Kautilya- the True Founder of Economics Read online

  International Trade: Certainly international trade was not an engine of economic growth. But perhaps it was not that insignificant either.5 Parmar (1987, p 129) notes, ‘In the days of Kautilya, international trade had acquired considerable importance; therefore, in his Arthashastra, he discusses the import and export trade also at length.’ In fact, the concept of terms of trade is quite explicit in the Arthashastra.

  Scarcity of Labour and Capital: It appears that at that time, the population was not growing much and labour and capital were more scarce than land. For example, Kautilya recommended to the king that he demand settled land as his share from a successful joint campaign since the affiliated labour and embodied capital would come with it. If the king did not get settled land, he should prefer very fertile virgin land so that less labour and less capital were needed to settle it. Kautilya (p 405) went as far as to suggest, ‘No one shall induce a woman [still capable of bearing children?] into becoming an ascetic (2.1)’, implying shortage of labour. Similarly, he was concerned with the saving of lives of ordinary people, implying shortage of manpower. He (p 130) recommended, ‘Persons carried away by floods shall be rescued using gourds, skin bags, tree trunks, boats and thick ropes. Owners of canoes shall be punished if they do not try to save someone in danger (4.3).’ He suggested that physicians ‘be called upon to counteract diseases and epidemics affecting human beings.’

  Immigration: Kautilya (p 178) suggested, ‘The king shall populate the countryside by creating new villages on virgin land or by reviving abandoned village sites. Settlement can be effected either by shifting some of the population of his own country or by immigration by inducement or force (2.1).’

  SUMMARY It is obvious that the economy needed almost everything: law and order, a functioning judiciary, an efficient and honest bureaucracy, creation of markets, infrastructure, national security and maintenance of independence. Kautilya’s goal was to create an ideal economy, progressive, fair, open and efficient. Perhaps, that is why the Arthashastra is so broad in scope and abstract in reasoning.

  TWO

  Concepts, Methodology and Tools of Analysis

  In this part, arguments justifying the claim that Kautilya is the true founder of economics are provided. Kautilya’s analysis is more rigorous, consistent, comprehensive and concise than that of Adam Smith. Kautilya surpasses Adam Smith in every category, viz., methodology, tools of analysis and innovation of concepts.

  3

  Origin, Scope and Methodology of Economics

  The history of economics as a science is, in my view, still waiting to be properly written.

  — Redman (1997)

  What is a science? Is economics a science? Who should be given credit for founding it? Has there been progress in economic knowledge? Such questions may seem settled but in science nothing is ever settled for all times. Groenewegen (2002) considers the determination of the origin of economics very important and explores it in depth.1 Similarly, Backhouse (1997) attempts to answer the questions related to the growth (or lack of it) in economic knowledge. Although economists seldom agree on an issue, it is amazing that for almost two hundred years, there has actually been a near consensus among economists that economics originated in the eighteenth century and that Adam Smith was its founder. This was accepted despite the fact that there has been no consensus regarding the requirements to be fulfilled for declaring someone to be a ‘founder’ of economics. However, in recent years, strong doubts have been raised on accepting Adam Smith as the one and only founder of economics.

  Still, all these explorations have been limited only to Europe. Somehow, the Euro-centric mentality has not allowed any search or acknowledgement, for the fact that the non-Westerners, long before Adam Smith or anyone else in the West, might have founded economics as a separate discipline. Recently, Pack (2001, p 179) has remarked: ‘There must be an Indian, a Chinese, Japanese, and other traditions of economic thought.’ Indeed, India has an ancient tradition of appreciating and applying economic analysis to a wide range of problems. Sen (1987) believes that there are two ancient origins of economics: one ethics-based and the other technique-based, which he calls ‘engineering’. He credits the Greek philosophers, particularly Aristotle, for originating the ethical approach to economics and Kautilya (in the tradition of Walras) for the engineering approach to economics. Part Three shows that Kautilya’s Arthashastra actually has much more ethical content than the contributions of Plato, Aristotle or Adam Smith. Indeed, his work is also the original of the ethics-based approach to economics and came before all others. According to Sen, Kautilya’s Arthashastra is the first book on the origin of the ‘engineering approach’ to economics. He (p 4) states: ‘The “engineering” approach also connects with those studies of economics which developed from the technique-oriented analyses of statecraft. Indeed, in what was almost certainly the first book ever written with anything like the title “Economics”, namely, Kautilya’s Arthashastra (translated from Sanskrit, this would stand for something like “instructions on material prosperity”), the logistic approach to statecraft, including economic policy, is prominent.’

  A justification for such an outstanding claim that Kautilya’s Arthashastra is the first origin of the ‘engineering approach’ to economics was obviously beyond the scope of Sen’s lectures in as much as the determination of the origin of economics as a science demands an involved discussion on three issues, viz.:

  • interpretationofearlier,particularly,ancientwritings

  • thespecificationoftherequirementsfordeclaringeconomicsas

  a science, and

  • thedefinition,scopeandmethodologyofeconomics

  Section 3.1 offers the views of leading economists on how to interpret, evaluate and accredit earlier works. At present, there is no uniformity in the requirements to declare someone as founder of economics. In literature, at least three types of requirements have been advanced for determining the founder of economics:

  (a) by whom and when was economics established as a separate or

  autonomous discipline

  (b) by whom and when were a reasonable number of economic

  concepts and hypotheses developed, and

  (c) who passed the Schumpeter’s Test of displaying an understanding

  of the economy as a system of inter-dependent elements?

