Hume

David Hume (1711-76) was a Scottish philosopher and an influence on Adam Smith. His brief works on economics consisted of several serious errors, as noted by Murray Rothbard below. As a proponent of the quantity theory of money and its corollary, the price-specie-flow mechanism, Hume recognized that the abosolute quantity of money in an economy did not matter: prices would adjust according to the quantity of money in circulation. He believed that changes to the money supply mattered in the short-term; specifically, that an injection of money would stimulate the economy in the short term. However, this effect would disappear as the new (higher) price levels reflected the increased money supply. Hume believed that this adjustment in prices would be quick and proportionate. This is problematic in the following ways. ...

The Price-Specie-Flow Mechanism The price-specie-flow (PSF) mechanism is the extension of the quantity theory of money (QTM) to a multi-country scenario. Proponents of the end-neutrality of QTM often implicitly assume a closed economy. But when nations trade amongst each other, the injection of monetary units in a nation can, instead of putting upward pressure on local prices, promote imports, and thus cause an outflow of money, in the short term. The price-specie-flow mechanism accounts for these dynamics. ...

Statement The level of prices depend on the quantity of money. Early discussions on this matter can be found in the essays of John Locke, David Hume and Irving Fisher (see Reference). Discussion Provided that the item used as money can be divided and combined as necessary, any amount of money is sufficient for running an economy. Ideas about bringing lasting changes to an economy by expanding the money supply are invalid. Should the money supply increase, all else equal, the prices of goods and services would increase proportionately. Thus, the outcome would ultimately be neutral. ...