15. The Scottish Enlightenment

0:0015. The Scottish Enlightenment The temptation is to entitle this chapter The Forerunners of Adam Smith, himself a leading product of the Scottish Enlightenment. The problem, however, is that Smith, in most aspects of economics, was a retrogression and deterioration rather than an advance from his notable predecessors. By the later seventeenth and during the eighteenth century, the once mighty Oxford and Cambridge universities, previously in the forefront of thought and scholarship, had deteriorated to being merely the playground of wealthy young men. Instead, for over a century, the intellectual leadership of Great Britain devolved on the two great universities of Scotland, the University of Glasgow and, particularly, the University of Edinburgh.

0:571. The Founder, Gershom Carmichael The founder of the tradition of academic economics in Scotland was Gershom Carmichael, circa 1672 to 1729. Carmichael's father was a Presbyterian minister who was exiled for heresy by the of the Scottish Presbyterian-run government. Born in England, Carmichael graduated from Edinburgh University. He then became regent at St. Andrews and Glasgow universities, where courses were taught by regents, who were essentially young graduate students. After that, Carmichael was Presbyterian minister at Fife. When the regenting system was abolished in 1727, Carmichael Paul was named the first professor of moral philosophy at Glasgow, where he died two years later.

1:57Economics or political economy was taught as a subset of a course in moral philosophy, and thus the analysis of trade and the economy was embedded in a groundwork and treatment of natural law. In many ways, the 18th century Scottish professors followed the post-medieval and late Spanish and the Irish Scholastic Method of including economic analysis as one segment of an integrated tome covering ethics, natural law, jurisprudence, ontology and theology, as well as economics proper. The term Protestant Scholastic has been coined for such writers as John Locke, and indeed the phrase is a coherent one, Since one does not have to be Catholic to use the rational scholastic method or arrive at scholastic conclusions.

2:50A fascinating example of this was perhaps the first Protestant scholastic, the Dutch jurist Hugo Grotius, 1583-1645. Grotius, who studied law at the University of Leiden and later became Chief Magistrate of Rotterdam, was an eminent natural law theorist who brought the concepts of natural law and natural rights to the Protestant countries of Northern Europe. In his outstanding work, which made him the founder of international law on the law of war and peace, 1625, Grotius clearly pushed natural law to its logical and rationalist conclusion. Even if God did not exist, natural law would still be eternal and absolute.

3:42Such law is discoverable by unaided human reason, and even God could not negate, even if he wanted to, such natural law insights as 2 plus 2 equals 4. Natural law required the rights of property to be secure in order to enjoy social cooperation, And under Grotius' influence, the idea of the rights of property became expanded to the economic sphere. In a prefigurement of 18th century natural law, natural rights theory, Grotius believed in the harmony of human interaction based on free action and property rights. Grotius had been able to work in the rationalist and natural law tradition because his mentor, Jacobus Arminius had previously broken off from orthodox Calvinism to stress the freedom of will of every individual.

4:40On these important matters of social philosophy, the Armenians had what might be called a neo-Catholic position. In politics, Grotius was a leader in the classical liberal, free-trade Republican Party in Holland, and then engaged in their century-long struggle with the monarchist orthodox Calvinists. Particularly influential on Northern European theorists was the late 16th century Spanish Jesuit scholastic Francisco Suarez. Suarez and his school heavily influenced two men who are generally considered founders of modern philosophy, the early 17th century Frenchman and René Descartes and the late 17th century German Gottfried Leibniz.

5:30Suarez's Metaphysical Disputations was his most influential work, published in Salamanca in 1597. Particularly important was the second edition, published in Mainz, Germany in 1600, which became the leading philosophy textbook in most European universities, both Catholic and Protestant, for over a century. Leibniz, indeed, referred to the disputations as the philosophia recepta, the received philosophy. Suarez's work was heavily influential in Protestant Central Europe, Bohemia, Germany and Holland. The University of Leiden, a leading academic center in Holland during the 17th century, was a particular focus of Suarezian dominance, and it was at Leiden that Hugo Grotius pursued his studies.

