Thoughts on economics and liberty

Kautilya would have strongly favoured FDI and opposed Anna Hazare’s approach to alcohol

I chanced upon an interesting article on Kautilya’s thought, published in theIndian Economic Review (the journal of the Delhi School of Economics) in 1996. I’ve transcribed to text from the PDF and am posting it below. I’ll comment on this article and other aspects of Arthashastra as time permits.

A few initial thoughts, at this stage:

(1) Kautilya would have STRONGLY OPPOSED NEHRUVIAN SOCIALISM (and any attempt to bring about forced equality amongst people)

(2) Kautilya stronglyfavoured an open economy and would have favoured FDI

(3) He built astrong regulatory system for “vices” like alcohol and prostitution, but NO PROHIBITION. He would have STRONGLY OPPOSED Gandhi’s and Anna Hazare’s attempts to impose prohibition.

He was, however, not a modern economist and didn’t quite understand the price system(e.g. he advocated price regulation). But overall, a far better economist than any of India’s economic advisers to the governmentsince 1950(excluding B.R. Shenoy).


“Import and sale of foreign goods was encouraged in order to make them freely available all over the country. To promote imports, tax exemptions were given to importers, foreign merchants were given limited immunity from being sued and a higher profit margin allowed for imported goods compared to local products {2.16.4,12,13; 4.2.28}.”


These shall be sold in as many places as possible [in order to make them readily available to people in the towns and the countryside]. {2.16.4}

The following incentives shall be provided [to encourage the imports of foreign goods needed in the country]:

(i) [local] merchants who bring in foreign goods by caravans or by water routes shall enjoy exemption from taxes, so that they can make a profit;

(ii) foreign merchants shall not be sued in money disputes unless they are legal persons in the country; their local partners can, however, be sued. {2.16.12,13}

