Kautilya- the True Founder of Economics Page 2
No one should get surprised by the claim that Kautilya founded economics. Kautilya’s genius has been recognized in India and Southeast Asia but very little is known or acknowledged about his contributions in the West. Surprisingly, there is not even a mention of his name in the literature on the history of economic thought, which, after a brief reference to the Greek masters, usually covers the conditions and thoughts in the post-Middle Ages in the western hemisphere. Even well-read and eminent economists display ignorance about Kautilya’s contributions. In this book I have sought to present Kautilya’s Arthashastra as objectively as possible. I was inspired by Professor Samuelson’s work on Adam Smith and follow his ‘rational reconstruction’ approach to interpret Kautilya’s Arthashastra. However, the ‘historical reconstruction’ approach cannot be used effectively in this case, since sufficient information for the purpose is not available for that period. Elementary graphs and charts have been used at some places to facilitate greater clarity in understanding.
Recently, Mattessich (2000, Chapter 6) finds that Luca Pacioli, the Italian mathematician, who is acknowledged as the founder of modern accounting, simply initiated the practice of double-entry book keeping, whereas Kautilya founded the theory of accounting itself. He concludes that Kautilya’s Arthashastra is as important a contribution as Pacioli’s Summa. It is claimed here that Kautilya’s Arthashastra is as important a contribution as Adam Smith’s Wealth of Nations. After going through this book, many open-minded readers might be convinced that Mattessich’s above cited observation about Kautilya’s contribution in the field of economics is an understatement.
Chronological priority has been the sole legal standard of proof/ criterion to grant patent/copyright to an innovator/writer. My objective in writing this book is simply to get Kautilya his due recognition as the true founder of economics since he, indeed, accomplished much more than what Adam Smith did two thousand years later. Also, many unfounded distortions, both about Kautilya and Hindu culture, get corrected with this work. It is, indeed, extremely difficult for anyone to accept that he/she has been worshipping a wrong god or that his/ her father is someone other than the one who he/she knows as his/ her father. My purpose in writing this book is not to hurt or convert anyone. Still, it might not convince or it might even infuriate some guardians of the faith. Kautilya’s Arthashastra is, indeed, a world heritage. It is a manual on how to achieve peace and shared prosperity. The world community could benefit by adopting Kautilya’s ethical and practical approach. I hope this book initiates a constructive debate as to how to ensure that every citizen of every country enjoys a richer and fuller life.
Whatever royalty is earned from the publication of this book will be donated to the Munshi Ram and Nimbo Devi Charitable Trust, which has been doing its bit in promoting quality education in rural India. The Trust built a Girls’ Higher Secondary School in my village and handed it over to the Government of Haryana (India) in May 2002.
— Balbir Singh Sihag Sisai, Haryana January 2014
Acknowledgements
I have been very fortunate in getting advice and generous help from so many distinguished scholars. My graduate education at MIT was of tremendous help, it provided me with the necessary tools of analysis and the confidence in undertaking this ambitious project. Additionally, the very first thing I learnt from Kautilya was that ego is the biggest hurdle in the acquisition of knowledge and that changed my attitude to learning and opened many doors to the knowledge and wisdom of many scholars.
I owe my greatest gratitude to Professor Jagdish Bhagwati. His support was invaluable to me throughout the process of writing this book. I am grateful to Dr Manmohan Singh, Prof Robert Solow, Prof T N Srinivasan and P K Kaul for their extraordinary help in enhancing my capabilities to write this book and to Prof Avinash Dixit for encouragement and advice to minimize the role of hindsight. I am indebted to Prof Louis Haddad for advice, numerous suggestions and comments on the earlier drafts.
I am deeply indebted to late Dr Anand Chandavarkar for the superb editing and for adding both content and clarity to the manuscript. I am equally grateful to Bhoopendra Sinha, who reviewed every line of the multiple drafts and provided countless suggestions to refine, clarify, rearrange and fill the logical gaps in presentations of the manuscript. Chapter 5 was added especially due to his suggestion.
