Hume Process

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Hume Process

The Scottish philosopher David Hume (1711–1776) made famous the argument that the balance of trade was not worth worrying about because any imbalance would be self-regulating. A trade surplus would lead to higher prices, then to an outflow of gold and silver—and vice versa for a trade deficit. This has come to be known as the Hume process. It is described in the following passage from Hume’s “Of the Balance of Trade” (1748), which is one of the most frequently quoted and among the most influential essays in the history of economics:

Suppose, that all the money of Great Britain were multiplied fivefold in a night, must not the contrary effect follow? Must not all labor and commodities rise to such an exorbitant height, that no neighboring nations could afford to buy from us; while their commodities, on the other hand, became comparatively so cheap, that, in spite of all the laws which could be formed, they would be run in upon us, and our money flow out; till we fall to a level with foreigners, and lose that great superiority of riches, which had laid us under such disadvantages? (Hume [1748] 1985, p. 311)

The popularity of the Hume process arose largely because it was seen as a death blow to the mercantilist fetish for accumulating bullion. Two points about the Hume process struck serious contemporaries. First, Hume assumes a sudden, large inflow of money to make his point. This is a very different thing from the small (relative to the money stock) and steady inflow advocated by the so-called mercantilists. Secondly, Hume assumes that this sudden inflow is met by an instantaneous adjustment in prices. Otherwise, if the change in, say, wages attracts more labor, there is no reason why the increased money supply could not lead to a greater output and thus avoid inflation. Hume’s “new” result was obtained by (1) altering the substantive position in question from the effects of a steady inflow of gold to that of a sudden inflow, and (2) denying the standard mercantilist assumption of international labor mobility for skilled workers. Hume and the mercantilists differed in that they asked different questions and answered them under different assumptions. Indeed, two of Hume’s correspondents, James Oswald (1715–1769) and the Reverend Josiah Tucker (1712–1799), each provided penetrating critiques and forced Hume to admit, in a later paper, that slow inflation may well help growth.

Hume’s argument is simple and powerful; unfortunately, its implicit assumptions are not obvious. Three such assumptions may be noted. First, the use of the simple quantity theory by Hume, with metal as the sole medium counting as money, was a step backward since the Irish philosopher George Berkeley (1685–1753) had already emphasized the paramount importance of credit a decade earlier. Secondly, Hume assumed that individuals care only about real values, or what is called the homogeneity of degree zero in money and prices. Frank Hahn (1980) clearly points out that even if one grants this assumption for individuals, it does not follow that the economy as a whole will exhibit such homogeneity, unless general equilibrium is unique. Finally, William Darity (1987) showed how the endogeneity of money, which all Hume’s contemporaries were aware of, could make the process neutral or even unstable and hence permit a continual adverse balance of trade. If the gold or silver mines provided metal with increasing returns, then the more prices rose in Spain, the more cheaply they could obtain more precious metal, so that it was actually “economical” for Spain to continue an unfavorable balance of trade. While the popular acclaim for Hume’s argument is not doubted, it largely reflects the difference between an argument that is readily understood by the educated public and one acceptable to those who devote care to such issues.

SEE ALSO Balance of Payments; Balance of Trade; Equilibrium in Economics; Hume, David; Quantity Theory of Money; Trade, Bilateral

BIBLIOGRAPHY

Darity, William A., Jr. 1987. The Hume Process, Laws of Returns, and the Anglo-Portuguese Trade. Southern Economic Journal 54 (1): 119–133.

Hahn, Frank H. 1980. Discussion. In Models of Monetary Economies: Proceedings and Contributions from Participants of a December 1978 Conference Sponsored by the Federal Reserve Bank of Minneapolis, eds. John H. Kareken and Neil Wallace, 161–165. Minneapolis, MN: Federal Reserve Bank of Minneapolis.

Hume, David. [1748] 1985. Of the Balance of Trade. In Essays: Moral, Political and Literary, ed. Eugene F. Miller. Indianapolis, IN: Liberty Fund.

Rashid, Salim. 1984. David Hume and Eighteenth Century Monetary Theory: A Critical Comment on Recent Views. Hume Studies 10 (2): 156–164.

Rashid, Salim. 2000. Monetary Economics and Economic Development in Berkeley’s Querist. In The Querist [1735–1737] by George Berkeley, 135–159. Düsseldorf, Germany: Verlag Wirtschaft und Finanzen.