How Did Enlightenment Ideas Influence Modern Economics

Adam Smith (1723-1790)

The Enlightenment was a period in world history that roughly corresponds with the eighteenth century, originating in the nations of Britain, France, and the German-speaking kingdoms and then spreading to the rest of Europe and the European colonies. It was a period when philosophers such as Rousseau, Voltaire, and Locke advocated ideas of political freedom, which ultimately influenced movement toward more democratic and republican governments in the late eighteenth and early nineteenth centuries. Although the Enlightenment is known today more for the political ideas that came from it, there were also major changes in economic theories and practices that took place within the milieu of the Enlightenment.

Beginning in the Early Modern Period of world history, roughly during the early sixteenth century, corresponding with the Age of Exploration and the rush to conquer and colonize the New World, a new economic system developed in Europe. The old feudal economy was replaced by mercantilism, which was a financial system whereby the mother country would exploit the resources of her colonies and then sell manufactured goods back to the colonies. The system worked well for some time, but by the eighteenth century, numerous problems became very obvious. Eventually, Enlightenment philosophers such as David Hume and Adam Smith realized that not only was the mercantile system inefficient, it was in many ways anathema to the basic ideas of the Enlightenment. The economic ideas of Smith, Hume, and others were ultimately championed by the leaders of the most powerful countries, which helped to usher in the Classical Gold Standard and modern capitalism.

The Enlightenment

The Enlightenment proved to be one of the most revolutionary periods in world history as it transformed the way in which societies viewed the relationship between the ruler and the ruled. The movement first began in Great Britain in the late seventeenth century, which was experiencing profound political change, and then spread to France and the German-speaking kingdoms. Some of the basic ideas of the Enlightenment were increased political freedom for all classes, more political equality, and a diminished role of government. Many, but not all, of the most prominent Enlightenment philosophers, were anti-monarchy and most were ardent believers in free trade.

Regarding economics, Enlightenment thinkers believed that although commerce often promoted self-interest and sometimes greed, it also helped to mitigate other negative aspects of society, particularly concerning governments, thereby ultimately promoting social harmony. As the eighteenth century progressed, economics played an even more significant role in the Enlightenment due to the drastic changes that were taking place in society from the onset of the Industrial Revolution. In order to keep up with the rapid technological changes that were affecting European society, especially in the realm of the economy, Enlightenment philosophers began taking note of the role the mercantile system played in people’s lives and how much it stifled freedom.

David Hume and Economics

David Hume (1711-1776)

Among the most important writers of the British Enlightenment was Scottish thinker David Hume (1711-1776). Two of Hume’s most important works were Essays and The History of England and although neither of those works, or any of Hume’s writings for that matter, never focused specifically on international relations or macroeconomics, his thoughts on those issues were scattered throughout all of his works.

Hume’s specific ideas on economics were quite nuanced and revolutionary for the period. He believed that the idea of the nation-state was essentially a good concept and that healthy amounts of national pride would result in economic well-being, as well as advances in the arts and sciences. Like Adam Smith, Hume opposed the contemporary economic system of mercantilism because he believed it hampered free commerce through export controls, which had the ripple effect of stifling freedom in general.

Hume was one of the first thinkers to promote the idea of true “free trade,” unbounded by borders, tariffs, or other taxes on imports. He argued that foreign trade increases the stock of labor in a nation, which can then be used for public works projects. To Hume, imports were good as they were a sign of wealth in a nation and that increased imports usually lead to more luxury items, which ultimately meant that the people would be happier. Finally, David Hume thought that under a truly free economy, trade imbalances would not be a problem and that the amount of gold and silver leaving the country in such a system would be negligible because foreign investment would be promoted due to the lack of tariffs.

Although Hume recognized that sometimes wars were inevitable, he believed that they were for the most part terrible for economic progress. Hume argued that any benefits gained from territorial conquest were often mitigated by the fact that wars usually disturb free commerce, create lazy laborers, and are almost always expensive and increase the national debt. Ultimately, the entire concept of the empire itself was financially ruined some and for that reason alone should be abolished, Hume advocated. He believed that empires were usually beneficial to the mother country in the beginning, but almost always became financial burdens that hurt the overall economy. David Hume’s revolutionary economic ideas resonated with many Enlightenment thinkers, no more so than his fellow Scotsman, Adam Smith.

Adam Smith and the Enlightenment

Map Depicting the Mother Countries and Their Colony Possession during the Enlightenment

Adam Smith (1723-1790) synthesized and improved on many of David Hume economic theories to create an economic worldview that would influence global economics until the present. In Smith’s most famous work, The Wealth of Nations, and in his earlier yet no less important, The Theory of Moral Sentiments, he argued that economic freedom was intertwined with political freedom and that many societal benefits actually came from greed, which was a process he referred to as the “Invisible Hand.” Smith’s philosophy was extremely optimistic, as he argued people were inherently good and that economically driven men would seek to better themselves while simultaneously promoting the welfare of society. But what made Smith a revolutionary thinker was his strident opposition to the old economic order.

Smith believed that the mercantile system was obsolete and inherently unjust because it undermined any attempts to build and/or conduct a fair and honest government. Much like Hume, Smith argued that the free exchange of commodities would lead to greater political freedom and the free exchange of ideas. In the mercantile system, government subsidized companies, such as the British East India Company, were given monopolies to control all trade in a specific colony, but Smith believed the benefits the system may have provided to greater society were negligible at best and were usually more of a detriment.

“But these kinds of monopolies derange more or less the natural distribution of the stock of the society: but they do not always derange it in the same way.”

Although Smith, like Hume, was a pragmatist and knew that wars were inevitable and that more powerful countries often rule over the weak, he opposed colonialism just for the sake of it. Smith wrote much of his works during the decades leading up to and during the American Revolution, which he often cited as an example of the follies of colonialism. He argued that colonialism was extremely costly for many reasons, including the fact that the government subsidized companies carrying out the efforts were often inefficient and could rely on government bailouts. Smith believed that it was pointless for the mother country to subsidize such affairs:

“If any of the provinces of the British empire cannot be made to contribute towards the support of the whole empire, it is surely time that Great Britain should free herself from the expense of defending those provinces in time or war, and of supporting any part of their civil or military establishments in time of peace, and endeavour to accommodate her future views and designs to the real mediocrity of her circumstances.”

Conclusion

There is little doubt that Enlightenment philosophers David Hume and Adam Smith indelibly influenced the modern economic world. Their critique of the mercantile economic system, particularly the idea of government-subsidized monopolies and imperialism, influenced political and economic leaders in the late eighteenth and early nineteenth centuries. By the middle of the nineteenth century, the economic policies practiced by the most industrialized nations of the world more closely resembled what Smith and Hume envisioned. The government's that subsidized monopoly companies were slowly dying, tariffs and other trade restrictions were not as common, and the Classical Gold Standard was the primary economic regime. The days of empire were also coming to a gradual end, signaling the end of one economic and political order and the beginning of another that in many ways still exist.