Professors Ravi Prakash Arya, Mark Blaug, John Conlisk, Jerry Evensky, Evelyn Forget, Monica Galizzi, Ruth Grant, Daniel Hammond, Daniel Hausman, V Nagarajan Iyer, Linda Kistler, Alain Marciano, Subodh Mathur, Richard Mattessich, Steven Medema, Lallan Prasad, Lall Ramrattan, Eric Rasmusen, Satyavrat Shastri, Upinder Singh, Anthony Waterman and Judge Richard Posner provided several suggestions to improve the content and presentation of various segments of the manuscript. I also benefited from the participants in the lectures and seminars at the Rajasthan University at Jaipur, the Mahrishi Dayanand University at Rohtak, the Kurukshetra University, the Kautilya Foundation in New Delhi and Transparency International in New Delhi. The figures were done by Puneet Sharma, I appreciate his help.
Dr William Hogan, former Chancellor of the University of Massachusetts, Lowell, was kind enough to grant me a sabbatical to embark on this project. I am grateful to him for providing me this precious opportunity. I am grateful to Chancellor Martin Meehan and Associate Chancellor Dr Jacqueline Moloney for supporting my project in every possible way by making available the necessary support services. Gregory Keefe, Kevin Smith and Judy Stevenson, secretary of the Department of Economics, were very helpful.
My thanks to my publisher Renu Kaul Verma, my editor Papri Sri Raman and her production team of Alok Saini and Geetali Baruah.
My wife, Neelam, has been an equal partner in this endeavour. She had to sacrifice the most. This manuscript is the fruit of her patience and faith in me. My daughters, Swati and Smita, managed all of my computer-related needs.
The generosity of L N Rangarajan and Penguin Books is greatly appreciated for giving me the permission to use the translation of the Arthashastra for interpretations. I am grateful to Craufurd Goodwin, Paul Dudenhefer, Kishore Kulkarni, Steven Medema, Sushil Mittal, Surjeet Singh, Hrishikesh Vind, Stephen Walker and several unknown referees for dissemination of Kautilya’s ideas. I admire Dr Masudul Alam Choudhury for his courage and wisdom. I am indebted to him for publishing a special issue of Humanomics on Kautilya’s contributions. I acknowledge with a sense of gratitude the willing generosity of the publishers of the following journals for permitting me to use my articles included in their publications earlier:
Sihag, Balbir S (2004) Kautilya on the Scope and Methodology of Accounting, Organizational Design and the Role of Ethics in Ancient India Accounting Historians Journal Vol 31, No.2: p 125-148.
(2005a) Kautilya on Ethics and Economics, Humanomics Vol 21, No.3/4: p 1-28.
(2005b) Kautilya on Public Goods and Taxation, History of Political Economy Vol 37.4: p 723-751.
(2007a) Kautilya on Institutions, Governance, Knowledge, Ethics and Prosperity, Humanomics Vol 23, No.1: p 5-28.
(2007b) Kautilya on Time Inconsistency and Asymmetric Information Indian Economic Review Vol 42, No.1: p 41-55.
(2007c) Kautilya on Moral and Material Incentives, and Effort History of Political Economy Vol 39, No.2: p 263-292.
(2007d) Kautilya on Administration of Justice during the Fourth Century BCE, Journal of the History of Economic Thought, 1.29, No.3: p 359-377.
(2008a) Kautilya on Risk-Return Trade-off and Diversification, Indian Journal of Economics and Business, December Vol 7, No.2: p 281-296.
(2008b) Kautilya on Management by Wisdom during the Fourth Century BCE International Institute of Informatics and Systemics Proceedings, Vol 7, p 256-262.
(2009a) Kautilya on Economics as a Separate Science Humanomics Vol 25, No.1: p 8-36.
(2009b) Kautilya as a Forerunner of Neo-classical Price Theory Humanomics Vol 25, No.1: p 37-54.
(2009c) Kautilya on Principles of Taxation, Humanomics Vol 25, No.1: p 55-67.
No.1: p 68-74.
(2009e) Kautilya on Law, Economics and Ethics, Humanomics
Vol 25, No.1: p 75-94.
(2009f ) Kautilya on Moral, Market and Government Failures,
International Journal of Hindu Studies, Vol 13, No.1, p 83-102. (2010) Kautilya on Famine, Fairness and Freedom, Indian Journal
of Economics and Business, June Vol 9, No.2: p 263-274. (2013) Kautilya on Prudence, Protection and Prosperity, Hrishikesh
Vinod (ed.) in The Handbook of Hindu Economics and Business at
:https://www.createspace.com/4224711.