6:27Though Gershom Carmichael, who inaugurated the teaching of economics in Scotland, launched the tradition of reading and studying Grotius, a tradition that was followed by Adam Smith in the 18th century line of Scottish intellectual descent, more directly important for Carmichael was Grotius' best-known follower, Samuel Baron von Pufendorf, 1632 to 1694. Pufendorf was born in Saxony, son of a Lutheran pastor. He first studied theology and then shifted to mathematics, jurisprudence and natural law. Graduating from the University of Jena, Pufendorf went to Leiden, where he published his first work on jurisprudence in 1661.

7:17On the basis of this achievement, Carl Ludwig, the Elector Palatine, created for the young Pufendorf a chair of natural and international law at the University of Heidelberg. In 1672, while teaching at the University of Lund in Sweden, Pufendorf published his and his great work, De jure naturai et gentium. The following year he produced the De officio hominis et civis, a resume or abstract of his great De jure. It turned out, not surprisingly, that the more concise De officio proved more useful as a teaching tool, and therefore became and the far more directly influential, if inferior, product of Pufendorf's pen.

8:08Not only did Professor Gershom Carmichael bring the study of the new natural and international law teachings of Grotius and Pufendorf to British shores, but also he was himself the English translator of De Officio. Carmichael published the English translation in 1718, along with extensive notes and a supplementary commentary. This work turned out to be Carmichael's most important achievement, certainly in economics or the social sciences. Six years later, Carmichael published an improved second edition of De Officio, and this edition was reprinted in 1769. Carmichael saw to it that his students were steeped in Pufendorf and in his own commentaries.

8:59Carmichael was the first teacher in Scotland to expound Locke, Leibniz and Descartes as well as Grotius and Pufendorf. A knowledgeable observer has called Gershom Carmichael the true founder of the Scottish School of Philosophy. A contemporary noted that he was a very great reputation and was exceedingly valued both both at home and abroad. So much so, in fact, that another observer noted that on Mr Carmichael's death all the English students have left the University, and indeed it's very thin this winter, and his name and reputation brought many to it. Thus Carmichael led the way in the emerging custom of bright English students deserting at Oxbridge and Going Up to a Scottish University for Intellectual Attainment.

9:52On Carmichael's commentary on the De Officio, the testimony of Carmichael's most distinguished student, Francis Hutchison, is telling. Pufendorf's smaller work, De Officio Hominus et Civis, which that worthy and ingenious man the late Professor Gershom Carmichael of Glasgow, by far the best commentator on that Book has so supplied and corrected that the notes are of much more value than the text. Samuel von Pufendorf, like the 18th century French and Spanish scholastics, was a pre-Austrian subjective utility scarcity theorist. That is, he believed that the value of goods on the market was determined by their common Common Valuation Placed on Them by the Consumers, and that the more abundant the supply, the lower the value.

10:48Thus Pufendorf. Of common value the foundation is that aptitude of the good or service by which it helps directly or indirectly to meet human needs. Yet there are some things most useful for human life upon which no definite value is set. The necessity of the good or its great usefulness are so far from always being the first determinant that we can observe men putting a very low value on what is indispensable to human life. This is because nature gives us a plentiful supply of such goods. In fact, a high value proceeds from scarcity.

11:33In his notes to Pufendorf, Carmichael adds some valuable and not so valuable insights. He stresses the subjective nature of utility, pointing out that the usefulness of a good, which is essential to its value, may be either real or imagined. Unfortunately, he also muddied the waters by adding to scarcity as a determinant of of Value, The Difficulty of Acquiring Goods, An Obvious Real-Cost Attempt to Measure the Value of Goods by the Effort Put into Their Production. 2. Francis Hutchison, Teacher of Adam Smith Carmichael's most prominent student and follower was his successor at the Chair of Moral Philosophy at Glasgow, Francis Hutchison, 1694-1746. Hutchison, too, was the son of a Presbyterian minister of Ulster Scottish or Scots-Irish Stock, who was born in Ireland. Educated in Glasgow and then Dublin, Hutchison succeeded to the moral philosophy chair at Glasgow in 1730, upon the demise of Carmichael, where he taught until his death 16 years later.

