Kautilya- the True Founder of Economics Read online

  On the other hand, Dasgupta does not think much of the contributions of ancient writers to economic thought (including those of Kautilya). He (p 6-7) makes a sweeping observation, ‘In my judgment, “analytic or scientific aspects of economic thought” of the kind Schumpeter was referring to in defining economic analysis, cannot be found in Hindu, Buddhist, or Islamic writings on economic topics; nor for that matter in their Greek, Roman, Jewish or Scholastic counterparts. A history of economic analysis in India would have to start sometime in the nineteenth century.’

  The author strongly disagrees with Dasgupta’s claims. Reference is made to a few of Kautilya’s ideas to refute the prevalent myths about his Arthashastra. Chapters 3 to 20 contain Kautilya’s treatment of several concepts which, it is hoped, provide sufficient evidence to correct the prevailing misrepresentations regarding his contributions and maturity of the Hindu civilization.

  The most likely reason for the many important omissions by Spengler, Dasgupta and others seems to be that they overlooked the chapters relating to law and order and foreign affairs to which Kautilya applied many important economic concepts. Similar omissions in other works have also been endured for centuries. For example, an important omission regarding Adam Smith’s knowledge of diminishing returns persisted for more than two centuries as Samuelson (1980) points out, ‘Ricardo and his contemporaries may, however, be in no need of enemies if their defenders must write on their behalf that they missed what was in theWealth of Nations because the relevant material was “scattered” and appears in out of the way chapters where such esoteric subjects as colonies are discussed.’

  Evaluation of Kautilya’s Arthashastra on

  Political Issues by Non-economists In the literature on political science, Kautilya has been compared to Machiavelli and even to Plato and Aristotle. The author is not competent to comment on the relevance or nature of such comparisons. However, a summary of their conclusions is presented below. The reader interested in further investigations of this aspect may refer to Basham (1959), Drekmeier (1962), Kangle (2000, part III), Parmar (1987), Ray (1999) and Varma (1995-96).

  It is not surprising that different commentators read Kautilya’s Arthashastra differently. Some find it merely a synthesis, although brilliant, of existing ideas. For example, according to Kamandaka, who wrote Nitisara (a set of thoroughly proved policies) during 4th or 5th CE (see Karwal, 1966), Kautilya ‘churned the nectar of the science of policy from the ocean of political sciences.’ Others like Ghoshal (see Kangle, part III, p 56) find Kautilya’s Arthashastra ‘a virtual reconstruction of the science’. Kangle (Part III, p 55) concludes, ‘It appears reasonable to suppose that except in those cases where divergent opinions are specifically attributed to Kautilya, the bulk of the teaching in this text is materially the same as he found it in the source-books on which he relied’. He (p 56) adds, ‘It is, therefore, possible to say that the shastra as it emerges from Kautilya’s hand is more sober, more rational and inevitably more advanced than was the case in the earlier writings.’

  1.3 WHY ANOTHER BOOK ON KAUTILYA? A serious attempt is made to revise the currently accepted history of economic thought. First, it is claimed that presentation of Kautilya’s monumental contributions should succeed in dispelling the deep seated myth that economics originated during the eighteenth century and Adam Smith is the founder of economics.

  A claim is only as good as the arguments it stands on. For the first time, strong arguments are provided why Kautilya should be considered as the founder of economics in the 4th century BCE. Secondly, it is argued that Kautilya’s Arthashastra may be correctly designated as Dharmanomics: economics built on an ethical foundation, projecting economics and economic policy in a more meaningful and socially desirable perspective. Thirdly, it is shown that Hindu civilization is not averse to economic growth as an important goal. A brief overview is provided below.

