Ethics is an art of fine distinctions, one that disdains the bluntly authoritative in favor of something filigreed and unfixed. This is one reason why its practice invites confusion and controversy (and not occasionally annoyance). One individual’s courageous undertaking is another’s foolhardy endeavor. A generous touch is mistaken for prodigal excess. Civic loyalties jostle with ecumenical ideals, and the standing of certain virtues, such as chivalry or piety, fluctuate wildly, while others, such as chastity, fall entirely out of fashion.

If ethics is rife with ambiguity, let’s focus on a favorite instance of mine, one in which moral and semantic uncertainty seem to coincide: Is there a difference between being “frugal” and being “cheap”? As someone who keeps close track of his pennies, I take a special interest in this question, but it also has an unusual salience in the Midwest, one of the few places in the United States where frugality remains a widely acknowledged virtue, albeit one that can seem musty and quaint.

I suspect that most of us think we know what it means to be frugal—it is to refrain from spending money unnecessarily. But let’s linger for a moment on that qualifier: What does it mean to spend money “unnecessarily”? To say that this is simply a relative term, that one person’s necessity is another person’s excess, seems glib and dissatisfying. Indeed, whenever we assert that someone is “cheap,” we believe we have good reason for suggesting that an individual’s financial propensities go far beyond mere frugality, crossing over into behavior that is distasteful and problematic—even if we can’t exactly explain why we feel that way.

A gospel of frugality

Let’s try to articulate this distinction by taking a longer look at frugality, specifically its status as one of a collection of moral dispositions that Deirdre McCloskey, an economic historian at the University of Illinois at Chicago, has famously described as the “bourgeois virtues.” Such traits include industry, prudence, orderliness, temperance, and sincerity, and together with frugality, they consistently won praise in protocapitalist tracts for being conducive to personal financial success and economic development more broadly.

Take one of the most famous entries, Daniel Defoe’s The Complete English Tradesman. The book debuted in 1726, just three years after Adam Smith’s birth and 50 years before The Wealth of Nations was first published, and it lives up to the ambitions of its title by distinguishing itself, in the opinion of at least one economist, as “the first comprehensive business textbook.”

The frugal individual is someone who forgoes the immediate enjoyment money might bring and puts it to work instead as capital. 

This may come as a surprise to some contemporary readers. Today, Defoe is best remembered as one of the original architects of the English novel, the author of works such as Moll Flanders, Roxana, and Robinson Crusoe. During his life, however, he was far better known as a tireless pamphleteer whose sharp-tongued contentions put him crosswise with the powers that be. It was only in his dotage, long after one especially incendiary tract landed him in the pillory, that Defoe turned his polemicist’s knack for marshaling facts and making arguments to the more conservative task of writing conduct books, a genre that flourished in 18th-century England. While most of Defoe’s were preoccupied with navigating the impediments to conjugal bliss, apart from a few digressions, such as the dangers of marrying too soon (a “married apprentice will always make a repenting tradesman”), The Complete English Tradesman is a notable exception.

A book that announces it is written for “all sorts of warehouse-keepers” and “shopkeepers, whether wholesale dealers or retailers of goods,” Defoe’s work endeavors to provide a catalog of advice that covers everything a young merchant might need to know to make a successful start in business. It drew extensively on his own experience, more than a decade before his writing career began, as a London retailer trading in wine, hosiery, and woolen goods. The book’s advice covers a wide range of practical matters, such as basic accounting and bills of exchange, but its abiding significance is the evocative description of the moral psychology of the successful merchant, a figure who in Defoe’s estimation is constantly exposed to trials and temptations that would imperil his trade and test his character.

“The credit of a tradesman,” he warned his readers, is “too much at the mercy of every enemy he has, till it has taken root, and is established on a solid foundation of good conduct and success.” Credit is a chief concern throughout Defoe’s book, and here as elsewhere it has a double meaning. On the one hand, credit is synonymous with personal reputation. As an upstart in the world of business, your name doesn’t precede you, so you have no credit built up in the minds of others to withstand poor first impressions, to say nothing of malicious rumors. Your reputation is like a “fine flower,” wrote Defoe, “if it is but touched, the beauty, or the flavour, or the seed, of it is lost.”

