Kautilya- the True Founder of Economics
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14.2 NATURE OF INTERNATIONAL TRADE IN ANCIENT TIMES Cooper (1977, Vol 26, p 910-916) indicates that during ancient times, trade was risky, consisted of light and high-valued products due to the presence of risk and poor means of transportation, and was based on natural advantages implying its pattern to be selfevident.2 Kautilya’s Arthashastra is the only known book, which has survived and describes issues related to international trade during the 4th Century BCE. There are, at least, four points worth noting in his formulation. First, Kautilya considered both high value and low value products as tradable. He (p 239) suggested, ‘The frontier officer shall inspect the caravans carrying foreign goods and classify as those of high value or of low value (2.21).’ He added, ‘All dutiable goods shall be weighed, measured or counted and the duty payable on goods of low value shall be determined carefully [not ignoring them as insignificant] (2.21).’ Clearly, goods of both high value and low value were considered importable.
Secondly, according to Kautilya, precious goods attracted bandits much sooner than the inexpensive ones, implying that the risk varied directly with the value of the product. It may appear reasonable to believe that transportation of goods of light and high-value should be cheaper and easier, but Kautilya pointed out that it could be more than neutralized by the increased cost of extra protection needed for high value products. He (p 238) stated, ‘If the Chief Controller of State Trading sends a caravan by a land route, he shall choose a safe route. One quarter of the goods shall be of high value. Jungle chieftains, frontier officers and governors in the city and the countryside shall be contacted beforehand for assuring security. Steps shall be taken to ensure the protection of the members of the caravan and goods of high value (2.16).’
It is obvious that the existence of high risk for high value products, to some extent, worked against them. Additionally, Kautilya noted that the market in precious goods was very thin. He (p 623) stated, ‘Buyers of high-valued products are rare and found only after a long search; there are many buyers and a steady demand for products of small value (7.12).’ Apparently, trade in high-valued products was not that attractive during ancient times. Interestingly, instead of the buyer undertaking the search it was the seller, who had to do it.
Risk Minimization through Diversification: Kautilya emphasized the principle of diversification by requiring a combination of high value and low value goods. Since extra spending on protection would reduce both expected return and risk, implying that he considered risk, to some extent, as endogenous. An awareness of the trade-off between expected return and risk is clearly discernible in his analysis.3
Handling Missing Markets: At the time there were no markets to insure against theft. Kautilya (p 235) stated, ‘Frontier officers shall be responsible for the safety of the merchandise passing on the roads and shall make good what is lost (2.21). Traders may stay inside villages after letting the village officers know of the value of their merchandise. If any of these is lost or driven away, the village headman shall recompense the trader (4.13).’ The security of trade was thus ensured through making the local officers accountable in terms of compensation for any loss.
Thirdly, Kautilya was aware of the transportation constraint and tried to relax it. He (p 235) recommended, ‘The king shall promote trade and commerce by land and by water and market towns/ports. Trade routes shall be kept free of harassment by courtiers, state officials, thieves and frontier guards and from being damaged by herds of cattle (2.1).’ He made here two additional points: (i) integration of markets and (ii) economies of scale.
Integration of Markets: He (p 623) stated, ‘Many inferior routes are preferable to a few important ones (7.12).’ His goals were to open new markets in the process and facilitate a fuller integration of the existing ones.
Economies of Scale: He (p 623) explained, ‘A route usable by carts is preferable to a foot path for men and animals only because of the larger quantities that can be transported on carts (7.12).’ This statement implies that he has at least some idea of the concept of the economies of scale.
Fourthly, even during ancient times, some choices had to be made regarding trade–some of which appear quite sophisticated. The conclusions by Caves, Frankel and Jones (2002) in this respect are based on the assumptions of the existence of inexpensive modern transportation and communications facilities, low insurance premium, credit extensions from financial institutions, foreign exchange markets, and of already identified markets.4 However, it was not so evident two thousand years ago when there were potentially too many risk factors.
14.3 THEORY OF GAINS FROM TRADE Kautilya (p 237) stated, ‘The Chief Controller of State Trading shall ascertain the profitability of a trading operation with a foreign country using the following method. The price of the goods to be sold in the foreign country and the price likely to be realized on the goods imported in exchange shall be estimated. From the gross margin, all expenses, as described below, shall be deducted:
For caravans: customs duty, road cess, escort charges, tax payable at military stations, ferry charges, daily allowances paid to merchants and their assistants and the share payable to the foreign king.
For trade using ships: all the above plus the following additional charges: ie. the cost of hiring ships and boats, provisions for the journey.
He shall, in general, trade with such foreign countries as will generate a profit; he shall avoid unprofitable areas (2.16).’
Although there is no theory of comparative advantage here, in the sense of predicting the pattern of trade, the rule proposed for gainful trade is the one that correctly implies that gains from trade will ensue if the rule is followed by the ruler of a country where market prices reflect social costs.
