Thoughts on economics and liberty

Balbir Sihag on Chanakya (Kautilya) #3

Now for extracts from Balbir S. Sihag, (2009),"Kautilya on economics as a separate science", Humanomics, Vol. 25 Iss: 1 pp. 8 -36.
I'd like to make a general comment on Balbir's work. I'm not particularly interested in whether Kautilya meets the requirements of any artificial Western theory of economics. Balbir seems keen to fit Kautilya into Western economics. I'm more interested in the fact that Kautilya thought like an economist. He had an intuitive grasp of basic economic ideas. To that extent he was like von Mises, who believes that economics is an intuitive science: if only we learn to think carefully. Kautilya was a CAREFUL THINKER, above all. He paid attention to the impact of incentives, and to the impact of changes in incentives.
Kautilya specifies a very broad scope for economics. He applies economic analysis not only to core topics 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 fourth century BCE. After a lapse of two millennia, economics re-originated but initially its scope was limited primarily to issues related to economic growth. However, from the later half of the nineteenth century, its scope has been increasing steadily and it has been colonizing other disciplines.
In section 6, Kautilya’s methodology, which is very similar to Marshall’s, is offered. Kautilya adopts a partial equilibrium approach and very frequently but implicitly, uses phrases similar to the phrase ‘all other things being equal’. Also, he implicitly uses the discrete marginal analysis.
5. Kautilya’s Arthashastra on definition and scope of economics
The word Arthashastra is a combination of two words: Artha and Shastra. Kautilya uses the word Artha (p. 100), as “wealth” and (p. 145) as “material well-being”. There is no ambiguity regarding the word Shastra: it means science. As Varma (1995-1996, p. 583) observes, “The name of the book is shastram, which means a philosophical and theoretical exposition and not a historical presentation”. However, in later time periods, the original meaning of the word Shastra was diluted and was used to denote even inconsequential works.

5.1 Kautilya on the scope of economics

Kautilya (p. 99) described his work as: “This Arthashastra is a compendium of almost all similar treatises, composed by ancient teachers, on the acquisition and protection of territory. Easy to grasp and understand, free from verbosity, Kautilya has composed this treatise with precise words, doctrines and sense (1.1). Interestingly, “The Method of Science”, is placed at the end rather than in the beginning of The Arthashastra.
Kautilya covers a wide range of topics, such as economic growth, taxation, government expenditure, administration, crime and punishment, property laws, consumer protection laws, labor laws, foreign trade, war and peace, principal-agent problem, diversification to reduce risk and many others. Essentially, anything related to the wealth and welfare of citizens is covered in The Arthashastra.
He (p. 100) summarizes the scope of The Arthashastra as: “The science by which territory is acquired and maintained is Arthashastra – the science of wealth and welfare (15.1)”.

6. Kautilya’s methodology: a partial equilibrium approach

Adhishthanam tatha karta, karanam cha prithagvidham, vividhashcha prithakcheshta,daivam chaivaatra panchamam, i.e. Success (output) depends on five factors: initial conditions, doer (labor), tools (capital), managerial efforts and random variables (luck). Gita (2nd BCE, Chap. 18, Verse 14).
6.1 Kautilya on the role of methodology

Book 15, which is the last one in The Arthashastra, has just one chapter and it deals exclusively with methodology adopted in writing it. Kautilya (p.101) stated, '‘Thirty-two stylistic and logical devices are used in this work’’. Some are stylistic rules like the ones in ‘University of Chicago Manual of style’’. But others are more substantive such as stating a hypothesis, reasoning to prove it, a conclusion and a recommendation.

 He (p. 103) stated, ‘Reasoning is used to prove an assertion. In asserting [in {1.7.7}] that artha alone is supreme, the reason is given: ‘because dharma and kama depend on artha’.

Kautilya’s goal in establishing methodological rules was not to accelerate the creation of knowledge, rather to ensure that the reader understands him clearly. The sentence ‘Easy to grasp and understand, free from verbosity'.

6.3 Implicit use of “Other Things Being Equal” by Kautilya

The use of this phrase has been more widespread than acknowledged by the modern writers. Kautilya was possibly the first economic thinker who implicitly used phrases similar to the phrase “all things being equal’ in economics. Two examples from his Book 7 are presented to support this claim[11].
Kautilya (p. 665) suggested (to the king), “Where there is a choice between kings equally immune to the diplomacy of the aggressor, the weak king shall seek the protection of one who has better counselors and who surrounds himself with wise elders. When there is a choice between kings equally immune to the diplomacy and
might of the aggressor, the one who had made more extensive preparations for war shall be preferred. When there is a choice between kings equally immune to the diplomacy, might and energy of the aggressor, he who has battlefields favorable to him shall be preferred; among those having equally favorable battlefields, he who can fight at a time suitable to him shall be preferred; among those equal in place and time of war, he who has better weapons and armor shall be preferred (7.15)’.
A few points may be noted. First, Kautilya is engaged in thought experiments as to how a weak king should explore his choice set. Second, he first compares two kings in terms of just two variables, adds the third variable while holding the other two variables constant and so on. This is essentially a partial equilibrium approach.hus his analytical approach is identical to that of Marshall.

