Kautilya’s Arthashastra: A Neglected Precursor to Classical Economics
Thanks to Sanjeev for alerting me to this remarkable paper. Â It is actually more than 15 years old (!) and was published in the journal of the Delhi School of Economics. It is remarkable for it shows that Bharat was far ahead of its time in ancient days when it came to cutting-edge economic theory and Chanakya was perhaps the pioneer of classical economics, free trade and progressive taxation policies..Excerpts from the paper below (you can download the pdf created by Sanjeev here).
Kautilya’s Arthashastra: A Neglected Precursor to Classical Economics
CHARLES WALDAUER, WILLIAM J. ZAHKA AND SURENDRA PALÂ School of Management, Widener University Chester, PA 19013 USA, Indian Economic Review, Vol. XXXI, No. 1, 1996, pp. 101-108
ABSTRACT
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.
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).
On International Trade
…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 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 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.
…Kautilya recognized that trade based on the principle of comparative advanÂtage would be to the material benefit of both exporting and importing nations.
On Taxation
…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:Â 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. …
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”.
…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)
…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)
…(A) 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)
…
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).
…
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.
On Labour Theory of Value
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).
…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 establishÂing 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.
Summary
…
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.
…
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.
*** End of Excerpts ***
A simple conclusion is that Chanakya would have STRONGLY opposed Nehruvian or any other form of socialism. He would also have strongly advocated FDI and foreign trade and competition.
India can do worse than follow Chankya, although there are many superior options. But it is DANGEROUS to follow economics illiterates like Congress, BJP, Hazare or Ramdev.
S
“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.”
And, yet we are stuck with Marx and Fabian socialists, who in their quest for equality of outcome destroyed nations and their wealth.
I have been an ardent student of Arthashastra for long – unfortunately, it is still very hard to get accurate English translations of the entire text. I was surprised and impressed by Sanjeev’s recent post on “Legalised prostitution” as propounded by Chanakya (something we have debated here.
And, I was also hugely impressed by this part here:
“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 ”
This is why economics is counter-intuitive, and why the socialists will never get it, in their quest for equal outcomes. Imports are a far better measure of a country’s wealth and productivity and economy, than exports. Ricardo was the first contemporary economist to spend time on this aspect. And, here we have Chanakya (our own classical liberal economist) saying the same nearly 1700 years earlier. WOW!!!
Arthashastra should become mandatory course material for all our graduate programs in economics.
Cheers
Dr. Subramaniam Swamy wrote his op-ed on how to destroy Islamic terror in which Dr Swamy states that the only way to weed away the global-nexus the 2 Abrahamic religions have caused on Bharata Varsha with the aide of Congress and leftists cohorts, is by re-framing Indian Constitution from the present “socialistic & secular” one to that of Hindu Raashtra. Many a questions were asked as to how to do so and what is the best alternative Bharatiya’s have?
Here’s the answer. “KAUTILYA’S ARTHASHASTRA” a comprehensive socio-political-economic text, written by a genius who enabled to sow seeds of discord in the mighty Alexander’s army by making Alexanders minister Megasthenes realize a lot of truths. Kautilya is stated to have said to Megasthenes that “A king can be respected as a king, only if he cares for his country which in turn protects it’s people. At any point in time, if the king becomes selfish/greedy, the people should be willing to sacrifice the king and bring in change for the sake of their happiness & prosperity, resulting in betterment of that country.”
The great sage Kautilya had laid down rules to the minutest of details. For eg. he even had noted down in his ARTHASHASTRA how a supervisor (Kshatriya) of a particular village had to ensure the protection of a goldsmith (Vaishya) in that area, for that gold smith would in turn generate revenue for the village which in turn contributes for the entire Raajya (kingdom).
Please visit this comprehensive link to know the minutest detail to which Chanakya had thought out. http://www.hinduism.co.za/kautilya.htm. Just astounding at the kind of vision and forethought this great Bharatiya had.
A few things to note.
1. Chanakya was not the first to develop these theories or principles of economics or administration. These topics have been covered in Ramayana and Mahabharat as well during discussions of characters. Chanakya compiled all in one under one book. Same thing with Kamasutra, Vatsyayana was not the first one to work on the topic, nor was Patanjali the first on Yoga.
When Bharat comes back and finds that Rama has been exiled he curses that the one caused his exile, may he get as much sin as a king who taxes excessively. Just administration has been central to Indian governance. Even with a king, India has been a ‘democracy’ and ‘meritocracy’ for long.