12:54Hutchison brought to Scottish philosophy a solid belief in natural rights and the beneficence of nature. Hence, Hutchison brought to Scottish thought the basic classical liberal worldview. Francis Hutchison was a stimulating and dynamic lecturer who introduced the style of pacing The Never-to-be-forgotten Dr. Hutchison, as Adam Smith referred to him in a letter half a century later, was the first Glasgow professor to teach in English instead of Latin, and also the first to become friend, guardian and even banker to his students. His lectures on philosophy, politics, law, ethics and political economy drew students from all over Britain, The most famous of whom was Adam Smith, who studied under him from 1737 to 1740.

13:50Hutchison's major work, The System of Moral Philosophy, 1755, was published by his son after his death. Hutchison's treatment of value in his system is virtually identical to that of Pufendorf. Again, utility and scarcity are the determinants of value. Starting with the statement, when there is no demand, there is no price, Hutchison also points out that some highly useful things, such as air and water, have little or no value because of the bountiful supply furnished by nature. An increasingly scarce supply will raise the value or price of a good, a more abundant supply will lower them. Furthermore, Hutchison perceptively defines use highly subjectively, not simply as a good which naturally yields pleasure, but as any tendency to give any satisfaction by prevailing custom or fancy.

14:54Unfortunately, however, Hutchison also took the Carmichael confusion about real costs and escalated it. For Hutchison not only brought in the difficulty of labor as a determinant, he also made it even more determining where the demand for two sorts of goods is equal. Foreshadowing Adam Smith's famous analysis, Francis Hutchison stressed the importance of an advancing division of labor in economic growth. on the market involves reciprocal aid through mutually beneficial exchange, a prime example of the beneficence of nature. The division of labor is a key to the preservation of human life, and Hutchison shows the enormous advantages of specialization, skill and exchange over the puny productivity of an isolated Crusoe. Extended division of labor also connotes a more extensive communication of knowledge and permits greater use of machinery in production. In his analysis of money, Hutchison set forth an analysis of which commodities are likely to be chosen as money on the market that used to be standard in money and banking texts until governments destroyed the gold standard

16:17in the early 1930s. Money, Hutchison pointed out, is a commodity generally accepted in a particular country that becomes used as a general medium of exchange and as a common standard of value and measure for economic calculation. Commodities which are chosen as money on the market are those with the most moneyish qualities, already generally Very desirable and acceptable in exchange, divisible into small quantities without losing their pro-rata share of value, durable for long periods of time, and portable, for which quality they must have a high value per unit weight.

17:02Generally, he pointed out, silver and gold have been the two commodities that have been are chosen as by far the most suitable as money, with coins becoming the most popular form precisely for being divisible and easily carrying a warrant of purity. Debasement of coins increases their supply proportionately and raises prices of goods in terms of the money unit. As in the case of all other goods, an increase in the supply of gold or silver, Hutchison pointed out, lowers their value in terms of other goods, that is, increases their prices in terms of specie. Hutchison's most impressive achievement was his sharp rebuttal of the satiric Bernard de Mendeville, 1670-1733, whose enormously popular Fable of the Bees, or Private Vice's Public Benefits, was published in 1714 and expanded and reprinted in several editions over the next fifteen years.

18:10In a pre-physiocratic, proto-Keynesian piece of mischief, the fable maintained that the The Vice of Luxury, no matter how deplorable, performs the important economic function of maintaining the prosperity of the economy. Many historians, especially F. A. von Hayek, have held Mandeville to be a forerunner of Smithian laissez-faire, since Smith held that individual self-interest is harmonized with the interests of all through the operation of competition and the free market. But the intent and the analysis are very different, for Mandeville stressed the alleged paradox of private vice public benefits, and the benefit was to come through the pre-Keynesian mechanism of consumption spending.