  Kautilya as the Founder of Economics Kautilya provided consistent and coherent interpretations of more than a score of modern economic concepts. It is claimed that Kautilya pioneered political economy much before appearance of Adam Smith’s Wealth of Nations (1776). Adam Smith came to be accepted as the founder of economics based on the arguments that (i) he was the first one to write a treatise on economics, and (ii) he synthesized brilliantly the existing ideas. Samuelson has added another argument that Smith was also a theorist, who made original contributions. It is shown in Chapters 3-20 that Kautilya was the first economist who accomplished all these feats two thousand years earlier than Adam Smith. Kautilya carved out economics as a separate discipline. Additionally, Kautilya’s Arthashastra is much more sophisticated, both in method and content than Adam Smith’s Wealth of Nations. In fact, based on the degree of sophistication of his analysis, it could be claimed that Kautilya was a neoclassicist well before the classicists came on the scene.

  A strong critique of the prevailing orthodoxies regarding the origins of economics and Adam Smith being its founder is provided here. It is not claimed that Kautilya provided any formal proofs or that the Arthashastra as a book is as sophisticated as Samuelson’s Foundations. It can thus be claimed that Kautilya’s Arthashastra is, at least, as important a contribution as Adam Smith’s Wealth of Nations. It is shown that despite the non-availability of the calculus and statistical methods, Kautilya’s economic analysis was reasonably organized, adequately developed, and applied to a variety of problems. The following table provides an insight into Kautilya’s contribution and genius.

  Table 1.1: A Partial List of Concepts Used by Kautilya Genesis of Concepts in the Arthashastra

  during 4th century BCE Re-emergence of these concepts

  Opportunity Cost

  Demand-Supply Framework Diminishing Returns

  Liquidity

  ‘All other things being equal’ Marginal Analysis

  Constrained Optimization

  Distinction between Short Run and Long Run

  Moral Hazard

  Linear Income Tax

  Public Goods

  Producer Surplus

  Importance of Capital Formation Theory of Gains from Trade Author Year

  Wieser 1889

  Marshall 1870

  Turgot 1766

  Keynes 1936

  D Bernoulli 1738

  Turgot 1766

  Walras, Slutsky 1874 -7, 1915 Marshall 1870

  Adam Smith 1776 Mirrlees 1971 Lindahl, Samuelson 1919, 1954 Marshall 1870 Adam Smith 1776 Ricardo 1817

  Contd... Genesis of Concepts in the Arthashastra

  during 4th century BCE Crime and Punishment

  Efficiency Wages

  Risk-return Trade-off

  Asymmetric Information Time Inconsistency Problem Non-cooperative Game Contingency Planning

  Re-emergence of these concepts Becker 1968

  Marx, Solow 1867, 1979 Markowitz 1952

  Akerlof 1970

  Kyland-Presscott 1977

  Waldegrave, Nash 1713, 1951 H Stein 1996

  It may be noted that the above illustratively enumerated twentyone concepts, used in modern economic analysis, were already used and applied in Kautilya’s formulations. Adam Smith has the credit for only two. Undoubtedly, the social, the political and the economic institutions and conditions prevailing at the time of Kautilya were markedly different from those of today. Yet, remarkably, almost all of his insights, concepts, and methodology are as relevant today in our industrialized and globalized world as they were in his times.

  Kautilya’s Arthashastra as Dharmanomics Contrary to the now prevalent view, Kautilya placed a very heavy emphasis on ethical values. Ancient thinkers in India attached justifiable significance to keeping a proper balance between spiritual health and material health, and elaborated the former as the objective and the latter as an accompanying obligation on the public plane. Although ideas regarding attainment of artha at an individual level and complimentary and enabling public policy at the government’s level, are said to have their origin between 650-600 BCE, it was
Kautilya who elaborated on raising the standard of living to achieve the true balance between spiritual and material health. He proposed advancement of material wellbeing along the path of dharma (ethics). Significantly, he argued that prosperity, even if somehow attained was not sustainable in an unethical society. He strongly believed that dharma was the glue that held the society together. According to him, dharma was the source of joy, harmony and prosperity. He wanted a sage king (Rajarshi) at the helm of affairs, who could be a role model for his subordinates and the people. He maintained this theme throughout the Arthashastra. He, thus, performed a Vedic (pious, purposive, genuine and inseparable) marriage between ethics and economics.