But Chanakya’s import/export comments should not mean that we should open over economy completely in every sector, like in retail and insurance! That would be stupidity in name of being just and fair. Like Arjuna who couldn’t see the wrong in him deciding not to fight for his ‘love’ for his kinsmen, those who think that being fair means we have to open everything, should see what other countries do. And when to open something and when not to.
Retail and insurance sectors don’t require any external expertise that we don’t have inside. It is a game of handling money, like in chit fund, and retail is only being the middleman between the produce and the consumer. Why can’t Indians do it? To better the practices (one reason to bring in open competition) can be done by making relevant laws.
Allowing FDI indiscriminately, will simply help pump the wealth of the country outside.
Written 2000 yrs ago,Kautilya!s Arthashastra!s fundamental rules shall remain valid for ever as far as value of money is recognised.
@Shashi: PL join the debate on FDI in Retail here..
You may yet change your mind!
Shantanu,
It is surprising to know that you of all think that FDI in retail is good.
Please see this link – http://www.fastcompany.com/magazine/77/walmart.html to know what Walmart has done to small biz in its own country, fellow country men. If they have done that there, do you think they will have any mercy for brown guys?
Q1. Why should anyone care for FDI in any sector?
Maybe we don’t have the technology? – Retail and Insurance are tech intensive sectors.
Maybe we don’t have the money? – India has lot of money, just distributed differently.
Maybe we want to hoard USD? – There are better ways to get USD
Every govt. has protection for its certain sectors. E.g US Work visa has limits by the country and by type of worker (skilled, manual etc.)
Why can’t we put rules, that we will only open these X Y Z sectors. Why not opening certain sectors should be looked as anti-market/anti-economy…?
And whatever great heavenly benefit Walmart will bring, why can’t we make rules to give incentive or threaten our own local Indian businesses to do the same? What I mean is why call an external butcher like Walmart to teach lesson to our businesses who don’t do a good job? Why not make laws that will force them to do a better job, like holding them accountable?
If we can’t hold our own biz accountable, do you think we can hold foreign biz accountable?
What is the fascination or compulsion to even consider FDI in retail? OR letting Walmart come in? Except for pressure from companies larger than countries.
Why do we want the profits from retail go to outside companies? What are they bringing in? Foreign products? No, they will sell Indian stuff from India producers to Indian consumers.
Do not forget, East India Company was a business. And modern day imperialism will only happen through economy, at least against democracies like India. No one is going to send a clear uniformed army to mess, but suited officials only.
How can we all of a sudden become so blind?
Correction:
Retail and Insurance are tech intensive sectors.
— should read —
Retail and Insurance are NOT tech intensive sectors.
Shashi: Can I please request you to post your comments on the FDI thread https://satyameva-jayate.org/2011/11/29/fdi-in-retail/ where many of these points are being discussed?
Thanks
Completely disagree.
In what kind of meritocracy does a “teacher” ask for the thumb of a “student” because the teacher doesnt want that student to excel and outshine his favorite pupil?? (I hope you get the reference)
Not only it shows that there was no meritocracy but it also shows how unfair, inhumane and cruel this teacher was.
People should be repulsed by such patently unfair behavior yet in India this is accepted without any critical questioning.
RC, you are picking one example and ignoring everything else, this is called throwing the baby with the bathwater.
If you think droNAchArya and ekalavya are literally and 100% true and it happened exactly as depicted, then we must agree to so many other things as well from mahAbhArata 🙂
Do you reject the entire American progress because George Washington had slaves? Or because they displaced five native tribes from Florida/Georgia/Alabama to Oklahoma (Trail of Tears)? Or do you not call USA the greatest bastion of freedom because they imprisoned thousands of American citizens of Japanese decent but American birth, during WWII ?
Try to get the point in a discussion. It is easy to distract and avoid. The same mahAbhArata also has the famed bhagvad-gItA and many more oceans of wisdom, if you care to read, and have patience to sort out entertainment and wisdom.
In India alone you find that even a king had rules to follow, made by wise men who were not kings. A king was not the legislative, but only the executive. Every king was supposed to have a council of wise ministers to be respected and successful. And this you find in any story (or mythology as many call it) or of history. If you see, chANakya is held in high regard, why? He was not the king, but the law maker.
Anyway, to all according to their understanding.
Dhanyavada.
“People should be repulsed by such patently unfair behavior yet in India this is accepted without any critical questioning.”
What do you mean by “accepted without any critical questioning”? Do teachers today emulate Dronacharya’s behavior? Have you come across some links where Drona’s behavior vis-a-vis Eklavya is exalted by other Hindus?
And what can one do today but accept that it so happened (if it did happen)? It’s not as if we have time machines and we can go back to the past and change that incident according to what’s right based on our current morality.
