Kautilya- the True Founder of Economics

by Balbir Singh Sihag

5 . Modern History of Opportunity Cost: Spiegel (1991, p 538) points out, ‘The germ of Wieser’s concept of opportunity cost was already contained in a seminar report he delivered in 1876, and although it was more fully developed in his later publications as well as by Böhm-Bawerk and other writers, it was Wieser who pioneered in this important matter.’ Spiegel credits Wieser for developing the concept of opportunity cost. Although Kautilya did not provide any formal definition of opportunity cost he understood it and correctly applied it more than two thousand years earlier.

  6. Barber (1967, p 174) notes, ‘In general it was presupposed that alternative uses of the various factors of production were available. Firm X, for example, could not expect to acquire more land, labour, or capital for its purposes unless it was prepared to outbid other claimants for the same resources. The point at issue was described more formally in terms of “opportunity cost”, ie. costs in the form of income the supplier of services was obliged to forego when committing himself to one activity, thus precluding other options. It was not always recognized within the neoclassical tradition, however, that this argument depended on conditions of full employment; otherwise some suppliers of productive services might have no readily available options. In such a situation the “opportunity costs” of employment would be zero.’

  7. A History of the Law of Diminishing Returns: Brue (1993) provides a brief history of the evolution of the law of diminishing returns. He finds, ‘The law of diminishing returns is rooted in the work of the 18th century French physiocrat Anne Robert Jacques Turgot.’ He notes, ‘Ricardo modestly credited Malthus and West for the discovery of the law of diminishing returns, but Ricardo developed the idea most thoroughly. Nevertheless, Ricardo’s statement of the law was imprecise and mixed with the idea of heterogeneity of scarce resources.’ He concludes, “Clark (1899/1956, p 201) used his modern formulation of the law to develop his marginal productivity theory of distribution. The law of diminishing returns thereafter became the central explanation for downward-sloping short-run resource demand curves.’

  Adam Smith on the Law of Diminishing Returns: Samuelson (1978, fn. 13) concludes, ‘Professor Stigler points out to me that I have been charitable to Smith in attributing to him knowledge of diminishing returns; and less than just to Ricardo in not crediting his Chapter 1 with having succeeded in showing that changes only in wage rates will not affect relative values. Professor Blaug also doubts that the differences between Ricardo and Smith are usefully dismissed as being merely semantic; in any case, upon review, I find no thought experiments proposed by Ricardo to which he has given a different substantive answer than would Smith’s system; outright slips by Smith seem if anything less than those in Ricardo and are of secondary importance in both cases.’

  Hollander (1980) finds some paragraphs in the Wealth of Nations in support of Samuelson’s finding. He quotes from the Wealth of Nations, ‘When the most fertile and best situated lands have been all occupied, less profits can be made by the cultivation of what is inferior both in soil and situation.’

  Two remarks are in order. First, Samuelson and Hollander point to some paragraphs in the Wealth of Nations, which imply diminishing returns but Ricardo as well as others could not find those in it. However, it does not prove that Adam Smith was the originator of this concept. Second, on this issue, the level of sophistication in the Wealth of Nations may be only marginally lower than that in Ricardo’s Principles of Political Economy, but both deal with declining returns from applications of fixed amounts of labour and capital to heterogeneous pieces of land.

  8. Backhouse (1985, p 148-50) provides a brief history of the evolution of the concept of the production function. A production function is defined as the minimum amounts of inputs required to produce given levels of output.

  9. Negishi (1989, p 14) quotes W Petty as ‘Labour is the father of wealth, as lands are the mother.’ This statement is equally revealing but, perhaps, a more poetic way of indicating complementary nature between land and labour.

  10. Samuelson (1978) comments, ‘Ricardo and Marx were not naive observers as to believe literally in fixed proportions between capital goods and labor.’

  11. Mercantilists on Demand-Supply Framework: Spengler (1960, p 23) characterizes the notion of competition under mercantilism as, ‘The term (competition) is used to signify a rivalry of sorts, but not the pricemodifying rivalry of the market place.’