  Kautilya understood the principal-agent problem and the concept of efficiency wages and suggested both moral and material incentives to elicit optimum amount of effort. Apparently, according to Kautilya, it is better to pass on good values rather than ill-gotten wealth to the younger generation. He believed market failure is bad, government failure is worse but moral failure is the worst. No amount of rules and regulations, without ethical anchoring, could prevent systemic risk (like the financial meltdown of 2008). Thus, an ounce of ethics is better than a ton of rules and regulations.

  Kautilya’s Ideas on Economic Growth and

  the So-called Hindu Growth Rate

  The analysis in Kautilya’s Arthashastra dispels the myth that Hindu civilization is inimical to economic (material) growth and also provides some insights into assessing policies like the ‘second generation’ economic reforms of recent years in India. Kautilya argued that ethical conduct not only paved the way to heaven but also to prosperity. He identified land, labour and capital as sources of economic growth but believed that increases in these inputs depended largely on the quality of institutions and good governance, which in turn depended on ethical environment and ethical conduct of the decision makers. That is, according to Kautilya, ethics was the ‘deep determinant’ of prosperity and not institutions as such. One may call Kautilya’s Arthashastra as the ‘Wealth of Nations’ much before Smith’s Wealth of Nations, since it displays a far deeper understanding of the nature and causes of Wealth of Nations than that provided by Adam Smith in his An Inquiry into the Nature and Causes of the Wealth of Nations in 1776.

  Relevance of Kautilya for the Post-WTO World–the World Stage The WTO has been working hard to open up world markets, both in products and services. Certainly, even before the emergence of mercantilism during the 14th century, sizeable international economic intercourse prevailed. However, Kautilya is the only known writer who strongly argued for promotion of imports, rather than for both import-substituting and export-promoting policies. The challenge for the world leaders is to bring back Kautilya’s internationalism in the interconnected world. Significantly, even Adam Smith favoured domestic production over international trade (see below); similarly Ricardo was certainly against the Corn Laws but did not fault the creation of comparative advantage through ‘artificial’ factors.

  Again, no one has ever applied the modern methods while interpreting the Arthashastra, whereas such techniques have been applied to improve understanding of Adam Smith’sWealth of Nations and David Ricardo’s Theory of Comparative Advantage. Finally, Kautilya practiced clarity, consistency and simplicity in writing that has been most sincerely sought to be maintained here in interpreting his work.

  The chapters in the book are organized into five parts. Part One provides introduction to Kautilya, his vision and genius and the contemporary economic and social conditions.

  Sen (1987) believes that there are two origins of economics. He credits the Greek philosophers for the ‘ethical’ approach to economics. He points out that Kautilya’s Arthashastra is the first book on the origin of the ‘engineering approach’ to economics but it, just like the modern economics, is devoid of any ethical content. He (1987, p 6) asserts, ‘The motivations of human beings are specified by and large in very fairly simple terms, involving, inter alia, the same lack of bonhomie which characterizes modern economics. Ethical considerations in any deep sense are not given much role in the analysis of human behavior. Neither the Socratic question nor the Aristotelian ones figure in this other ancient document of early economics, by a contemporary of Aristotle’. In the above statement Sen (1987) makes the following claims:

  • Logic-based (engineering) approach to modern economics was

  originated by Kautilya.

  • Ethics-basedapproachtoeconomicswasoriginatedbytheGreek

  philosophers.

  • Kautilya’sArthashastra, just like modern economics, does not

  contain moral content.

  Sen does not provide any arguments or examples to justify either of his claims. In part Two, strong arguments are offered to justify the claim that Kautilya is the founder of the logic-based, that is, the ‘engineering approach’ to economics. This part contains the tools of analysis, concepts and methodology, which are discernible in the Arthashastra and are used in modern economics.

  Kautilya’s ideas on ethics and freedom from wants (economics) are presented in part Three. Strong arguments are provided to refute Sen’s second and third claims. Kautilya, just like the Vedic sages before him, assigned a foundational role to dharma: if there was no dharma there was no society. It is indicated that the Socratic question was asked by the Vedic sages more than a thousand years earlier in India, and serious and systematic attempts were made to formulate rules of moral conduct to lead a virtuous life. Kautilya was a Vedic man and he enthusiastically embraced and promoted dharmic (ethical) values.

