that promise is underwritten by a desire that is always morally suspect. Envy, the primal ache of inequality, motivates the merchant and pickpocket alike. Both pursue their own medicine, and Smith’s challenge is to convince us why only one remedy should be broadly prescribed.
This is no easy task. To demand that someone who is poor and powerless give himself over to an impersonal economic system that promises to reward him, over time, by the work of an invisible hand, well, that’s asking no small amount of faith. Say what you will about theft, the proof is in the taking.
To overcome this, Smith asks his readers to forget about the inequality most familiar to them—that which confronts them everyday when they see things in the hands of others they can only dream of owning themselves—and to instead consider the inequality across nations. Smith wants to know why certain countries are more prosperous than others, for he believes that in these differences lie the keys to economic growth.
This strategy is encapsulated at the end of the first chapter of The Wealth of Nations, where Smith goes to great lengths to describe the complex commercial system that supplies the needs of “the very meanest person” in a well-developed society.
Compared, indeed, with the more extravagant luxury of the great, his accommodation must no doubt appear extremely simple and easy; and yet it may be true, perhaps, that the accommodation of an European prince does not always so much exceed that of an industrious and frugal peasant, as the accommodation of the latter exceeds that of many an African king, the absolute master of the lives and liberties of ten thousand naked savages.
Forgive Smith the unsavory stereotype. The point he is trying to make is that the inequality the peasant ought to consider is not that between himself and the European prince, but that between himself and the African king. The latter can take with impunity anything he desires, but the nation he leads provides little in the way of choice. The peasant, by contrast, lives in a society where his means are modest and his power limited, yet because of broader prosperity and the consumer choices available to him, he still enjoys a better standard of living.
In contemporary terms, we might say it’s better to be poor in Mississippi than rich in Mogadishu. That may be true, though by the same logic, it is also better to be unemployed in Holland than working class in Harlem. Smith is only trying to prove that free markets provide a better standard of living than can a highly centralized economic system. He says nothing about the policy choices a country might make in regulating its own system of capitalism to best provide for the poor and vulnerable. Moreover, Smith never contends that either the total wealth of a nation or even its median income is the last word on the moral status of economic arrangements. True, capitalism may best ensure that all people have food, shelter, and clothing, but it also exposes us to the afflictions of affluence, those, as Michael Lewis discovered, that wound our pride more than our person.
Some may argue that such distress is unworthy of being taken seriously, but “get over it” is a response more obtuse than enlightened, willfully indifferent to the role of personal pride in driving an economy and shaping our identity. We have to be honest in confronting the essential paradox of economic development, namely, that the wealthier a society becomes, the poorer many of us may end up feeling. Or, as a fellow trader replies when Lewis tells him of his own frustration, “You don’t get rich in this business. You only attain new levels of relative poverty.”
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May 23, 2012
6 Min read time