  Classical School on Demand-Supply Apparatus: Samuelson (1978) asserts, ‘Within every classical economist there is to be discerned a modern economist trying to be born.’ On the other hand, Garegnani (1983) concludes, ‘The attempt to read in the classical authors as explanation of relative prices along the lines of modern theory is not well founded.’ He points out, ‘The role of effectual demand is to explain the tendency of the actual or “market” price toward the normal price and not that of determining the latter. It does not therefore consist of a curve but of a single determinate price-quantity point.’ In other words, there are no demand and supply schedules in the classical analysis and therefore, classical demandsupply apparatus is not a rudimentary representation or a precursor of the one developed by the neoclassicals. Similarly, Whitaker (2000, p 391) remarks, ‘Or it could be argued that this stress had a more self-interested basis and was designed to throw doubt upon the claims to originality of some of his contemporaries and strengthen his own claims to authority. Most commentators have regarded his emphasis on the continuity of development from classical to neoclassical economics as overdone.’

  CHAPTER -5 1 . The Origin of Statistics: Stephen Stigler (1986, p 361) provides a most complete history of measuring uncertainty during the 18th and 19th centuries. He provides a clear and fascinating exposition of the origins of the least squares of Legendre, error curve of Gauss, the central limit theorem of Laplace, regression (and quincunx) of Galton and the seminal contributions of Edgeworth, Pearson and Yule. He (p 361) concludes, ‘The conceptual triumphs of the nineteenth century had been the product of many minds working on many problems in many fields, and one of the most striking of their accomplishments was the creation of a new discipline.’ Stigler (1999, p 382) adds, ‘The construction of optimal tests of significance is a twentieth century innovation in statistical theory; the early works of Ronald Fisher (including likelihood-based significance tests in the 1920s), of Walter Shewhart (including the control chart in 1924) and the joint work of Jerzy Neyman and Egon Pearson (including the Neyman-Parson Lemma of 1933) played key roles.’

  2. Backhouse (1985, p 17) points out that Adam Smith would exclude the output of unproductive labour from income and the payments to labour came out of savings implying that his definitions of income and consumption were far from perfect. Adam Smith (p 430) asserts, ‘Thus the labour of a manufacturer adds, generally, to the value of the materials which he works upon, that of his own maintenance, and of his master’s profit. The labour of a menial servant, on the contrary, adds to the value of nothing.’ Similarly, defense related services and ‘churchmen, lawyers, physicians, men of letters of all kinds; players, buffoons, musicians, opera-singers, opera-dancers, etc. are unproductive’ according to Adam Smith. Moreover, Quesnay is usually given the credit for developing national income accounts. Notwithstanding that, Samuelson (1977) constructs at least a rudimentary national income accounts from Adam Smith’s analysis related to the ‘rude’ stage of society.

  CHAPTER -6 1. Yajur Veda on a long and healthy life free of vices: ‘May we be able to live freely without being a burden on anyone. May we be able to see, hear, live, and sing your glory freely for more than one hundred years.’ (Chapter36, mantra 24)

  ‘O God, the Creator of the universe and Giver of all happiness! Keep us far from bad habits, bad deeds, and calamities. May we attain everything that is auspicious.’ Yajur Veda (Ch 30, mantra 3)

  2. Richard Kraut (2010) observes, ‘What Aristotle has in mind when he makes this complaint is that ethical activities are remedial: they are needed when something has gone wrong, or
threatens to do so. Courage, for example, is exercised in war, and war remedies an evil; it is not something we should wish for.’

  James Halteman and Edd Noell (2012) explore Adam Smith’s ideas on ethics. They (p 76) remark, ‘The social passions are generosity, compassion, and esteem. They are inherently good and bring forth virtuous behavior, but they are also scarce and not prevalent enough in everyday life to serve as the foundation of a successful social order.’

  3. Confucius ‘To practice five things under all circumstances constitutes perfect virtue; these five are gravity, generosity of soul, sincerity, earnestness, and kindness.’

  4. (25) Dhar (2003, p 156-157) observes, ‘Our tradition recognizes certain eternal values including love, compassion and non-injury. It underscores the importance of means being right to achieve right ends.’

  On the other hand, Staveren (2001, p153) asserts, ‘Central to Aristotle’s Nicomachean Ethics is that virtue can only be found by trial and error as a mean between efficiency and excess: virtue depends on deliberation, as I argued in chapter one. It is important to repeat Aristotle’s view that virtues are not pre-given, they are not universals, nor subjectively prescribed in individual objective functions.’

  5. Jim Holt (2006) asserts, ‘Aristotle defined virtue as a quality of character that makes for a life well lived. Then he characterized the good life as a life lived in accordance with virtue. Circular?’ However, Vedic approach to ethics does not involve any such circularity.

