Today I had a delightful lunch with an old friend with whom I chatted about the Scottish Enlightenment, amongst other things, and in particular what big fans we both are of David Hume. Adam Smith owed a great intellectual debt to Hume, as Nicholas Phillipson's recent biography Adam Smith: An Enlightened Life (reviewed by me in the New Statesman) makes clear. Not all that many people realise that Hume did write about economics. When I got back to my desk I looked up his classic essay 'Of the Balance of Trade' from Essays Moral, Political and Literary of 1752. This is the essay that sets out the famous price-specie flow mechanism. Hume was the first to point out that capital and current accounts have to balance, ex post. He wrote:

“There still prevails, even in nations well acquainted with commerce, a strong jealousy with regard to the balance of trade, and a fear that all their gold and silver may be leaving them….. I should as soon dread that all our springs and rivers should be exhausted, as that money should abandon a kingdom where there are people and industry.”

He goes on to point out the equilibrating adjustments to monetary shocks that occur via the exchange rate and discusses the adverse effects of accumulating reserves and trying to prevent the addition to the money supply from affecting prices. He would be unimpressed with China's exchange rate policy, but equally unimpressed by concern about US sales of financial assets to foreigners. For as the essay concludes:

“A government has great reason to preserve with care its people and its manufactures. Its money, it may safely trust to the course of human affairs, without fear or jealousy. Of it it ever give attention to this latter circumstance, it ought only to be so far as it affects the former.”

I think one has to describe Hume as a monetarist with a Keynesian heart.