La politique

Economics in Early Modern Philosophy

1. Schools of Economic Thought

Adam Smith’s An Inquiry into the Nature and Causes of the
Wealth of Nations
(1776) is without question the single most
influential tome, both for the early modern period and for the entire
history of economics. Smith’s analysis not only unpacked the
core features of money and markets, but also provided a dynamic
analysis of the “progress of opulence”, sweeping across
the globe and reaching back to ancient times (see Rothschild & Sen
2006). He covered the entire range of economics, from price theory to
public finance. Significantly—and this may prove his greatest
contribution—his first and only other book, The Theory of
Moral Sentiments
(1759), developed a moral psychology that served
as the foundation for his economics and, arguably, for economics to
the present insofar as it still commits to the self-interest axiom
(see Davis 2003; Schleisser 2017; Fleischacker 2013 [2020]).
Smith’s first book motivated the universal sympathetic regard
that binds us to one another, even to strangers, and it established a
restless desire for approbation and hence for wealth as the driving
force of human betterment. Finally, his essays on the history of
science served to elevate the epistemic standing of economics, and by
the first half of the nineteenth century the science of political
economy, as it came to be known, was widely esteemed (see Redman

Smith remains nonpareil, not only because of the breadth and depth of
his work, but also because he provided one of the most penetrating
analyses of human behavior to explain our economic condition. If
Hobbes offered a political solution to conflict and penury, Smith
grasped a century later that economic forces, the accumulation of
wealth and the ever-expanding global trade, overrode the power of the
most ambitious of sovereigns. Recognition of the immense power of
markets, both local and international, commenced in the seventeenth
century, as a number of prominent twentieth-century economists came to
recognize. John Maynard Keynes paid tribute to the English
Mercantilists, John Locke, and William Petty; Friedrich Hayek honored
the insights of Bernard Mandeville and Richard Cantillon; Paul
Samuelson admired François Quesnay; and Milton Friedman praised
John Law. All four—Keynes, Hayek, Samuelson, and
Friedman—admired and wrote about David Hume’s economics
(see Schabas & Wennerlind 2020: Ch. 7).

Smith owed a sizable debt to his immediate predecessors, above all to
his close friend Hume with whom he exchanged ideas for over
twenty-five years (see Harris 2015). There is a grain of truth to
Joseph Schumpeter’s harsh judgment that

the Wealth of Nations does not contain a single
analytic idea, principle, or method that was entirely new in
1776. (Schumpeter 1954: 184)

This, however, is testament to the theoretical maturity of economics
by the second half of the eighteenth century. The most robust verities
of economics, even to this day, are to be found in the pre-Smithian
literature (see Hutchison 1988). The core elements of the theory of
prices had been broached, its grounding in use-value and
exchange-value, the appeal to the costs of labor and the imperative of
cost-recovery, as well as the laws of supply and demand in various
guises, including the concept of the price-elasticity of demand.
Pre-Smithian economists are renowned for contributions to monetary
theory, stipulating the form and function of money, the principles of
bimetallism, debasement and devaluation, the quantity theory of money,
the specie-flow mechanism and the multiplier (see Murphy 2009; Arnon
2010). Gresham’s law, devised circa 1560, was extended from
domestic currencies to foreign exchange markets. Financial markets
became increasingly sophisticated, with a wide array of equities,
bonds, and discounted banknotes in circulation. The state issued
public debt in the form of bonds and Exchequer notes, and amassed
significant funds through lotteries and annuities (see Neal 1990). In
the stock markets of Hamburg (1558), Amsterdam (1602), and London
(1698), one could find short selling (windhandel),
bond-equity swaps, and futures (see De Marchi & Harrison 1994). In
1747, Émilie du Châtelet is reputed to have devised and
profited from contracting a percentage of future tax revenues, a novel
instrument akin to a modern derivative (Bodanis 2006: 217–218)

Economists before Smith, such as Cantillon, Hume, James Steuart, and
Anne-Robert-Jacques Turgot, discerned some of the key arguments for
the gains from trade and the dynamics of economic growth that stemmed
from the division of labor, population growth, economies of scale and,
above all, capital accumulation (see Murphy 2009). Because of the
growth of markets and factor mobility, eighteenth-century economists
recognized the regional manifestation of a uniform wage and profit
rate, and thus made insights not only about the inverse relationship
between profits and wages but also about the tendency of the profit
rate to decline over time. Above all, they did what is essential to
most if not all philosophical thought—drive a wedge between
appearance and reality—distinguishing prices from underlying
values, and the nominal or money wage from the real wage, its
purchasing power. Petty, Hume, and Smith firmly entrenched the central
distinction of the nominal and the real in economic discourse while
also grappling with efforts to measure inflation.

As a field of inquiry, economics was prodigious during the early
modern period. From the mid-sixteenth to the late eighteenth century,
the catalogue of French and English publications on economics exceeded
five thousand entries (see Massie 1760; Théré 1998;
Hoppit 2006). These took the form of books, short tracts, essays,
pamphlets, and dictionaries, as well as entries in periodicals such as
the Gentleman’s Magazine or les
Éphémérides du Citoyen

There were at least a dozen distinct schools of economic thought in
early modern Europe (see Hutchison 1988). By far the largest and most
long-lived were the Cameralists, and their voluminous output is not
included in the figure of five thousand given above. Cameralists were
to be found across the Germanic, Scandinavian, and Italian
principalities or republics for much of the seventeenth and eighteenth
centuries. Kameral-wissenschaft, or the science of the
chamber, was primarily a set of courses for young men as preparation
for government positions. They also studied philosophy, the
metaphysics of Christian Wolff for example, as well as botany,
chemistry and metallurgy (see Tribe 1978; Wakefield 2009). Some of the
leading Cameralists, notably Johann Joachim Becher, Joseph von
Sonnenfels, and Johann Heinrich Gottlob von Justi, advanced distinct
doctrines pertaining to autarky or public finance, vestiges of which
endured in twentieth-century Fascism. Justi’s last book,
System des Finanzwesens (1766), synthesized much of the
extant knowledge of Cameralism, specifically on fiscal policy. As a
group, they concentrated on resource extraction—mining and
logging—as the means to enrichment and self-sufficiency, but
there were also schemes, particularly by the Swedish botanist and
Cameralist, Carl Linnaeus, to domesticate non-native plants as a means
to reduce trade dependencies (see Koerner 1999).

Innumerable writings on money, trade and commerce were posthumously
grouped by Adam Smith under the rubric of the “Mercantile
System”, or what eventually came to be known as Mercantilism.
Many of the texts were polemical and self-serving, and endorsed Crown
rights and monopolistic trade. Mercantilist writings sprang up across
western Europe, particularly in seventeenth-century Sweden, Holland,
and England (see Magnusson 1994; Stern & Wennerlind 2014). Among
these were important works by Gerard de Malynes (1622) and Edward
Misselden (1623), each of whom made efforts to discover the underlying
factors for the economic depression of the 1620s (see Appleby 1978).
The two most influential English mercantilists, Thomas Mun (1664) and
John Cary (1695) theorized about the gains from trade and its benefits
for national wealth and well-being, and were by no means crude
bullionists (see Reinert 2011).

Other schools were more localized and less enduring than the
Cameralists or Mercantilists. One of the first is the Salamanca school
of mid-sixteenth-century Spain that included Luis de Molina,
Martín de Azpilcueta, and Francisco Suárez (see
Grice-Hutchinson 1978). Another school drew inspiration from the
natural law theories of Hugo Grotius and Samuel Pufendorf, who had
addressed the principles governing contractual obligations in general,
and the complexities of property rights in particular (see Skinner
1999). Johan De Wit and Christiaan Huygens of the Dutch Golden age
recorded important insights into commercial mathematics (see Daston
1988; Sylla 2003). The Political Arithmeticians of seventeenth-century
England and Ireland, notably William Petty, Edmund Halley, and John
Graunt, devised ingenious methods for measuring population, the money
supply, and the movement of core prices (see Rusnock 1999). The
Stadialists of eighteenth-century Scotland, namely Lord Kames, Adam
Ferguson, and John Millar, offered a theory of economic development
based on four stages, hunting and gathering, shepherding, cultivation,
and commerce and trade that was partly adopted by Hume and Smith (see
Wolloch 2011).