Kautilya’s Arthashastra: A Neglected Precursor to Classical Economics
CHARLES WALDAUER, WILLIAM J. ZAHKA AND SURENDRA PAL School of Management, Widener University Chester, PA 19013 USA,Indian Economic Review, Vol. XXXI, No. 1, 1996, pp. 101-108
This paper demonstrates that Kautilya, a great Indian philosopher-statesman and contemporary of Aristole, and whose work was lost for more than 1400 years, anticipated classical economic thought by some 2,000 years in the areas of international trade, taxation and a labor theory of value. This aspect of Kautilya’s philosophy of government has been overlooked by historians of economic thought and we believe that his contributions should receive appropriate and overdue recognition.JEL Classification : B1, B3
Kautilya, the great Indian philosopher-statesman and contemporary of Aristotle, wrote his ARTHASHASTRA as a primer for good rule by the king. The goal of this is treatise was to increase the monarch’s wealth and that of his realm – as was true of ancient and medieval philosophers, Kautilya did not distinguished between the wealth of the sovereign and that of his subjects. In this respect, Kautilya’s approach is akin to the seventeenth century German Cameralist School of Economic Thought (Dasgupta, ch. 3). Kautilya’s work continues a long-standing Indian tradition of inquiry into the creation of wealth, which goes at least as far back as the ARTHARVAVEDA, circa 1000 BC (Chand).
Unfortunately for the development of economic thought, Kautilya’s writings were lost toward the end of the Gupta Dynasty in India, around 500, and were not rediscovered until early in the twentieth century (Choudhary). Translations from Sanskrit into English and Hindi did not occur until 1915, and subsequent translations into other languages did not take place until the 1920s and 1930s. Unlike his contemporary, Aristotle, Kautilya’s views were unknown to medieval and renaissance philosophical and, consequently, had no influence on the creation of modern economic theory. David Hume, Adam Smith, David Ricardo and John Stuart Mill, among others, therefore did not have the benefit of Kautilya’s thoughts on the best policies and practices for creating and enhancing a nation’s wealth.
In proposing rules and practices by which the king will rule successfully, Kautilya explicitly recognizes that international trade (trade among kingdoms) in goods and services is a major vehicle for increasing the sovereign’s wealth as well as that of his subjects. Kautilya also counsels his monarch that the wealth and well being of the realm can be most advanced by a fair and efficient system of taxation, one which will supply the king with tax revenue while not stifling economic growth. Finally Kautilya advocates a wage system which rewards workers for the economic value they have created and encouraged them to work harder and more efficiently.
The importance of international trade is emphasized by Kautilya in that he advises the sovereign that foreign relations should be guided strongly by trade considerations. He counsels that relationships with southern kingdoms are to be favored over those with northern kingdoms because the southern kingdoms possess greater mineral wealth. As he puts it “Possessing immense gold is better than a friend ruling over a vast population… for armies and other desired objects can be purchased with gold.” (Sen, p. 10) Kautilya also advantages attracting foreigners who possess good technical and other economic development of the realm.
Unlike the Mercantilists, Kautilya also explicitly recognizes that imports represent a very important way in which the wealth of the realm can be increased, in that imports can provide the kingdom with products which are either not available domestically (e.g., natural resources and agricultural commodities) or can be obtained more cheaply from foreign sources through trade than through domestic production. Kautilya fully realizes that exports are not more important than imports as a means for enhancing the kingdoms’s wealth.
Kautilya explicitly formulates a comparative advantage view of international trade patterns by stating that it is mutually beneficial to the various kingdoms when the products being imported are cheaper than those that can be obtained domestically and will fetch higher prices to the exporter than can be gotten in domestic markets (Sen, p. 29).
Kautilya proposes heavy state regulation of trade, both so as not to undermine state monopolies and not to aid potential adversarial kingdoms. Kautilya also advocates price and profit controls, being concerning about “just” and “fair” prices and profits (this is similar to Aristotelian and Christian Schoolmen doctrines concerning economic justice and fairness in commercial transactions). “Kautilya imposed a heavy taxation on imported foreign goods of luxury. On the articles of common consumption, light duties were imposed.” (Choudhary, pp. 124-125).
Kautilya supports the use of tariffs, both import and export duties, primarily as revenue-raising devices for the monarch rather than as mechanisms for altering trade patterns. “Import rates, intended for revenues rather than for trade limitation, generally ranked between 4 per cent and 20 per cent ad valorem.” (Braibanti and Spengler, p. 249).
