David Hume Philosopher Ideas History

David Hume Philosopher, David Hume ideas History

Economics suffered by the failure of David Hume (1711-1776) to devote more of his brilliance and analytical abilities to questions of economics, but our loss has been the gain of philosophy, politics, and history. Hume was a close personal friend of Adam Smith; their joint intellectual output is awesome in terms of its impact on following generations.

Like many of his contemporaries, Hume could be called a liberal mercantilist; he had one foot in mercantilism, but with the other stepped forward into classical political economy. Hume took the insights of John Locke, who saw that the level of economic activity in an economy depends on the quantity of money and its velocity, and presented a reasonably complete description of the interrelation­ships among a country's balance of trade, the quantity of money, and the general level of prices. In international trade theory Hume's contribution has become known as the price specie-flow mechanism. Hume pointed out that it would be impossible for an economy to maintain a favorable balance of trade continuously, as many mercantilists advocated. A favorable balance of trade would lead to an increase in the quantity of gold and silver (specie) within an economy. An increase in the quantity of money would lead to a rise in the level of prices in the economy with the favorable balance of trade. If one country has a favorable balance of trade, some other country or countries must be having an unfavorable balance, with a loss of gold or silver and a subsequent fall in the general level of prices. Exports will decrease and imports will increase for the economy with the initial favorable trade balance because its prices are relatively higher than those of other economies. The opposite tendencies will prevail in an economy with an initial unfavorable balance. This process will ultimately lead to a self-correction of the trade balances. The mercantilists paid little attention to Hume on this score, and it is interesting that Adam Smith did not use Hume's argument in his long and strongly worded condemnation of mercantilistic theory.

Hume's mercantilism is represented by his views on the consequences of a gradual increase in the money supply on the level of real output and employment. The mercantilists had argued that changes in the money supply could increase real output. The classicals maintained that real output depended not on the quantity of money but on real forces: labor supply, natural resources, capital goods, and the institutional structure. Changes in the money supply would change only the general level of prices. Hume believed that although the absolute level of money in a nation would not influence real output, a gradual increase in the money supply would lead to an increase in output.

Two other, much broader, ideas put forth by Hume are worthy of mention. One may be particularly relevant to the present, when many countries in Eastern Europe and the former Soviet Union are restructuring their societies and economies. Hume searched for a connection between economic freedom—the freedom to sell one's resources, labor or nonlabor, when, where, and at what price one chooses; the freedom to produce and sell the fruits of one's activities; and the freedom to buy outputs or inputs without constraint by outside forces— and political liberty. Hume maintained that the growth of economic freedom went hand in hand with the growth of political freedom.

Finally, Hume was a precursor of the distinction made later by Nassau Senior, John Neville Keynes, and Lionel Robbins concerning the difference between positive and normative statements. That what ought to be (normative statements) cannot be derived from what is (positive statements) is called Hume's Dictum.