  6. (a) Self-Improvement:

  Be pure and pious

  O worshippers. — Rig Veda (10-18-2)

  May honest earnings flourish,

  I destroy the ill-earned wealth. — Atharva Veda (7-115-4)

  Self-discipline:

  Do not tread the path of

  Rajo (sensuous) and Tamo (destructive) impulses

  And thus thou wilt be free

  From agonies and afflictions. — Atharva Veda (8-2-1)

  Truth:

  The earth is sustained through truth. — Atharva Veda (14-1-1)

  Controlling Greed:

  Do not covet the wealth of others. —Yajur Veda (40-1)

  [2] ‘Better’ and ‘agreeable’ present themselves to man: Considering them carefully the wise man discriminates, Preferring the better to what only pleasure brings:

  Dull men prefer the ‘agreeable’,

  For the getting and keeping [of what they crave].

  — Katha Upanishad, Chapter II (b) System Building: The Vedas, which were composed more than four thousand years ago, emphasized charity, truth, honesty, love, harmony, nonviolence, and self-discipline. A few quotes supporting this claim are provided below.

  May all men, beasts and birds

  Be blessed with peace and prosperity. —Atharva Veda (1-31-4) Charity:

  He who hoards provisions in vain

  And does not feed his elders and companions,

  Is inhuman, unkind and stingy,

  Verily he brings his own destruction.

  He who eats alone

  Is a great sinner. —Rig Veda (10-117-6)

  He who performs selfless action

  Accompanied by auspicious words

  Full of truth, joy and sweetness

  In the atmosphere of mutual-co-operation Reaches the goal. —Yajur Veda (3-47)

  Non-violence:

  O enlightened men,

  We neither harm any one

  Nor impose ourselves on others,

  We act in accordance with

  Vedic doctrines and ideals,

  We coexist and cooperate in life

  With kins as well as aliens

  To render good to all. —Rig Veda (10-134-7)

  Truth and Benevolence:

  They follow eternal law

  Preach and practice truth

  Extend helping hand to all

  Act as unique guide and guardian

  Bounteous, benevolent, broad-minded And savior from sins. —Rig Veda (5-67-4)

  I bless you to be free from malice

  To live with concord and unanimity Love one another as cow loves

  its new-born calf. —Atharva Veda (3-30-1)

  May we not hate any one. —Atharva Veda (12-1-24) Human Dignity:

  He who sees all beings

  In his own self

  And finds the reflection

  Of his own self

  In all beings

  Never looks down upon anybody. —Yajur Veda (40-6)

  7. I am indebted to Ravi Prakash Arya for this and the next endnote. The contribution of dharma at micro level and macro level is beautifully acknowledged in Vaisheshika Darshan (1.1.2) as:

  yato abhyudaya nihshreyas siddhi sa dharmah

  At the macro level, dharma is essential to abhyudaya (social and economic development or as system building). At the micro level, it is essential to Nisshreyas or as spiritual upliftment.

  8. In Dharmic economics, the value of paropakara (helping others) has a significant role to play. Modern philosophy talks about struggle and survival of the fittest. There is another philosophy that talks about ‘Live and let live.’ But Vedic philosophy, based upon the ethical value of propakara, talks about ‘Live and help others to live.’

  9. Origin of Philosophy and Religion in India: Bolling (1977, Vol 27, p 925) notes that the origin of some of the Vedas, such as the Rig Veda, the Indian sacred scriptures, may be dated around 2000 BCE. That means that some of the Vedas were composed more than a millennium before the earliest of the Greek works. He explains Veda as: ‘This word means “knowledge” (vid seen in Greek Fιδµεν “we know” Latin videre, Gothic witum, “we know”, English wit), which specializes in the sense of “knowledge par excellence,” “the sacred knowledge” is somewhat comparable to the designation of our sacred Scriptures as “the Book, the Bible.” He adds, ‘For the oldest of these, the Rig Veda, the estimates of competent scholars vary from 4000–1000 BC–about 2000 B C being a conservative estimate.’

  Origin of Philosophy in Greece: Brown (1977, Vol 13, p 396) points out, ‘In the primitive folk culture of Greece, as in other primitive cultures, science, philosophy, literature, and art in the modern sense did not exist.’ He adds, ‘Until the birth of Greek science and philosophy in the 6th century BC, Greek explanations of natural and social phenomena were entirely mythical; even thereafter myth remained central in Greek religion and poetry, and philosophy and science never fully got rid of its influence.’