19:01Mandeville, furthermore, did not in any sense draw laissez-faire conclusions from this analysis. On the contrary, in a letter to Dion, 1732, published shortly before his death, Mandeville insisted that not the free market, but the wisdom and dexterous management of a skillful politician are needed to transform private vices into public gain. Mandeville's work, furthermore, was virtually the living embodiment of what the 19th century Every French laissez-faire economist, Frederic Bastiat, would call the broken window fallacy. Mandeville not only defended the importance of luxury, but also of fraud as providing work for lawyers and theft for having the virtue of employing locksmiths.

19:53And then there was Mandeville's classically imbecilic defense in his Fable of the Bees of the Great Fire of London. The fire of London was a great calamity. But if the carpenters, bricklayers, smiths and all, not only that are employed in building, but likewise those that made and dealt in the same manufactures and other merchandises that were burnt, and other trades again that got by them when they were in full employed, were to vote against those who lost by the fire, the rejoicings would equal, if not exceed, The Complaints, Keynesianism Gone Mad, or rather, carried to its consistent conclusion.

20:39Mandeville's defense of the vice of luxury was enough to outrage both the rational economist and the Presbyterian in Francis Hutcheson. In rebuttal, in a prefigurement of Say's law, he pointed out that income not spent in one in one way will be spent in another, and if not wasted in luxury will be devoted to useful prudent purposes. Luxurious spending, then, is scarcely necessary for economic prosperity. In fact, he went on, it is the thrifty and the industrious who provide prosperity by supplying goods to the public. Declared Hutchison, the good arising to the public is in no way owing to the luxurious, intemperate or proud, but to the industrious, who must supply all customers.

21:30Ridiculing Mandeville, the ordinarily sober Hutchison reposted, Who needs to be surprised that luxury or pride are made necessary to public good, when even theft and robbery are supposed by the same author, Mandeville, to be subservient to it, by employing locksmiths? The money saved by not spending on luxury or locks would be profitably employed elsewhere, unless all other wants had been totally saturated, that is, unless all men be already so well provided with all sorts of convenient utensils that nothing can be added. As a general proposition, Hutcheson called for liberty and the natural right of property.

22:19As he put it in his system, each one has a natural right to exert his powers according according to his own judgment and inclination for those purposes in all such industry, labor, or amusements as are not harmful to others in their persons or goods, while no more public interest necessarily require his labors. This right we call natural liberty. An unexceptionable statement, except for the ominous vagueness in the concept of public Hutchison's devotion to laissez-faire, however, was limited and guarded. Thus, in his Introduction to Moral Philosophy, he opines that the populace often needs also to be taught and engaged by laws into the best methods of managing their own affairs and exercising their mechanic arts.

23:17In international trade, for example, Hutchison was mired in old-fashioned mercantilism, advocating state regulation to ensure a favorable balance of trade and high protective tariffs, as well as government subsidies of shipping to develop industry. Hutchison's devotion to natural rights was weakened still further by his being the first to adumbrate the chimerical and disastrous formula of utilitarianism, the greatest happiness for the greatest number, possibly after having acquired it or its equivalent from Gershom Carmichael. The specific influences of Hutchison on Adam Smith will be detailed further below.

24:03Suffice it to say here that the order of topics of Hutchison's lectures as published in the System, and as heard by Young Smith at the University of Glasgow, is almost the same as the Order of Chapters in the Wealth of Nations. 3. The Scottish Enlightenment and Presbyterianism. The Enlightenment was a general movement in European thought in the 18th century that stressed the power of human reason to discern truth. Originally it was dedicated to natural law and natural rights, although in the later years of the century it began to shade off into utilitarianism. While scholasticism was compatible with an emphasis on natural law and natural rights, it was generally discarded and reviled as ignorant superstition along with revealed religion.

