Kautilya- the True Founder of Economics

by Balbir Singh Sihag

  According to Kautilya (p 225), ‘The Comptroller shall be responsible for the compilation of all fixed rules as well as the conventions used (2.7.3).’ It appears, even at that time there were some conventions, which today would be called GAAP (generally accepted accounting principles) and the Comptroller-Auditor would have the combined powers of FASB (Financial Accounting Standards Board) and the SEC (Securities and Exchange Commission).

  Labour Management Policy: Finally, according to Kautilya, the role of labour management policies could not be ignored in reducing fraud. Book-keeping is not restricted to compiling data, but also to correcting inadvertent errors and to discouraging and reducing manipulation or fraud. Similarly, audits test data and cannot ensure that all transactions are recorded accurately. Even in Kautilya’s time, he was concerned about the possibilities of overstating expenditures and understating revenues by employees and siphoning off state resources.

  Kautilya was aware of the possibility that some employees might shirk work and also become corrupt. He suggested both preventive and remedial measures to overcome such problems. As mentioned in Chapter 6, he stressed ethical anchoring for preventing moral hazard problems and corruption. He suggested several other measures. He emphasized accountability. He devoted Book two, which is about one fourth of the Arthashastra to specifying in detail the responsibilities of each employee to ensure accountability. He tried to reduce the scope for conflict of interest situations. He recommended an appropriate mix of salary, strings and supervision to elicit effort (see Chapter 11 for details).

  SUMMARY Kautilya believed that market failure and government failure were like conjoined twins with a common stomach. Market failure could not occur without government failure and government failure could not happen unless there were moral failure and poor organizational design. According to Kautilya, the government should protect, nurture and enrich the people. He suggested helping children, the sick and the old but did not want to create their dependency on the government. He believed that government must be proactive and progressive and remove all obstacles to economic growth. It must be vigilant and, if possible, should try to prevent natural disasters and, if they occurred, should provide maximum possible relief to the affected. He believed that the creation of a prosperous and fair economy required not only the removal of all obstructions to economic growth but also the building of infrastructure, establishing of law and order, and private property rights, prevention of monopoly and fraud and providing the services in which private markets did not exist. Thus Kautilya expanded the role of government to regulation of monopoly and externality and mitigation of the problem of ‘moral hazard’ and, thus, correct market failure. In this context, he also demonstrated sufficient awareness of the problems of inefficiency, indifference and corruption among public servants and suggested effective ways to deal with their sins of omission and commission.

  Kautilya did not want the suppliers of goods and services and traders to subsidize their customers. However, he expected that they deliver the best possible quality products and services, and do not cheat or charged monopoly prices Thus he expected suppliers to be efficient and ethical. He believed that encouragement of ethical behavior and designing of a sound organizational structure provided best insurance against corruption and consequently lowering the probabilities of various failures. He proposed a very comprehensive approach for effectively dealing with various kinds of failures. Parmar (1987, p 14) aptly quotes Beni Prasad as observing: ‘The Arthashastra is unsurpassed in the Hindu literature. It is complete in its perspective, detailed in its regulations, thorough in its treatment. It makes provisions for all contingencies and for all imaginable possibilities. As a statement of Hindu administrative theory, it hardly leaves anything to be desired.’

  10

  Information, Knowledge, Wisdom and Management

  Since the seventies there has been an information revolution. Just like the Inada conditions, specification of the information matrix has become a regular fixture in economic analysis. The theoretical models based on free and full information are no longer acceptable since information is both costly and imperfect. Kautilya explicitly discussed the importance of information gathering and insisted on having maximum possible information for making informed choices. His list included the collection of detailed information on both economic and non-economic variables. After experimenting with some other expressions, Simon (1957) coined the word ‘bounded rationality’. However, Kautilya did not use today’s jargons like bounded rationality, irrationality and asymmetric information, etc. but he was the first writer, who applied these concepts appropriately and extensively. Kautilya’s recognition of bounded rationality and his emphasis on (i) king’s own education and (ii) hiring of advisers and benefiting from their good counsel and judgment for relaxing the cognitive constraint could provide guidelines for twenty-first century CEOs.