  Almost invariably, these three types of requirements have been advanced as mutually exclusive but it seems that Schumpeter implicitly suggests requirements (b) and (c) as complementary in the determination of the origin of economics. Section 3.2 contains a discussion on the origin of economics and requirements for adjudging its founder. It is also indicated that Ekelund and Heberts’ claim that microeconomics is of French origin falls far short of the requisites. Section 3.3 presents the views of a few prominent economists on Adam Smith as the founder of economics.

  Kautilya specified a very broad scope for economics. He applied economic analysis not only to core subjects like taxation and economic growth, but also to other areas, such as law, war and peace. In fact, economics might have acquired the status of an imperial science during his time, the 4th century BCE. After a lapse of two millennia, economics re-emerged. Initially its scope was limited primarily to economic growth. However, from the latter half of the nineteenth century, its scope has been increasing steadily and it has been colonizing other disciplines.2, 3 In Section 3.4, Kautilya’s views on the scope of economics are discussed. In Section 3.5, Kautilya’s methodology, which is very similar to Marshall’s, is offered. Kautilya adopted a partial equilibrium approach and very frequently but implicitly, used phrases similar to the phrase ‘all other things being equal’. Also, he implicitly used the discrete marginal analysis. A few examples are presented to illustrate Kautilya’s partial equilibrium approach. Applications of the methodology of constrained optimization and an inter-temporal analysis by Kautilya are discussed in Sections 3.6 and 3.7, respectively. In Section 3.8, Kautilya’s Arthashastra is examined a
gainst the most stringent requirements for declaring it as the first origin of the engineering approach to economics and it comes out faring far better than Adam Smith’s Wealth of Nations or the contributions of Dupuit and the other French econo-engineers.

  3.1 INTERPRETATION, EVALUATION

  AND ACCREDITATION OF EARLIER WORKS How does one interpret or evaluate earlier works? Should one use today’s beliefs and standards for evaluation, or those prevailing at the time? At present, there is no consensus that any specific method or approach is superior to the others. To a large extent, it depends on the purpose of the study, availability of the appropriate material and the competence or the comfort level of a researcher with the particular approach. For example, Grampp (2000) is concerned about the possibility of excessive imagination on the part of some researchers in interpreting earlier writers. Accordingly, he lays some ground rules to avoid such tendencies. He proposes: ‘A way to get things straight about Smith or anyone else. It is to begin by distinguishing between (a) what the author actually said, (b) what is implied by what he said, (c) what can reasonably be inferred from it, (d) what we may conjecture he meant, (e) what he conceivably could have meant, and (f ) what it would be convenient to believe what he meant. The next step is to stay as close as possible to points (a) and (b), to know that about point (c), the operative word is “reasonably”, and to move as far as point (d) only when all else fails, or never at all. Distinctions (e) and (f ) are left to those who, to paraphrase George Stigler, make the study of economic ideas a work of the imagination.’

  Backhouse (1997) adds another perspective to the interpretation of the works of earlier writers. He remarks, ‘This debate has centered on whether it is appropriate to read the past from the perspective of present-day ideas. The opponents of “Whig” history argue that it is important to read past writings against the contexts in which they were written, and the concerns of past economists, their presuppositions and beliefs may be very different from those of present-day economists. In its most extreme form, this position denies that there can be progress in economic thought: there are merely changes in the questions’.

  Blaug (2001) labels this controversy as ‘rational reconstruction’ versus ‘historical reconstruction’. Essentially, the rational reconstruction approach involves the use of modern methods and concepts to interpret earlier writings. Its proponents believe that it adds rigor to the analysis and helps in making any inconsistencies or implicit assumptions in the older writings explicit. On the other hand, the historical reconstruction approach consists of going back to the time of the writer under consideration, construct a picture of his time and interpret his writings in terms of what he meant and not what we think he meant. For example, Tribe (1999) asks: ‘Is there any real point in laboriously excavating, cleaning down, and presenting a newly restored “Adam Smith”, whose features would have been recognizable to few of his contemporaries, and a diminishing series of successors?’ Blaug, Tribe and others who advocate the historical reconstruction approach strongly defend such an undertaking and deplore the rational reconstruction approach.

  Blaug, however, concedes, that while ‘rational reconstruction makes past thinkers appear to be a bit more like us than they were; historical reconstruction make them out to be a little less like us than they were.’ It is obvious that these approaches are not substitutes, but rather complements of one another, meaning that the pursuit of both approaches helps in the reconstruction of a more complete picture of the past. However, sometimes, rational reconstruction approach is possible whereas the historical reconstruction approach is likely to fail due to lack of supporting writings.