25:00In religion, therefore, Enlightenment thinkers tended to discard Christianity, attack the In this atmosphere, corrosive of Christian faith and values, it is remarkable that the Scottish Enlightenment was linked very closely with the Presbyterian Church. How did this happen? How did a Scottish kirk, which in the 16th century, under the aegis of John Knox, had had been fiery and militant, become softened into a church that welcomed the enlightenment, that is, natural law, reason, and latitudinarian, if not skeptical, Christianity.

25:45The answer is that in the two centuries since John Knox, the hard-nosed Calvinist faith had weakened in Scotland. In particular, after 1752, a powerful group of moderate Presbyterian clergy was able to to take over and dominate the Church of Scotland, the established Church, which, since the Union of Scotland and England in 1707, had been established by the British Crown, even though it was Presbyterian rather than Anglican, as was the Church of England. Bitterly opposed to the moderates were the evangelical party, that is, clergy true to the basic Calvinist faith. The well-connected and highly educated moderates, strong in the lowland areas of Edinburgh and Glasgow and on the east coast up to Aberdeen, were able to form the dominant power elite in the Church of Scotland after the 1750s, even though they represented a minority of the local Kirks.

26:49The moderates, embodying a soft and latitudinarian theological outlook, were intimately connected with the Edinburgh and Glasgow intellectuals who constituted the Scottish Enlightenment. Most of their tactics were planned in meetings in Edinburgh taverns. The dominant figure among the moderates was the Rev. William Robertson, 1721-1793, an incessant talker and indefatigable organizer who led the moderates since their formation in 1752, and who became the moderator, or head, of the General Assembly of the Church of Scotland from 1766 to 1780. In 1762, furthermore, Robertson became the principal of the University of Edinburgh, and it was his leadership and administration that vaulted Edinburgh into the front ranks of European universities.

27:47Robertson was also the founder and leading light of various learned societies, which brought together weekly for papers, discussion and socializing the leading figures of the Scottish Enlightenment, including university professors, lawyers and the major figures of the moderate clergy. Thus Robertson founded the Select Society of Edinburgh in 1750. During the 1750s, the select society met weekly and included in its ranks such university figures as Robertson, David Hume, Adam Ferguson and Adam Smith, classical liberal lawyers such as Henry Hume, Lord Kames, and Alexander Wedderburn, later Lord Chancellor of Great Britain, and such youthful but prominent moderate clergy as Robertson, Alexander Jupiter Carlisle, Robert Wallace, Hugh Blair, John Hume and John Jardine.

28:47Carlyle was a charismatic figure as well as a heavy drinker, as many moderate clergymen were in that era. Wallace was in charge of Church of Scotland patronage as well as being royal chaplain. Wallace in his private papers favored illicit sex almost to the point of promiscuity, quickly A Warning that the activity would have to be kept hidden. Blair, in addition to his duties in the clergy, was professor of rhetoric at the University of Edinburgh. Jardine was a shrewd politician whose daughter married the son of Lord Cames, who in turn was a cousin of David Hume. John Hume was a moderate clergyman and secretary to Lord Bute, close friend of David Hume and and a playwright, an activity which in itself was a matter of deep suspicion to the dour fundamentalist evangelical clergy.

29:44Thus, Hume wrote a play, Douglas, in 1756, which was put on with many top leaders of the moderate Enlightenment acting in the play, including the Reverend Robertson, Alexander Carlyle, David Hume, Hugh Blair and the Reverend Adam Ferguson, professor of moral philosophy at the University of Edinburgh. The lax views of the moderates were under constant attack from the evangelical forces. Particular targets were Lord Keynes and especially the philosopher David Hume, who was almost excommunicated for heresy by the General Assembly of the Church of Scotland, but was saved by his powerful moderate friends.

30:30and his moderate university connections, however, could not gain for Hume any post in a Scottish university, so great was the enmity of the Presbyterian evangelicals. It should be noted that one of the key leaders of the moderate party was none other than Francis Hutchison. Thus the Enlightenment intellectuals, philosophers and economists of 18th century Scotland were are intimately connected with the fortunes and the institutions of the establishment moderate wing of the Church of Scotland. Hutchison, Hume and Smith then, while scarcely orthodox Calvinists, were dedicated Presbyterians according to their own lights, and hence their rationalism and theological laxity were nevertheless infused from time to time with hard-nosed Presbyterian values.