Kautilya urges the monarch to create trade missions to promote trade with other kingdoms and he especially supports bilateral trade arrangements in products. In fact, he counsels against unilateral trade, where products are exported or imported for money (bullion) only. He stresses the need to exchange commodities for commodities so that both kingdoms may be mutually enriched (Sen, p. 27). This stress on two-way trade in products is based on the desire to raise tax revenues for the monarch through both export and import duties.
His views on international trade are most clearly spelled out in Book II of the Arthashastra, Chapter XVI, which specifies the duties of the king’s Superintendent of Commerce:
“…The superintendent shall show favour to those who import foreign merchandise: mariners and merchants who import foreign merchandise shall be favoured with the remission of the trade taxes, so that they may derive some profit… Foreigners importing merchandise shall be exempted from being sued for debts unless they are (local) associations and partners.” (Shamasastry, p. 107)
Kautilya also enunciates rules governing the export of state-ownedcommodities:
“the sale of the king’s merchandise in foreign countries…[having ascertained] the value of local produce as compared with that of foreign produce that can be obtained in barter, the superintendent will find out (by calculation) whether there is any margin left for profit…lf no profit can be realized by selling the local produce in foreign countries, he has to consider whether any local produce can be profitably bartered for any foreign produce he may take his merchandise to other countries through rivers …. Having gathered information as to the transactions in commercial towns along the banks of rivers, he shall transport his merchandise to profitable markets and avoid unprofitable ones.” (Shamasastry, pp. 108-109)
Thus, Kautilya recognized that trade based on the principle of comparative advantage would be to the material benefit of both exporting and importing nations.
This section of the paper focuses on the Kautilyan tax system, which was remarkable for how extensive it was and how well it conformed to modern principles of good tax systems (Choudhary, pp. 128-130). In advising the ideal tax system, Kautilya enunciates a set of “principles of taxation” remarkably similar to the modern-day criteria first formulated by Adam Smith as “canons of taxation” in his Wealth of Nations, published in 1776.Thus, Kautilya’s views on the elements of a good tax system predate modern economic thought by some two thousand years:
“Kautilya’s discussion of taxation and expenditure, apparently in keeping with traditional doctrine, gave expression to three Indian principles: taxing power is limited; taxation should not be felt to be heavy or exclusive; tax increases should be graduated.” (Spengler, 1971, p. 72).
Kautilya recognized that a prosperous and stable kingdom had to be founded on a well-developed an administered tax system. The importance of public finance to the successful reign by a monarch is underscored by his succinct advice to his sovereign:
“All undertakings depend on finance. Hence foremost attention must be paid to the treasury…Thus, when both the receipts and expenditures are property earned for, the king will never find himself in financial or military difficultues.” (Gopal, p. 19).
“…the army is sometimes the means of securing the wealth acquired; but wealth is always the means of securing both the treasury and the army. Since all activities depend on finance, financial troubles are more serious.” (Gopal, P. 20)
In Kautilya’s view, finance was so important to the success and well being of the sovereign that it, along with the army, was under the direct control of the king. In the ideal Kautilyan state, the monarch’s revenues came from two major sources: sales of minerals, timber and agricultural products from the king’s lands and mines, and taxes levied on private income, wealth and products (including exports and imports).
As presented in the Arthashastra, Kautilya’s advice to his monarch on the ideal tax system is based on achieving the following objectives: gaining as much tax revenue as possible for his king; promoting economic growth and development within the kingdom; ensuring that resources are used efficiently; and applying taxes that are “fair” and “just”.
As a noted student of Mauryan public finance observed, the Kautilyan system of taxation resembled that of the Roman Empire at its height: taxes were levied on income, wealth in the form of both real and personal property, and market transactions (sales) including both export and import duties, as well as poll taxes on all adult males. (Gopal, P. 22) Further, Kautilya recognizes that the “ideal” tax system should embody the following principles: it would be convenient to pay, easy to calculate, inexpensive to administer, fair (equitable) in its burden, non-distortive of economic behavior in its impact (neutral), and in general not inhibit economic growth and development. (Gopal, pp. 23- 26)
In keeping with the criteria of convenience, equity, neutrality, and promoting economic growth, Mauryan taxes could be paid in gold, coins (usually silver or copper), livestock (mostly cattle), agricultural products, minerals and timber, and personal services (e.g., working on the construction of roads, canals and forts, laboring in the king’s mines or logging in the king’s forests, or serving without pay as a soldier). Kautilya counsels that taxes should be collected only when people have the capacity to pay:
“Just as fruits are gathered from a garden as often as they became ripe, so revenue shall be collected as often as it becomes ripe. Collection of revenue or of fruits, when unripe, shall never be carried on, lest their source may be injured, causing immense trouble.” (Gopal, p. 23)
Further, Kautilya advises that taxation should not be raised to such a high degree that it destroys people’s economic incentives to engage in productive undertakings, thereby lowering the level of economic activity and the material wealth of the kingdom:
“Thus, a wise Collector-General shall conduct the work of revenue collection…that production and consumption should not be injuriously affected…financial prosperity depends on public prosperity, abundance of harvest, and prosperity of commerce among other things.” (Gopal, pp. 23-24)
According to Kautilya, the amount of tax liability should be certain and known, and convenient to pay:
“…collection of revenue at a season when people were unable to pay is forbidden because it injures the source and causes immense trouble.” (Gopal, p. 24)
In Kautilya’s view, the tax system should be fair, and tax rates should reflect people’s ability to pay in terms of wealth or income or sales revenue:
“…the policy is to make the richer section of the peasantry or those who hold lands in fertile areas of high productive calibre to contribute more [have higher tax rates apply], and to grant exemptions from this liability where the cause of production and development may suffer through high taxation.” (Sen p. 119)
Higher rates of sales taxation apply to the most expensive commodities traded (e.g., gold, silver, diamonds, pearls, etc.) and progressively lower rates of sales taxation apply to less expensive commodities (e.g., cloths and threads, grains and dairy products, and finally firewood/earthen vessels/bamboo). (Sen, pp. 121-122) A similar system of graduated tax rates apply to the occupational privilege and income taxes levied on artisans and craftsmen, where the highest rates are levied on the most skilled workers and the lowest rates are assigned to the least skilled. (Sen, pp. 122-123)
Kautilya advocates a highly structured and centralized revenue system, with extensive usage of broad-based taxes. The system is supervised by the Collector-General of Revenues (Samaharta), who reports directly to the monarch and is equal in importance and influence to the Commander-in-Chief of the Army. All the Superintendents of the king whose activities generate revenues for the sovereign report to the Collector-General of Revenues as concerns the revenues collected (Superintendents of Gold, Mines, Storehouse, Commerce, Forest Products, Tolls, Weaving, Agriculture, Liquor, Slaughter-House, Prostitutes, Ships and Passports).
Responsibility for gathering information on which the collection of tax revenue and its auditing is based resides in the Village Accountants (Gopas, each responsible for from five to ten villages), who in effect are the census takers. These Gopas are required to inventory all the real and personal property wealth in their domains for wealth tax purposes, the number of adult males for poll tax purposes, the annual income and expenditure of each household for income tax purposes, and the number and type of merchants and artisans (as well as volume of business done) for both sales and occupational license tax purposes. The breadth and detail of Mauryan census-taking revalled that of ancient Egypt under the Pharaohs, and was the most extensive census existing before the industrial revolution (Bandyopadhyaya, p. 138). With reference to the U.S. fedral government, the Gopals combined the functions of the Internal Revenue Service and the Bureau of the Census.
Under the tutelage of Kautilya, the Maurya tax system was as extensive as any that exists in this modern age. As would be expected in a pre-industrial economy, real property and excise taxes were major sources of tax revenue. Because of the detailed census conducted by the Mauryan kingdom, however, considerable revenue was derived from personal property and poll (head) taxes, as well taxation in the form of occupational licenses. Even income taxation was employed. Thus, Kautilya clearly enunciated-well before the rise of classical economic thought-a detailed, all-inclusive and effective tax system.
Two millennia before Adam Smith enunciated has labor theory of value, Kautilya in the Arthshatra held that a “just” wage to be paid to workers should be based on the amount of time spent on the job, the amount of output created, and the skills necessary to perform the required tasks. Kautilya explicitly recognizes three distinct components for determining the market value of labor: the level of skill required (the human capital element), labor hours worked and units of output produced (the labor productivity element). As stated by Benoy Chandra Sen in his treatise, Economics in Kautilya (p. 51):
