Kautilya- the True Founder of Economics

by Balbir Singh Sihag

  Matrix 20.1: Selection of an Ally King I King II

  Not Revise Revise

  Believe Weaker or upright

  Not Believe Equal or Stronger and not upright

  The above matrix may be used to express Kautilya’s classification of all possible allies. For example, if King II had the six qualities or had the reputation to be upright (who did not revise) or was weak (who could not revise), he recommended the strategy (believe, not revise), that is the upper left cell. On the other hand, if King II was equal, or stronger, King I should adopt the strategy (not believe, revise), that is the lower right cell.

  20.2 KAUTILYA ON ASYMMETRIC INFORMATION Kautilya pointed out that for proper formulation and effective implementation of a plan, a king must collect as much information as possible. However, he did not explicitly dwell on the cost of gathering information about other kingdoms and in protecting one’s own privacy and might have considered it a normal function of the state. But he did emphasize that possession of private information provided a definite advantage over rivals. His (p 177) advice to a king was: ‘No enemy shall know his secrets. He shall, however, know all his enemy’s weaknesses. Like a tortoise, he shall draw in any limb of his that is exposed (1.15).’ As discussed above (18.2), Kautilya suggested setting-up an intelligence apparatus to gather information on other kingdoms.

  He provided several applications of asymmetric information. This section lists some of those applications and presents a detailed analysis of one of them, in the next section.

  Offering a Lemon

  • Akingknewthequalityofhisland,whichwaspoorbutthebuyer of the land did not know anything about its quality. Kautilya (p 621) stated, ‘If a settlement of a tract is likely to entail heavy losses or expenditure, a king shall first sell the land, with the intention of reacquiring it, to one who will fail in the attempt at settlement. Such agreements shall remain verbal (7.11).’

  • Similarly,Kautilyamaderecommendationsastowhatkindofland to give to neutralize an antagonist. He (p 612) suggested to give ‘useless land’ to ‘enemies in the rear, such as jungle chiefs’; ‘land not yielding a livelihood’ to a ‘forest thief ’ and ‘land affording no shelter’ to ‘one who deserts the army’ (7.16). The basic idea is the same that the giver knew the quality of the land but the receiver did not.

  Treaty Negotiation: Kautilya displayed the same bargaining skill in using the asymmetrical information in giving a hostage as part of a treaty. He (p 599) stated, ‘He who gives a treacherous minister or a treacherous son or daughter as a hostage outmanoeuvres [the receiver]. The receiver is outmanoeuvred because the giver will strike without compunction at the weak point— ie. the trust that the receiver has that the giver will not let the hostage come to harm (7.17).’ The giver knew the uselessness of the hostage but the receiver did not have this information and therefore, accepted this as part of the negotiated treaty.

  20.3 KAUTILYA ON BARGAINING

  WITH PRIVATE INFORMATION Although Kautilya was not aware of the distinction between a strategic game and an extensive game, an example of an extensive game from the Arthashastra is presented below. This case deals with a situation in which a weak king faced an aggression from a strong king. Kautilya laid out five stages of an extensive game and provided an exhaustive list of possibilities at each stage. He developed the strategies and actions to be undertaken by the weak king to minimize his losses. According to him, the main objective of a weak king should be to explore such ways as to minimize his losses. He reviewed the prevailing views on how a weak king should respond to an attack by a stronger king. He (p 664) stated (the views of earlier thinkers), ‘Bharadvaja says that a weak king, when attacked by a stronger king, shall bend like a reed and surrender his all. For he who submits to a strong king, bows to Indra. [On the other hand] Vishalaksha says that a weak king shall fight with his resources, for only with valour can one surmount calamities. It is the dharma of a Kshatriya to fight, whether he wins or loses.’

  ‘Kautilya disagrees with both. He, who surrenders all, lives only a life of despair, like a sheep that has strayed from its herd. On the other hand, one fighting with a tiny army perishes like one trying to cross the ocean without a boat. It is better to seek the protection of a powerful king or an impregnable fort. The weaker king shall offer, by one means or another, that which the other will, in any case, take by force. It is life that is worth preserving not wealth which, being impermanent, can be given up without regrets (12.1).’