6.4 Use of marginal analysis by Kautilya

Kautilya implicitly used discrete marginal analysis.

Kautilya (p. 259) stated,“With increased wealth and a powerful army more territory can be acquired, thereby further increasing the wealth of the state (2.12)”. Two points are in order. First, he was referring to a dynamic process and secondly to increments in wealth, army and territory.


He (p. 565) argued, ‘When the degree of progress is the same in pursuing peace and waging war, peace is to be preferred. For, in war, there are disadvantages such as losses, expenses and absence from home (7.2)’. Kautilya clearly emphasized the concept of additional net gain in making comparisons between choices. In calculating the net gain, he netted out the disutility of staying away from home. Thus according to Kautilya, a king should not wage a war unless the net gain from a war was greater than that in pursuing peace.

7. Kautilya on optimization subject to constraints

Kautilya (p. 115) explained, “If only one method is recommended, it is defined as ‘placing a restriction’, if a choice is suggested, it is an ‘option’ and if two or more are to be used together, it is a ‘combination’ (9.7)’.

Kautilya used optimization subject to resource constraints. He (pp. 199-200) suggested, ‘The five aspects of deliberating on any question are: (i) the objectives to be achieved; (ii) the means of carrying out the task; (iii) the availability of men and material; (iv) deciding on the time and place of action and (v) contingency plans against failure (1.15)”. Kautilya (p. 166) explained the phrase “means of carrying out” as "Of the four means of dealing with dangers, [conciliation, placating with gifts, sowing dissension and use of force], it is easier to employ a method earlier in the order (9.6)".

Specification of an objective and the phrase “availability of men and material” clearly establish optimization subject to constraints.

8. Kautilya on inter-temporal choice

He (p. 636) asserted, "When the gains from two campaigns are equal, the king shall compare the following qualities and choose the one which has more good points: place and time; the power and the means required to acquire it; the pleasure or displeasure caused by it; speed or slowness of getting it; the proximity or distance; the immediate and future consequences; its high value or constant worth; and its abundance or variety (9.4)".

Kautilya (p. 594) asserted, "A king may agree to forego a large immediate gain and seek [only] a small future benefit if he intends to use again the partner who is being helped (7.8)”

9. Kautilya’s Arthashastra on economics as a science
According to Kautilya (pp. 105-6),“Traditionally, (i) philosophy, (ii) the three Vedas, (iii) economics and (iv) the science of government are considered to be the four branches of knowledge. [However,]
a) the followers of [the Arthashastra of Prachetasa] Manu say that there are only three branches – the three Vedas, economics and the science of government. For [to them,] philosophy is only a special branch of Vedic studies.
b) The School of Brihaspati considers only economics and politics to be true branches of knowledge; [they argue that] those experienced in the ways of the world use the Vedas only as a cover [in order to avoid the accusation of being materialistic atheists.]
c) The school of Ushanas, maintains that politics is the only science; because, they say, it is in that science all other sciences have their beginning and end.
Kautilya holds that there are, indeed, four branches of knowledge. Because one can know from these four all that is to be learnt about Dharma [spiritual welfare] and artha [material well-being], they are called ‘knowledge’. Philosophy is the lamp that illuminates all sciences; it provides the techniques for all action; and it is the pillar, which supports dharma.
Samkhya, Yoga and atheistic are schools of philosophy. One should study philosophy because it helps one to distinguish between dharma and adharma [evil] in the study of the Vedas, between material gain and loss in the study of economics and between good and bad policies in the study of politics. [Above all,] it teaches one the distinction between good and bad use of force. When the other sciences are studied by the light of philosophy, people are benefited because their minds are kept steady in adversity and prosperity and they are made proficient in thought, speech and action (1.2)”.

According to Kautilya,establishment of economics as a separate discipline does not mean its independence from other disciplines. That is, economics can provide to and receive inputs from other disciplines.

9.2 Economics and political science

Economics does provide inputs to political science but it does not receive any direct input from political science. For example, the king is supposed to carry out the cost-benefit analysis before undertaking a project, [Sanjeev: This is entirely missing from India's socialist policy making]  that is, economic concepts are used to improve the functioning of the government.
9.3 Political science and vedas (moral values)
According to Kautilya, it was the spiritual duty of a king to take care of his subjects. He expressed the need for both the citizens and the king to be ethical. He emphasized dharma (ethics) through out The Arthashastra. He wanted that a king be benevolent, and energetic public servant implying that he be guided by public interest and not by his self-interest.