  In recent years, knowledge management (KM) has acquired a pivotal place in business strategies for survival and growth. Current research rightly considers data management as a subset of information management and that, in turn, a subset of knowledge management. It appears though as if knowledge management is a new tool to acquire a competitive edge. However, Kautilya understood the importance of knowledge management to economic prosperity more than two thousand years ago but considered it as a subset of wisdom-based management. His analysis offers at least three insights, which may be relevant to today’s enterprises. First, he believed that wisdom was the most valuable asset and advocated a wisdom-based management. According to him, information, knowledge, and intelligence were the critical inputs to management by wisdom. A wise person, depending on the situation, understood how to reconcile, negotiate or coordinate, sometimes, the conflicting forces arising from ideas, institutions, and interests. Secondly, he indicated how one became wise and included acquisition of ethical values as an important component of knowledge. Thirdly, according to him, a wise CEO (king) was ethical, selfdisciplined, farsighted, foresighted, humble, preferred moderation, open-minded and appreciative of the wisdom of others, that is, in essence was both efficient and ethical. Such a CEO understood the inherent trade-off between maintaining confidentiality and sharing information and knowledge.

  According to Kautilya, reflection on knowledge squeezed the nectar (insight, wisdom) out of it. He suggested the study of Vedas and philosophy for learning the ethical values, such as honesty, non-violence, compassion, tolerance and truthfulness. Similarly, he recommended the study of economics and political science for acquiring information and knowledge for survival and material enrichment. A wise person was not only knowledgeable of ethical values and practical skills, but also reflected on them and practiced them.

  Kautilya’s recognition of bounded rationality is presented in Section 10.1. This section also includes collection of information on economic variables. The current research on KM concentrates on acquisition, codification, transfer, sharing, and using knowledge and puts heavy emphasis on knowledge workers and knowledge-intensity. Kautilya believed that wisdom, and not knowledge as such, was the most valuable asset and a king (CEO) needed wisdom to manage or harness the full potential of knowledge workers. He emphasized the learning of wisdom. He offered insights as to how one could become wise. Particularly the role of education in the learning of wisdom is presented in Section 10.2. Almost all studies on KM focus on the benefits of sharing information and knowledge and some discuss the risks associated with sharing knowledge. Kautilya discussed how much information needed to be shared with the subordinates and the trade-off between pooling knowledge and confidentiality. This insight is presented in Section 10.3.

  10.1 ON BOUNDED RATIONALITY Relevance of Bounded Rationality: Conlisk (1996) offers four arguments for incorporating ‘bounded rationality’ into modeling economic behavior. He asserts, ‘First, there is abundant empirical evidence that it is important. Second, models of bounded rationality have proved themselves in a wide range of impressive work. Third, the standard justifica
tions for assuming unbounded rationality are unconvincing; their logic cuts both ways. Fourth, deliberation about an economic decision is a costly activity, and good economics requires that we entertain all costs’. Finally, he resorts to the usual ‘as if ’ argument to advance his case. He expresses it as: ‘To gain perspective, it is entertaining to imagine an accidentally different history for economic theory. Imagine that modern decision theory began, not with perfect rationality and imperfect information, but with the opposite.’ Kautilya did begin decision theory this way and Conlisk has to find some other avenue to entertain himself.

  However, for quite some time, some researchers even avoided using the expression ‘bounded rationality’. For example, Haltiwanger and Waldman (1985, fn.1) remark, ‘Note, this limited ability to process information is sometimes referred to as bounded rationality. However, because of its frequent association with the related concept termed “satisficing”, we will refrain from using the term bounded rationality in this paper.’ They prefer to call it ‘limits of rationality’. Similarly, Palma, Myers, and Papageorgiou (1994) call it ‘imperfect ability to choose’ or ‘competence-difficulty’.