(2013), Kautilya on Ethical Anchoring as Systemic Risk Management,
Hrishikesh Vinod (ed.) in The Handbook of Hindu Economics and
Business at :https://www.createspace.com/4224711.
ONE
Kautilya and His Times
Kautilya set out to lay down the foundation, erect the necessary pillars and structures to build and sustain such an ideal economy. He believed that the establishment of rule of law, an impartial judicial system, private property rights, an incentive mechanism to ensure efficiency and honesty of government officials, and establishment of dharma through the moral and spiritual rules of human behavior, were the key ingredients for the creation of a prosperous economy.
Prologue
Kautilya’s Vision
Kautilya's Arthashastra is comprehensive, internally consistent, original and wide in scope. It contains sufficiently large number of significant concepts and hypotheses that clearly establish Kautilya as the founder of economics.
Vishnugupta Chanakya (son of Chanaka), also known as Kautilya, wrote the Arthashastra, the science of wealth and welfare, during the latter half of the 4th century BCE. It has 150 chapters that are distributed subject-wise in fifteen books. Kautilya was addressed as an Acharya (professor) and a statesman. He has been credited with the destruction of the oppressive and corrupt Nanda Dynasty and installing Chandragupta Maurya (321-297 BCE) on the Magadha throne. Chandragupta Maurya considered him as mentor and sought his advice on both political and economic matters. Some writers incorrectly claim that he served as a Prime Minister to Chandragupta Maurya. Nehru (1946, p 123) describes their special relationship quite appropriately as: ‘He sat with the reins of empire in his hands and looked upon the emperor more as a loved pupil than as a master. Simple and austere in his life, uninterested in the pomp and pageantry of high position.’ Kautilya was an independent thinker and it would be incorrect to label him as an administrator only.
It may be reasonable to assume that he was older and undoubtedly wiser than Chandragupta Maurya. Kautilya was probably born around 360 BCE, was very influential during Chandragupta’s rule (321-297 BCE), and might have lived beyond the latter date.
BCE), and might have lived beyond the latter date.
322 BCE). However, there is absolutely no evidence that Kautilya was aware of Aristotle’s ideas. Moreover, Aristotle wrote very little (if any) on economics. Kautilya’s Arthashastra was very widely referred to and was revered by scholars for more than a thousand years after its writing.1 There is no reference to the emperor Chandragupta Maurya or to his kingdom Magadha in the Arthashastra since it was meant to be a theoretical treatise designed to instruct kings everywhere and in all times.2 Kautilya is also credited with two other works, Chanakya Sutras (Chanakya’s Precepts) and Chanakya Rajanitisastra (Chanakya’s Statecraft).
1.1 PROVISION OF HUMAN SECURITY Kautilya had a grand vision of building an empire encompassing the whole of the Indian subcontinent, prosperous (free from wants), secure against foreign threats, crime-free (free from fear), internally stable and based on secular virtues such as non-violence, compassion, benevolence, truth and honesty. There was a big gap between Kautilya’s ideal economy and the one actually prevailing at the time. His goal was to write a theoretical treatise for transforming the actual economy into an ideal economy and sustaining it. Kautilya’s genius lay in developing a conceptual framework while anticipating various problems that might arise in the intended transformation, and devising appropriate policies to resolve them. The level of abstraction achieved in the Arthashastra is remarkable for his times.
Kautilya set out to lay down the foundation, erect the necessary pillars and structures to build and sustain such an ideal economy. He believed that the establishment of rule of law, an impartial judicial system, private property rights, an incentive mechanism to ensure efficiency and honesty of government officials, and establishment of dharma through the moral and spiritual rules of human behavior, were the key ingredients for the creation of a prosperous economy. He critically examined, extended and codified the existing rules and regulations to establish the rule of law. However, he believed that in the absence of moral anchoring, no amount of rules and regulations could prevent systemic risks.