Early modern France spawned a number of distinct groups, each one
adhering to the dictates of a single leader, namely the Colbertistes
(Jean-Baptiste Colbert), the Gournay Circle
(Jacques-Claude-Marie-Vincent Gournay ), and most famously, the
Physiocrats, who were also known as “les
économistes” devoted to their founder François
Quesnay, court physician at Versailles (see Meek 1962; Larrère
1992; Faccarello 1989 [1999]). In the Italian cities, Milan and
Naples, Enlightenment circles were renowned for espousing the ideals
of pubblica felicità (public happiness) and
economia civile (civil economy). Some of the leading thinkers
were Antonio Genovesi, Cesare Beccaria, Pietro Verri, and Ferdinando
Galiani (see Robertson 2005; Reinert 2018). Portugal housed an active
group of economic thinkers, notably António de Vasconcelos
Nogueira and Isaac da Pinto (Cardoso 1990). In colonial America and
its early days as the republic of the United States of America,
Benjamin Franklin, Thomas Paine, Alexander Hamilton, and James
Madison, among others, devised a distinct set of principles on money,
banking, capital markets, and property rights that were directly
indebted to the teachings of Locke, Montesquieu, Hume, and Smith (see
Pocock 1985).

From the standpoint of present mainstream economics, the legacy of the
British utilitarians was by far the deepest and longest, starting with
Francis Bacon, Shaftesbury (Anthony Ashley Cooper), and Francis
Hutcheson, who coined the phrase “the greatest happiness for the
greatest number” (1725 [1726: §3.8]), a governing principle
for both Hume and Smith in their economic inquiries (see Gill 2006;
Driver 2009 [2014]). Hume’s quartet of “happiness
essays” (1742 but collected in 1758), and Smith’s two
books (1759, 1776) are replete with insights on the ethical dimensions
of the pursuit of wealth. Each one recognized that there were many
impediments to happiness, that humans are prone to self-deception, to
overestimate their luck and to underestimate the adversities that life
holds. They each positioned non-pecuniary goods, equanimity and
friendship, as more valuable than material wealth, and issued numerous
insights on the various paths one might take with one’s life.
While the debate about the degree to which either Hume or Smith
adhered more to virtue ethics than to utilitarianism may never be
resolved, when it comes to their respective economic analyses, their
consequentialist observations about untoward ambition or the value of
foresight fits a utilitarian sensibility (see Sakamoto 2016: Schabas

The early utilitarians, grounded in British empiricism, laid the
foundation for both the classical school of political economy and for
neoclassical economics that commenced with the Marginal Revolution of
the 1870s. Jeremy Bentham, John Stuart Mill and Henry Sidgwick made
major contributions to the moral doctrine of utilitarianism and to
political economy. It is important to distinguish the moral doctrine
of utilitarianism from the utility theory of value that unpacks the
formation of prices. Utilitarianism provided a framing for economic
thought from the seventeenth century, whereas the utility theory of
value, while broached multiple times in the eighteenth and nineteenth
centuries, only replaced the labor theory of value in the 1870s.

Interestingly, the majority of the leading contributors to nineteenth
economics lived in Britain. This list features David Ricardo, John
Stuart Mill, Alfred Marshall—even Karl Marx, notwithstanding
Jean-Baptiste Say, Léon Walras, or the Austrians. The
prevalence of economic discourse in Britain might partly reflect its
hegemonic standing in global trade, but a more significant factor
might be its enlightened culture that fostered freedoms of the press,
liberal mores, and religious toleration (see Winch 1996).

Eighteenth-century economic discourse was more evenly spread across
the Continent, but the empiricist school in Britain left the most
enduring imprint. Locke, Hume and Smith made important contributions
to economics, whereas scholars have yet to locate significant economic
insights in the work of the leading rationalists, Descartes, Spinoza,
or Leibniz, although Leibniz also wrote extensively on politics. One
discernible pattern is that the leading anglophone contributors to
eighteenth-century economics were, for the most part, not
English-born, but Dutch, Scottish or Irish; nor were they particularly
devout. Locke is the notable exception on both counts. It is important
to point out that Mandeville (Dutch), Cantillon (Irish-French), and
the Scots Law, Hume, and Smith, were inclined to study and promote
commerce and trade as the progressive face of a more secular world. If
much of modern economic thinking builds upon moral philosophy, it is
and was, with a few exceptions, grounded in non-sacred sources.

This pattern of thinkers on the periphery of the religious status quo
is also manifest in the nineteenth century, with Say, Ricardo, and the
Mills, père et fils. To engage in the study of economics
demands a willingness to overcome the Biblical restrictions on
commercial activities. As Voltaire observed, praising the degree of
religious diversity in the London stock market,

where there is not liberty of conscience, there is seldom liberty of
trade, the same tyranny encroaching upon commerce as upon Religion.
(Voltaire [1952: 43])

The fact that individual liberties and religious toleration were more
prevalent in Britain might provide a more plausible explanation as to
why mainstream economic thought was most cultivated in the English
language over the course of the eighteenth and nineteenth centuries
(see Mokyr 2009). This is in marked contrast to the natural sciences,
which were most concentrated in France in the eighteenth century and
in Germany in the nineteenth century.

Many contributors to economics were actively engaged in scientific and
philosophical societies. The members of the Hartlib Circle of
mid-seventeenth century England conjoined natural science with
economic objectives, not least alchemical pursuits as a solution to
the dire shortage of coins (see Wennerlind 2014). Its best known
member, the Irish philosopher William Petty, was a leading contributor
to monetary theory and demography, as well as a founding member of the
Royal Society. His economic writings fill two large volumes and he
broached the concepts of the transactions level and the velocity of
money, two key variables that cemented the core principle of the
quantity theory of money. Two of the most renowned philosophers of the
period, Locke and Isaac Newton, were actively engaged in debates over
the value of the currency, specifically when Newton served as Warden
and then Master of the Mint (see Westfall 1981). Hume and Smith were
members of the Edinburgh Philosophical Society (Hume was co-secretary)
and were close friends of the leading contributors to mainstream
science, William Cullen, Joseph Black, and James Hutton in Scotland,
as well as, in Hume’s case, the French proto-evolutionist Comte
de Buffon and, in Smith’s case, the French botanist Charles
Bonnet. Smith’s essays on the history of astronomy and of
physics, first sketched in the 1750s but updated and revised for the
rest of his life, display a sophisticated command of science and the
history and philosophy of science. His stance was one of fallibilism
and instrumentalism, and he broached the possibility that the
Newtonian system, while ascendant, would one day be superseded (see
Schliesser 2017).

In France, the Académie des Sciences offered prizes for
contributions to economics, and the multi-volume
Encyclopédie (1751–1780) produced by Denis
Diderot and Jean le Rond d’Alembert distinctly positioned
economics on the tree of knowledge, as one of the three branches of
the moral sciences (politics and natural jurisprudence were the other
two). It contained numerous entries on mining, metallurgy and
textiles, including one that illustrated the production of metal pins
that most likely inspired Smith for his analysis of the division of
labor (Ross 1995, 273-274). There were important entries by Rousseau,
entitled “économie ou œconomie” (1755), by
Quesnay, entitled “fermiers” (1756) and
“grains”(1757), and by Turgot, entitled
“foire” (1756). In sum, eighteenth-century economics was
conjoined with natural philosophy, both theoretical and applied. It is
not by accident that Turgot, best known as an economist and as
Contrôleur Général des Finances (1774-1776),
devised one of the most critical breakthroughs for the Chemical
Revolution. His concepts of expansibilité and
vaporization recognized that each substance, when heated,
underwent state changes from solid, to liquid, to gas. A number of the
leading contributors to eighteenth-century science, notably Carl
Linnaeus, Leonhard Euler and Antoine Lavoisier, also wrote about

2. Temporal Boundaries

When writing the history of a segment of the past there is always a
degree of arbitrariness in demarcating its temporal boundary. Early
modern philosophy spans the early sixteenth century to the late
eighteenth century, but where to draw the precise boundaries will
forever garner debate. In the history of economics, there is little
question that Adam Smith constitutes the founding authority on the
subject. A few general treatises appeared before Adam Smith’s,
starting with Antoine de Montchrétien’s
Traicté de l’économie politique (1615),
Pierre de Boisguilbert, Dissertation de la nature des
(1707) and culminating with Turgot’s
Réflexions sur la formation et la distribution des
(1766), James Steuart’s Principles of
Political Œconomy
(1767), and Condillac’s Le
Commerce et le gouvernement considérés relativement
l’un à l’autre
(1776). Nevertheless, Adam
Smith’s Wealth of Nations (1776) was the definitive
work of the period, although it took about two decades to reach that
stature, and serve as the founding text for the classical school of
political economy of the nineteenth century.

