David Hume's Concept of Money
Cay Hehner
[A paper presented at the annual Council of Georgist
Organizations
conference, Cleveland, Ohio; 5 August, 2009]
Abstract: David Hume is
generally considered the mentor of Adam Smith and the originator of
the quantity theory of money. His Essays on Economics [1752/58] mark
the in-point of classical economic theory with definite panache.
This paper will explore Hume's influence on Georgist monetary theory
& the relevance of both thinkers to showcase solutions for the
present Great Recession.
It has been all but forgotten that Hume's Economic Essays ran
through 11 editions during his life time, that they were much more
popular & successful than Smith's Wealth of Nations --
which did not catch on in circles "in the loop" until half a
century later -- and that those essays heavily influenced every one of
the major social thinkers of his day from Benjamin Franklin, and the
New Frontier philosophers[1] down, to James Steuart, the Mercantilist,
and the leading Physiocrats, Turgot & Quesnay, not to mention Adam
Smith himself. To our knowledge there is no direct reference in Henry
George's work to Hume's economic essays, but the influence is both
obvious & undeniable as we shall see presently.
With the waning of the idea of Divine Providence and a teleological
conception of History derived from scholastic thinkers like Thomas
Aquinas something else had to take its place. Hume shares with the
enlightenment philosophers Locke and Jefferson and Henry George, who
based his teachings on them, their preoccupation with the analysis of
natural phenomena and the natural laws derived thereof. This
natural-law approach in lieu of the previous theological one would
spawn an unprecedented thriving of the natural or 'hard' sciences on
the one hand and the foundation of of Classical Economics on the
other. It is the foundation of the second that interests us here.
"Money is not, properly speaking, one of the
subjects of commerce; but only the instrument which men have agreed
upon to facilitate the exchange of one commodity for another. It is
none of the wheels of trade: it is the oil which renders the motions
2 of the wheels more smooth and easy."[2]
This is the celebrated opening passage of Hume's most famous economic
essay: Of Money. In other words for Hume -- as opposed to the
Mercantilist school -- money is not wealth in itself, but it is a
medium and facilitator of exchange. He continues the passage in giving
an outline of the quantity theory of money in a nutshell, a theory
that had as yet not be formulated, but that would dominate the
economic thinking of the main schools of economic thought in the
second half of the 20th century, the schools of the Micro-economists &
the Monetarists, a theory also that would have to be connected with
Hume's name in perpetuity.
"If we consider one kingdom [read: nation] by
itself, it is evident, that the greater or less plenty of money is
of no consequence; since the prices of commodities are always
proportioned to the plenty [read: quantity] of money, & a crown
in Henry VII time served the same purpose as a pound does at
present."[3]
That is to say that what took a nickel to buy in the days before the
Great Depression, say a cup of coffee, will take a dollar or two at
present. The product may be the same, its quantity or quality may be
even exactly the same, but it takes a multiple monetary amount to
obtain it today. "The pay of the servants", Hume continues, "must
rise in proportion to the public opulence."
Hume in his economic essay on Public Credit even makes the
strange prediction that a land (or natural resources) tax would have
the effect of a reversal of the positions of the landlords and the
laborers within five centuries.[4] He may be wrong in his prediction
and the reversal or liberation of the laborer from the oppression of
the latifundistas or land-monopolists may not take that long.
More than two hundred fifty years have past since he made it, and if
we play our hand correctly and disseminate the ideas of Henry George
far & wide, we may not have to wait an equal amount of time to
live to see a Georgist society. Unemployment figures rising, home
fore-closures at a record high and increasing our times are markedly
outrageous and getting progressively worse, and never has there been
an age in greater need of economic change and a more equitable
distribution of wealth.