  Limiting the Role of Hindsight: Walker (1999) notes: ‘The activity of describing, interpreting and evaluating past theory is undertaken under the powerful influence of current economic thought.’ That is, knowledge of current theories and the availability of mathematical and statistical tools do help in a better understanding of past theories. However, one should guard against two possible pitfalls in the interpretation or evaluation of past contributions.

  First, De Long (2000) points out, ‘In Patinkin and Johnson’s view, Old Chicago Monetarism was a retrospective construction by Milton Friedman (1956). In their view, Friedman used “Keynesian” tools and insights to provide a retrospective post hoc theoretical justification for policy recommendations that had little explicit theoretical base at the time, and to construct for himself some intellectual antecedents’.

  A second pitfall may arise due to the failure to distinguish the current state of our knowledge from what existed in the earlier times. Thaler (2000) advances the hypothesis that ‘Once we know something, we can’t imagine ever thinking otherwise.’ It means that if this hypothesis is valid, then the answer to Blaug’s (2001) question that ‘given the fact that texts must be reconstructed, the question is how are we to do so: in the light of all that we now know or as faithfully as possible to the times in which they were written?’ — is not possible, implying that the historical reconstruction cannot be differentiated from the rational reconstruction.

  Use of Modern Methods to Interpret Earlier Writers: Those who adopt historical reconstruction approach try to steer clear of mathematical and statistical tools, which is unfortunate since these modern tools are used as complements, and not as substitutes, to insight or intuition. Commenting on Samuelson (1978), Hollander (1980) advised economic historians to get acquainted with modern methods. He remarked, ‘It is probable that Professor Samuelson’s statement of the “canonical classical model of political economy” will become the locus classicus for the next generation of textbook writers; teachers of the history of thought would be advised to familiarize themselves with the ingenious diagrams in particular.’

  Accreditation: Schaffer (1996, p 14) quotes Brannigan (1981, p 90) when he states, ‘Events are discoveries not in virtue of how they appear in the mind, but how they are defined in and by a cultural criterion.’ He (p 19) remarks, ‘Much recent work on discovery and invention in the sciences demonstrates that retrospection and celebration play key roles in the production of discovery. Because discoveries acquire their status as the result of subsequent work within the relevant community, the ‘fetishism’ of discovery is therefore the consequence of the whole process through which change is analyzed, debated and assessed.’ It may be pointed out that Adam Smith was declared founder of economics without going through such a process.

  There is a major difference of opinion between the philosophers and the sociologists in this regard. Philosophers, like Kuhn, discuss the paradigm-shifts and attribute those to certain individuals. Sociologists believe that ‘it is not the genius who creates the paradigm, but the paradigm that creates the genius who gives expression to it.’ An old and popular saying in India captures this point of view: ‘The origination of the River Ganges was inevitable, but Bhagiratha was credited with its origination.’

  Sociologists concentrate on social factors and stress that a discovery is not a discovery unless authorized by the community. And there is a lengthy process of review before authorship is granted. Schaffer (p 43) notes that according to Gooding (1985, p 234), ‘Herschel wrote, “He who proves, discovers.”’ However, this standard of accreditation has not been used in economics. If economists had used such a standard, Adam Smith, for example, could not be given credit for the Invisible Hand Theorem, not because it was already in the air, but because of the fact that he merely stated it and did not prove it. As Rosenberg (1998) remarks: ‘Walras’s Theorem that a general market clearing equilibrium exists, that it is stable and unique, follows from the axioms of microeconomic theory. Walras offered this result in 1874, as a formalization of Adam Smith’s conviction about decentralized economies, but he was unable to give more than intuitive arguments for the theorem. It was only in 1934 that Abraham Wald provided an arduous and intricate satisfactory proof, and much work since his time has been devoted to producing more elegant, more intuitive, and more powerful proofs of new wrinkles on the theorem.
’

  Similarly, Adam Smith discussed the regulation of monopolies and provision of public goods by the government but he did not label them as ‘market failures’. He was not aware of the concept of the deadweight loss. Therefore, the undesirability of monopoly, as argued by Adam Smith was not based on the ground that it created a deadweight loss, but it was considered oppressive. Economists still credit him for recognizing these problems. The point is that if an earlier writer recognized a problem and suggested a reasonable solution, laterday economists have given him credit for its origination. As another illustration, during the 1860s, Scottish chemist Peter Tait simply started cataloging knots. He could not imagine that today, the Knot theory would be one of the hottest topics in mathematics and might be useful in understanding DNA and making computers more efficient. Just to emphasize the point, if an earlier writer initiated and advanced a concept further than Tait (ie. beyond making a classification) and well short of our current understanding, he would be given credit for originating that concept. This methodology is followed in the author’s evaluation of Kautilya’s work. In other words, economists do follow a very liberal approach in evaluating earlier writings but it does not imply, for example, that Aristotle should get credit for originating the concept of the ‘law of gravitation’, based on his argument that a stone falls to the ground since it has a tendency to return to its natural resting place.