But credit also has a more prosaic significance in The Complete English Tradesman. It means “creditworthiness,” how likely you are to pay your bills. This is hardly a trivial concern for any entrepreneur, but compared with the present day, establishing creditworthiness was a far more complicated matter for those who tried to conduct business long before there was anything resembling a FICO score.

In the 18th century, even in a major trading center such as London, there simply was no comprehensive body of well-organized, readily available financial data that might tell a lender how reliable you were in paying your debts. Instead, there were only the patterns established by personal relationships and the word of mouth that supported them. Your creditworthiness as a borrower, therefore, went hand in glove with the general credit of your character. What mattered wasn’t so much the fact of whether you paid your bills; it was the trust and good opinion such behavior built up in the lenders who knew you. They were not only more likely to offer you a loan at a highly attractive interest rate, but they would also give their word to others that you were someone very much worth doing business with.

Accordingly, one can see why frugality might become a cardinal virtue. Both the appearance and the reality of frugal habits were indispensable in a world where an individual’s creditworthiness was dependent not only on paying his debts but also on giving the clear impression that he was certain to do so.

Defoe well understood this. In one memorable chapter, “Of Fine Shops, and Fine Shows,” he counseled that the young upstart intent on opening his own storefront ought not to “sink perhaps a third part, nay, a half part, of his stock, in painting and gilding, wainscoting and glazing, before he begins to trade, nay, before he can open his shop.” The temptation to do so, Defoe said, comes from a profligate strain of fake-it-till-you-make-it reasoning, a belief that projecting financial success is more important than providing for it in the first place. “The reputation of having a great stock is ill purchased, when half your stock is laid out to make the world believe it,” he observed. The choice is tantamount to “reducing yourself to a small stock to have the world believe you have a great one.”

The wordplay is clever, but such dour counsel hardly delighted readers. Defoe was sensitive to this, for he appreciated that the impression one endeavored to make—as a writer, a shopkeeper, or simply a human being—was inevitably fraught with trade-offs. For him, the choice to give the impression of creditworthiness was inconsistent with an impression of opulence, gentility, or general puissance—of being what we might today call a baller.

You had to choose, and as far as Defoe was concerned, there was good reason to choose wisdom and prudential restraint over razzle-dazzle.

“It is true that all these notions of mine in trade are founded upon the principle of frugality and good husbandry,” he admitted, “and this is a principle so disagreeable to the times, and so contrary to the general practice.” And yet, he continued, “it is a maxim in commerce, that money gets money, and they that will not frugally lay up their gain, in order to increase their gain, must not expect to gain as they might otherwise do.”

“Frugality may be out of fashion among the gentry,” he concluded, “but if it comes to be so among tradesmen, we shall soon see that wealthy tradesmen will be hard to find.”

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The evangelists of thrift

To take seriously what The Complete English Tradesman preaches about frugality, it is helpful to overlook what its author practiced. By all accounts, Daniel Defoe enjoyed the good things in life—lace ruffles, a lustrous periwig—but consistently had trouble paying for them. Indeed, when he died in 1731 at the dawn of his eighth decade, Defoe was hard at work on another trade he excelled in: keeping a step ahead of his creditors.

The specter of landing in debtor’s prison, a place where Defoe spent not a small amount of time, gave a special urgency to the practice of frugality, and it was not lost on the evangelists of thrift who followed him, most famously Benjamin Franklin and Adam Smith. In his autobiography, Franklin named Defoe’s An Essay upon Projects as one of the two books in his youth that inspired a lifelong commitment to public service. As an up-and-coming shopkeeper, he almost certainly devoured The Complete English Tradesman, which was included in the private lending library he and his circle of friends established in Philadelphia.