As Michel Foucault discerned in Les mots et les choses
(The Order of Things, 1966 [1970]), there was a significant
transformation in economic discourse circa 1800, but not for the
reasons he gave. It was not that the concept of wealth was merely
represented before 1800, and then gained materiality. What
distinguishes early modern economics from the classical period that
took hold in the early nineteenth century was that the latter
organized their analysis around “the economy”. Prior to
that, the various core phenomena were either treated separately or, if
bundled together, were for the most part treated as part of the
natural order (see Schabas 2005).

It is important to recognize that “the economy” is a
theoretical construct, an emergent order that sits upon patterns of
human activity directed at production, distribution, and consumption.
As a social kind, recognition of “the economy” took hold
with Ricardo (1817) and John Stuart Mill (1848), among others (see
Tribe 1981). This shift in part reflected the great economic
transformation of the time, what has come to be known as the
Industrial Revolution. Smith and his predecessors were still under the
grip of a pre-industrial world, one of mercantile and agrarian
capitalism, with only fleeting acknowledgments of the industrial
take-off that had commenced by the 1760s.

Finally, the adjective “political” became paramount in the
nineteenth century, but was seldom used in the early modern period.
The primary name for economics in the the eighteenth century was the
“science of commerce”, as is evident in the titles of a
number of leading texts at the time, for example by Forbonnais,
Cantillon, Tucker, and Condillac. Moreover, the primary focus was on
public debt, and appeals to significant political reforms were
peripheral rather than central. As Hume observed in 1741, “trade
was never esteemed an affair of state till the last century”
(“Of Civil Liberty”, [1987: 88])—Niccolò
Machiavelli made no mention of trade; moreover, it might prove too
challenging to arrive at “general truths in politics”
(ibid. [1987: 87–88]). When Smith took up the “science of
political economy” in Book Four of the Wealth of
, he limited it to the policies of the legislator and
public finance. Notwithstanding attention to the political
restrictions on trade and commerce, the leading economists of the
latter half of the eighteenth century, namely Hume, Quesnay, Turgot,
and Smith, were inclined to downplay the influence of politics, and
were conservative when it came to property rights. It was an age
dominated by Montesquieu in France, and Edmund Burke in Britain, and
the revolutions of 1776 and 1789 were bourgeois rather than socialist
(see Pocock 1985; Sonenscher 2007).

In this respect as well, political economy of the nineteenth century
was significantly different in tenor; it put center-stage the plight
of the poor, the expansion of suffrage to working men, and their
entitlement to form trade unions. Socialist economic thought only
emerged in the beginning of the nineteenth century, particularly in
France. There were antecedents, such as the English Levellers Gerrard
Winstanley and John Lilburne, and the Dutch reformers Johan De Witt
and Pieter de la Court, but they were not important contributors to
economic discourse. To a significant degree, Smith served as the
inflection point, with his famous statement that “no society can
surely be flourishing and happy, of which the far greater part of the
members are poor and miserable”, or that merchants “have
an interest to deceive and even to oppress the public” (Smith
1776 [1976: 96, 267]). British and French economic thought, with some
exceptions, leaned primarily toward socialism throughout the
nineteenth century. Ricardo exposed the parasitical standing of the
landowning class, and spawned a radical following that included both
James and John Stuart Mill, as well as a group known as the Ricardian
socialists. In fact, many of the early neoclassical economists, for
example William Stanley Jevons, Alfred Marshall, and Léon
Walras, were democratic socialists of one stripe or another. It is not
a challenge to plaster a very different and far more conservative
tenor to mainstream economics of the twentieth century, whether one
looks to Vilfredo Pareto, Irving Fisher, Schumpeter, Hayek or
Friedman. Attending to the political hue of economic discourse serves
all the more to distinguish the early modern period from the classical
school of political economy of the nineteenth century or the
neoclassical school that persists to the present.

While there is no single definition of economics, most of the
discourse of the early modern period centered upon a set of phenomena
such as prices, trade, taxes, money and banking. In the nineteenth
century, most texts foregrounded the laws that govern production and
distribution and, starting in the 1870s, exchange and consumption. In
the twentieth century, the best known definition is the one offered by
Lionel Robbins in 1932:

Economics is the science which studies human behaviour as a
relationship between ends and scarce means which have alternative
uses. (Robbins 1932: 15)

Consumers maximize utility (preferences) and firms maximize profits
(expected returns), and this seeps into virtually every facet of life.
Given some limiting assumptions, modern welfare theory can prove that
an economy in general equilibrium attains Pareto optimality, that it
is the most efficient and the most just.

3. Pre-Modern Economic Thought

As with many sciences, Aristotle laid much of the groundwork for
economic thought, and his legacy, with the medieval scholastics, with
the early modern philosophers and last but not least with Karl Marx,
was profound and far-reaching (see Meikle 1995). Aristotle’s
unit of analysis was the oikos, or household, from which the
word economy is derived, but he also issued important insights on
money and prices, as well as property and slavery. Above all, he
argued that commercial pursuits were, for the most part, unethical,
because they distorted means and ends. He thus drove a wedge between
material betterment and the pursuit of virtue. Economic pursuits must
always be subsumed to the good life, or sustained happiness
(eudaimonia). Usury was particularly problematic because it
violated the natural order, obtaining a yield from an object, money,
that was inanimate (Aristotle Politics 1258b).

Aristotle asked one of the most fundamental questions of economics:
What is a price? The simple answer is a ratio of two goods, one of
which might be the established currency, but he maintained that it
made no difference; a price in barter is the same as a money price.
However, he qualified this claim with the recognition of the evolution
of money over time and the fact that many mistake it as an end in
itself rather than simply a means to facilitate barter. More
remarkably, Aristotle grasped that a price masks the fact that no two
commodities are fully commensurable. Exchange of goods or services, he
noted, is grounded in fulfilling specific human needs, and no two of
those are ever the same.

Although [two] things so different cannot become commensurate in
reality, they can become commensurate enough in relation to our needs
… Currency, then by making things commensurate as a measure
does, equalizes them. (Aristotle, Nicomachean Ethics,

He went further on this path and asserted what is one of the most
enduring propositions in economics, namely that “everything must
have a price”. (ibid.)

Aristotle identified the three functional properties of money that
remain canonical: money serves as a unit of account (a measure), a
medium of exchange (replacing barter), and a store of value (stockpile
of wealth). Furthermore, he noted that the denomination is purely
conventional and that legal authorities might alter this at whim.
Money was but a yardstick to measure the exchange-value of goods but
unlike those goods, lacked a use-value as the fable of Midas proved
all too well. He also asserted that it made no difference what
substance is used for money, but then went on to assert that the
fetish for gold and silver had made metallic coins unique in human
society. Moreover, precious metals offered certain advantages: they
are durable, divisible, transportable, and easily stamped with the
value of the coin. Finally, his analysis of monopolistic pricing
displays a firm grasp of the principles of supply and demand.

Aquinas, Jean Buridan, and Nicole Oresme, among others of the late
medieval period, assimilated Aristotlean economic thought to Biblical
teachings and, by and large, cast commercial activities in a negative
light (Jones 1989; Langholm 1998). To buy low and sell high was to
engage in deception and hence to violate the Golden Rule. To practice
usury contravened the Biblical dictum, to “lend, expecting
nothing in return” (Luke 6:35). The late medieval philosophers
dug more deeply into the evolving legal practices of their time,
insofar as wholesale grain merchants, partnerships, and debasements
had become increasingly commonplace. Aquinas and Buridan each
accepted, albeit with qualifications, that money is but a unit of
measure set by men, and thus decreed that the crown might alter the
denomination to serve the common good (Kaye 1998; Hirschfeld 2018).
Oresme’s Treatise on Money (1358) went further, acknowledging
the problematic shortage of specie and thereby promoting the use of
copper or “black money”, since the coins had turned this
color from overuse. He positioned the currency within the commercial
sphere and thus broke all the more from the Christian view that the
established coins emanated from God via divine rule, and were thus the
sole property of the prince (Lapidus 1997).