  Kautilya suggested that the strategies and actions to be undertaken by a weak king should depend on the type of the attacker. He (p 664) listed three types of aggressors with their characteristics: ‘(i) The righteous aggressor is satisfied with submission. The weak yield to him, particularly when there is a danger from another enemy. (ii) The greedy aggressor is satisfied with seizing land and goods. The weak king shall give up wealth to him. (iii) The monstrous aggressor is satisfied only when he takes the land, goods, wives, sons and even the life of the defeated. A weak king may give up land and goods but shall not let himself be taken (12.1).’

  Several Points are Worth Noting

  • It is interesting to point out that the solution suggested by Bharadvaja is identical to the one reached through backward induction, which is: the realization on the part of a weak king that he was going to lose ultimately, so why fight, to begin with? It is comparable to the ‘nuisance suits’ in which backward induction leads the plaintiff to drop the case.

  • The earlier thinkers suggest only two extreme choices, which according to Kautilya, were undesirable. Kautilya suggested that the weak king should explore additional options such as seeking protection of a strong king or of a fort. He (p 664) recommended, ‘When attacked by a strong king, a weak king shall seek the protection of a king who is stronger than the aggressor and who cannot be swayed by the diplomacy of the aggressor trying to outmanoeuvre the weak king (7.5).’ He (p 665) added, ‘If a weak king cannot find any other king to protect him, he shall seek shelter in a fort; it shall be such that the aggressor, even with a large force, cannot cut off supplies of food, fodder, fuel and water and shall be so impregnable that the aggressor will suffer heavy losses and expenses if he tries to take it (7.15).’

  • Moreover,beforesurrendering,theweakkingshouldfindoutthe ‘type’ of the aggressor. Since his life and honour might depend on it.

  • Kautilya used every opportunity to emphasize the importance (‘like one trying to cross the ocean without a boat’) of capital. It seems that Kautilya dealt extensively only with the third type of

  aggressor (ie. the monstrous one). He laid out an extensive game plan

  to minimize a weak king’s losses. He (p 668-674) listed five stages of

  an aggression: (i) the strong king was getting ready to attack, (ii) he

  started the march, (iii) he put the siege on the fort, (iv) weak king’s

  defeat was imminent and (v) after a weak king got defeated, Kautilya

  recommended various strategies and actions to be undertaken by a

  weak king at each stage to minimize his losses.

  Aggressor Planning to Attack: Kautilya (p 668) stated, ‘When an aggressor is on the point of attacking, the weak king has three choices: he can make peace with the aggressor, try to avert the attack by diplomacy or wage secret warfare. He shall try to win over the sections favourable to him in the aggressor’s camp by means of conciliation and gifts and prevent treachery in his own camp by sowing dissension and use of force. At this stage the weak king may make peace without taking any action to harm the aggressor (12.1).’

  The Aggressor Started the March: Kautilya suggested that if the attempt to avert the attack failed and the aggressor [has] started the march, [at this stage], the weaker king should consider: (a) suing for peace again (b) reasoning with the aggressor about the soundness of the attack (c) undermining the aggressor (d) using the circle of kings, and (e) counter attack.

 
Suing for Peace: It may be mentioned that Kautilya preferred peace to war. He (p 568) recommended, ‘When the benefit accruing to kings under a treaty, irrespective of their status as the weaker, equal or stronger king, is fair to each one, peace by the agreement shall be preferred course of action; if the benefits are to be unfairly distributed, war is preferable (7.8).’ It is also clear from another statement. Kautilya (p 635) asserted, ‘That which entails small losses is a gain by diplomacy rather than by war (9.4).’

  Kautilya (p 668-669) suggested, ‘In negotiating for peace the weak king shall successively offer a quarter more of money and arms each day until the offer is accepted. If the weak king seeks peace on condition of surrendering a portion of his forces and the offer is accepted, he shall give dull and cowardly elephants and horses; if he has to give active and energetic animals, a long-acting poison shall be administered to them. If peace is sought on condition of paying money, the weak king shall give articles of high value for which there are no buyers, or forest produce that is unfit for use in war. If the condition is surrender of land, weak king shall give land that can be easily recovered, which has permanent enemies, which provides no shelter or which can only be settled with heavy losses and expenses (12.1).’

