David Hume Foundations of the Classical School of Economics
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Economic Insights FEDERAL RESERVE BANK OF DALLAS VOLUME 8, NUMBER 1 David Hume Foundations of the Classical School of Economics Adam Smith is the founder of the nomic essays] are all clearly written classical school of economics, but eco- and often contain an excellent sum- nomic theorizing predates Smith. The mary and synthesis of the ideas of his philosophic foundations of classical eco- predecessors. In that respect, how- nomics are found in the work of the ever, Cantillon’s Essai sur la nature Scottish Enlightenment thinkers of the du commerce en général, published early to mid-18th century, centered in 1755, but written over twenty years David Hume is primarily known as around the University of Edinburgh. previously, is superior. a philosopher and chronicler of English Notable among these great thinkers and writers is David Hume. It is impossible to know whether history. Less well known is his work on eco- Hume was born in Edinburgh, Smith was more influenced by Can- nomic theory and several political econ- Scotland, on May 7, 1711. The extent to tillon’s book or by personal discussions which Hume influenced Smith, his close with Hume. Schumpeter (1954, 124) omy issues, some of which remain salient friend, has to be inferred from their argues that Hume did influence Smith, today. Studying his economic work respective writings, but the warmth and and Rothbard (1995, 430) suggests that depth of their relationship is incon- Hume was one of Smith’s mentors. enables us to see how he reshaped John testable. Smith said of Hume: O’Brien (1975) gives Hume a large role Locke’s quantity theory of money and how in the development of classical econom- Upon the whole, I have always con- ic thought because of his participation he influenced the great Adam Smith, sidered him, both in his lifetime and in spreading natural law philosophy. Hume’s close friend and fellow Scottish since his death, as approaching as On the question of self-interest’s nearly to the idea of a perfectly wise role in human affairs, Hume seems to Enlightenment philosopher. Hume is one and virtuous man as perhaps the have influenced Smith greatly. For of the pillars of the classical school of eco- nature of human frailty will admit. Hume, and for much of the Western (Goldberg 1961) world after him, self-interest became the nomics, primarily founded by Smith. This primary motivating force that explained issue of Economic Insights offers some of Like Smith, Hume tried to use Isaac most of social reality (Herman 2001, Newton’s method of analysis in his in- 170). Hume’s early book expounding Hume’s economic theorizing for those who quiries. Hume also borrowed from phi- his idea of self-interest, A Treatise of want to pursue the intellectual history of losopher John Locke’s epistemology as Human Nature (1734), may have cost he related mostly moral concerns. Hume him a university teaching position. The modern economic theory. saw such moral concerns as the thread work so horrified other philosophers that connected his various writings, that some—notably Francis Hutcheson— — Bob McTeer which included political economy. actively sought to deny him such a pos- President While we shouldn’t overemphasize ition. He later repudiated this first Federal Reserve Bank of Dallas Hume’s economic influence on Smith, book. However, this was not the last their relationship—especially in light time Hume offended prevailing sensi- of the similarities of some of their bilities and challenged majority opinion analyses—is intriguing. As Roll (1953, on an issue. 117–18) writes: Hume’s view that self-interest could be channeled profitably only through In recent years the tendency has even economic cooperation and competi- arisen to regard him [Hume] as the tion—making civil society a possibility most important of the pre-Smithian so long as the rule of law prevailed— economists….[T]hey [Hume’s eco- was a pillar of Smith’s thinking as well. In this regard, Hume’s influence on erally pro-free trade and antimercan- automatically adjusts international trad- Smith is both clear and profound. Gov- tilist. Because of his extreme skepticism ing partners’ domestic price levels. As ernment is required, they argued, be- and presumed atheism, as well as his such, its intellectual lineage comes di- cause instinct may cause people to act view of human nature, academe was rectly from the quantity theory of against their interests, even though closed to him. He pursued instead a money—traceable back to Locke—as it they are driven primarily by those self- career in public life, traveling for tutor- was applied to international trade bal- interests (Rotwein 1987, 693). ing positions, becoming British chargé ances. Philosophers see Hume as a direct d’affaires in Paris