In the case of commercial transactions, particularly of necessities,
the late scholastics recognized legitimate charges for mercantile
services of transportation, storage, and risk-taking, but condemned
the practices of price gouging and other types of market
manipulations, particularly the forestalling, regrating and engrossing
of grain supplies. As for singular purchases of land or a luxury item,
Aquinas unpacked in considerable detail the question of whether or not
it was ethical to sell a good for more than it is worth.
Notwithstanding customary prices, he recognized numerous circumstances
where this might prove not only legal but also ethical. While berating
the Roman maxim of caveat emptor, he endorsed the prevailing
principle of laesio enormis which stipulated that the
contracted price could fall within a fifty percent range (plus or
minus) of the customary price. The doctrine of the “just
price”, one that covered costs but was also sensitive to local
conditions of demand, was further developed in this period and is
still at the core of commercial law. Aquinas also reviewed four
different contexts that would permit the charging of interest. One
articulated the concept of an opportunity cost, and another appealed
to the arrangement of capital transfer known as a partnership still
honored today by Islamic authorities. Increasingly, commercial loans
saw the principal as a form of capital that had legitimate and
alternative yields. In sum, the late scholastics offer many insights
on commerce and trade, the status of the Crown in managing legal
tender, and the inherent tensions between commerce and virtue.

4. Ethics of Commerce and Trade

As Albert O. Hirschman (1977) argued, philosophers in early modern
Europe went to great lengths to position commerce, banking, and the
accumulation of wealth in a positive light, and thus overturn the
harsh judgments of Aristotle and Aquinas. The widespread doctrine of
doux commerce cast the pursuit of pecuniary interests in an
innocent light and tamed the other more untoward passions for
political power or lust. The core idea was that the love of
gain—relishing the ever-increasing pile of coins—eclipsed
inclinations for other pleasures or more indolent pursuits. This in
turn prompted industriousness, a virtue that had already been firmly
established by Hobbes and Locke, among others. Furthermore, as Locke
had argued, money served to reduce the affront to God in the event
that plums or meat were left to rot rather than brought to market.
That said, the modern era was a far cry from Locke’s vision of
the American frontier. Many merchants made vast sums from importing
luxuries—coffee, tea or tobacco—and some European nations
imposed sumptuary laws or hefty taxes to reduce this trade. Several
philosophers argued that the consumption of luxuries was unethical,
Joseph Butler and Claude-Adrien Helvétius for example (see
Berry 1994). Mandeville and Hume were two of the first to argue that
the economic benefits of luxuries outweighed the potential deleterious
effects (see Susato 2006). Hume also noted that goods that had once
been luxuries, such as paper, had become not just conveniences but
even necessities. Adam Smith condemned sumptuary laws as hypocritical,
since the extravagant consumption by the aristocrats who set the laws
tended to be far more ruinous to the well-being of the state (Smith
1776 [1976: 346]).

Money-making and material advancement also rendered human actions more
predictable and transparent. The seventeenth-century maxim that
“interest will not lie”, first coined by Henri de Rohan,
was in wide circulation (Hirschman 1977: 36). The self-interest axiom
also began to germinate in economic discourse, enhanced by appeals to
other virtuous traits, prudence and foresight (see Force 2003).
Self-interest did not eclipse other-regarding traits, however, nor
entail selfishness. While serving their pecuniary interests, merchants
maintained that they also served God and Country, by increasing crown
revenues and by taming the open seas. Merchants also prompted the rise
of artisanal techniques and hence the growth of towns. This in turn
prompted more mild and moderate dispositions. As Montesquieu remarked
in the Spirit of the Laws:

it is an almost general rule that everywhere there are gentle mores,
there is commerce and that everywhere there is commerce, there are
gentle mores. (1748: [1989: 338])

Commerce induced civility and more feminine sentiments. As Hume
observed of those who

flock into cities, … both sexes meet in an easy and sociable
manner; and the tempers of men, as well as their behaviour, refine
apace… it is impossible but they must feel an increase of
humanity, from the very habit of conversing together. (“Of
Refinement in the Arts” [1987: 271])

Smith observed in his Theory of Moral Sentiments that
“humanity is the virtue of a woman”, and that

among civilized nations, the virtues which are founded upon humanity,
are more cultivated than those which are founded upon self-denial and
the command of the passions. (1759 [1976: 190, 204–5])

Smith, however, also expressed the worry that the European uppercrust
suffered from excessive “flattery and falsehood”, and that
the “man of fashion” lacked the more esteemed
“masculine virtues” (1759 [1976: 63]). Modern commercial
life, for Smith, was not unequivocally for the good.

In his overview of early modern economics, Hirschman foregrounded what
he called the Montesquieu-Steuart doctrine, namely that international
trade induced global peace. Montesquieu singled out the significance
of the bill of exchange as a critical starting point. This was an
international bank order that much expanded European trade in the
early modern period, and constituted an extensive network of trust
between the major banking families in different countries. To trade
over great distances requires considerable coordination and
cooperation, if only because of the need to recognize different
currencies or to contract deliveries at a later point in time. The
bill of exchange averted the risky practice of shipping silver and
gold from one port to another, and allowed paper representations to
circulate and hence the expansion of credit.

Hobbes had already grasped that the interdependency of nations for
basic goods, such as Swedish timber for English wool, might lessen
international conflict, particularly if nations depended on one
another for necessities or conveniences. Conflict stemmed from the
desire for imported luxury goods; these goods tended to instill a new
type of cupidity that would endanger peaceful trade, or so Hobbes
believed (see Sorell 2006). He thus endorsed the imposition of
sumptuary laws. Montesquieu was of a different mind. War is always
more destructive and more costly than trade under peaceful terms. His
argument pivoted on an appeal to the mutual gains from trade, and the
ensuing division of labor. Hume issued other worries. He observed that
each war of his lifetime had lasted longer, and cost more in real
terms, than was rational given the initial objectives (“Of the
Balance of Power” [1987: 339]). Insofar as much of the funding
came from the excessive issuance of government bonds, the mounting
public debt was bound to cripple the British government. The best
means to avoid state bankruptcy was to overcome protectionist policies
and promote unrestricted global trade, thereby enriching the world and
diminishing military conquests.

However myopic these theories might sound—given the horrific
enslavements of African and Indigenous peoples throughout the early
modern period, and given the bloodbath of the twentieth century
between purportedly civil trading nations—it is important to
underscore that a widespread optimism for a more peaceful and
prosperous world characterized early modern economic thought. Immanuel
Kant’s celebrated appeal to a world of perpetual peace may be
viewed as the capstone to this long line of thought (see Nakhimonvsky
2011). As Hirschman noted, Adam Smith was the exception, for exposing
the monopolistic and rapacious tendencies of European merchants and
colonizers. Smith deplored the European treatment of African slaves
and Indigenous peoples, not only for the inherent injustices of their
actions, but because this tended to inculcate deplorable traits in the
colonizers, such as tyranny, cowardice and inhumanity (Smith 1759
[1976: 200–211]; Rothschild 2001).

Above all, Smith reduced the pursuit of wealth to mere vanity and the
desire for the approbation of others. There may be a trickle down
effect to the lower orders, or a gradual enrichment of the globe, but
the inherent parasitical nature of men, particularly of
landlords—“who love to reap where they never
sowed”—and the oppressive actions of the merchants ensured
that our world would be permanently saddled with grave injustices and
inequalities (Smith 1776 [1976: 67]). Smith was still a far cry from
the stronger despairing claims of later critics of capitalism, notably
Marx’s appeal to widespread alienation, Durkheim’s caveats
about anomie, or Keynes’s ridiculing of stock market
frenzies (see Hirschman 1977: Part 3). Nevertheless, there is a clear
sense in Smith that, however entrenched our practices of commerce and
trade, their potential to elevate humans to a kinder and better world
beyond mere material gratifications is severely limited (see Griswold
1998; Hanley 2009). Smith looms large as the voice of pessimism.