  The importance of asymmetric information may be noted here since the weaker king had full information about his mammals and materials but the aggressor did not. Secondly, the administration of a ‘poison pill’ is an old idea to combat a hostile take-over. Kautilya always preferred friendly mergers than hostile takeovers. Thirdly, he was aware of the illiquidity of high value items. Essentially, the weaker king wanted to make sure that his own resources were not used against him. Finally, it is significant to note that all the elements of bargaining were present in Kautilya’s analysis: the frequency of an offer, the cost of rejecting an offer, the number of offers and the magnitude and the rate of adjustment in the offer. For example, just one offer was made every day. That means, the aggressor had to maintain his forces for another day if he rejected the offer. Also, it gives a signal to the aggressor that the weak king was not unduly frightened of him.

  Kautilya’s Implicit Model of Bargaining: Suppose the aggressor believed that π was the probability of a victory, the expected gain from the attack would be πY (where Y = value of (land + loot + fort)). Let the cost of the aggression, C = F + V where F was the fixed cost of preparation for the war, and V =s t, the variable cost which depended on the size of the army, s and the time, t during which it was on the move, that is, C= F + s t.

  Expected initial net gain to the aggressor, Z0 = πY—F

  If the weak king wanted the stronger king to accept his initial offer, X0, then

  X0≥ Z0 (20.6)

  For example, if t=0, π =0.6, Y=1000, F= 20, the aggressor would expect that the initial offer by the weak king should be such that, X0 ≥ 600—20 =580. If the weak king made an initial offer, X0 = 100, it was likely to be rejected by the aggressor. Kautilya suggested that ‘the weak king should successively offer a quarter more of money and arms each day, that is, Xt = X0 (1+θ)t, where X0 was the initial offer and θ = 0.25. As an illustration, the weak king should increase the offer to 125 (= 100 (1+0.25)) the next day and keep doing this until the offer was accepted. However, the net gain to the aggressor would be, Zt =100 (1+0.25)t – 20–5 t, if s =5 per day. Kautilya offered many other suggestions to the weak king to escape from this predicament. Reasoning with the Aggressor: According to Kautilya, a weak king should try to dissuade the aggressor from attacking by bringing out all the consequences of the aggression to him. He (p 669) suggested, ‘If the aggressor declines to conclude a peace treaty, the weak king shall try to persuade him to do so by reasoning with him. The arguments to be used are that the strong king (i) was being misled by friends in name but enemies in reality, (ii) was frightening all his allies, (iii) was promoting the interests of his enemies, and (iv) because of all this, he was risking his wealth and his life (12.2).’

  If the bargaining for peace failed, the weak king should consider undermining the aggressor, seeking support of his circle of kings and even contemplating a counter attack.

  The following argument is particularly worth noting. Kautilya (p 670) stated, ‘[The envoy, shall also point out the following]. The weak king, who had many allies, would get many more with the things [forces, men, wealth or land] rejected by the strong king: together they could attack the strong king from all sides. While the weak king still enjoyed the support of his own circle of kings, the Middle king and the Neutral king, all these had abandoned the strong aggressor. For they were just waiting for him to start the war, incur heavy losses and expenses, be cut off from his allies and lose his control over his stronghold; then they would strike and overwhelm him (12.2).’

  First, according to Kautilya, the weak king should let the aggressor know that there were alternative uses of the men and materials being offered to him. This is quite significant, since it indicates that Kautilya was aware of the concept of opportunity cost. The weak king should negotiate with other kings also. He could present the rejected offer Xt to them, or some other amount, M, to win their support. So long M ≤ Xt, he was better off by seeking support of his Circle of Kings.