I’m constantly amazed by the infinite capacity for self-loathing among Hindus and feel shame/outrage over something that happened in the way past, and a behavior that is not even glorified. It’s not as if Hindu gurus or leaders praise Drona because he asked Eklavya for his thumb in the form of guru-dakshina.
BTW, is your one example – and even that example seems to be poorly understood by you – enough to reject the statement that in India, meritocracy was awarded in the past? One can have reward for meritocracy, yet concurrently have some unfair incidents, and that doesn’t make the statement false. If you are looking for a 100% record and look at the world in strict black and white terms, then yeah, you can reject the statement based on one example, but the real world doesn’t work that way.
Oh, and apologies for making the assumption – which I don’t know is correct or not – that you are a Hindu.
For example
Dronacharya Award
and
A College named after
I dont want to comment further on controversial topics. So I will stop here. Macro economics and other topics are more interesting and important (to me at least)
RC,
I’m highlighting the key words from my comment, which you seemed to have missed, and your two links do not constitute as the proof I asked for:
“..Drona’s behavior vis-a-vis Eklavya…
There’s no doubt that Drona was a great guru, and Arjun’s skills vindicate Drona’s status as such. There’s nothing wrong with acknowledging his contribution as a teacher by instituting an award in his name, and still consider Drona’s behavior wrt Eklavya as unjust. You seem to have a different yardstick (than I do) of “100% perfection, otherwise, rejection.” Besides, one has to look at the context of the yug in which such events took place.
“I dont want to comment further on controversial topics.”
Actually, I wouldn’t mind discussing this in an appropriate post on this blog, as we shouldn’t shy away from “controversial” topics.
From Why it’s time India goes back to Kautilya’s idea of ‘dharmic capitalism’ (Jaithirth Rao’s review of Sriram Balasubramanian’s book ‘Kautilyanomics’), a few excepts:
….I remember reading years ago a Western scholar’s assessment that India had many saint poets but had failed to produce a Plato or a text like The Republic. As we revisit our classics—the Shanti Parva of the Mahabharata, the Tirukkural and even parts of Valmiki’s Ramayana in today’s ambience, we can safely assert that the ancient Indian contribution to economics and political philosophy is not only significant but possesses universal value that all humans can benefit from
…
Assessing a text that at a minimum is 2,300 years old, a text written in verse form and not in staccato prose as is common for philosophical tomes of the West, a text which is clearly embedded in a tradition that goes back at least a few more centuries further in time, a text written in a language possessed of complex etymological and semantic boundaries, a text that is a summary of ideas with a hoary lineage and which is simultaneously meant to be a primer for readers—in short, a book that deserves multiple commentators or bhashyakaras in our tradition cannot be subject to the simple process of translation as demanded by today’s publishing houses.
…
Kautilya’s primary concern, as the title of his magnum opus suggests, is with “artha” another untranslatable word that I shall leave as is.
…
The rule of law, enforcement of contracts, protection of individual property rights not only from other contestants, but even from the sovereign, protection of the rights of lawful inheritance, protection of the interests of consumers, time value of money, need for orderly bankruptcies, importance of free and fair trade, importance of financial incentives, challenges associated with taxation including the problem of how a sensible sovereign avoids rapacious taxation, role of the State and the need for it to be limited and not intrusive, importance of standards in transactions (for instance, standard weights and measures), significance of efficient transportation, requirement to be fair, even indulgent of foreign talent and foreign investors, and, of course, need for effective penalties when incentives fail—all of these are meticulously catalogued by Kautilya. His incessant concern about the possibility, nay certainty, of government officials indulging in corruption and tyranny presciently anticipates the 20th-century work of economists like Nobel Laureate James Buchanan. No wonder, Balasubramanian concludes that today’s public domain would benefit a whole lot from paying attention to Kautilya and his masterful text. Their significance is not limited to antiquarian studies.
…
The common image of Kautilya (or Chanakya as our Left-influenced schoolbooks refer to him) as a Machiavellian strategist is inadequate and incomplete, and almost a caricature of this noble, wise, and far-sighted thinker. It would be sensible for our schools and universities to include extracts from Balasubramanian’s book as a corrective.
…
I am making a strong plug for Balasubramanian’s book. Read it quickly once, skipping some dense parts. Go back and read it again slowly, without skipping any part. Sit back and contemplate the fact that with all our cherished notions of progress and all our arrogance, how small we are in comparison to the greats who lived before us. ….. Spending time in Acharya Kautilya’s courtyard is a feast for the intellect and the soul. We should not deprive ourselves of this opportunity.