THE JOURNAL OF PHILOSOPHICAL ECONOMICS Volume VI Issue 2 Spring 2013 ISSN 1843-2298 Copyright note: This is an open access e-journal which means that all content is freely available without charge to the user or his/her institution. Users are allowed to read, download, copy, distribute, print, search, or link to the full texts of the articles in this journal without asking prior permission from the publisher or the author provided acknowledgement is given to the original source of publication. The missing link: From Kautilya’s The Arthashastra to modern economics Marinko Škare Škare, Marinko (2013) ‘The missing link: From Kautilya’s The Arthashastra to modern economics’, The Journal of Philosophical Economics, VI:2 The missing link: From Kautilya’s The Arthashastra to modern economics Marinko Škare Abstract: The aim of this paper is twofold: first, to provide evidence supporting the thesis that Kautilya was the first political economist; second, to verify that a systematic study of political economy has begun long before the ideas and works of Adam Smith. It was in the works of Kautilya (around 375 B.C.). In order to validate the aims of our study, we look for evidence in his Arthashatra of rational behaviour, self-interest motivation, and market elements of a traditional commercial society. Providing a sound interpretation of Kautilya’s main arguments, we demonstrate that his is no less a systematic study in political economy than Smith’s The Wealth of Nations. Economics is a science that tries to offer policies and practices for creating and enriching a nation’s wealth, and in that sense, the Arthashastra (literal translation being The Science of Wealth) represents the first systematic manual of political economy. The development of economics as a science must take cognition of the economic principles and ideas presented in The Arthashastra so as to reveal the true origins of economic thought and its evolution. It is only by understanding methodological problems in a historical perspective we can understand the modern methodological and conceptual issues. Keywords: Arthashastra, Kautilya, economic evolution, heterodox economics Introduction The teachings and works of Kautilya (ca. 375 B.C. /1992) [1] rightfully deserve the appellation of the ‘missing link’ in economics. Unfortunately, scholars and students of economics around the world are not familiar with his work. Lately, 2 The Journal of Philosophical Economics VI:2 (2013) Škare, Marinko (2013) ‘The missing link: From Kautilya’s The Arthashastra to modern economics’, The Journal of Philosophical Economics, VI:2 the modern economic theory has recognized his contribution to economic thought, but no more than the work that of an exotic ‘ancient economic novelist’ (see Waldauer, Zahka & Pal 1996, p. 101). Though Kautilya’s own contribution in terms of economic concepts and principles is large and important (as we can evaluate it in Arthashastra), orthodox economic science has considered him to have had no influence whatsoever on the development of the ‘modern’ economic thought. This is a rather confusing fact, as the range of his thinking stretches from international trade, labour, wage, price, fiscal and monetary theory to economic growth process and corporate social responsibility behaviour. Orthodox economists and supporters of Finley’s (1999) theory of ‘primitive economics’ fail to acknowledge the existence of any form of economic thought that can be found before the life and works of Adam Smith (1759, 1776). To be exact, to a certain extent, they recognize ‘some’ precursors to classical economics in the work of Aristotle, de Jean Olivi, late Scholastics and Physiocrats to Mandeville. Their placement of economics on the throne of ‘modern science’ is based on two key arguments: (1) First, that the individuals pursuing personal interests are led by an invisible hand in their work, and (2) Second, that the market system functions to ensure the progress of society improving its social welfare through material prosperity. Hutcheson (2010) defines economy from the Greek words oikos (household) and nomos (complex root of the word dumb – manage, order, custom, law). According to Xenophon, Oikonomicos (450 B.C.) summarizes the knowledge of more than 2000 years. The thesis that before The Wealth of Nations markets and the economic principles were only randomly associated with economic categories such as unemployment, efficiency, inflation, and GDP—and are merely products of general knowledge or philosophical reflection—is based on the postulate that the market did not exist 3000 years ago [2]. Below, we provide evidence that the market was present and functioning very well within Kautilya’s state. The market mechanism, economic policy, and growth theory models that we find in Kautilya’s Arthashastra cannot merely be the result of a simple social practice or process; they must instead be evidence of a complex economic process and the economic analysis of that process itself. The Journal of Philosophical Economics VI:2 (2013) 3 Škare, Marinko (2013) ‘The missing link: From Kautilya’s The Arthashastra to modern economics’, The Journal