Recounting his early days in business in his memoir, Franklin names frugality as one of the 13 virtues he chose in service of the “project of arriving at moral perfection.” To each of these virtues he assigned a precept, and the one for frugality is notable: “Make no expense but to do good to others or yourself; i.e., waste nothing.” The command is something of an ennobling complement to Defoe’s crude commercial maxim, “Money gets money.” Frugality, for both men, is clearly a procreative force, one productive of the commercial and common good, while profligacy supports wasteful excess and, as such, is synonymous with destruction.

Smith, whose The Wealth of Nations effectively systematized many of Defoe’s insights, put the matter even more piquantly. Insofar as what “the frugal man” saves “affords maintenance to an additional number of productive hands,” Smith likened him to the “founder of a public work-house.” But as for the “prodigal” who squanders his income on fine food, fancy clothes, and (a slight he especially favored) “trinkets and baubles,” Smith compared him to the reprobate who “perverts the revenues of some pious foundation to profane purposes.”

The cheap alternative

The alignment of a moral instinct with an economic assumption helped to make frugality a preeminent virtue in the early days of capitalism. When Defoe’s fellow pamphleteer, Bernard Mandeville, called frugality a “mean starving virtue,” it was because he appreciated that its practice denied us worldly pleasures we might otherwise purchase in favor of a Lenten spirit of austere generosity. To be frugal was not only to believe that a passion for the common good trumped the privileges of personal indulgence but also to embrace a fairly severe view of what constitutes an “unnecessary” expenditure. Indeed, in the pages of Franklin and Smith, it can sometimes seem that even a modest garnish or minor indulgence is nothing less than waste.

The age-old ambivalence of Christendom toward the claims of earthly enjoyment surely gave scope and support to such a conviction, but it was emboldened by neoclassical economists who hammered home the distinction between the evanescent pleasures of prodigal excess and the wonder workings of capital. To be clear, the frugal individual is not to be confused with the skinflint who buries a pot of gold in the backyard. That, too, is wasteful. Instead, the frugal individual is someone who forgoes the immediate enjoyment money might bring and puts it to work instead as capital, creating goods, employment, and, yes, more money in the process.

Is there a limit to such behavior, a point where virtuous practice passes into vice? Or, to come back to the question we started with, is there a way we might distinguish practicing frugality from simply being a cheapskate?

In an intriguing passage in The Theory of Moral Sentiments, Smith provided one possible answer in the distinction he drew between “the character of a miser and that of a person of exact economy and assiduity.” The latter, he said, is frugal in his behavior not because he is “anxious” to “gain or to save a single shilling” but “only in consequence of the scheme of life which he has laid down to himself.” He doesn’t believe that every last penny absolutely matters. This is the conviction of the miser, a disposition, said Smith, that “would degrade the most vulgar tradesman in the opinion of all his neighbours.” Instead, he is committed to a “general rule which to him prescribes, with the utmost rigour, such a tenor of conduct” that is consistent with the demands of frugality whenever it comes to spending his hard-earned money.

Now, whatever you make of this distinction—which even by the airy standards of philosophical disputation may seem far too abstract to be of much assistance—there is something to be said for the line Smith drew between a rigorous commitment to frugality and a crude affinity for penny-pinching. Those given to miserliness seem more pathologically minded than principled, especially when their parsimony comes at a price paid by friends and neighbors. A ritual of eating ramen at home when one can readily afford a salmon filet is something of an odd commitment that under certain circumstances might be coldly esteemed. But withholding a tip from a waiter on a four-course meal isn’t frugal conduct. It’s merely saving a dime at the expense of another. It’s the epitome of what it means to be cheap.

By contrast, those who join a passion for stretching their dollar with a belief that money is best put to use on undertakings that produce rather than consume value are guided by a sense of moral priority that aims to improve the world around them. If Warren Buffett has lived in the same house since 1958, it’s not because he couldn’t buy a better home. It’s because he’s convinced he has better things to do with his billions.

This conviction—that money is better spent on capital investment and the common good than gilded indulgence and gross monuments to vanity—is why frugality is a virtue that remains as widely admired as it is so rarely practiced.

John Paul Rollert is adjunct associate professor of behavioral science at Chicago Booth.

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