A uniform and flat rate of wages for laborers of all sorts is impracticable in an advanced economic condition where commodities of various gradations of value representing different kinds and degrees of manufacturing skill are produced and used by consumers. The wages of a laborer cannot but be dependent on the market-value of the article produced. The latter again depends on the cost of its production, including the cost of material used. Thus the settlement of just wages is a complicated matter depending not only on the skill of the worker employed but also on the total out-turn of his work; i.e., both the quality and quantity of the job completed by him.”
R. Shamasastry in his translation, Kautilya’s Arthshastra, cites that among the duties of the Superintendent of Weaving shall be the setting of wages paid to weavers (pp. 125- 126):
Wages shall be fixed according as the threads spun are fine, coarse or of middle quality, and in proportion to a greater or less quantity manufactured, and in consideration of the quantity of thread spun…Wages shall be cut short, if, making allowance of the quality of raw material, the quantity of the thread spun out is found to fall short.
In determining wages for labor in general, Shamasastry quotes Kautilya in establishing the following procedure (p. 208):
As to wages not previously settled, the amount shall be fixed in proportion to the work done and the time spent in doing it. Wages being previously unsettled, a cultivator shall obtain 1/10th of the crops grown, a herdsman 1/ 10th of the butter clarified, a trader 1/10th of the sale proceeds. Wages previously settled shall be paid and received as agreed upon.
V. Nagarajan, in his book on Evolution of Social Polity of Ancient India, observes that (p. 114).
To prevent deception by employers, Kautilya lays down that cultivators or merchants shall either at the end or in the middle of their cultivation or manufacture pay the labourers proportionate wages. Payment to labour is not contingent on marketing of goods. Production should not be hampered by the irresponsible conduct of the workers. Guilds of Artisans (“Sanghabhrta”) often functioned as contractors and employed semi-skilled and unskilled laborers. To protect these laborers, Kautilya, as cited by Narayan Chandra Bandyopadhyaya in his book, Kautilya, (p. 203) recommends that a board of overseers review the guild contracts concerning wage rates and working conditions.
Kautilya, the great Indian philosopher and statesman, in writing his epic treatise on the art of good government, the Arthashastra, enunciated classified views on international trade, principles of taxation, and a labor theory of value.
Writing more than two thousand years before Hume, Smith, Ricardo and J.S. Mill, Kautilya anticipated their thoughts on the importance of conducting trade in accordance with the principle of comparative advantage, that imports are as important as exports in promoting a nation’s economic development and growth, and that reciprocal demand will determine the value of commodities in bilateral and multilateral trade.
He also clearly anticipated Smith and Ricardo on the principles of effective taxation that will result in an ideal system of taxation: one which will promote economic growth and development, ensure that resources are used efficiently, whose burden is borne fairly, and which distorts economic decision-making as little as possible.
Kautilya was also far ahead of his time in developing a labor theory of value in trying to determine what was a “just” wage for workers. Anticipating the thoughts of Smith and Ricardo, he explicitly recognized that the value of labor depend on the level of skills employed, time spent on the job, and the amount of output produced. He also was cognizant that the market value of labor also reflects the market value of the product created.
One can only conjecture that trade theory, principles of taxation, and the labor theory of value associated with classical economic thought might have evolved much earlier (perhaps in the fourteenth or fifteenth centuries) if Kautilya’s views had been known to scholars such as St. Thomas Acquinas in the late middle ages or early Mercantilists in the Renaissance. This is another example of occidental philosophical thought suffering from not having access to oriental philosophical thought.
  • Bandyopadhyaya, Narayan Chandra (1982), Kautilya, Varanasi, India: lndological Book House. Braibanti, Ralph and Joseph J. Spengler, (1963) eds Administration and Economic Development in India, Durham, NC: Duke University Press.
  • Chand, Devi (1982), The Atharvaveda, New Delhi, India: Munshiram Manoharlal Publishers. Choudhary, Radhakrishna. (1971) Kautilya’s Political Ideas and Institutions, Varanasi, India: Chowkhambra Sanskrit Studies Office.
  • Dasgupta, Ajit K. (1993), A History of Indian Economic Thought, London, England: Routledge. Gopal, M. H. (1935), Mauryan Public Finance. London, England: George Allen & Unwin Ltd. Kangle, R.P. (1965), The Kautilya Arthashastra, Delhi, India: Motilal Banarsidass.
  • Nagarajan, V. (1992), Evolution of Social Polity of Ancient India. Delhi, India: Dattsons.
  • Sen, Benoy Chandra, (1967), Economics in Kautilya. Calcutta, India: Sanskrit College. Shamasastry, R. (1956) Kautilya’s Arthashastra, 8th ed., Mysore, India: Mysore Printing and Publishing House.
  • Spengler, Joseph J (1971) Indian Economic Thought, Durham, NC: Duke University Press. Spengler, Joseph J (1980) Origins of Economic Thought, Carbondale, IL: Southern Illinois University Press.
  • Trautmann, Thomas R (1971) Kautilya and the Arthashastra, Leiden, Netherlands: E.J. Brill.