9.4 Economics and vedas

According to Kautilya, unless the survival of the state was threatened, ethical values should set the boundaries for all endeavors including economic ones. He (p. 107) emphasized the basic dharmic (moral) duties of individuals as “Duties common to all: Ahimsa [abstaining from injury to all living creatures]; satyam [truthfulness]; cleanliness; freedom from malice; compassion and tolerance (1.3)”.

9.5 Anviksiki (philosophy) and economics

According to him, philosophy provide[s] the reasoning between ethical and unethical actions [and] sheds light on methodological issues in all branches of knowledge including economics. His goal was to strike a proper balance between material well-being and spiritual well-being.

9.6 Economic knowledge and public policy
Kautilya (p. 100) writes, ‘‘By following [the principles set out in] this treatise one cannot only create and preserve dharma [spiritual good], artha [material well-being] and kama [aesthetic pleasures] but also destroy [their opposites, i.e.] unrighteousness, material loss and hatred’.

He does not accept any point without sound reasoning. His scientific methodology blended with rich content sets him apart from his predecessors. 

The identification of wage, rent, profit and interest as different factor payments by his predecessors was remarkable. But Kautilya saw the role of land, labor and capital as sources of economic growth and thus provided a modern interpretation. Finances were always critical to the maintenance of any kingdom and therefore, some fiscal issues were discussed by his predecessors. However, Kautilya extended that in two directions that: there are limits to taxation and suggested that tax revenue be directed to the provision of infrastructure, which increased income and consequently to more tax revenue, that is, instead of increasing the tax rate, he suggested increasing the tax base.
Similarly law and order issues were considered critical to the stability of the kingdom and therefore, reducing criminal activity through punishment was discussed by pre-Kautilyan writers. But Kautilya (p. 377) added, ‘It is the power of punishment alone, when exercised impartially in proportion to the guilt, and irrespective of whether the person punished is the King’s son or an enemy, that protects this world and the next’. [Sanjeev: This is perfectly reflected in my insistence that freedom comes with accountability.]

Kautilya initiated the exploration of “science of man’. For example, He (p. 283) suggested, ‘The king shall have the work of Heads of Departments inspected daily, for men are, by nature, fickle and, like horses, change after being put to work (2.9).

A partial list of some important concepts contained in The Arthashastra is:
  •  opportunity cost;
  •  rudimentary demand and supply apparatus;
  •  the law of diminishing returns;
  •  externalities;
  •  undesirability of monopoly and need for its regulation;
  •  moral hazard;
  •  role of law and order[14];
  •  public goods;
  •  Kautilya-curve (nowadays called Dupuit–Laffer curve);
  •  producer surplus;
  •  importance of human and physical capital accumulation to economic growth;
  •  role of infrastructure to economic growth;
  •  theory of gains from trade and terms of trade;
  • principal-agent problem;
  • efficiency wages;
  • specification of explanation and prediction as the goals of an economic inquiry;
  • role of asymmetric information in bargaining; and
  • time inconsistency problem.

Kautilya synthesized and refined the existing ideas at his time. But his true genius lay in innovating the novel concepts.

9.7 A set of hypotheses proposed by Kautilya

He advances several hypotheses. A few of them may be listed here:
  • human effort and capital accumulation are the sources of economic growth;
  • heavy taxation leads to the erosion of tax base;
  • prosperity changes peoples’ minds;
  • information is the key to better decision making;
  • justice and rule of law are the pre-requisites for economic growth; and
  • consumer durable goods face unstable demand.

Kautilya’s Arthashastra declares economics as a distinct discipline. The Arthashastra considers economics as the “science of man” and contains a logically consistent and adequate core of economic knowledge.

Kautilya shows that Hindu-civilization has no intrinsic aversion to economic growth and there is no such thing as Hindu growth rate: The analysis in Kautilya’s Arthashastra dispels the myth that Hindu civilization is inimical to economic growth and also sheds some light on the ‘second generation’ economic reforms in India. Since it is essentially a treatise on the imperative of economic growth.

10. Conclusion

According to Kautilya, the scope of economics is very broad, more like that of postmodern era with some imperialistic tendencies of colonizing other disciplines. His methodology is essentially Marshallian: the use of partial equilibrium approach and the making of a distinction between the short-run and the long run. Kautilya recommended the use of optimization subject to constraints methodology. Also, discrete marginal analysis is discernible from his analysis. Adam Smith did not use either the marginal analysis or the ceteris paribus clause.

Kautilya was the first one, who wrote a treatise on economics, carried out brilliant synthesis of existing ideas, originated more than a score of basic concepts in economics, provided coherent interpretations and most importantly understood the economy as an inter-dependent system of various elements. 
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Sanjeev Sabhlok

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3 thoughts on “Balbir Sihag on Chanakya (Kautilya) #3
  1. Very commendable effort

    By this noble work some one who likes our culture, knowledge, intelegence, behaviour and tradition in ancient INDIA can have authentic literature and facts to have glimpse in our past and creat our future on relevent knowledge available in such treasures.

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