What David Hume ( 1711-76) Has To Teach Us Today
Reading David Hume on economics, one has the feeling that he is rebutting current Keynesian policies. How could that be, since Keynes lived hundreds of years later? The explanation is simple: Keynesianism is not new. It is just a revival of the old mercantilist ideas that Hume was targeting.
Keynes even admits at the end of the General Theory that he is reviving mercantilism, apparently having forgotten his claim at the beginning of the same book to be staking out new ground in economics. Whatever the reason, much of Hume seems highly relevant to today’s debates:
1. On deficit spending
“…Our modern expedient, which has become very general, is to mortgage the public revenues, and to trust that posterity will pay off the encumbrances contracted by their ancestors: …[This is] …a…ruinous… practice….
“It is very tempting to a minister to employ such an expedient, as it enables him to make a great figure during his administration, without overburdening the people with taxes, or exciting any immediate clamors against himself. The practice, therefore, of contracting debt, will almost infallibly be abused in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker’s shop in London, than to empower a statesman to draw bills, in this manner, upon posterity.
“What, then, shall we say to the new paradox, that public encumbrances are, of themselves, advantageous, independent of the necessity of contracting them. . . . [These]… absurd maxims [ are] patronized by great ministers, and by a whole party among us. . . .
“It must, indeed, be one of these two events; either the nation must destroy public credit, or public credit will destroy the nation. It is impossible that they can both subsist. . . .” [ Of Public Credit]
2. On money and banking
“… A government has great reason to preserve with care its people and its manufactures. Its money, it may safely trust to the course of human affairs….
“ We fancy, because an individual would be much richer, were his stock of money doubled, that the same good effect would follow, were the money of every one increased; not considering that this would raise as much the price of every commodity, and reduce every man in time to the same condition as before. . . .” [Of the Balance of Trade]
“It is also evident, that the prices do not so much depend on the absolute quantity of commodities and that of money, which are in a nation, as on that of the commodities, which come or may come to market, and of the money which circulates….
“Though the high price of commodities be a necessary consequence of the increase of gold and silver, yet it follows not immediately upon that increase; but some time is required before the money circulates through the whole state, and makes its effect be felt on all ranks of people. At first, no alteration is perceived; by degrees the price rises, first of one commodity, then of another till the whole at last reaches a just proportion with the new quantity of specie which is in the kingdom.
“Institutions of banks, funds, and paper credit, with which we in the Kingdom are so much infatuated,…render paper equivalent to money, [and] circulate it through the whole state…. What can be more short -sighted than our reasoning on this head… .
“It must be allowed that no bank would be more advantageous, than such alone as … never augmented the circulating coin.” [ Of Money]. (Hume pointed with admiration to the Bank of Amsterdam that was run at the time on 100% reserve lines.)
3. On trade
“Nothing is more usual, among states which have made some advances in commerce, than to look on the progress of their neighbors with a suspicious eye, to consider all trading states as their rivals, and to suppose that it is impossible for any of them to flourish, but at their expense. In opposition to this narrow and malignant opinion, I will venture to assert, that the increase of riches and commerce in any one nation, instead of hurting, commonly promotes the riches and commerce of all its neighbors; and that a state can scarcely carry its trade and industry very far, where all the surrounding states are buried in ignorance, sloth, and barbarism. . . .” [ Of the Balance of Trade]
4. On the theory of Value
When Hume received a copy of Adam Smith’s Wealth of Nations during his final illness, he immediately saw the error of Smith’s labor theory of value:
“If you were at my fireside, I should dispute some of your principles. I cannot think…but that… price is determined altogether by the quantity and the demand.” [ Letter to Adam Smith, April 1, 1776, Hume’s Correspondence, Writings on Economics, E. Rotwein, 1955. P. 217]
5. On the need for better economic reasoning
“Mankind are, in all ages, caught by the same baits: the same tricks played over and over again, still trepan them.” [ Of Public Credit]
“. . . It must be owned, that nothing can be of more use than to improve, by practice, the method of reasoning on these subjects, which of all others are the most important, though they are commonly treated in the loosest and most careless manner.” [ Of Interest]