David Hume's Argument Against British Mercantilism

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INTRODUCTION:
The Scottish philosopher David Hume made many essential contributions to economic thought. His empirical argument against British Mercantilism was a building block for classical economics. He was a contemporary of Adam Smith. His views on Economics are conveyed in his “Essays, Moral, Political and Literary” Part II (1752). Hume made many major lasting contribution to economics. Out of the many, one is his assertion that “you cannot deduce ought from is” i.e. one cannot make value judgements simply on the basis of facts. Today, economists make the same point by differentiating between positive ( what is ) and normative (what should be). Another is his idea that economic freedom is a necessity for political freedom. This idea was
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Hume’s monetary theories are viewed highly favorably by Mayer as having predicted later monetary theory on a variety of issues. Such issues include Hume’s writings on the quantity theory, private sector stability, the Chicago transmission process and the vertical Philips Curve that Hume originated. According to Robert Lyon, Hume introduced 2 ideas into monetary theory that did not enter mainstream economic thought until Keynes. One was the importance of the variable of time in economic analysis. The other was Hume’s emphasis on psychological factors as affecting trade and money. For Hume, money is not one of the wheels of trade but “is the oil that allows the wheels of trade to roll more easily.” The real quantity of money is insignificant as prices are proportional to the amount of existing money (OM 281). Hume refuted the notion that supply of money will be depleted by trade. Hume (OM 286), stated that the rise in general price level was due to the inflow of silver and gold from the Americas. He observed that the increase in price level was less in proportion to the increase in gold and silver. Hume explained this non proportional increase to happen because of a “change of customs and manners” (OM 292). Modern monetary theorists would ascribe this phenomenon to a gradual rise in productivity. His argument was essentially the monetarist quantity theory of money: a country’s prices change directly as the money supply changes. He explained that with the increase in net exports and rise in the gold flow into a country to pay for them, the prices of goods in that country will rise. He showed that the rise in domestic prices due to the gold inflow would encourage imports and discourage exports, thereby automatically limiting the amount by which exports will exceeed imports. This adjustment mechanism is known as the price-specie-flow mechanism. An important facet of Hume’s monetary theory

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