“David Hume and Modern Economics,” S. Dow (2009)

(This post also deals with a 2011 JEP Retrospective by Schabas and Wennerlind entitled “Hume on Money, Commerce and the Science of Economics.”)

Hume is first and foremost a philosopher and historian, but his social science is not unknown to us economists. Many economists, I imagine, know Hume as the guy who first wrote down the quantity theory of money (more on this shortly). A smaller number, though I hope a nontrivial number, also know Hume as Adam Smith’s best friend, with obvious influence on the Theory of Moral Sentiments and less obvious but still extant influence on The Wealth of Nations. Given Hume’s massive standing in philosophy – was Hume the Paul Samuelson of philosophers, or Samuelson the Hume of economists? – I want to jot down a few notes on particularly interesting comments of his. Readers particularly interested in this topic who have already read the Treatise and the Enquiry might want to pick up the newest edition of Rotwein’s collection of Hume essays on economics, as without such a collection his purely economic content is rather scattered.

First, on money. Hume claims prices are determined by the ratio of circulating currency to the number of goods, and lays out what we now call the specie-flow mechanism: an inflow of specie causes domestic prices to rise, causing imports to become more attractive, causing specie to flow out. He doesn’t say so explicitly, as far as I can tell, but this is basically a long-run equilibrium concept. The problem with Hume as monetarist, as pointed out by basically everyone who has ever written on this topic, is that Hume also has passages where he notes that during a monetary expansion, people are (not become! Remember Hume on causality!) more industrious, increasing the national product. Arguments that Hume is basically modern – money is neutral in the long run and not the short – are not terribly convincing.

Better, perhaps, to note that Hume has a strange understanding of the role of money creation. On many questions of moral behavior, Hume stresses the role of conventions and particularly the role of government in establishing conventions. He therefore treats different types of monetary expansions differently. An exogenous increase in the monetary supply, from a silver discovery or other temporary inflow of specie, does not affect conventions about the worth of money, but an increase in money supply deriving from excess credit creation by banks and sovereigns can affect conventions, hence affecting moral behavior, hence affecting the real economy. The above interpretation of Hume’s monetary writings is by no means universal, but I think, at least, it is an important framework to keep in the back of the mind.

Concerning methodology of social science, Hume makes one particularly striking claim: the human sciences are in a sense easier than natural sciences. A more common argument – due to Comte, perhaps, though my memory fails me – is that physics is simpler than chemistry, which is simpler than biology, then again simpler than psychology, and then social sciences, because each builds upon the other. I understand how particles work, hence understand physics, but I need to know how they interact to understand chemistry, how molecules affect lifeforms for biology, how the brain operates to understand psychology, and how brains and bodies interact with each other and history to understand social science. Hume flips this around entirely. He is an empiricist, and notes that to the extent we know anything, it is through our perceptions, and our own accounts as well as those of other humans are biased and distorted. To interpret perceptions of the natural world, we must first generalize about the human mind: “the science of man is the only solid foundation.” Concerning the social world, we are able to observe the actions and accounts of many people during our lives, so if we are to use induction (and this is Hume, so of course we are wary here), we have many examples from which to draw. Interesting.

https://dspace.stir.ac.uk/bitstream/1893/3167/1/2009%20Hume%20and%20Modern%20Economics.pdf (Working paper – final version in Capitalism and Society, 2009)

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