  Definition of Bounded Rationality: It is not claimed that Kautilya called it ‘bounded rationality’, although his discussions contain the concept.1 He (p 177) observed, ‘A king can reign only with the help of others; one wheel alone does not move a chariot. Therefore, a king should appoint advisers as councilors and ministers and listen to their advice (1.7).’ Clearly, the phrase ‘one wheel alone does not move a chariot’ indicates a complementary nature of relationship between the king’s own abilities and the advice from the advisers, which may be critical in ensuring survival and progress of the kingdom. He (p 196) added, ‘Because the work of the government is diversified and is carried on simultaneously in many different places, the king cannot do it all himself; he, therefore, has to appoint ministers who will implement it at the right time and place (1.9).’ That is, according to him, there were two kinds of limitations: (i) the ability to process information and draw inferences and (ii) the impossibility of being physically present at various locations simultaneously implying that the king could not run the country alone. He recommended that the king himself must be well educated, and also have advisers to relax the bounded rationality constraint. For relaxing the second limitation, the king should appoint ministers and delegate responsibility to them for providing various services to the public. Vishalaksha (a pre-Kautilyan thinker) also appears to have emphasized limitations on rationality.

  Collection of Information on Economic Variables: Kautilya believed that availability of information was critical in arriving at an informed decision and, therefore, was obsessed with the collection of information on economic as well as non-economic variables. He recommended the appointment of a Record Keeper for every five to ten villages, who kept detailed records on almost everything in the villages. He (p 220) suggested, ‘The villages shall be classified as best, average or lowest. They shall also be classified according to whether [they are tax paying or] tax exempt, whether they supply soldiers [in lieu of tax], and whether they supplied [fixed amounts of ] grain, cattle, gold, forest produce, labour or other commodities. [Within each village,] every plot of land shall be numbered and its use recorded according to the classification: cultivated or fallow, dry or wet cultivation, park, vegetable garden and orchard, enclosed area, forest, sanctuary, temple, water works, cremation ground, rest-house, public drinking-water facility, holy place, pasture and roads. These records shall be used for determining the location of fields, forests and roads [in case of boundary disputes] and to record transactions such as gifts, sales, charitable endowments and tax exemptions. [Likewise,] each house shall be numbered and classified as whether taxpaying or tax-exempt. Records of the inhabitants shall also be kept under the following headings: (i) the varna; (ii) occupation (such as farmer, cowherd, trader, craftsman, labourer or slave); (iii) the number of males and females as well as the number of children and old people, their [family] history, occupation, income and expenditure; (iv) livestock and poultry owned; (v) the amount of tax payable in cash or in free labour; and (vi) tolls and fines that may be due (2.35).’

  10.2 WISDOM-BASED MANAGEMENT AND ECONOMIC PERFORMANCE Although Kautilya did not formally define information or knowledge but such definitions are discernible from his applications. According to him, information may be defined as organized data (he designed a format), knowledge as skills, strategies, tactics, approaches or methods and wisdom as an extracted manna (nectar, insight) from knowledge and experience aided by intelligence.2 That is, wisdom was like separating the grain from the husk and offered vision and insights. A wise person understood that it was shortsighted to be unethical. He looked at all aspects of management for achieving the highest possible economic performance. According to him, a wise person knew how to use information and knowledge for removing gaps between vision and reality and understood the challenges and opportunities presented by ideas, information, institutions and interests.

  Importance of Wisdom: Kautilya argued that the power of sound analysis and judgment enhanced economic performance directly, as well as indirectly, by enhancing national security that was a prerequisite for economic development, which, in turn, enhanced the power of the army through increases in tax revenue and also by winning public support. Accordingly, as also earlier mentioned in the context of discussion on the concept of ‘opportunity cost’ in Chapter 4, he (p 600) suggested, ‘When there is choice between a wise son and a brave son, it is better to give the brave son, who though valorous, lacks wisdom. For, a wise son, though timid, uses his intelligence in his endeavors; like the hunter outwitting the elephant, the intelligent outwit the brave (7.17).’ If a king was forced to give up a son, he should give a brave son as a hostage. Since the opportunity cost in terms of loss in national security and economic growth of giving up a wise son, who ‘uses his intelligence in his endeavors’ was much higher than that of a brave son. Accordingly, he advised the king for transferring power only to the wise son, who was both ethical and efficient. He emphasized wisdom in almost every context and indicated that both knowledge and intelligence were the critical inputs to sound judgment (see Chapter 18).

