(A) David Hume
There was no "first economist". A number of ancient Greek and Indian thinkers wrote on economic topics, including Aristotle and Plato, but there is a profound difference in the thinking of ancient and more modern thinkers. The ancients were more concerned with the rulers they advised, while modern economists were more concerned with the well-being of all of society. Between the old world of economics and the new resides David Hume, and the enlightenment he inspired.*
Figure 1—David Hume (1711-1776)
Allan Ramsay [Public domain or Public domain], via Wikimedia Commons
When I am asked who was the first economist, I tend to answer David Hume. Hume was a intellectual revolutionary, whose skepticism in the areas of religion(H2) prohibited him from acquiring the university appointments he deserved, but his books sold well and their contents admired by most all thinkers at the time—and the present.(C2)
The Scottish Enlightenment began with Hume, where his faith in the ability of reason to enhance the life of both nobles and ordinary people inspired investigations into the role of markets and money in society. One moral philosopher particularly inspired was his student and friend, Adam Smith, who would later write the book that would revolutionize economics: The Wealth of Nations.
Although Adam Smith may have established economics as a new field, I still believe David Hume wrote the first modern piece of economics in his 1742 essay, On the Balance of Trade.(H1) This essay was a response to writers who worried that Britain would run out of currency if it continued to import goods. The idea was that the British paid their currency for imports and that currency was taken across the English channel—gone forever, they thought. No country wants to run out of money. How would it pay for things?
If you are a locavore, this argument about currency may sound familiar.
(B) Hume and the locavore
The local foods movement encourages people to purchase their food from local sources, for a variety of reasons. One of these reasons is related to local economic development. By giving a dollar to a local farmer instead of Walmart, that dollar remains in the local community, thereby stimulating local economic growth. Notice there is nothing special about food in this argument. If local food is good for the local community, then buying anything local (e.g., lumber, iPods) is also good for the community.
Video 1—The Beliefs of a Locavore (from documentary, Locavore)
Over two hundred years ago, Hume demonstrated this argument is invalid. If a town of Stillwater attempts to import nothing but has no problem exporting, it is true that money would flow into Stillwater and no money would leave. It is also true that the actual goods people consume would flow out of Stillwater, with no goods coming in. If this continued in perpetuity two things would happen. First, Stillwater would eventually possess all the U.S. dollars in the world, and second, and it would have much fewer goods to buy. Obviously, this would not happen, and in Hume's explanation why, he also debunks some of the locavore's arguments.
Figure 2—Logo From a Buy-Local Movement
 local.jpg)
Taken from www.keepitlocalok.com
Continue with the thought experiment where Stillwater, OK wants to exports but does not want to import anything. As Stillwater's possession of money rises and goods become scarce, prices will rise—and rise, and rise, and rise. After all, people will be walking around with pockets full of cash, yet competing for only a few goods. Everyone will be millionaires, but with little food to purchase. As more money comes into Stillwater and more goods leave, prices will become so high that the citizens will rebel against the locavore movement and will insist on the right to import cheaper goods from other regions. As imports resume, goods start flowing into Stillwater and money begins to leave.
Once prices in Stillwater are comparable to other regions, prices and the flow of money will stabilize. Stillwater prices will be consistent with prices in other regions, and the number of dollars entering Stillwater will equal the number of dollars leaving.
We do not have to worry about all money leaving a region, because regional prices will change to ensure roughly the same amount of money enters and leaves a region every year. When there is an imbalance, prices change to correct for it. If exports exceed imports, like the locavore wants, we have already seen how this causes Stillwater prices to rise, triggering an increase in imports, once again restoring balance.
Conversely, if imports exceed exports then money begins to leave Stillwater. As people have less money to spend prices must fall, as people are unwilling to pay the prices they once paid. The lower prices in Stillwater then entice people from other regions to shop in Stillwater, triggering an increase in exports and an inflow of money, causing imports and exports to equal one another.