5. Principles of Property and Contracts

Contracts lie at the very core of economic thought. A simple purchase
is a type of contract, the use of money another. Property rights are
also grounded in the idea of a contract, at least since the early
modern period. Aristotle had argued in favor of private property,
primarily with appeals to security and superior stewardship. Aquinas
reinforced these claims but also argued that in the case of a famine
or siege, one might appropriate available foods to fulfil the
Christian dictate of self-preservation. In the early modern period,
Bodin, Grotius, and Pufendorf reflected at length on the question of
property rights, prompted by the breakdown of feudal land tenure and
ever-expanding overseas trade. Grotius’s De Mare
(1609) addressed the possibility of unregulated naval and
fishing rights. Hobbes (1651) and Locke (1689), with their respective
appeals to the state of nature, motivated the formation of property
rights and hence the government. Sovereign rule would alleviate
penury, facilitate the spread of trade and commerce and, above all,
foster population growth, or so it was widely believed.

Population growth, providing more hands as well as the demand for more
corn and cloth, was viewed as the primary source of economic
prosperity for about two centuries, until the alarm bell sounded by
Thomas Robert Malthus’s Essay on the Principle of
(1798). Whereas for Hobbes, might made right, Locke
grounded property rights in consent and the virtue of industriousness;
those who enclosed and cultivated the land created a right to its
yield that did no harm to one’s neighbors (see Sreenivasan
1995). Because children are one’s property, this also
legitimated the transfer of accumulated wealth via inheritance. Over
time, inequality became salient, as some owned land while others, less
fortunate, were compelled to enter into a wage contract to earn their
bread and ale. Locke, however, underscored the volitional nature of
these arrangements, forged on equal terms and by “tacit

While a strong advocate of traditional property laws to insure
economic flourishing, Hume underscored their contingent nature,
pointing to the voluminous quantity of law books that meant
interpretation would never come to an end. In opposition to Locke,
Hume believed that the appeal to an ancient contract forming the
commonwealth was merely a myth. Ancient land rights were primarily
gained by conquest and usurpation, and sustained by privilege, rather
than a reward to the sweat of one’s brow. By contrast, the
modern commercial era that enabled the spread of capital and hence
moveable wealth, moved in step with the rise of representative
government, either in the form of a republic or a constitutional
monarchy such as his own (McArthur 2007; Harris 2015).

In his Treatise of Human Nature (Book Three) Hume unpacked
the essential components of a contract. He identified the implicit
conventions in contracts and the importance of trust.

Your corn is ripe to-day; mine will be so to-morrow. “Tis
profitable for us both, that I shou’d labour with you to-day,
and that you shou’d aid me to-morrow. (Hume 1739–40 [2000:

Such contractual arrangements might exist and spread among strangers
as individuals came to discern their benefits. As Hume observed,

the freedom and extent of human commerce depend entirely on a fidelity
with regard to promises. (1739–40 [2000: 349])

This included the use of money, which Hume recognized symbolized a
chain of pledges, extending backward and forward in time. Property,
money, and markets were thus bundled together, as conventions that ran
no deeper than the utility of promise-keeping and one’s

Hume took up the matter of forging an honorable character in his
Enquiry Concerning the Principles of Morals (1751). Although
the sphere for exercising one’s free will to reform one’s
character was very limited, Hume adhered to the gradual evolution of
behavioral norms, forged by material conditions, particularly commerce
and trade. Monkish virtues of the medieval period had given way to
commercial virtues of the modern period, honesty, probity and
industry. For Adam Smith, self-command, prudence, and courage were
virtues ranked more highly than others. For these reasons, those in
the middling ranks, merchants and bankers, were more likely to happen
onto the road to virtue than those in the lower or upper classes. And
because the nouveau riches were the ones to safeguard contractual
settlements, this meant that the core institutions of property and
commerce would, ceteris paribus, be sustained in the
centuries ahead. The merchant or banker, not the knight, had become
the paragon of honor, serving the national interests as much as

6. Philosophy of Money

A cornerstone of monetary theory, and arguably the most robust and
enduring law in economics, is the quantity theory of money that
commits to a causal and positive function between the price level and
the money supply, treating the latter as the independent variable,
that is, (P = f(M^s)) (see Schabas & Wennerlind 2020:
151–172). With the influx of silver from Latin America after
Columbus, the money supply in Europe had more than doubled by 1510.
While entering exclusively on Spanish ships, it spread rapidly, first
to the Netherlands and then across Europe. Prices rose as well,
although the underlying factors were not readily understood. Most
purchases were of food, whose prices fluctuated with the harvests,
good and bad. Consumer durables tended to be purchased infrequently,
often at seasonal fairs, which had complex systems for price
negotiations, pitching and haggling. The rise of middlemen, wholesale
markets and retailing, became more prevalent in the seventeenth
century, although the public was suspicious that these traders who
lived well off their earnings were the cause of increasing prices.
Although newspapers and broadsides posted prices, starting in the late
seventeenth century, urban shopping still required negotiation. It was
only with the department stores of the late nineteenth century that
prices were routinely posted.

Pause and reflect on how difficult it would be to discern inflation in
the early modern period, or perhaps even at present, and thus how
brilliant was the insight that the overall price level is a function
of the money supply. In the 1520s, the Prussian Diet commissioned none
other than Nicholas Copernicus to investigate the recent increase in
price instability. Drawing on his skills with handling large
quantities of data, Copernicus’s Monetae cudendae ratio
(1526) established the proposition that the value of the currency (its
purchasing power) had diminished due to its abundance. We thus have
the first inkling of a principle that is, in some respects, as central
to economics as the principle of inertia is in physics.

Others in the second half of the sixteenth century, notably Navarrus,
Luis de Molina, and Jean Bodin, arrived independently at a variant of
the quantity theory of money. A century later, John Locke and William
Petty added two additional variables, the velocity and the
transactions level, to the core relation in the quantity theory of
money. The velocity of money is something of a misnomer. It is the
average rate at which a given unit of currency turns over in a given
period of time. The transactions level is the rate at which payments
are made, for example wages (daily or weekly) or rents (quarterly).
For the capital bill, Petty estimated that five per cent of its value
was manifest in liquid terms at any point of the year, a sum
equivalent to the interest payment. As a remedy for the shortage of
money, a problem that beset not only Petty’s Ireland but
virtually every nation, the best policy was to shorten the temporal
interval for the transactions level and hence increase the velocity.
These four variables were cemented by Irving Fisher in 1911, with his
equation that MV = PT (money supply (M) times the velocity of money
(V) is equal to the price level (P) times the transactions level (T)).
Fisher was also the first to measure the velocity of money. The
average rate for the turnover of one dollar in New Haven was twenty
times per annum.

The quantity theory of money also entails the neutrality of money.
Hume broached a series of thought experiments, whereby the quantity of
money in a nation doubled or halved overnight, or was reduced by an
even greater amount, four-fifths (“Of Interest” [1987:
299]; “Of the Balance of Trade” [1987: 311]). He argued
that this would have no lasting effect. In the case of an increase,
prices would rise commensurate to the increase in money as dictated by
the quantity theory. As a result, imports would surge because foreign
goods were favorably priced, and the specie would flow out almost
immediately and prices return to their original level, hence what came
to be known as the specie-flow mechanism. Earlier contributors, such
as Mun, had already argued that money would follow trade, and hence
that the quantity of specie in England would reflect the balance of
trade. If the balance was favorable, such that exports exceeded
imports, the nation’s coffers would be augmented. Hume
extrapolated from Mun’s one nation to the entire globe. Imposing
the metaphor of the world’s oceans, Hume argued that it was no
more possible to stockpile specie in a nation than to dam the oceans
and raise them above sea-level. Each nation would see its domestic
prices rise or fall in accordance with the quantity of money, and
hence the strong propensity for the global supply of money to
equilibrate in each nation in line with the balance of trade. It
rested on a clear understanding of the distinction between the nominal
and the real.

Notwithstanding his brilliant argument for the neutrality of money,
Hume recognized that the specie-flow mechanism was never fully
achieved; trade barriers, transaction costs, and other interferences
with the money supply limited its full operation. As a result, Hume
endorsed the non-neutrality of money as more veridical. He argued
that, from roughly 1500 to 1750, the money supply had increased by a
factor of eight but the price level had only increased by a factor of
four. The simple reason was significant economic growth, a doubling of
output that required the extant money to service the significant
increase in transactions. The growth was stimulated by many factors,
the gains from trade, the division of labor, and the accumulation of
capital. Hume also acknowledged the importance of new technologies and
their rapid spread once in place. Above all, he discerned that money
could engender growth, even though this remained mysterious and was
not “easily accounted for” (Hume “Of Money”
[1987: 288).

