David Hume: Money & Supply and Demand

David Hume is arguably the greatest British philosopher of classic Modernity, surpassing fools, such as John Locke and George Berkeley, and giants, such as Thomas Hobbes and Issac Newton, because of his breadth and depth. Hume's writings are not limited to metaphysics, epistemology, philosophy of science, morality, or the philosophy of religion, but also include economics, politics, and aesthetics. Immanuel Kant says that "the celebrated David Hume was one of the great geographers of human reason who have imagined that they have sufficiently disposed of all such questions by setting them outside the horizon of human reason" (Kant, 606). Hume is mostly remembered for his work on naturalizing epistemology and demonstrating that reason cannot explain human nature, but only habit and custom. His essay concerning Money (1751) is not very well known, but is a very important source of inspiration to Adam Smith, so its consideration and exposition may be beneficial to those businessmen, who are keen on Smith's economics. "This notion [inflation and interest]...has been so fully exposed by Mr Hume, that it is, perhaps, unnecessary to say anything about it" (Smith, 385). Benjamin Franklin says that "Hume is keenest and broadest thinker, since Aristotle (Franklin, 120).

Personally, any businessman will benefit from an exposition of Hume's Essay of Money, not because his philosophy will generate "success," or a "better leadership," but better thinking. LinkedIn is full of peddlers of "success," how to be a better CEO, how do this or that, but not much on thinking. Since writing philosophy is my chief reason for participating on LinkedIn and "doing" is of no interest, Hume's Essay of Money will hopefully be explicated in such manner not be too "shallow" nor too "obtuse."

In his essay "Of Money," Hume argues that money is not commerce itself, but "is nothing but the representation of labor and commodities, and serves only as a method of rating and estimating them" (Hume, 285). Unlike Locke (who believes that gold and silver coins are the measure of labor and commodities due to their non corruptible nature), Hume rejects Locke's conception of money, because he does not accept the Christian myth of Genesis. Instead, gold and silver coin are merely representations, like letters and numbers. Just as letters represent objects or actions in the world, so gold and silver coinage represent labor and commodities in the world. Gold and silver have no intrinsic value in themselves, but are only agreed upon methods to measure, like numbers, the value of labor and commodities. Hume makes this point in referring to "Anacharsis, the Scythian, who had never seen money, that gold and silver seemed to him of no use to the Greeks, but to assist them in numeration and arithmetic" (Hume, 285).

Hume's point with the Anacharsis case is meant to demonstrate his natural history thesis: the acceptance of gold and silver, as the measure of the exchange of labor and commodities, is a recent historical development similar to written communication and numbers. Just as letters and numbers are meant to exchange ideas from one person to another regardless of time, so silver and gold coinage are the measure of the exchange of commodities and labor from one place to another. Anacharsis, the Scythian, is a barbarian, who is illiterate and unfamiliar with civilization, so the implicit agreement among the Greeks' usage of silver and gold is bewildering to him, because before the use of gold and silver coin, people would exchange their surplus commodities or labor for other commodities or labor. "We must consider that, in the first and more uncultivated ages of any state, men content with the produce of their own field have little occasion of exchange, at least for money, which by agreement, is the common measure of exchange" (Hume, 291). The cause of this fact is that more people exchange commodities and labor, the greater demand for representations of those exchanges, just as people will need written communication, the more ideas are exchanged. Hume sees no real distinction between coinage and letters, except that the former involves the exchange of commodities and labor, while the latter involves ideas.

Hume deduces a general maxim from his natural history of the exchange of labor and commodities: the more gold and silver, they diminish in their measure against commodities and labor; on the other hand, the more plentiful commodities and labor, the greater the measure of gold and silver. "Increase the commodities, they become cheaper; increase the money, [commodities] rise in their value" (Hume, 290). The measure of commodities and labor relative to money depend upon the circulation gold and silver coinage and the commodities available on the market. "It is only the overplus, compared to the demand that determines the value" (Hume, 290). Hume's general maxim is the economic law of supply and demand, which means the movement of the cost of commodities and labor is due to the surplus of commodities/labor versus gold/silver coinage, or vice versa. Interestingly, Hume discovers the law of supply and demand before Adam Smith and that the latter merely expands upon former's self evident maxim.

Again, Hume explains the self evident maxim of supply and demand by way of natural history of human custom. The more complex the society becomes in its exchanges of commodities and labor, the more probable that society will either have a surplus of commodities and labor or a surplus of gold and silver coinage. In fact, the more money that circulates through the society, the more exchanges occur for gold and silver coinage for commodities and labor. "There is more exchange and commerce of all kinds, and more money enters into that exchange" (Hume, 290). While labor and commodities are specific, gold and silver coinage as representations of them are general, which means the latter can be used to buy different amounts of commodities or employ different labor. More primitive societies do not require abstract representations to measure commodities and labor, because they exchange one commodity for another. But "where coin is in greater plenty; as greater quantity of it is required to represent the same quantity of goods" (Hume, 285). The law of supply and demand is derived from Hume's conception of representation, because the more goods in the market, the greater need to have a system of representation (or money).

Accordingly, the law of supply and demand emerges from the natural history of human exchanges of commodities and labor, because coinage, as the representation of those exchanges, makes the law of supply and demand possible. With the system of representation of exchange, exchanges can create a surplus of either the representations (i.e., gold and silver coinage) of exchange, or surplus of commodities and labor. A nation, which has an increasing supply of money, is in a better situation than a nation with a decreasing supply of money, because the latter cannot have as many exchanges than the former, which creates surplus capital. "A nation, whose money decreases, is actually, at that time weaker and more miserable than another nation, which possesses no more money, but increasing hand" (Hume, 288). Just as a natural language (which has a more elaborate vocabulary than another) makes it possible for more exchanges of ideas, so an economy with more money makes it possible for more exchanges of commodities and labor.

Understood in this way, surplus capital is nothing more than the storage of representations of commodities and labor. So surpluses of the representations (money), commodities, or labor dictate the rhythm of supply and demand. "If we consider, that alterations in the quantity of money, either on one side or the other, are not immediately attended with proportional alternations in the price of commodities" (Hume, 288). If labor is rare, labor will command more money. If labor, on the other hand, is plentiful, then labor commands less money, because money is the measure of the surplus of commodities and labor. Accordingly, "it is the proportion between the circulating money, and commodities in the market, which determines the prices" (Hume, 291). The determination of the price of labor or a commodity depends upon how much is circulating on the market.

Understandingly, Adam Smith gives Hume credit as the first thinker to understand supply and demand, because he is "the most illustrious philosopher and historian of the present age" (Smith, 848). Or he is, as Kant and Franklin say, the "great geographer" of human intellect, to whom has the depth and breadth of a modern Aristotle. Hume's discovery that money is a mere representation of commodities and labor, which moves according to the law of supply and demand, is as great of a philosophical discovery as Aristotle's distinction between natural and artificial wealth, which distinguishes wealth derived from labor versus interest.