Make no mistake, however, Hume - as ingenious, intuitive and
anticipatory a socio-economic thinker he may have been -- did not
welcome the idea, of the "slaves" taking the stand of the "masters",
the idea of social justice in an economically democratic society in
other words. Hume did belong to the caste of the lords & masters,
and he was very conscious of that fact all his life! He belonged to
the landed gentry, he had worked as a diplomat in France and even as
the Undersecretary of Commerce and Trade of the British Empire -- a
position close to the one that Stuart Mill would inherit from his
father James Mill a century later, and a position roughly akin to the
one Louis F. Post would hold in the Wilson administration nearly two
centuries on. Laborers as lords, slaves as masters, Americans in the
driver's seat of History rather than the British imperialists Hume
represented, he wanted none of it and he would have loathed &
resented every moment of the change he so clearly foresaw!
Later Adam Smith would expand tremendously on Hume's economic thought
in quantity, but he would get as many things wrong as he would get
them right in quality. Consider as an example the following passage
from Hume's Essay of Commerce:
"Everything in the world is purchased by labor; and
our passions [read: primary needs] are the only causes of labor.
When a nation abounds in manufactures and [the] mechanic arts, the
proprietors of land, as well as the farmers, study agriculture as a
science, and redouble their industry and attention. The superfluity
[meaning: surplus], which arises from their labor, is not lost; but
is exchanged with manufactures for those commodities, which men's
luxury [read: striving for a greater material well-being] now makes
them covet. By this means, land furnishes a great deal more of the
necessaries [today: necessities] of life, than what suffices for
those who cultivate it."[5]
The first phrase clearly adumbrates the labor theory of value. The
remainder of the passage highlights the importance of land and natural
resources, the abundance of nature, indeed. In Hume we find none of
the "niggardliness of nature", of the 'invisible hand' of
the Almighty sanctioning & even causing poverty, giving its
blessings to the most egregious social and economic injustices that we
find from Smith down in the writings of most later classical
economists. Again, let's make no mistake about this, Hume wasn't happy
with the labor theory of value, he found the power of the land
awesome, perhaps frightening, and he did not like the prospect of
social justice for future generations one bit, but he -- unlike most
of his successors --had the intellectual integrity not to deny any of
them. Part of his genius consisted in foreseeing and visiting the
future & even if it would put himself at a personal disadvantage
he was not foolish enough not to acknowledge the facts or deny the
laws of nature or social development. In this sense Hume unlike most
of the rest of the classical school - and this includes Karl Marx --
was a proto-Georgist against his better interest and inspite of
himself. Smith follows his mentor to the letter, pays a lot of lip
service, but forfeits the spirit and whenever he has a chance of
getting anything wrong, he can't resist the temptation to do so.
What can we learn from Hume and George in our present global economic
crisis?
- Money (and by extension credit) is not a fetish, it is
an ancillary means to facilitate economic activity, nothing more,
nothing less
- The quantity theory of money in Humist & Georgist terms
stipulates that money needs to reflect real economic activity,
i.e. production & exchange of goods & services in real
terms (Enron and hedge fund managers learned the hard way that
pushing paper may create temporarily illusions, but solves
ultimately nothing & leads to certain general disaster)
- The labor theory of value underlines that no economic value can
be created without labor, i.e. a system that denies labor its
value and the laborer his or her human dignity and worth is
certainly doomed to fail
- Natural law when followed & honored may produce miracles of
wealth and abundance, grossly violated it will produce both
natural & economic disasters
ENDNOTES
- These are sometimes referred
to as the "Federalists" or 'U.S. enlightenment',
however, from the Georgist perspective, the economists of the New
Frontier, mainly Franklin, Jefferson, Paine et al would develop
ideas from the Physiocrats towards an LVT reform, Hamilton, for
instance, is generally counted among the first, but he doesn't
belong to the second group
- Eugene Rothwein [ed.], Hume's
Writings on Economics, NYC, 1955/2007, p. 33
- Rothwein, same page
- Rothwein, op. cjt., 1955, p.
97
- op. cit, p. 11
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