A few further points are worth noting. First, Kautilya explicitly incorporated the cost of transportation and other expenses into his gains from trade argument. During his time, not only travel between two countries was hazardous but also the costs of transportation associated with international trade were significant. Secondly, Kautilya, unlike mercantilists, did not argue for generating trade surplus.
Kautilya did not have any systematic theory on what determined the trade pattern, however, the Arthashastra contains several intriguing and pertinent observations.5 He listed sources of imports depending upon climate or presence of mines, implying that he was aware of the influence of natural factors on production patterns. He mentioned that pearls could be imported from Ceylon (Sri Lanka), Barbara and Arachosia, aloe from Burma (Myanmar), woolen cloth from Nepal, furs and horses from Gandhara (Afghanistan), Vanayu (Arabia or Persia) and Bahilika (Bactria) and wine from Afghanistan and Scythia. As for exports, he mentioned (p 803-4) live animals, food, fresh produce, preserved food, liquor, medicines, spices and perfumery, raw materials, manufactured goods (garments, carpets, leather goods, earthenware) and gems and jewellery. Aside from natural resources as a factor that conferred production and trade advantage, Kautilya also referred to the role of exogenous productivity differences and also of capital—both physical and human.
SUMMARY Kautilya would not have realized that his condition for generating a profit was an alternative way to approach the theory of the gains from trade. He understood the contribution of both physical and human capital on labour productivity two thousand earlier than the classical economists. Pirenne (1937) points out the existence of internationalism before the emergence of mercantilism. Kautilya understood that a country did not need a trade surplus to enjoy the gains from trade and he, in fact, specified the condition to engage in trade. Trade was not considered an engine of growth. Rather, the objective was to expand the availability of a maximum number of products at a maximum number of places. It is obvious that there was no need for a WTO at that time and its existence now serves only as a reminder of nationalism. It is also obvious that our understanding of the nature or level of trade during the ancient times is painfully inadequate. Although, for sure, international trade was not an engine of growth but it was not insignificant either.
6 The point emphasized is that the history of economic thought in this respect is still incomplete.7
FOUR
Ethics and Freedom from Fear of Crime
Kautilya envisioned a society free from crimes. He called criminals ‘social thorns’ and suggested legal measures to remove them. Part Four has the following three chapters that present Kautilya’s ideas on providing safety against crimes.
Chapter 15: Administration of justice. It sets out the general principles and the judicial process for administration of justice.
Chapter 16: Contract and Property Rules. It contains Kautilya’s ideas on the sanctity of contracts and labour theory of property.
Chapter 17: Penance, Penalty and Prevention. It presents Kautilya’s proposal of a mix of penance and penalty for effective and ethical tort laws.
15
Administration of Justice
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.
— (Kautilya, p 377)
Book Three and Book Four of Kautilya’s Arthashastra, which have 20 Chapters and 13 Chapters, respectively, are devoted to the administration of justice. Kautilya’s Judicial System is called ‘Dandaniti’, ‘the science of law enforcement’ and constitutes an important aspect of its overall policy framework. Kautilya codified, modified and created new laws related to loans; deposits; pledges; mortgages; sale and purchase of property; inheritance and partition of ancestral property; labour contracts; partnership1; defamation and assault; theft and violent robbery, and sexual offenses. He thus dealt with law and justice issues relating to both the civil law and the criminal law. He offered a truly comprehensive system of justice, which not only incorporated all the salient elements of the present-day system but also provided invaluable additional insights.
Kautilya’s Arthashastra discusses many issues, which are currently under intense research.2 His contributions relating to law and order issues may be classified under three headings:
Importance of the Rule of Law: According to Kautilya, existence of law and order was a pre-requisite for economic growth.3 He (p 108) observed, ‘The progress of this world depends on the maintenance of order and the [proper functioning of ] government (1.4).’ He continued, ‘Unprotected, the small fish will be swallowed up by the big fish. In the presence of a king maintaining just law, the weak can resist the powerful (1.4).’ Kautilya argued that corruption retarded economic growth by siphoning-off resources and by adversely affecting law and order. He (p 286) listed corruption and greed among the causes of loss in tax revenue, implying a lower provision of public infrastructure, which was essential to economic growth.
Laws must be clear, consistent and in a written form: Kautilya (p 213) stated, ‘The rule of kings depends primarily on [written] orders; even peace and war have their roots in them [2.10].’ There are at least two reasons as to why he codified the laws.4 First, many of the traditional laws were outdated or were insufficient to deal with the new situation. As Charles Drekmeier (1962, p 260) explains, ‘By the fifth and fourth centuries BC the ancient tribal institutions had lost their ability to regulate society effectively. New modes of production, new types of social relationships, new salvation theologies were changing the old ways. Kautilya was the theorist who most clearly saw the need for expanded state authority to fill the ever-widening gaps left by the declining authority of tradition.’