Joan Robinson (1953) has observed that neoclassical thought paid too much attention to little issues like ‘why does an egg cost more than a cup of tea’ and ignored the big issues like growth and distribution, which were pursued by the classical economists. However, both classical and neoclassical economists ignored the systemic risk arising from moral decline, foreign aggression or calamities like famine. Kautilya’s Arthashastra was quite concerned about the losses arising from such disruptions whereas now the sole emphasis is on losses resulting from the distortions (called deadweight loss). For example, understanding the distinction between disruptions and distortions is of paramount importance when the effects of a lump sum tax are compared to those of an income tax.
Accordingly, Kautilya formulated three kinds of policies:
• economicpolicies(Arthaniti) to promote economic growth and
prevent natural and man-made calamities,
• ajudicialfairnesspolicy(Dandaniti) for administration of justice,
and
• aforeignaffairspolicy(Videshniti) to help maintain independence
and to expand the kingdom.
He put heavy emphasis on acquiring new territories, developing the land and building settlements. He invariably analyzed all the available alternatives and recommended the best one. He laid emphasis on having a diversified economy with good infrastructure and irrigation facilities. He formulated detailed outlines for the various government departments, spelling out responsibilities and salaries of the officers. It was in the pursuit of formulating these policies that Kautilya originated more than a score of fundamental concepts of economics.
A brief review of the existing views on Kautilya’s Arthashastra is provided in Section 1.2. ‘Why Another Book on Kautilya?’ is explained in Section 1.3. Reasons for using Rangarajan’s (1992) translation of the Arthashastra for the basis of this work are provided in the Appendix A.
1.2 PREVALENT VIEWS ON KAUTILYA’S CONTRIBUTIONS Spengler (1971) and Dasgupta (1993) discuss Kautilya’s Arthashastra in limited detail. Spengler presents a few but quite fundamental economic concepts contained in the Arthashastra. He (1971, p 158) observes: ‘Kautilya was, of course, familiar with the general nature of man’s response to changes in price and income as well as to changes in the structure of rewards and penalties.’ Spengler (1971, p 74) explains: ‘His analysis, of course, was implicit, not explicit; it rested upon the assumption that individual behavior could be controlled in large measure through economic rewards and penalties, particularly when these were commensurate with the action to be encouraged or discouraged. Accordingly, while Kautilya looked at economic issues through the eyes of an economic administrator, he was aware that rules must fit man’s economic propensities and foster rather than repress useful economic activity.’ Spengler acknowledges that Kautilya not only recognized the agency problems but also suggested many solutions befitting the contemporary situation.
On taxation, Spengler (1971, p 72) remarks, ‘Kautilya’s discussion of taxation and expenditure, apparently in keeping with traditional doctrine, gave expression to three Indian p
rinciples: taxation power is limited; taxation should not be felt to be heavy or excessive; tax increases should be graduated. One of his main concerns seems to have been the collection and expenditure of revenue in such ways as to build up the permanent revenue-yielding capacity of the economy. While he manifested little knowledge of tax shifting and incidence, he emphasized the long run, cautioned against too heavy taxation in the short run, and noted that a ruler could not tax at his pleasure, particularly in frontier regions whence disgruntled taxpayers could flee to neighboring countries.’ This phenomenon is now called the Dupuit-Laffer Curve. In fact, as asserted below, a slightly differently shaped curve, which may be called the Kautilya Curve is discernible in his analysis.
On the concept of diminishing returns, Spengler (1971, p 71) observes, ‘He does not explicitly recognize the tendency to Ricardian diminishing returns implicit in his account of the quite unequally colonisable and unevenly cultivable character of India’s lands’. This is a very significant observation since it makes the debate over priority to Smith or Ricardo for diminishing returns irrelevant.
On factors of production, Spengler (p 75) notes that Kautilya understood the ‘distinction’ between ‘interest’ and ‘profit’. Kautilya discussed wages and rent also. In fact, not only did Kautilya understand the distinction among different factors of production but also discussed how to maximize profits from public enterprises, adjust interest rate for risk premium, pay efficiency wages to reduce shirking and how to determine the circumstances under which to have a wage system or a sharecropping arrangement on Crown land. It is obvious that Spengler acknowledges Kautilya’s understanding and his application of the most fundamental concepts in economics. Unfortunately, he explores only a few aspects of Kautilya’s contributions to economic thought.