of Philosophical Economics, VI:2 Theory of economic growth Kautilya’s major contribution is his theory of economic growth. His theory is elaborated in minutes—both at micro and macro level, with a significant central role for the King in promoting economic growth. His economic model can be presented as in Figure 1. Elements of Kautilya’s growth model include production of goods and services, demand for goods and services, productivity, government policy, fiscal policy, price stability and monetary policy, trade, economy, welfare, productive enterprise, productivity-linked wages, the position of women in the labour market, the role of marketing in the promotion of market activity, price stability, consumer protection division of labour, specialization etc. Mainstream economic models of today’s complex economic processes are not better formal representations of a ‘real’ world then the model Kautilya developed some 2,400 years ago. The proof for this claim lies in his The Arthashastra and the complex model of the Indian economy that he develops. The mechanism and components of the model support the evidence that economic thought and policies in ancient economies were far more advanced than we presently acknowledge. The model that we base on the data derived and the historical facts has all the ‘causality—feedback tree’ that we can find in any ‘modern’ growth models. Kautilya nourished a multi-dimensional growth model with several interrelated variables of interest (growth factors) and bi-directional causality. In his theory, it was no mystery why would some Empires register faster growth, and why the other would move slower. The central part of his model was agriculture and fishery— two main sectors that were generating added value and wealth for the King and the State. Mining industry was also an important source of wealth, with its four industrial levels: state monopolies (dealt with making weapons and brewing liquors), state-controlled industries (textiles, salt and jewellery), state-regulated small industries (craftsmen—goldsmiths, blacksmiths) [3] and private industry (that was free, unregulated)—potters, basket makers and others [4]. Other types of industries are not directly regarded to in Kautilya’s readings. 4 The Journal of Philosophical Economics VI:2 (2013) Škare, Marinko (2013) ‘The missing link: From Kautilya’s The Arthashastra to modern economics’, The Journal of Philosophical Economics, VI:2 Figure 1 Kautilya’s economic model Source: Author Productivity generated through the above-mentioned economic activities is the engine of economic growth. Unlike the ‘modern’ theories of growth, Kautilya did not recognize the role of unique and separable growth generators. According to him, economic growth originates from the coordination of all economic activities within the State, which has an intelligent and fair King on the top and citizens that are well protected, respected and motivated. The sole and final goal of this type of State is people’s welfare. This was his engine of growth — the one completely different from all the past and contemporary economic growth theories, which rest on pillars of economic growth yet unidentified. Thus, productivity was an important growth source, as we recognize it today [5], but Kautilya considered it only as the starter The Journal of Philosophical Economics VI:2 (2013) 5 Škare, Marinko (2013) ‘The missing link: From Kautilya’s The Arthashastra to modern economics’, The Journal of Philosophical Economics, VI:2 i.e. the ignition of the whole growth model. Increased boost in productivity does start the economic growth but is energy, or precisely said, the ‘growth momentum’ which is necessary for igniting the growth engine. It comes from all the previously mentioned activities and from interrelations between people and the institutions. Productivity is only a tool here, not the final and ultimate goal in the complex growth machinery. The State plays an important role in the model by encouraging fair trade, customer protection, harmony in profit and wages, stable fiscal policy and treasury management, stable prices and positive expectations. The State, or the King, is in charge of serving and administering this sophisticated mechanism of the economy. In fact, this is the evidence to show why, in ancient economies, household and village economy was in the centre of discussion, while the national or macro- economy as we know it today was not directly mentioned or given credit. Since we cannot trace national accounts or macroeconomic flows of any type at that time, we get a wrong impression based on this presumption. Thus, there is no reason to believe that it did not exist, as the Arthashastra in itself is solid evidence of this fact. To Kautilya, economic growth is a multi-dimensional phenomenon that results in increased economic activity, with productivity being the ultimate source. Several instances in his text provide strong evidence that he was fully aware of the economic growth process. At the very beginning of his theory he asserts that ‘A king shall augment his power by promoting the welfare of his people; for power comes from the countryside which is the source of all economic activity: He shall build waterworks since reservoirs make water continuously available for agriculture; trade routes since they are useful for sending and receiving clandestine agents and war materials; and mines for they are a source of war materials; productive forest, elephant forest and animal herds provide various useful products and animals. He shall protect agriculture from being harassed by fines, taxes and demands for labour.’ [6] In this paragraph, we can recognize several growth notions. Firstly, agriculture was the main source of economic growth, as it was well-known then that ‘(…) cultivable land is better than mines because mines fill only the treasury while the agricultural production fills both the treasury and storehouses.’ [7] The Indus Valley civilization was supposed to be the most productive, capable of generating large surpluses sufficient enough to support big cities along the empire. Historically, though this fact is still under debate, Kautilya provides clear evidence 6 The Journal of Philosophical Economics VI:2 (2013) Škare, Marinko (2013) ‘The missing link: From Kautilya’s The Arthashastra to modern economics’, The Journal of Philosophical Economics, VI:2 when he states that the countryside is the main source of all economic activity. Moreover, a significant part of opus is devoted to the farmers and agriculture, as the central activity in the Mauryan empire (323-185 BC), and the importance of the agricultural sector to the empire is visible from the fact that all activities involving land in the empire were under the control of the Chief superintendent of the State. It was his duty to monitor all activities involving land cultivation. Land was divided into crown land, private land and pastures. The central point of the countryside activity was the village, as a cornerstone of the village economy within the empire. Farms were agricultural areas, with a minimum of one hundred families and a maximum of five hundred families with arable fields that can be ploughed by one, two or three ploughs. [8] A similar organization agricultural activity and agronomic practices can be found in today’s agricultural household. Since the whole land was owned by the State, it was in charge of the land’s disposition. The State could grant the land to priests, preceptors, chaplains and Brahmins without taxes or fines, and without the right to sale or mortgage. Agricultural policy was set in accordance with the type of land under disposition. Non-arable lands were given to cultivators, or to slaves that were employed to work on the land. Another important aspect in Kautilya’s theory is the idea of diversified and sustainable economic growth. Only a diversified economy can assure stable and prosperous economic growth. Private property and self-interest had a strong role in promoting personal welfare and, in turn, state development. According to Kautilya, all subjects within the Kingdom were equally important for wealth creation—from the King to the slave. The degree of responsibility was another point. While the King is considered to be responsible for the total wealth of a Kingdom the slaves were responsible for wealth creation on the piece of land they were working on. State had no priority prior to the welfare of all King’s people. State and government officials were responsible to the King and the people. They were public servants and not ‘power figures’ as today. In fact, if we look at the list of their duties and penalty fees in relation to their wages, we shall see that the State had no intention to protect or elevate them to some high-status position in the Kingdom. Their main duty was to safeguard and uphold the invisible hand, promoting material production and activities resulting from any state servant. Any government official who failed to do so was strictly punished—for levying excessive tax burden on farmers, consenting merchants to determine unfair prices, promoting monopoly behaviour on the market. Thus, The Arthashastra’s is in no sense typical state capitalism. King was The Journal of Philosophical Economics VI:2 (2013) 7 Škare, Marinko (2013) ‘The missing link: From Kautilya’s The Arthashastra to modern economics’, The Journal of Philosophical Economics, VI:2 not allowed to depredate households of private wealth or run commercial enterprises as he pleases in the state capitalism tradition. This is what Kautilya actually writes: ‘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.’ [9] From this statement we could infer that The Arthashastra presents a sum of the ‘invisible and visible hand’ system where the King (representing the State) is taking care of resource allocation (the visible hand) and listening to the needs and motives of his subjects (the invisible hand). Theory of fiscal policy Fiscal policy and particularly the functioning of the treasury was well organised within the ‘Treasury’ (Arthakosh). It was like the Budget under the control of the Chancellor, one among the most important officials of the Crown. Government officials stipulated standard ‘blueprints’ for how the treasury should be built in order to be safe. Budget accounts and budget policy were also well-stipulated, planned to every detail. In some aspects, they were even more detailed in comparison to the existing budget policies of modern states. However, in Kautilya’s writings, we do not find a concept of national account, even though we do find the number and the levels of accounts clearly defined and described under budget accounts. The procedure of the budget policy, for a fiscal year with all departments (entities) included and that reports responsibility elaborated under the Chancellor’s supervision, is in no way of lower-quality in comparison with the procedure adopted in the economies all over the world today.[10] Comparisons between the budgets procedures in today’s developed economies and the budget policy procedure described in The Arthashastra provides us with striking facts about the advanced level of fiscal policy in the Mauryan State. ‘The Chancellor shall first estimate the revenue (for the year) by determining the likely revenue from each place and each sphere of activity under the different Heads of Accounts, total them up by place or activity, and then arrive at a grand total.’ [11] Credit side of the account or the budget revenue sources included revenues from: 8 The Journal of Philosophical Economics VI:2 (2013) Škare, Marinko (2013) ‘The missing link: From Kautilya’s The Arthashastra to modern economics’, The Journal of Philosophical Economics, VI:2 1) Income from Crown property a. Crown agricultural lands (production and lease) b. Mining and metallurgy c. Animal husbandry d. Irrigation works e. Forests 2) Income from State-controlled activities a. Manufacturing industry – textiles b. Manufacturing/leisure industry (liquors) c. Leisure activities (courtesans, prostitutes and entertainers) d. Betting and gambling 3) Taxes – In cash and in kind a. Custom duty b. Transaction tax c. Share of production d. Tax in cash e. Taxes in kind f. Countervailing duties or taxes g. Road toll h. Monopoly tax i. Royalty j. Taxes paid in kind by villages k. Army maintenance tax l. Surcharges 4) Trade a. State trading b. Compensation payments c. Excess value realization 5) Fees and service charges 6) Miscellaneous 7) Fines [12] The Journal of Philosophical Economics VI:2 (2013) 9 Škare, Marinko (2013) ‘The missing link: From Kautilya’s The Arthashastra to modern economics’, The Journal of Philosophical Economics, VI:2 Debit, the expenditure side of the budget, was carefully elaborated equally well. However, Kautilya was against any tight fiscal policy measure recognizing the negative effects of fiscal austerity and ‘deficit fetishist’ supporters on personal consumption and in turn on the supply contraction. This is clearly implied in his remark ‘State’s Officer who procures double of the normal revenue consumes the countryside. If he brings in the whole share for the King, he should be warned in case of a minor offence; and in case of a major offence, he should be punished according to the offence. He who makes out as expenditure the revenue which he has raised, consumes the work of men; and he should be punished according to the offence in cases of loss (waste) of days of work, the price of goods and the wages of men.’ [13] Evidently, as some believe even today, fiscal austerity is a way to economic distress, as it ruins personal wealth and power of consumption generating business cycles in the State. Monetary policy Money circulation in the Empire had two main functions: wealth accumulation an ‘grease’ for the trade and assertion of monetary sovereignty. A single currency was adopted across the Empire that was ensuring monetary sovereignty of the State. The danger of the inflation problem was taken care of through tough measures associated with money in circulation. It is evident from the fact that a special Coin Examiner was in charge of controlling the currency (gold standard) in the State. A severe punishment was stipulated for money counterfeiters and especially for those responsible for its circulation employed in the treasury (for them, the punishment was death). In addition, ‘(…) a lax anti-counterfeiting policy is inconsistent with price stability.’ [14] Allowing counterfeiting and not controlling the currency in circulation, implies inflationary pressures. Monnet (2005, p.7) demonstrates that ‘if a central bank wishes to take action against this activity without increasing the cost of counterfeiting itself, it will have to inflate the stock of legitimate money. As inflation increases so the relative cost of counterfeiting, it reduces counterfeiting incentives’. From this observation, indirectly, we could infer that to Kautilya, being the chief economic policy architect, price stability was important and so was the relationship between the money supply and price stability (or inflation) within the Mauryan Empire. While controlling the money, State officials were obliged to control inflation and price stability, because according to him, mixing of the genuine coins with the false ones 10 The Journal of Philosophical Economics VI:2 (2013)
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