Secondly, Kautilya was quite concerned about the possibility of ‘green justice’, that is, judges accepting bribes in exchange for rendering favourable verdicts. He codified the laws and introduced material incentives, such as efficiency wages to complement the existing moral incentives to resolve the principal-agent problem. Recently, Edward L Glaeser and Andrei Shleifer (2002) assert, ‘Codification emerges in our model as an efficient attempt by the sovereign to control judges as his knowledge of individual disputes deteriorates (as it did when the states and the economies developed). The simplicity of bright line rules, and the possibility of verifying their violation, enables the king to use them to structure incentives contracts for judges.’ It is difficult, however to put any specific label to Kautilya’s views since he combined elements of historical, metaphysical, imperative and sociological schools of jurisprudence.
Effective Administration of Justice: His insights into the administration of justice are the focus of the current study. According to Kautilya, effective law enforcement depended on (i) Honesty of the Law Enforcers: He emphasized that the law enforcers themselves including the king must be honest and law-abiding.5This is presented in Section 15.1. (ii) Importance of Judicial Fairness: Similarly, he emphasized the standard of proof, prompt trials, minimization of Type I error, and implicitly the minimization of type II error (since the king was required to compensate the victim if the crime was not solved). These issues, which come under the rubric of judicial fairness, are presented in Section 15.2. (iii) Impartiality, proportionality and certainty of punishment: Kautilya’s emphasis on impartiality, certainty and proportionality of punishment and discretion in sentencing are provided in Section 15.3. Kautilya preferred monetary fines to nonmonetary punishment and making sure that fines were paid-off. This and some other related issues are collected in Section 15.4.
15.1 ON CORRUPTION OF ENFORCERS AND CRIME DETERRENCE Insistence on Honest Enforcers as a Pre-requisite for Effective Law Enforcement: Kautilya was acutely aware of the possibility that some law enforcers might resort to extortion. He believed that honesty on the part of law enforcers was a prerequisite for effective law enforcement (government failure is discussed in Chapter 9). Similarly, he was concerned about the dishonesty of judges.
Guidelines on Judicial Conduct: Kangle (part III, p 215) notes, ‘The judges are called dharmasthas, a name which apparently refers to the dharma or law, by which they are to be guided in their work.’ This could also mean that they epitomize and swear by dharma while performing their function. Kautilya provided a detailed set of guidelines to ensure the judicial process to be fair and impartial. According to him (p 381), ‘A judge shall not: threaten, intimidate, drive away or unjustly silence any litigant; abuse any person coming before the court; fail to put relevant and necessary questions or ask unnecessary or irrelevant questions; leave out of considerations answers relevant to his own questions; give instructions on how to answer a question; remind one of a fact; draw attention to an earlier statement; fail to call for relevant evidence; call for irrelevant evidence; decide on a case without calling any evidence; dismiss a case under some pretext; make someone abandon a case by making them tired of undue delays; misrepresent a statement made in a particular context; coach witnesses; or rehear a case which had been completed and judgment pronounced. All these are punishable offenses; in case the offense is repeated, the judge shall be fined double and removed from office (4.9).’
Kautilya offered a comprehensive list of ways in which a judge could affect the outcome of a case. He believed that a judge must be competent and must not compromise with the judicial process to ensure impartiality. It is obvious that the judges themselves were not above the law. Kangle (part III, p 221-222) observes, ‘Such treatment expected to be meted out to members of the judiciary strikes us today as being very strange. If judges are themselves to be fined, the dignity that is expected to be attached to their office is bound to disappear. The judges, in the scheme of this context, occupy a position subordinate to the executive and are far from being independent of it.’ However, there was no other practical way to remove them since there did not exist any legislative body to have hearings for the removal of corrupt judges.
In fact, there were guidelines even for the judge’s clerk. Kautilya (p 382) wrote, ‘The clerks who record statements made before the court shall: record the evidence correctly; not add to the record statements not made; hide the ambiguity or confusion in evidence badly given; make unambiguous statements appear confused
; or change, in any way, the sense of the evidence as presented. All these are punishable offenses (4.9).’
He advised the king to compensate the victims and punish the corrupt officials. He (p 297) recommended, ‘A proclamation shall then be issued calling on all those who had suffered at the hands of the dishonest official to inform the investigating officer. All those who respond to the proclamation shall be compensated according to their loss (2.8).’
15.2 ON JUDICIAL FAIRNESS AND MINIMIZATION OF LEGAL ERRORS Current discussion on issues related to judicial fairness is focused primarily on the standard of proof and minimization of legal errors.6 Kautilya’s judicial system incorporated all the essential ingredients of fairness in resolving disputes. These are explained below.
Expedient Trials: The judicial trials were initiated very promptly, perhaps not to adhere to the dictum that ‘justice delayed is justice denied’ but due to the belief of an increasing unreliability of evidence as time passed. Kautilya (p 462) argued, ‘Because interrogation after some days is inadmissible [unreliable?], no one shall be arrested on suspicion of having committed theft or burglary if three nights have elapsed since the crime, unless he is caught with the tools of the crime (4.8).’ However, he (p 472) did state, ‘An offender shall not go scotfree [just because of passage of time] (3.19).’ He (p 386) suggested, ‘The maximum time allowed for a defendant to file his defense shall be three fortnights (3.1).’