31:254. David Hume and the Theory of Money David Hume, 1711-1776, the famous Scottish philosopher, was a close friend of Adam Smith, who was named Smith's executor, an acquaintance of Turgot and the French adherents of laissez-faire, and member of the moderate elite of the Scottish Enlightenment. Born in Edinburgh, the son of of a Scottish Lord, Hume studied on the continent, where he published his epical philosophical work A Treatise of Human Nature, 1739 and 1740, at the age of 28. Hume's treatise was pivotal in its corrosive and destructive skepticism, managing unfairly to discredit the philosophy of natural law, to create an artificial split between fact and Value, and therefore to cripple the concept of natural rights on behalf of utilitarianism, and indeed to undermine the entire classical realist analysis of cause and effect.

32:35There is no figure more important in the unfortunate discrediting of the classical philosophical tradition of natural law realism, a tradition that had lasted from Plato and Aristotle at at least through Aquinas and the late scholastics. In a sense, Hume completed the corrosive effect of the 17th century French philosopher René Descartes' influential view that only the precisely mathematical and analytic could provide certain knowledge. Hume's skeptical and shaky empiricism was the other side of the Cartesian coin. While highly influential in later decades, Hume's treatise was ignored in his own day, and after writing it, he turned to brief essays on political and economic topics, and eventually to his then-famous multi-volume History of England, which he presented from a Tory point of view.

33:34Barred from academia for his skepticism and alleged irreligion, Hume joined the diplomatic Corps and served as Secretary to Lord Hertford, the British Ambassador to France. In 1765, Hume became the British Chargé d'affaires in Paris and two years later rose to the post of Under-Secretary of State. Finally, in 1769, Hume retired to Edinburgh. Hume's contribution to economics is fragmentary and consists of approximately 100 pages of of Essays in his Political Discourses, 1752. The essays are distinguished for their lucid and even sparkling style, a style that shone in comparison to his learned but plotting contemporaries.

34:26Hume's most important contribution is his elucidation of monetary theory, in particular his clear exposition of the price-specie-flow mechanism that equilibrates national balances of Payments and International Price Levels. In monetary theory proper, Hume vivifies the Lockean quantity theory of money with a marvelous illustration, highlighting the fact that it doesn't matter what the quantity of money may be in any given country. Any quantity, smaller or larger, will suffice to do money's work of facilitating exchange. Boehm pointed up this important truth by postulating what would happen if every individual overnight should find the stock of money in his possession to have doubled miraculously.

35:19For suppose that, by miracle, every man in Great Britain should have five pounds slipped into his pocket in one night. This would much more than double the whole money that is at present in the kingdom. That there would not next day, nor for some time, be any more lenders, nor any variation in the interest. Prices then, following Locke's quantity theory of money, will increase proportionately. The price-specie flow mechanism is the quantity theory extrapolated into the case of many countries. The rise in the supply of money in country A will cause its prices to rise. But then the goods of country A are no longer as competitive compared to other countries.

36:11Exports will therefore decline, and imports from other countries with cheaper goods will rise. The balance of trade in country A will therefore become unfavorable, and specie will flow out of A in order to pay for the deficit. But this outflow of specie will eventually cause a sharp contraction of the supply of money in country A, a proportional fall in prices and an end to, indeed, a reversal of the unfavorable balance. As prices in A fall back to previous levels, specie will flow back in until the balance Balance of trade is in balance, and until the price levels in terms of species are equal in each country.

36:59Thus, on the free market, there is a rapidly self-correcting force at work that equilibrates balances of payments and price levels and prevents an inflation from going very far in any given country. While Hume's discussion is lucid and engaging, it is a considerable deterioration from that of Richard Cantillon. First, Cantillon did not believe in aggregate proportionality of money and price level changes, instead engaging in a sophisticated microprocess analysis of money going from one person to the next. As a result, money and prices will not rise proportionately even in the eventual new equilibrium state.