Sanjeev Sabhlok

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7 thoughts on “Kautilya would have strongly favoured FDI and opposed Anna Hazare’s approach to alcohol
  1. Sanjeev Sabhlok

    Nice point, Vijay. Chanakya was a bit of a statist, as well, but remember he lived 2300 years ago and would have been constrained by the lack of competent people to debate his ideas.

    Do add his picture, though. He was FAR MORE pragmatic and realistic than any of our current group of leaders.

  2. Jasvant Singh

    Kautilya lived 2300 years ago and that time conditions were different. He was talking about different problems. Author of article himself believe that Kautilya was wrong when advised price control. It mean Kautilya's advise can't be taken as it is and need to analyzed in current context and our own intellect.  But when it comes to alcohol author thinks that Kautilya's words are final and need to be followed as law. It is double standard for same person at one point you say that Kautilya was wrong and author of this article is more intelligent then Kautilya at the same time says Kautilya was most intelligent person and so if  he advised FDI then it should be followed without consideration. We saw a FDI of East India Company and saw the results of that investment we all know how much India was benefited by that.

    We need to make our own decision considering history of last 7000 years out of which 2300 years were not available to Kautilya to reach at right conclusion so we are in better situation to analyze.

  3. Sanjeev Sabhlok

    Jaswant, we have the benefit today of a deeper understanding of economics than was available to Chanakya. Even Adam Smith made some significant errors in his analysis, which were later fixed. Therefore I don’t rate Chanakya as a great economist compared with, say, Hayek. However, Chanakya does seem to understand a few crucial things about economics that economics illiterates like Hazare and Ramdev (apart from India’s political parties) simply don’t understand.

    East India Company was not FDI but a mere trading company. Its influence on India was negligible till it gained political power, at which stage it did not need any foreign investment. Indian money was used to invest. The difference is that there is no plan nor intention to hand over political control of India to foreign retail companies, nor are they interested. East India company had a GOVERNMENT MONOPOLY over trade with India. There are no government-sponsored monopolies in the USA or elsewhere today that will try to “take over” India.

    Anyway, looks like it is not going to be possible to reform India in my lifetime with SUCH DEEP WIDESPREAD IGNORANCE of basic economics and history.


  4. Vijay Mohan

    Anyway, looks like it is not going to be possible to reform India in my lifetime with SUCH DEEP WIDESPREAD IGNORANCE of basic economics and history.
    Sanjeev ,
    Even I feel the same about my lifetime… 
    This FDI in retail is an example or very small trailer of what we shall face. This FDI in Retail is just about 1% what FTI has plans to implement.
    Our country actually needs some avtaar … Which I dont think is a possibility.
    Anyway , We shall fight and fight and fight.

  5. Jasvant Singh

    Mr. Sanjeev Sabhlok you are being judgmental. You think Chankya understood what Anna and Ramdev are failing to understand. But I feel that Anna and Ramdev understand what you fail to understand. You have right to have your opinion and speak about it. But it is not good to hide behind Chanakya and target Ramdev and Anna. If you have point and you have done sufficient analysis of subject then you can prove it without hiding behind anybody.
    What do you think about Swadeshi movement in pre-independence era? Do you think that was flawed?

    As per my knowledge of History when East India Company was granted trade license that time there was no plan and no intentions to hand over political control of the country to East India Company but it got it. Same thing is true now.

    East India Company got Political power after capturing economic power. First some FDI was made after that profit was used to finance it and it succeeded in destroying domestic industry and once India was week financially it was conquered politically. So if you want to prove that FDI will be beneficial then you better get to facts rather than resorting to emotional blackmails like "Anyway, looks like it is not going to be possible to reform India in my lifetime".

  6. Sanjeev Sabhlok

    Clearly, Jaswant, it is futile discussing further. My last comment – and if it works, that’s good. Else pl. let me be. I’m struggling against EXTREME obtuseness of Indians who are their worst enemies. I’m afraid I can only do so much.

    So here goes:
    a) Anna and Ramdev may understand SOMETHING (that’s always true) but the don’t understand the BASICS (even the ABC) of economics (Arthashastra).

    b) Swadeshi is a DANGEROUS idea for the free society. It is a sure way to impoverish and ruin the society. It is an extreme version of mercantalism, and displays the DEEPEST ignorance of basic economics. It might have been OK for a short while as a political strategy. It failed, anyway. It was Gandhian satyagraha and ultimately the VIOLENT Quit India movement that sent shivers down the spines of the British.

    c) East India company (LET ME REPEAT!) was a MONOPOLY. That’s why it got support from the British government for its political actions (a support that was given very reluctantly). Indeed, the case of the EIC is very clear: it was the Indians who DESPERATELY wanted security and peace after chronic infighting for 100 years and therefore ASKED the British to step in, in almost all cases. Read your history if you don’t appreciate this basic truth. In the modern situation there are NO monopolies. Hence there is no possibility of foreign governments getting involved. It is a PURELY COMMERCIAL issue, not political. Microsoft won’t take over India just by opening an office in India. And so on.



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