and eventually Hume’s economic writings were link between the empiricist political becoming undersecretary of state. He usually concerned with the idea of eco- philosophy of Locke, the French lais- retired from public life in 1769 and nomic growth and its causes, perhaps sez-faire Physiocratic movement led by returned to Edinburgh. another example of an intellectual Francois Quesnay and early British pol- Hume’s most important foray into focus that he bequeathed to Smith. itical economy. Hume’s economic economic theory was his discussion of Hume was sometimes inconsistent in views overlapped both the mercantilist the price-specie-flow mechanism. The his economic theorizing. In one place and classical traditions, depending on movement of specie (gold and silver) he might praise the growth of the the topic he addressed, but were gen- between countries balances trade and money supply, while in another he would correctly show that larger sup- plies of money lead to rising prices. Smith might also have taken from Public Debt: Does Anything Ever Really Change? Hume the deeply flawed labor theory of value, as Hume routinely argued that But though the injury that arises to commerce and industry from our public funds will appear, only labor conveyed value. On bal- upon balancing the whole, not inconsiderable, it is trivial in comparison of the prejudice that results ance, Hume favored “hard money”— to a state considered as a body politic, which must support itself in the society of nations, and have that is, money made of precious metals various transactions with other states in wars and negotiations. The ill there is pure and unmixed, that had “intrinsic value.” He also seemed without any favorable circumstance to atone for it; and it is an ill too of a nature the highest and to support ultrasound banking, as when most important. We have indeed been told, that the public is no weaker on account of its debts, since they are he praised the Bank of Amsterdam for mostly due among ourselves, and bring as much property to one as they take from another. It is its policy of 100 percent specie-backed like transferring money from the right hand to the left, which leaves the person neither richer nor deposit reserves (Rothbard 1995, 428). poorer than before. Such loose reasoning and specious comparisons will always pass where we While arguing that an increase in judge not upon principles. I ask, Is it possible, in the nature of things, to overburden a nation with the money supply is neutral regarding taxes, even where the sovereign resides among them? The very doubt seems extravagant, since it the rate of interest, he also concluded is requisite, in every community, that there be a certain proportion observed between the laborious that, in the long run, such a continuing and the idle part of it. But if all our present taxes be mortgaged, must we not invent new ones? And increase might actually lower the inter- may not this matter be carried to a length that is ruinous and destructive? est rate. Although Hume had insights In every nation there are always some methods of levying money more easy than others, into many important economic issues, agreeably to the way of living of the people, and the commodities they make use of…. Duties upon his analysis was primarily one of com- consumptions are more equal and easy than duties upon possessions. What a loss to the public that the former are all exhausted, and that we must have recourse to the more grievous method of parative statics, or examinations of levying taxes!… equilibrium positions. He seldom dis- It will scarcely be asserted, that no bounds ought ever to be set to national debts, and that the cussed in detail the microeconomic public would be no weaker were twelve or fifteen shillings in the pound, land-tax, mortgaged, with adjustment processes that occur be- all the present customs and excises. There is something, therefore, in the case, beside the mere tween these equilibria, with the excep- transferring of property from the one hand to another. In five hundred years, the posterity of those tion of his essay Of Money. now in the coaches, and of those upon the boxes, will probably have changed places, without affect- Smith’s analysis of economic ing the public by these revolutions….The funds, created and mortgaged, will by that time bring in growth and society owes a great deal a large yearly revenue, sufficient for the defense and security of the nation: money is perhaps lying to his having read Hume’s massive The in the exchequer, ready for the discharge of the quarterly interest: necessity calls, fear urges, rea- History of England. Hume wrote the son exhorts, compassion alone exclaims: the money will immediately be seized for the current ser- four-volume work between 1754 and vice, under the most solemn protestations, perhaps of being immediately replaced.