37:47Second, Cantillon included the income effect of more money in a country, whereas Hume confined himself to the aggregate price effect. In short, if the money supply in country A increases, it will equilibrate not only by prices rising in A, but also by the fact that monetary assets and incomes are higher in Section A, and therefore more money will be spent on imports. This income, or more precisely the cash balance effect, will generally work faster than the price effect. There are more problems with Hume's analysis, problems other than the omission of previously discovered truths.

38:34For while Hume conceded that it does not matter for production or prosperity what the level of the Money Supply may be, he did lay great importance on changes in that supply. Now it is true that changes do have important consequences, some of which Cartillon had already analyzed. But the crucial point is that all such changes are disruptive and distort market activity and the allocation of resources. David Hume, on the contrary, in a pre-Keynesian fashion, hailed the allegedly vivifying effects of increases in the quantity of money upon prosperity, and called upon the government to make sure that the supply of money is always at least moderately increasing.

39:25The two contradictory prescriptions of Hume for the supply of money are actually presented in two successive sentences. From the whole of this reasoning we may conclude that it is of no manner of consequence with regard to the domestic happiness of a state, whether money be in a greater or less quantity. The good policy of the magistrate consists only in keeping it, if possible, still increasing, because by that means he keeps alive a spirit of industry in the nation. Hume goes on, in proto-Keynesian fashion, to claim that the invigorating effect of increasing the supply of money occurs because employment of labor and other resources increases long before prices begin to rise.

40:19But Hume stops, as Keynes did, just as the problem becomes interesting. For then it must be asked, why were resources underemployed before, and what is there about about an increase in the money supply that might add to their employment. As W. H. Hutt was to point out in the 1930s, deeper reflection would show that the only possible reason for unwanted unemployment of resources is if the resource owner demands too high a price or wage for its use, and more money could only reduce such unemployment when selling prices rise before wages or the price of resources, so that workers or other resource owners are fooled into working for a lower real, though not lower money, wage.

41:14Furthermore, why should idle resources, as Hume implicitly postulates, reappear after the effects of new money have been fully digested in the economy in the form of higher prices? The answer can only be that after the price increases are accomplished and a new equilibrium attained, wages and other resource prices have caught up, and the money illusion has evaporated. Real resource prices return to being excessively high for the full employment of resources. Hume's inner contradictions on the quantity of money and inflation permeate his meager and other writings on economics. On the one hand, continuing inflation over the centuries is depicted as bringing about economic growth. On the other, Hume sternly favored ultra-hard money in relation to the banking system. Thus Hume delivered a hard-hitting attack on the unproductive and inflationary nature of the very existence of fractional reserve banking.

42:23He wrote of, Those institutions of banks, funds and paper credit, with which we are in the kingdom so much infatuated, these render paper equivalent to money, circulate it throughout the whole State, make it supply the place of gold and silver, raise proportionately the price of labor and commodities, and by that means either banish a great part of those as Precious Metals, or prevent their further increase. What can be more short-sighted than our reasoning on this head? 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 everyone 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.

43:20Elsewhere, Hume noted that inconveniences result from the increase of genuine money – specie – but at least they are compensated by the advantages which we reap from the possession of these precious metals, including bargaining power in negotiations with other nations. That he added, there appears no reason for increasing that inconvenience by a counterfeit money, which foreigners will not accept of in any payment, and which any great disorder in the State will reduce to nothing. To endeavor to increase paper credit artificially, then, merely increases money beyond its natural Proportion to Labor and Commodities, thereby increasing their prices.

44:11Hume concluded his penetrating analysis with an ultra-hard money policy proposal, one hundred percent specie reserve banking. It must be allowed that no bank could be more advantageous than such a loan as locked up Another important flaw in Hume's analysis of money was his propensity, picked up and magnified by Smith, Ricardo and the classical school, for leaping from one long-run equilibrium from State to Another without bothering about the dynamic process through time by which the real world actually moves from one state to another.