  Kautilya understood not only the importance of ethical conduct to liberation from poverty and to lowering the systemic risk but also explored various ways to create an ethical society. He realized that unless the laws and policies were guided and informed by dharma, they might weaken the ethical foundations or crowd-out moral motivation. That meant, if the decision-makers were not ethical, both formulation of laws and policies and their implementation would be less than ideal. Some of the government employees might become corrupt and promote corrupt people. Therefore, he put heavy emphasis on ethical anchoring of the decision-makers—the king, his advisers and other employees—to prevent moral failure.

  Thus, Kautilya’s Arthashastra is also the original ethics-based approach to economics, since it has much more ethical content than the contributions of Aristotle or Adam Smith. For example, the commercial man of the Wealth of Nations and the benevolent man of Theory of Moral Sentiments deliberately avoid each other, and consequently never get acquainted with each other whereas Kautilya performed a holistic marriage between ethics and economics.

  Part Four presents Kautilya’s ideas on creating ethics-based and efficient laws for the removal of social thorns for providing safety to citizens. On the other hand, Kautilya’s approach to safeguarding national independence was based primarily on prudence. He argued that for people, freedom from foreign rule was essential to achieving freedom from wants. Thus, protecting independence by using every possible means available to the state was recommended. His ideas on freedom from fear of an attack by a foreign king are covered in part Five.

  Many of Kautilya’s statements or comments therein, by experts or the author, have relevance for more than one context discussed at different places in this book. They are often reproduced, in part or full, to facilitate the reader to have a self-contained analysis. They may, therefore, not be taken as repetitions as such.

  APPENDIX A

  Choice between Clarity and Fidelity Kautilya’s Arthashastra was written in Sanskrit, but fortunately English translations are now available of which Kangle’s translation of the Arthashastra is regarded as the most authentic. However, adhering strictly to the Sanskrit text in verses may sometimes involve sacrifice of clarity in understanding, especially if one is not sufficiently familiar with the ethos embodying the language of the authors. Rangarajan’s translation is, in general, clearer than the others currently available. Therefore, (occas
ionally, Kangle’s translation has been used here but) to a large extent the interpretations here are based on the version edited, rearranged, translated and introduced by L N Rangarajan (1992), although at some specified places, Kangle’s translation has also been used. The page references correspond to Rangarajan’s translation cited above but references to the original text wherever made have been specified. For example, (1.15) means Chapter Fifteen of Book One of the Arthashastra.

  Rangarajan (p 24-25) provides a few comparisons (from Kangle’s translation to his own) to show the enhanced clarity of his translation. Both Spengler (1971) and Dasgupta (1993) use Kangle’s translation for their observations. The following quotes, which are taken from their works, also justify Rangarajan’s claim of enhanced clarity without altering the meaning of the original Sanskrit verses.

  A Few Comparisons of the Translations • OriginalReference(1.19.34)fromtheSanskritshloka (stanza) in Kautilya’s Arthashastra. Spengler (p 64-65),‘In the happiness of the subjects lies the happiness of the king and in what is beneficial to the subjects his own benefit. What is dear to himself is not beneficial to the king, but what is dear to the subjects is beneficial (to him).’

  Rangarajan (p 149): ‘In the happiness of his subjects lies his happiness; in their welfare his welfare. He shall not consider as good only that which pleases him but treat as beneficial to him whatever pleases his subjects.’

  • Original reference (1.19.35-36) from Spengler (p 64-65): ‘Therefore, being ever active, the king should carry out the management of material well-being. The root of material wellbeing is activity, of material disaster its reverse. In the absence of activity, there is certain destruction of what is obtained and of what is not yet received. By activity reward is obtained, and one also secures abundance of riches.’

  Rangarajan (p 149): ‘Hence the king shall be ever active in the management of the economy. The root of wealth [economic] is activity and lack of it [brings] material distress. In the absence of [fruitful economic] activity, both current prosperity and future growth will be destroyed. A king can achieve the desired objectives and abundance of riches by undertaking [productive] economic activity.’