Hume articulated the various steps by which an influx of good Spanish
coins might magically stimulate economic growth. The circulation of
the additional coins could induce a multiplier effect that essentially
incentivized weavers and farmers to work more intensively. They did
this for an interval of time, until prices and wages caught up to the
additional money stock and reached a level once more. In short, the
specie-flow mechanism was couched as an ideal (friction-free) process,
understood as a thought experiment, whereas the injection of new money
and its circulation resulted in genuine economic growth. Milton
Friedman received the Nobel Prize for making these arguments, but he
paid specific homage to Hume for the central analysis (Schabas &
Wennerlind 2020: 208, 232). Friedman also credits Hume with asking
what would be the optimal quantity of money for a given nation, but in
fact several before Hume had grappled with this question, Petty and
Berkeley most notably. Hume’s work is best known but there were
dozens at the time who articulated one or more of the three core
principles of monetary theory, the quantity theory, the specie-flow
mechanism, and the multiplier.

Only the first of these three could be easily verified by empirical
findings. Because legal tender was issued by the royal mint, it was
possible to estimate the money supply. Hume, for example, claimed that
about 90 million pounds circulated in Britain circa 1750. It was much
more difficult to measure changes to the price level. Consumer price
indexing, a systematic method for measuring inflation that would serve
to confirm the quantity theory of money, was first devised in the late
nineteenth century and only undertaken by state agencies in the
decades after World War One. Nevertheless, early modern economists
devised clever means to measure the purchasing power of the currency,
whether by examining the price of corn (grains) or looking to other
benchmarks. William Fleetwood’s Chronicon Preciosum; or an
Account of English Money, the Price of Corn and other Commodities for
the last 600 years
(1707), proved an invaluable resource. He also
made estimates of purchasing power, noting that his stipend as a
Fellow of King’s College Cambridge, which had been fixed at five
pounds in 1450 ought to be increased to thirty pounds to command the
same value. Adam Smith proposed the longterm silver price of corn as
the best metric for estimating inflation. His belief was that one must
take a weighted average over a longer period of time, 50 to 100 years
in order to eliminate the seasonal variations in harvests or isolated
discoveries of silver reserves.

The focus on corn prices also unleashed another central principle of
economics, the law of demand (quantity demanded is an inverse function
of price). The so-called King-Davenant law, attributed to Gregory King
(see Evans 1967) and Charles Davenant (1698) of the late seventeenth
century, provided a time series analysis of corn prices (see Hutchison
1988: 46–53). They argued that in the case of a severe shortage
of corn, a fall by fifty per cent of the normal supply, the price
could increase by forty-five per cent. They also provided data in the
case of a bountiful harvest. Their chart established that the function
was an inverse one and, significantly, nonlinear.

The early modern period was plagued by a shortage of coins, and of
those in circulation, most were clipped or hammered. Gresham’s
law, that bad coins drive out the good ones, explained this phenomenon
very well. It was estimated that the average coin had only half of the
metallic content that had been stipulated by the mint. This meant that
countless people were filing the coins and melting the shavings into
bullion for additional remuneration from the mint. It was illegal to
tamper with coins, and for most countries of Western Europe, the death
penalty applied, even if one was caught simply with the tools of the
trade. Other commonplace illegal activities were counterfeiting paper
banknotes, bribery, smuggling, and adulterating products for sale. It
would be difficult to estimate the overall level of such activities,
but a background assumption in the writings of most early modern
economists was the understanding that criminal methods were widespread
(see Wennerlind 2011). The demise of Spain had become a trope, insofar
as it had been illegally drained of its American silver. As Hume
noted, smugglers in the previous two centuries had taken the Spanish
silver over the Pyrenees where French prices were one-tenth those in
Spain (“Of the Balance of Trade” [1987: 312]). The money
had saturated most where there was international trade. By the early
seventeenth century, it was the Dutch East India Company that
commanded the envy of European traders, and its legacy was such that
Mexican silver coins continued to dominate Asian trade until the
nineteenth century.

Early modern philosophers weighed in on legal monetary interventions,
notably debasement, devaluation, or recoinage. For most, the preferred
policy was to leave the money stock untouched, or restore its nominal
metallic value given the widespread hammering and clipping of coins.
In the fourteenth century, the French crown had altered the currency,
mostly with debasements, more than eighty times. As Bodin recognized,
this increased the money supply and hence raised prices, but it also
undermined confidence in the stability of the currency. There is no
greater incident of leading philosophers tampering with the money
supply than when Locke and Newton famously oversaw the Great Recoinage
of 1696. Locke persuaded Newton to do the opposite of a debasement,
namely to restore the silver content of the shilling to the amount
stipulated by Elizabeth I circa 1600 (see Appleby 1978; Vaughn 1980).
Newton thus affirmed Locke’s belief in essentialism (see
Caffentzis 1989). This meant that those willing to break the law
benefitted from a de facto money pump, and the crown lost
some two million pounds (roughly thirty million pounds in total was in
circulation). This contraction of the money supply engendered an
economic downturn, but for other reasons the English economy began to
expand and flourish under the reign of Queen Anne.

In their analysis of the essential properties of money, a number of
early modern philosophers climbed several rungs of the ladder of
monetary abstraction. George Berkeley, in his short tract The
(1725), recognized that the substance used for money was
irrelevant, and thus promoted the concept of fiat money, a counter or
token that was recognized as legal tender but not redeemable for a
precious metal. (Caffentzis 2000). Benjamin Franklin (1729) proposed a
novel schema whereby notes were issued with the land as the underlying
asset, but the practice was short-lived in colonial Pennsylvania.
Hume, while secretary to the British ambassador in France in 1765,
oversaw the dismantling of a fiat-currency in Québec that had
commenced in 1685 and the reinstatement of British Sterling in lower

In his Treatise, Hume broached the idea that money is
analogous to language, both in its commencement in a prehistoric age,
and in the sense that its primary role is to represent value, much as
words represent objects (see Schabas & Wennerlind 2020:
99–101). Neither money nor language adequately refer to objects
in this sense, but we tend to be duped into thinking that they do.
Because of this imperfect mapping, and the fact that money embodies a
pledge, a type of speech act, Hume was also inclined to appreciate
paper bank-notes, whether from private banks or the Exchequer. He did
not share Locke’s view that nature had stamped an indelible
value on gold and silver. Hume grasped that credit forms a continuum
with money, and noted that there was a range of degrees of liquidity:
mortgages, bonds, equities, promissory notes, bills of exchange, and
so forth. Hume praised the recent innovations of Scottish bankers, to
devise daily lines of credit so that merchants might monetize idle
capital, and to issue ten-shilling notes denominated such that
ordinary tradesmen might use them. He estimated that in 1750, over
half the transactions in Britain were conducted with paper-notes, thus
lubricating the wheels of trade that much the better.

Smith was more inclined to see banking and credit as precarious, and
captured this sentiment with his metaphor of paper money as a
“sort of wagon-way through the air”, bolstered by its
“Daedelian wings” (Smith 1776 [1976: 321]). If banks were
reckless with their issuance, their bills would soar in value and
become over-heated, as witnessed in the serious bank failures of 1772.
Smith in general was more circumspect about the benefits of merchants
and overseas trade, and he argued for firm regulations to be imposed
on banks and credit markets.

In the early 1670s, Shaftesbury, who had become chancellor of the
Exchequer, encouraged Locke to oppose a measure that would set a legal
ceiling of four percent on the interest rate. Locke revisited the
debate in 1692, and in both cases, persuaded the government to keep a
higher ceiling. Locke argued that in a world of perfectly competitive
banking a “natural” rate of interest would override the
legal one (see Vaughn 1980). Ironically, he made his arguments before
the monopolistic Bank of England was formed in 1694. Jeremy
Bentham’s Defence of Usury (1787), in opposition to
Smith, restored Locke’s position that the interest rate ought to
be unregulated and hence subject solely to market forces (see Sigot
2001). Smith’s position has remained a puzzle, since for the
most part, interest rates were low and hence non-usurious, and because
Smith in general embraced laissez-faire thinking (see
Hollander 1999). Both Hume and Smith recognized the longterm tendency
of the interest rate to fall, from ten percent under Elizabeth I to
three or four percent in their day, and they arrived at the more
profound understanding that this was due to capital accumulation and
sophisticated commerce and trade. They did not articulate the
principle of zero profits, but they understood that in a perfectly
competitive world, the profit rate would equal the interest rate, the
cost of borrowing capital.

