Specie Flow Mechanism of Hume

Specie Flow Mechanism of Hume does not work as advertised. Basically economies were on gold standard in late 19^th century and there was a lot of trade. According to the Hume the all trade among the countries will be eventually balanced-out but actually it was not that was happening in real. Unequal balance of power was also one of the reason of WWI. Theory of Comparative advantage is an ideological weapon which is used to make countries do that is not in their own interest. We were told, in India and Pakistan, our comparative advantage is in growing raw materials. Textile producers of India developed some machines which were very efficient in producing certain type of cloth and has great demand in England but those machines were burnt and trade restrictions were put on India. It was done to enforce the theory of comparative advantage which states that our comparative advantage is not in producing textiles but in raw material only. After it India only produce yarn and export it to England and there it was converted into clothes and Indians bought that cloth. In this way theory of comparative advantage worked only for so called developed economies at the cost of developing economies. At the time English invaded their industry was far behind than India then they banned the exports of Indian textiles and destroyed the industry and also copied lot of technology from Indian producers.

Suppose that there is an imbalance in the economy that exports are cheap for instance wheat price is controlled and is low in international market while clothe that other countries are exporting is very expensive. It will create balance of payment deficit which is actually exporting gold. Now according to Specie Flow Mechanism we are buying lot of expensive manufactured goods from abroad and they are buying our wheat cheaply so we are losing lot of gold which will drag down the domestic prices which causes to increase the exports and we will start importing gold in other words. But in reality gold outflow will be more than inflow and according to Keynesian theory money supply will be reduced in the country and can’t carryout business as before. It will cause to close down the factories and hence unemployment will occur in the economy. It was happening all over the world. Countries which had high exports experiencing full employment but countries which were importing had low domestic aggregate demand because it was used to finance the foreigners by importing their goods. Now if we create barrier to trade by tariffs then demand for domestic goods will increase and domestic industry will start booming which will increase employment in the country. Specie Flow Mechanism is not right as it does not happen like that in reality. Similarly if country has high exports then, generally, this will benefits the economy and according to Keynesian theory it would cause inflation. But this also not that happens in real world as it is not necessary to cause inflation. It could cause inflation if money is given equally to everybody but actually Japan experience as huge export surplus without having inflation. Reason is that they would take the exports, earn dollars on it and central bank would store it as a safety. They acquired huge balances of dollars but there was no inflation because money was just being stored and not circulated in the economy.