  Evaluation of Socrates’ Ideas: Rowe (2003, p 123) states, ‘How should a man live, in order to achieve eudaimonia?’ He continues, ‘Socrates’ own answer, which is echoed by nearly everyone else in the Greek tradition, gives pride of place to arête. Ifarête were equivalent to ‘virtue’, this could be taken as a simple assertion that the good life is, necessarily, a good moral life.’ He (2003, p 127) states,‘But if fine or right actions matter to us, how do we come to know what fine and right actions are?’ He adds, ‘Socrates seems to claim neither to know himself how to give a proper account of this thing, arête, which he values so highly, nor to be able to find anyone else who knows about it.’

  Similarly, the Greek philosophers did not explore the conflict of interest possibilities and although they did ask the question ‘how a man should live?’ they did not explore any substantive issues related to the question. For example, Rowe (2003, p 125) states, ‘If, as he believed, we all seek eudaimonia, our own, not someone else’s. For him too, therefore, the fact that certain types of behaviour seemed to involve preferring the interests of others to one’s own was itself the problem, not the solution; and any successful case for justice and the rest had somehow to show that they were, after all, in the interests of the agent. It is in this sense that we are to understand the famous Socratic paradoxes, that ‘Arête is wisdom’, and ‘No-one goes wrong deliberately.’ He (2003, p 127) believes, ‘The rise of Greek ethics can be seen in large part as a reflection of the overlaying of a fundamentally individualistic ethos with the demands for co-operative beha
vior implied by the political institutions of the city-state. What the philosophers attempt to show is that there is, in the end, no conflict between the two.’ He adds, ‘We may deplore the fact that they expanded so much energy on exploring the foundations of the subject that they had none left for discussing the substantive issues that constitute the subject itself—rather as if a mathematician were to become so obsessed with the problem of mathematical truth as to forget to do any mathematics.’ It appears that even with a considerable stretch of imagination, Greek philosophers’ contribution cannot be described as a ‘Greek Miracle.’ See Ifrah (2000, p 360) for a challenge to the ‘Greek Miracle’ in another area.

  10. Sen (1997) asserts, ‘The tolerance of heterodoxy is not to be found here. Indeed, there is very little tolerance in Kautilya, except tolerance for the upper sections of the community.’ He adds,‘Certainly, Kautilya is no democrat, no egalitarian, no general promoter of everyone’s freedom.’

  On the other hand, Drekmeier (1962, p 76) states, ‘Now the king must concern himself directly with the common good, an idea anticipated in theArthashastra.’ He (p 198) observes, ‘The author of the Arthashastra emerges as something of a champion of the Shudras, espousing their rights as freeborn citizens, and going so far as to suggest that the sons of slaves should enjoy the status of Aryans.’

  He (p 201) asserts, ‘There can never be a thoroughgoing divorce of politics and ethics for Kautilya; he never denies that the ultimate purpose of the state is a moral purpose, the maintenance of dharma.’ He (p 201) adds, ‘Traditionally, it was the religious proficiency of the purohita that determined the success of the king. Now, of course, the point had been reached where Brahmans must look to the state for the security of their interests.’

  11. Chang (1987) explores the contributions of Confucius (551-479 BCE), a moral philosopher and Han Feitzu (280-233 BCE), a legalist. Chang remarks,‘The Confucian state is established on a set of ethical norms and rites—rules, ceremonies, and manners codified by legendry sages—and governed by men through moral influence, rather than law, coercion, or by divine spirits.’ Chang adds, ‘Another outstanding legalist was Han Feitzu (280-233 BC), a theoretician and a disciple of Hsuntzu. Following his teacher, Han Feitzu believed that basically, people were motivated largely by self-interest. For the sake of social order and economic progress, Han Feitzu proposed strict and uniform application of rewards and punishments and rejected Confucian egalitarianism. In his view, chances for success under Confucianism were far less than under Legalism. In his assessment, the former would function well only if individuals are guided by morality and rulers are sage kings, but in reality, individuals are guided overwhelmingly by self-interest and rulers are mostly average kings. On the contrary, Legalism, along with its laws and regulations designed for the good of the whole society headed by an average ruler, offers a greater chance of success.’