David Hume's Theory Of Mercantilism

Classical economics is considered as the first modern school of economic thought. It was developed in the late 18th and early 19th century. Its major developers were Adam Smith, David Ricardo, J.S.Mill and Jean Baptiste Say. This theory is based on the factor that markets can regulate themselves without intervene of government. According to these economists trade is not a zero-sum game because both sides can benefited when they engaged in international trade. Mercantilism failed to understand the benefit of international trade as well as absolute and comparative advantages of the nations. Then the Adam Smith, David Hume and David Ricardo were bring their thoughts against mercantilism. Adam Smith’s “The Wealth of Nations” in 1776 which is

Hume as an economist made several essential contribution to economic thought. He trotted out the idea of free trade. British mercantilists believed that countries can achieved their prosperity by limited imports and encouraged exports. But David Hume showed this notion was invalid and by using this notion a country could not enhance its wealth. His argument was prices of goods in the country change directly with change of the money supply in the country. Hume explained when the exports increased more gold flowed in to the country then the prices of goods in the country would rise due to high money supply. Moreover he pointed out that the increase in domestic price discourage exports and encourage imports. Hume died the year the Wealth of Nations was published and in the presence of Adam

He ignored the mercantilism which attempt to regulate human as well as market functions. He stressed about the “Invisible Hand”, an automatic mechanism that markets moves toward. He said that government should not intervene to the economy because this intervention was more costly and destroy the smooth function of the economy. According to Smith government has a small role in the society. That is the government should involve to the defence, civil justice and public works. Smith agreed with the export subsidies which are payments for the domestic firms to increase exports. This helped to reduce the prices of the exporting goods. He argued that import restrictions benefit for certain domestic industries while it reduce the competition and crates a monopoly in the home market by giving possibility to charge higher prices from consumers. So the import restriction move towards to the market