David Hume (1711–1776)

Who They Were

David Hume (1711-1776) was a Scottish philosopher, historian and essayist, and one of the towering figures of the Scottish Enlightenment. Adam Smith worked amid a circle that included Hume -- a close friend -- which treated society as a proper object of systematic, secular study. Though best known today for his philosophy, Hume also wrote influentially on economics in his essays, and his thinking on money and trade fed directly into Smith's Wealth of Nations (1776), which broadened Hume's critique of mercantilism by redefining what wealth is. Hume sits near the start of the classical tradition on international trade -- a lineage that in later centuries runs through the gold standard, Bretton Woods in 1944, the 1971 Nixon shock, and beyond.

Key Contributions

Hume's key economic contribution came in his essay 'Of the Balance of Trade' (1752), where he demonstrated that a permanent trade surplus is self-defeating under a metallic standard. An inflow of gold raises domestic prices, which makes exports dearer and imports cheaper until the surplus erodes -- the mechanism later known as the price-specie-flow mechanism. The essay is generally treated as the first clear statement of an automatic international adjustment process, the conceptual ancestor of every balance-of-payments model taught today. Under the gold standard, adjustment of external imbalances was supposed to run through exactly this mechanism, assisted by central bank interest rate changes that attracted or repelled short-term capital. Hume's argument was also a direct challenge to mercantilist bullionism -- the idea that a nation should hoard precious metals -- a critique his friend Adam Smith would later broaden.

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