So long as markets are allowed to influence prices (as opposed to prices set by the government) we do not have to worry about trade imbalances, nor need we worry about losing all of our money to other regions. Over time, exports will always equal imports, and the dollars coming into a region equal the dollars leaving the region.(L1)
What this means is that every dollar spent importing a good is associated with a dollar of exports from the same region. Put differently, for every dollar leaving the region to pay for imports there is a dollar entering the region in payment for exports.
Quotation 1—Even the greatest of presidents can be wrong
I don't know much about the tariff, but I do know if I buy a coat in America, I
have a coat and America has the money—if I buy a coat in England, I have the coat
and England has the money.
—Abraham Lincoln
You support your local community regardless of whether you buy local. Spend $5 on a locally made beer, and that $5 is spent in the local community. Spend $5 on an imported beer (say, a Heineken), and that triggers $5 of exports from your region, causing $5 to enter your community. Buy local or not, all of your spending benefits your local community.
Quotation 2—The Secretary of Agriculture can also be wrong
In a perfect world, everything that was sold, everything that was purchased and consumed would be local, so the economy would receive the benefit of that.
—Tom Vilsack in The Washington Post on February 11, 2009.
What this also means is that a region cannot decide whether it will import or export, as if those are separate decisions. Exports must equal imports, so if a region decides it no longer wants to import goods it has also decided it no longer wants to export goods. That region has essentially severed its ties with the rest of the world, wishing to live an isolated life. This "region" can be anything. It can be a country wanting to not trade with the world, or it can be an individual who believes he can become richer by living a solitary life. I don't remember Robinson Crusoe having it so well, however.
A previous article argued that most of our wealth emanates from specialization and trade, so if you elect not to trade, you elect austerity—perhaps, poverty.
(C) So, is the whole local foods movement defunct?
No. If the local foods movement encourages people to look more closely at the food they eat, and when they do they discover they can find tastier, healthier, and perhaps cheaper food down the road than from a multinational corporation, then the local foods movement has served us well.
The movement is wrong to make you feel guilty about buying food at Walmart, though. If the movement can't convince you to buy local because the food is better, it should not seek to procure your money through guilt.
If you are interested in more information about local foods, I encourage you to read this short article at the Library of Economics and Liberty.
(D) So what about the Picken's Plan?
The patron saint of Oklahoma State University is Boone Pickens, who in addition to donating a fortune to the university is seeking to persuade the United States to base their transportation system not on oil, but natural gas. To promote his plan (he calls it the Picken's Plan) he produced this commercial which gives Americans the impression that when we buy oil from the Middle East we are essentially handing over vast amounts of wealth to foreigners, when that money would benefit America more if it were spent within the U.S. borders.
The video is below. How do you think David Hume would respond to this?
Video 2—Boone Pickens, Speaking on Foreign Oil Versus U.S. Natural Gas
Taken from https://www.youtube.com/watch?v=qDcQaJjQdDs in 2013.
* Since writing this article I have learned of Sir William Petty, who probably deserves the distinction of being the first modern economist, but he is not nearly as famous as Hume, and was not the founder of the Scottish Enlightenment that would usher in modern economics.(E1)
References
(A1) America Revealed [documentary]. April 11, 2012. "Food Machine." Season 1. Episode 1. Young, Nic [director]. Bernanke, Jaime and Joseph Dorman [writers]. Kwon, Yul [host]. Public Broadcasting Service.
(C3) Cahoone, Lawrence . 2010. The Modern Intellectual Tradition: From Descartes to Derrica. Lecture 7: The Radical Skepticism of Hume. The Teaching Company.
(E1) The Economist. December 21, 2013. "Free Exchange: Petty impressive." Page 116.
(L1) Lusk, Jayson L. and F. Bailey Norwood. January 3, 2011. The Locavore's Dilemma: Why Pineapples Shouldn't be Grown in North Dakota. Library of Economics and Liberty. www.econlib.org.
(H1) David Hume. 1742. On the Balance of Trade. Available for free at the Library of Economics and Liberty.
(H2) David Hume. 1748. An Inquiry Concerning Human Understanding.