The most central leitmotif of early modern economics was its
appreciation for the transformative effects of money. Hobbes, drawing
on William Harvey, had depicted money as the blood that courses
through the body politic (see Christensen 1989; Apeldoorn 2017). Money
vitalized a region, and was most effective if it was in circulation
and “quickened”, that is, increased its velocity. Quesnay
underscored the importance of the circulation of money, particularly
bullion, and its multiplier effects, again drawing an analogy to
Harvey’s great discovery. The French had initially, under the
inspiration of the Scottish émigré John Law (1705),
embraced private bank-notes and equity swaps. But after the collapse
of the Mississippi Company in 1720, for which Law was blamed, they
chose to hoard silver as household plate, and banking did not recover
until the end of the century. The Dutch and the British, looking to
France, imposed a tax on silverware and promoted the use of chinaware
as measures to reduce hoarding.

In the second of his Two Treatise of Government (1689), Locke
provided an important fable as to how money came into being as a store
of wealth given the existence of perishable goods. Hume, conversely,
emphasized money as a medium of exchange, as the “oil”
which lubricated the “wheels of trade” (“Of
Money” [1987: 281]). Hume’s story looked more to the
allure of luxury goods and the rise of towns and cities as prompting
the thorough monetization of the countryside, such that “no hand
is entirely empty of it [money]” (ibid. [1987: 294]). Once this
was achieved, however, money took on a power of its own, one that no
government could adequately control. As a general maxim, Hume declared

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 the Balance of
Trade” [1987: 326])

Money may well be a human artifact, but as Hume and Smith, among
others, argued, it operated according to laws that transcended
individual human agency. “Money answers all things”, to
quote the title of Jacob Vanderlint’s influential book of 1734.
Money had become so complex and so deeply entrenched in the social
fabric of modern commercial society that measures to retain or channel
it were believed to be futile.

7. Scientific Status of Economics and its Methodology

Newton lay down the gauntlet in his well-known Query 31 to
the Opticks (1704), namely that his methods for deciphering
the natural world might prove efficacious in understanding the moral
sphere. Many took up his plea to advance the moral sciences. In
France, one could name Voltaire, Condillac and Condorcet, and in
Britain, Hutcheson, Hume, and Smith. The common conviction was to
identify sufficient uniformities to human nature that resulted in
manifest patterns, whether in the economic or political sphere.
Hume’s associationist psychology and the copy principle implied
remarkable uniformity in the machinery of the human mind, while Smith
treated the sympathetic regard as akin to gravitational attraction.
Both believed that introspection meant that the moral sciences,
including economics could become epistemically superior to the natural
sciences. As both Hume and Smith pointed out, pre-modern philosophers
had endorsed a geocentric universe for thousands of years and in
modern times, mistakenly adhered to the system of Cartesian vortices
for almost a century. Nothing compared to the occasionalism of
Malebranche, that Hume deemed “a fairy land” (Hume 1748
[2000: 57]). In the moral realm, however, we could know right away if
something is as fanciful as a system of vortices. Both Hume and Smith
were fallibilists about all knowledge, but they each argued that we
are more likely to know when we are wrong in the moral sphere than in
the physical sphere. Introspection and experience of the world were
important assets in this respect. But, as Hume averred, “nature
will forever elude our grasp”, and even if we dig more deeply
into the microphysical realm, this would simply expose the need for
further investigations.

The scientific spirit that Hume and Smith brought to their economics
was already present a century earlier; both Hobbes and Petty voiced
the aspiration of rendering morals into a quantitative discourse.
“Commercial mathematics” took hold during the first half
of the seventeenth century and many of the formal methods that have
become commonplace in postwar economics were first adopted in the
early modern period (see Redman 1997; Sylla 2003). Blaise
Pascal’s wager to believe in God (1670 [1910]) and Daniel
Bernoulli’s Saint Petersburg paradox (1738 [1954]) are
preliminary examples of decision theory (see Hutchison 1988). Both
imposed probability measures on expected utilities and thus provided
the scaffolding of what has become an important line of inquiry in
mainstream economics. Pierre de Fermat (1654) [1962] and Christiaan
Huygens (1657) also studied games of chance (see Klein 1997). Game
theoretical modes of thinking permeated the works of Hobbes and Hume
(see Hampton 1986; Kavka 1986; Hardin 2007). Hume also articulated
core elements of decision theory, including the idea of time
discounting (see Diaye & Lapidus 2019; Sugden 2021).

Undergirding these preliminary efforts at both decision theory and
game theory was a clear appreciation for strategic behavior, more or
less a given among early modern philosophers following in the wake of
Machiavelli. No one was more vocal on the widespread tendency to
strategize for individual gain than Mandeville. As he observed,
everyone in commercial society was duplicitous, dressing to a higher
station, and rationalizing their frequent breach of ethical norms. It
was well known that the hand holding the scales of justice “had
often dropt ‘em, brib’d with Gold” (Mandeville 1714
[1988: 8]). Smith would echo these sentiments of duplicity:

civil government, so far as it is instituted for the security of
property, is in reality instituted for the defence of the rich against
the poor, or of those who have some property against those who have
none at all. (Smith 1776 [1976: 715])

It is important to see that the rise of game theory in mainstream
economics since the mid-twentieth century is to some extent an
unwitting revival of ascriptions of strategizing and power imbalances
that were commonplace in the early modern period.

Probability theory was developed in the early modern period, notably
by Huygens and Abraham de Moivre (see Daston 1988). The early
eighteenth-century English mathematician, John Arbuthnot, undertook
calculations that resembled Nehman-Pearson testing (see Stigler 1986:
226). Hume may have copied this method, as a young admirer of
Arbuthnot. Hume’s 100-page essay on population pivoted around
the null hypothesis that ancient Rome was more populated than Europe
in 1750, and he ably demonstrated that the likelihood that this was
the case was vanishingly small. Hume may also have appreciated the
insights of Thomas Bayes, who devised his theorem—now known as
Bayesianism—in the 1750s, with a posthumous publication in 1764
(see Raynor 1980).

Hume appealed explicitly to the law of large numbers and invoked a
number of mean-reverting tendencies, as in his commitment to uniform
wages, prices and interest rates. Quantitative efforts to measure
population or the money supply were undertaken with much regularity
starting in the 1660s, despite a paucity of data (Endres 1985;
Derringer 2018). Many, such as Graunt, understood the value of
trimming outliers and seeking what Thomas Simpson (1755) coined as the
arithmetic mean (see Stigler 1986; Klein 1997). Smith’s analysis
of the wage spectrum was grounded in the belief that market forces had
established stable and salient wages for each type of trade, and that
deviations could be reduced down to his list of six key factors (Smith
1776 [1976: 82–104]).

There were some efforts at model building in the eighteenth century.
Jean-François Melon (1734), whose work was widely known,
constructed a model based on three similar islands with two goods in
circulation (see Hont 2005: 30–32). Quesnay’s tableau
(1758) was the most celebrated model. His
disciple, Pierre Samuel Du Pont de Nemours, published a treatise in
1768 that promoted physiocracy as a “new science” on equal
standing with the natural sciences. Adam Smith intended to dedicate
the Wealth of Nations to Quesnay, but he died too soon.

Quesnay’s model made stylized assumptions about the French
nation, ascribing three distinct classes: a quarter were landowners
(aristocrats), a quarter artisans, and half farmers. He showed
visually that after the initial payment of rent (the annual net
product) by the farmers to the landowners, the entire unfolding of the
economy would reach mathematical closure by the time of the next
harvest and, like a perpetual motion machine, prompt the next period
of production and distribution. No sector would increase or decrease
in size and each would have its just reward in accordance with its
station (a stylized assumption was that landowners consumed twice as
much as the others, per capita). Quesnay also, brilliantly, introduced
disturbances, for example, an unduly high interest rate, a tax, or an
increased demand for artisanal goods, to demonstrate the rapid
disequilibration of his system (see Quesnay 1758-1759). Contemporary
modelling thrives on introducing slight variations or manipulations to
disclose the underlying structure and is much indebted to Quesnay (see
Hausman 2003 [2021]; Morgan 2012).