45:07It is this brusque neglect or comparative statics that leads Hume to omit the cationian analysis of microchanges in cash balances and income, and that causes him to neglect Income Effects in the Price-Specie Flow Mechanism of International Monetary Adjustment. Ironically, by doing so, and thereby neglecting the distribution effects of changing assets and incomes during the process, Hume, as well as countless other economists following him, distorts what happens in equilibrium itself, for they then cannot see that the new equilibrium will be very different from the old.

45:52Thus, when the money supply changes, there will not be an equiproportionate increase in all prices across the board. Professor Salerno puts the point very well. There is some truth to Cain's statement that Hume began the practice amongst economists of stressing the importance of the equilibrium position as compared with the ever-shifting and Transition towards it. For in reading Hume, one gets an unmistakable whiff, if not the full flavor, of the notion that it is in the states of long-run equilibrium that the economy actually resides most of the time. The transition between these states, Hume conceives as proceeding rapidly and terminating before another change in the economic data can intervene and propel the economy toward a new equilibrium.

46:50This notion at times leads Hume to truncate a full step-by-step analysis of a given change in the data, thus sliding or skipping over altogether its short-run effects in order to focus upon a comparative static analysis of its ultimate consequences. In reality, as the Austrians have emphasized, the situation is precisely the reverse of the Hume-British classical assumptions. Rather than the long-run equilibrium state being the fundamental reality, it never exists at all. Long-run equilibrium provides the tendency towards which the market is ever moving, but is never reached, because the underlying data of Supply and Demand, and therefore the ultimate equilibrium point, are always changing.

47:45Hence a full step-by-step analysis of a given change in the data is precisely what is needed to explain the process of successive short-run states which tend towards but never reach equilibrium. In the real world, the long run is not equilibrium at all, but a series of such short-run states, which will keep changing direction as underlying data are altered. A final problem with Hume's monetary views is that in contrast to the French laissez-faire school, he believed that money need not be a useful marketable commodity, but was a mere convention. According to Abbé André Morelle, 1727-1819, a disciple of Gournay and life-long friend of Turgot, Hume opines that money functions as such because of the belief that others would accept it.

48:48Very true. But this does not mean that money originated as a mere convention. And Hume acknowledges that money should be made of materials which have intrinsic value, or otherwise it would be multiplied without end and would sink to nothing. Hume's thoughts on interest are illuminating if only in contrast to the profundity and brilliance of Turgot's exposition twenty years later. Since money's impact is ultimately on prices only, Hume shows that interest can only be a phenomenon of real capital rather than of money. He discusses the relation between interest rates and profit rates, that is, the fundamental rates of return on investment.

49:36Here he points out correctly that no man will accept of low profits where he can have high interest, and no man will accept of low interest where he can have high profits. In short, interest and profit rates tend to be equal on the market. Hume characteristically abandons the search for cause and says that both arise from an extensive commerce and mutually forward each other. Boehm-Bawerk is surely right when he says that this view is somewhat superficial. But more than that, it is incorrect and reverses cause and effect, by stating that extensive commerce, by producing large stocks, capital, diminishes both interest and profits.

50:31For there is no reason why larger stocks of capital should lower interest or profit rates. What they do lower is the prices of capital goods and consumer goods. The causal chain is the other way round. Lower time preference rates, which usually but not always attend higher standards of living and greater prosperity, will cause both capital to accumulate and profit and interest rates to fall. The two, as the Austrian School would later point out, are different sides of the same coin. According to the other areas of economics, it is possible that some of the deep flaws in Adam Smith's value theory were the result of David Hume's influence.

51:21For Hume had no systematic theory of value and had no idea whatever of utility as a determinant of value. If anything, he kept stressing that labor was the source of all value. In political economy, David Hume may be considered a free trader and opponent of mercantilism. A friend and mentor of Adam Smith from their first meeting in 1752, Hume came to know the French laissez-faire during his years in that country, and Turgot himself translated Hume's and its Political Discourses into French.