  Wisdom-based Management and Economic Performance: According to Kautilya, economic performance depended on wisdom, which was acquired through learning and imitation (emulation).3 He believed that aptitude for learning and intelligence were prerequisites to benefiting from education. Table 10.1 may be used to summarize Kautilya’s ideas on the link between wisdom and economic performance:

  Table 10.1: Kautilya on Wisdom and Economic Performance Economic Performance

  Management by Wisdom

  Sources of Wisdom

  Contd... Imitation Watching and

  interacting with the

  elders

  Education Information (Historical) Ability

  to think

  (reflection, evaluation, synthesis,

  creating new knowledge) Knowledge Vedas and Philosophy for

  characterbuilding

  (self

  discipline and ethical conduct)

  Economics and Political Science for learning

  skills,

  methods,

  strategy and tactics

  He summarized, ‘Only a king who is wise, disciplined, devoted to governing of the subjects and [ever] conscious of the welfare of all beings will enjoy the earth unopposed (1.5).’

  10.3 TRADE-OFF BETWEEN POOLING KNOWLEDGE AND CONFIDENTIALITY A king can reign only with the help of others; one wheel alone does not move a chariot. Therefore, a king should appoint advisers (as councilors and ministers) and listen to their advice.

  — Kautilya (p177) Kautilya understood the importance of pooling information and knowledge but was also concerned about maintaining confidentiality. He visualized the conflict between sharing and creating knowledge, on the one hand, and the danger of leaking that knowledge to potential rivals, on the other.4 He beli
eved that the probability of a successful campaign critically depended on power, particularly the intellectual power, and protection of its confidentiality.

  Good Counsel and Imperfections in Rationality: Kautilya considered knowledge and intelligence as the most important factors in maintaining (and expanding) the kingdom and enhancing economic growth. He understood the limits of human cognitive ability. He suggested the appointment of advisers to relax this constraint. He provided an in-depth analysis of (i) the need to have advisers for arriving at a superior decision, (ii) how many advisers to have to achieve an optimum probability of success of a project, and (iii) who should be hired as an adviser? As noted above, according to him, the over-all survival of a kingdom as well as the success of undertaking a project depended on good counsel. Along with it, he emphasized the importance of secrecy. He (p 562) asserted, ‘He who cannot maintain secrecy will undoubtedly find his efforts destroyed like a broken boat in the sea even if temporarily there are some appearances of success (7.13).’

  The Optimum Number of Advisers: The answers to some of the important questions as to how many advisers to have, and how much and with whom to share information were tied to how ‘both objectives of sound advice and maintaining secrecy will be achieved’. The level of sophistication achieved on this topic was unparalleled for his time. Elementary calculus (such as, the optimum number of advisers is determined by the condition where the net additional gain of an additional adviser is zero) and graphs are used to bring it out.

  Kautilya (p 198-199) critically examined the various ideas expressed by four of his predecessors (Bharadvaja, Vishalaksha, Parasara, and Pisuna) before reaching his own conclusions regarding the number of advisers. According to Kautilya, ‘Bharadvaja says: “a secret [prematurely] divulged is fatal to the well-being of the king and the officials entrusted with the task. Every adviser has his own adviser, and latter, in turn, his adviser [and so on]. Thus [the series become too long and] the secret is divulged [somewhere along the line]. Therefore, a king shall deliberate by himself [without advisers].” [As the saying goes:] “None shall know what a king sets out to do. Only those who have to implement it should know when the work is begun or when it has been completed (1.15)”. Thus, according to Bharadvaja, a king should not have any advisers because that might compromise secrecy.’