  Secondly, according to Kautilya, the weak king should try to convince the aggressor that his estimate of the probability of winning was too optimistic, a more realistic probability was, π*< π (his estimate). Similarly, aggressor’s estimate of the cost of war was unrealistically low since he was ignoring the losses of men and material in war, and also the loss resulting from the desertion of his allies. Clearly, the aggressor and the weak king had differences over the magnitudes of the probability of winning, the cost of operation and the duration of the operation.6 The aggressor might be overestimating his power and the weak king might be underestimating the power of the aggressor. They revealed their private information through various rounds of negotiations. But, in the mean time until their differences got resolved, the aggressor was expending resources on keeping his forces moving.

  The Aggressor Put the Siege: According to Kautilya, the weak king under siege should consider the following: (a) take some necessary precautions (such as to burn any grass and wood around the fort to improve visibility and deny the enemy any cover) as the aggressor approaches to lay the siege, (b) use of tunnels (to move away men and materials), (c) leave the fort without surrendering, (d) deprive the besieger of men and material, and (e) keep trying to make peace.

  Defeat was Imminent: According to Kautilya (p 673), ‘When the besieged king’s resources are totally exhausted, he shall abandon the fort and escape, by secret tunnel, by digging a new passage or by breaching a wall of the fort. Alternatively, may mount a surprise night attack (12.5).’

  After the Defeat: If the weak king was unable to escape, he should hide inside the fort and wait for an opportunity to strike. Kautilya (p 674) suggested, ‘If the fort is taken, the king shall hide himself in a sanctuary where plenty of food has been stored. He shall lie low until the victorious occupier forgets him and becomes careless (12.5).’

  SUMMARY Magill and Quinzii (1996, p 14) observe, ‘The classical economists, however, provided no explicit description of the way economic activity over time is organized through contracts and, that self-interested behavior may create difficulties for the functioning of a system based on contractual commitments is of much more recent origin.’ The reality is quite the contrary. The problem of time inconsistency has been recognized and incorporated into decision-making, at least, by Kautilya. It is clear that Kautilya inherited very little from his predecessors. Credit for anticipating and dealing with the problem of credibility, and showing understanding that the possession of asymmetric information confers advantages in negotiations, goes solely to Kautilya. Additionally, the concept of coordination failure is also discernible in the Arthashastra. Kautilya (p 193) asserts, ‘The armed forces—elephants, chariots, cavalry and infantry— shall each be under more than one chief. For, with many chiefs, mutual fear will
prevent them from succumbing to the temptations of the enemy.’ According to him, the coordination problems become almost insurmountable if the number is more than four.

  Epilogue

  Kautilya’s Place in Economic Thought

  Every age has its myths and calls them higher truths. — Anonymous

  Kautilya’s Arthashastra is a mine full of jewels and this work has brought out only a handful of them to the surface, and a lot of polishing will be required to bring out their full luster. The Arthashastra, far removed in time from the heat of current controversies provides a clearer picture of universal human tendencies, such as risk-aversion, rent-seeking and greed and suggests that society tirelessly search for ways to reduce risk and contain excessive greed and rent-seeking activities.

  So far as the Western world is concerned, Adam Smith has been credited with founding economics during the 18th century AD. However, economic reasoning had achieved a much higher level of sophistication two thousand years earlier in India. The detailed expositions of dozens of concepts have been offered in Chapters 3 to 20 to dispel the three long-standing myths that: (i) economics originated in the eighteenth century; (ii) Adam smith was the founder of economics; and (iii) Hindu civilization chose social stability over economic growth. Section 21.1 contains a brief summary of Kautilya’s original contributions and their relevance for today’s economies to dispel these myths. Kautilya fully embraced and promoted secular virtues as enshrined in the Vedas. He performed a holistic (Vedic) marriage between dharma (ethics) and artha (economics) and provided sacred vows (guidelines) for this marriage to last forever. This is presented in Section 21.2. Section 21.3 urges the economic profession to honour the true founder of economics.

  21.1 RECAPITULATION OF KAUTILYA’S CONTRIBUTIONS Kautilya (p 99) describes 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).’ Kautilya was a humble man and wrote the Arthashastra in a third person to avoid any feelings of ego. He considered it as a survey of the existing literature on the subject. But it is actually a different sort of survey full of new analytical methods and concepts. Contemporary surveys hardly offer any synthesis or new concepts.