8. Distributive Justice

As was recognized at the time, the transition from feudalism to
capitalism commenced by the early sixteenth century. In his
History of England, Hume argued that commerce arose in
Britain under Henry VII circa 1500, drawing on the Flemish trade.
Smith shared this view, and both looked to the Italian city-states of
Florence and Genoa a century before as critical developments. The
shift to capitalism intensified, as both Hume and Smith recognized,
with the rise of the joint-stock companies, particularly the East
India companies of the Dutch, French and English.

There may be no single event or even decade to mark the transition to
capitalism. Aristotle’s analysis of the agora in central Athens
reminds us that markets and money were commonplace in antiquity. What
sets capitalism apart is the emergence and central role of markets for
the three factors of production—land, labour, and
capital—and it was these that took hold during the sixteenth
century. By the end of that century, possibly galvanized by other
major transformations, notably the Reformation and the Scientific
Revolution, it had become evident that prominent bankers and merchants
were wealthier than many aristocrats. By the mid-1600s, half the
people in the Netherlands lived in towns or cities and most were

Land was still the primary source of wealth, and merchants were
renowned for retiring to a country estate. And there was widespread
suspicion of upstarts, not to mention appeals to the longstanding
adage that the newly-acquired wealth would disappear by the third
generation. Moreover, there was a deeply-rooted belief in the
necessity of ranks, most explicitly voiced by Millar and Smith.
Despite the considerable expansion of domestic manufacturing in
Western Europe, there was a pronounced predilection, at least among
the Physiocrats and Adam Smith, to foreground the agrarian sector and
view the aristocratic landowning class as an essential part of the
economic picture. Historical studies justify this emphasis. Until the
twentieth century, the majority of capital was invested in the
agrarian sector, far more than in manufacturing or trade. If anything
best characterizes the early modern period, it was the sustained
increase in population due to improved fishing and agrarian

Egalitarian ideals reach back to ancient times, but in early modern
philosophy the arguments appeared to have more efficacy. Locke,
Rousseau, Paine, William Godwin, and Mary Wollstonecraft are just some
of the more significant philosophers who left their mark on the modern
transition to a more equal society. Diderot was an important voice for
the abolition of the slave trade and slavery. Both Hume and Smith
argued that wage labor was more efficient than slavery and thus gave
economic motivations for the significant end to slavery that came to
pass in the nineteenth century.

The primary emphasis in the early modern period was on the rights of
the “middling sorts”, merchants, bankers, and
manufacturers, in contrast to the landed aristocracy. Fiscal policy,
as a means to address economic inequality and serve middle-class
interests, spawned a large body of thought, running from Hobbes to
Hume and finally to Smith, whose principles of taxation became
canonical until John Stuart Mill. Hume’s essay “Of the
Middle Station of Life”, in conjunction with his writings on
economics, makes plain that this group would provide the impetus for
future economic growth. The commercial class was far more likely to be
industrious and enterprising, and serve as the backbone of modern
civil society and the custodians of liberal values. In his Enquiry
Concerning the Principles of Morals
(1751), Hume portrays a
hypothetical son-in-law, Cleanthes, as a paragon of virtue. He was
also a lawyer and businessman and, as the father of Hume’s
hypothetical grandchildren, the one most likely to insure that the
family name would be sustained for at least one more generation.

The early modern philosophers reflected on the principles of
international distributive justice and its implications for global
peace. As Istvan Hont highlighted, the rich-country/poor-country
question was vigorously debated in the eighteenth century (Hont 2005).
Gershom Carmichael and Hutcheson, for example, gave voice to these
concerns, but it was Hume and Smith who laid the analytic foundations.
A country was wealthier than another not because of specie but because
of its people and its accumulated capital in agriculture and
manufacturing. Josiah Tucker (1755) gave voice to the potential for
unlimited growth, noting that higher wages were correlated with more
skilled labor and capital infrastructure. Both Hume and Smith
advocated high wages, but feared that with time capital would be
shifted to countries with lower wages until those regions were also
enriched. Because of increasing demand worldwide, however, there was
no reason to suppose that a nation with a healthy export sector would
decline. As was widely understood, Holland was testament to the
potential of long-lived wealth, having sustained its significant
foothold in global trade since it reached its apogee as the most
powerful economic nation in the 1620s.

Smith is recognized as the critical figure to shift attention to the
working class and to advocate higher wages. He noted that merchants
and manufacturers are strongly inclined to collude so as not to raise
wages (Smith 1776 [1976: 267]). He noted the degradation of workers
who were compelled to spend their entire lives “performing a few
simple operations” (1776 [1976: 782]). With pointed words, he
underscored the dehumanizing effects of unvaried work, such that a
typical person

generally becomes as stupid and ignorant as it is possible for a human
creature to become. (1776 [1976: 782])

Smith believed this would become widespread. In

every improved and civilised society this is the state into which the
labouring poor, that is, the great body of the people, must
necessarily fall, unless government takes some pains to prevent it.
(1776 [1976: 782])

Smith advocated widespread schooling, with mechanics and gymnastics,
and the fostering of theatre or dancing on the day of rest. He
believed that inventions often came from the shopfloor, and that a
more orderly standing army would be fostered by men who learned to
develop both body and mind.

Above all, Smith exposed the emptiness of the pursuit of wealth, that
it consisted primarily in “the parade of riches”, which
feeds upon the envy of those without (Smith 1776 [1976: 190]). The
rich garner far more pleasure from being observed riding in a carriage
than from the comforts a carriage might offer. Our efforts to pursue
wealth and power stem from the universal desire for admiration and
approbation. There is also a deep asymmetry in Smith’s account
of human sympathy, the act of fellow-feeling, in that we sympathize
with the rich and shun the poor. The reason is that we imagine
ourselves in their place and thus fill in the gaps of our otherwise
inadequate lives. It is for this reason, Smith believes, that the
state must insure that royalty indulge in opulent displays. Ranks are
of great importance in the world, for motivating us to strive, driven
by “the desire of bettering our condition” (Smith 1776
[1976: 341]). Smith believed that we are a restless lot, that

there is scarce perhaps a single instant in which any man is so
perfectly and completely satisfied with his situation, as to be
without any wish of alteration or improvement of any kind. An
augmentation of fortune is the means by which the greater part of men
propose and wish to better their condition. (1776 [1976: 341])

As a result, there is nothing worse than a fall from grace and ensuing
loss of admiration. Smith observes that “bankruptcy is perhaps
the greatest and most humiliating calamity which can befall an
innocent man” and its fear has thus fostered widespread prudence
in the modern commercial world (Smith 1776 [1976: 342]).

Smith’s portrayal of human nature is tinged with these dark
thoughts, similar to the cynicism of Mandeville. We spend our entire
life attempting to garner approval, grounded in the sympathetic
regard, and are for the most part prone to vanity and greed. His
parable about the poor man’s son, who is driven by ambition to
become wealthy only to realize at the end of his life that the
indignities he suffered “to serve those whom he hates” and
to be “obsequious to those whom he despises” have robbed
him of a “real tranquillity” that he might have achieved
had he known his place and remained poor. (Smith 1759 [1976: 181]).
Only at the end of his life does he grasp that “wealth and
greatness are mere trinkets”, and that the loss of friendship
and the “injustice of his enemies” that he has suffered as
he climbed upwards has left him bereft of peace of mind (ibid.). Smith
remarks that the beggar on the highway sleeps better than the king,
and that the better aim in life is to achieve inner equanimity. Adam
Smith, the philosopher most readily associated with the voice of
capitalism, could not be more disparaging about its tendencies to
reinforce the baser features of human nature. While he endorsed rising
standards of living for the lower orders, his stoicism was the more
dominant sentiment. Life was a lottery and one had best prepare for
adversity. As Smith aptly put it, wealth might “keep off the
summer shower, [but] not the winter storm” (Smith 1759 [1976:
183]). Early modern economics thus offered practical wisdom and served
as a major resource for forging a wise and virtuous life.