Hume, David (1711-76)

Updated: Aug 20, 2021

Scottish philosopher whose systematic treatment of economics is contained in several chapters of his Political Discourses (1752). He exposed as unwarranted the mercantilist fear of a chronic imbalance of trade and loss of gold. He argued that the international movement in bullion responded to the rise and fall of prices and in so doing kept national price differences within limits and prevented permanent balance of payments surpluses or deficits. He also foresaw how this mechanism could be distorted by the growth of domestic banking and of paper money. He accepted a quantity theory of money but distinguished between short-run and long-run effects. By tracing the course of the effects of a rise in the quantity of money, he came to the conclusion that money was not neutral but could affect employment, although only in the short run. His beliefthat the level of the rate of interrest depended on the rate of business profits became the basis of Adam Smith’s interest-rate theory.

Reference: The Penguin Dictionary og Economics, 3rd edt.

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