David Hume was an 18th century philosopher who was important in the Scottish enlightenment and laissez-faire economics that lead to Smithian free market thinking.
David Hume’s contribution to economics
- extended John Locke’s view of property rights as a center of economics
- a quantity theory of money
- international thery of the balance of trade
Hume on private property
Unlike Locke, Hume did not believe that private property was a natural right. This seems like a departure from Locke’s ideas, but it is not.
This is because although ownership was not a right, it was a necessary evil. Private property exists because of the fundamental economic problem of scarcity. That is, we have limited wealth and resources in this would, so it needs to be managed with the idea of private ownership. If there were unlimited goods, we would not need private property.
Unequal distribution of wealth is good
According to Hume an unequal distribution of wealth in society was a positive thing. Why? Because this is what makes people strive to improve themselves. Society gets innovation and individuals get self-actualization. Therefore, Hume like Adam Smith believed in freedom of expression in the market place.
- Equality would destroy industry and thrift and lead to a nation to poverty.
Hume on balance of trade
When a country purses a mercantilist policy of trade, the steady inflow of gold (money) results in inflation. This makes the countries less competitive in the long run. Economics is about balance. In the long run if a country pursues a mercantilist policy it will create disequilibrium, which would rebalance because of a loss of competitiveness. This was known as price–specie-flow mechanism. It was an early balance of trade theory. If the central bank did not intervene trade flows would come back to equilibrium. This theory was accepted by classical economists and even Karl Marx. It was a counter to mercantilism.
The Mercantilist argument against this rebalancing thinking when like this:
The implicit hypothesis in this way of thinking is that of a low price elasticity of imports and exports. Under such conditions, an increase in internal prices with respect to international prices would cause an increase in the value of exports rather than causing changes in the quantities of imports and exports. Thus, an improvement in the terms of trade would reflect positively on the balance of payments. – Screpanti and Zamagni – An outline of Economic thought
It was a theory Cantillon believed. However, the logic of this thinking was not proven. Free trade is a much better way.
Further, Hume adhere to an early monetary theory of value.
It seems a maxim almost self-evident, that the prices of every thing depends on the proportion between commodities and money, and that any considerable alteration on either has the same effect, either of heightening or lowering the price. Encrease the commodities, they become cheaper; encrease the money, they rise in their value. As, on the other hand, a diminution of the former, and that of the latter, have contrary tendencies.
Which John Stuart Mill expanded on. It implied a correlation between money in circulation and the price level. Hume believed that a money supply increase created a temporary stimulus because there was a lag.
Money is not, properly speaking, one of the subjects of commerce; but only the instrument which men have agreed upon to facilitate the exchange of one commodity for another. It is none of the wheels of trade: It is the oil which renders the motion of the wheels more smooth and easy. -David Hume Of Money
Keynes later developed this theory. Central bank policy makers see money as the oil which can prime the pump to get the engine started again. This is all wrong. Stimulating the economy like this will only cause long-term problems. The economy is not an engine, more complex than can be imagined, the economy is the interaction between millions of people like me and you.
So you can see how an innocent theory like Hume’s theory of money was revisited and revised by some economists.