Kautilya- the True Founder of Economics
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P
H
y (PF X – C – T – Z)/PF —PH X > 0
(14.1)x y x
Or
(PF X – C – T – Z)/PF > PH X/PH (14.2)x y x y
Or
(1–
µ
–t–
π ) P
F X/PF H H
y > Px X/Py
(14.3)x
Or
(1–
µ
–t–
π
) P
F/P F H H
y > Px /Py (14.4)x Where
= C/P
F X, t = T/PF
x X, and π = Z/PF X x x
It is quite clear from equation (14.4), which incorporates tariffs and transportation costs that Kautilya understood, that there were gains from trade. It is ambiguous, however whether he understood the principle of comparative advantage. Never the less Waldauer et al (1996) conclude, ‘Thus, Kautilya recognized that trade based on the principle of comparative advantage would be to the material benefit of both exporting and importing nations.’
6. Wilford (2002) reports, ‘So robust was the India trade 2000 years ago that Emperor Tiberius, concerned over Rome’s increasingly adverse balance of payments, complained that “the ladies and their baubles are transferring our money to foreigners.”’ He adds, ‘Also, it was not an overwhelmingly Roman enterprise, as had been generally assumed. The researchers said artifacts at the sight indicated that the ships might have been built in India and were probably crewed by Indians.’ He describes the archaeological trove at Berenike seaport in Egypt as: ‘“Mindboggling” find: teak and metal, beads and gems, batik and peppercorns.’ Of course, by the time of Adam smith, international trade had become quite significant.
7. Recently, Ken McCormick (1999) asserts, ‘Specifically, this paper is about the independent advocacy of a policy of laissez-faire by both ancient Taoist philosophers and Classical economists. Recognizing the independent development of this idea has not only intrinsic historical interest but also provides the doctrine of laissez-faire with another substantial philosophical leg on which to stand.’ He finds that ‘This “hands off ” approach to government is central to Taoism. There is a natural harmony in the social order, which can be achieved only by a policy of non-interference. Passivity on the part of the ruler allows the Tao to bring about harmony and prosperity.’ He claims that ‘Laissezfaire is simply an extension of the doctrine of “wu wei” to government policy.’ He defines ‘wu wei’ as ‘do nothing.’
CHAPTER -15 1. Joseph J Spengler (1971) makes a special note of legal rules regarding partnership. He (p 79) writes, ‘Rules for the distribution of remuneration when work was done jointly not only were laid out by Kautilya but also found expression in commercial arithmetic. When workmen, guild members, or others engage in cooperative undertakings, they “shall divide the wages as agreed upon or in equal proportions” (3.14.18).’
2. Since Gary S Becker’s (1968) seminal work, hundreds of articles have appeared dealing with a variety of aspects of law enforcement. These works also analyze law enforcement and deterrence. These may be classified as: (i) rent-seeking behavior or corruption by the enforcers and its impact on economic growth and crime deterrence; (ii) judicial fairness and the minimization of legal errors in the disposition of criminal cases; (iii) the form of punishment that whether it should be monetary or nonmonetary, and (iv) the time inconsistency or the credibility problems, that is, society may not find it optimal to carry out the punishment once the crime has been committed and the related issue of judicial discretion.
3. Only recently has this issue has drawn attention from economists. Pranab Bardhan (1997) reviews the issues related to corruption and economic growth.
4. ‘Early Roman law derived from custom and statutes but the emperor asserted his authority as the ultimate source of law. His edicts, judgments, administrative instructions, and responses to petitions were collected with the comments of legal scholars. As one 3rd-century jurist said, “What pleases the emperor has the force of law.” As the law and scholarly commentaries on it expanded, the need grew to codify and to regularize conflicting opinions. It was not until much later in the 6th century AD that the emperor Justinian I, who ruled over the Byzantine Empire in the east, began to publish a comprehensive code of laws, collectively known as the Corpus Juris Civils, but more familiarly as the Justinian Code.’(Reference http://www.crystalinks.com/romelaw.html)
5. A Mitchell Polinsky and Steven Shavell (2000) survey the field on law enforcement. In the last section of their article, under the sub-heading ‘future research’ they recommend, ‘The behavior and compensation of enforcement agents have not been examined in this article, but this topic is important and should be studied for two reasons. First, the incentive of enforcement agents to discover violations is affected by the structure of their payments. Secondly, enforcement agents may be corrupted: they may accept bribes, or demand payments, in exchange for not reporting violations. Corruption tends to reduce deterrence, and therefore its presence obviously will affect the theory of optimal law enforcement.’ In the light of Kautilya’s contribution their suggestion amounts to[:] ‘going back to the future.’
Similarly, David D Friedman (1999) describes the various elements of an efficient system of criminal punishment, which includes ‘penal slavery for criminals who can produce more than it costs to guard and feed them.’ He summarizes his findings as: ‘Hence imprisonment is always dominated by execution and both are dominated by fines and other alternatives. Modern legal systems do not fit that pattern. One possible explanation is that the ability of enforcers to profit by convictions can produce costly rent seeking.’ Friedman believes that the real reason for the existence of inefficient system is to curb the possibility of rent seeking on the part of the enforcers.
6. For example, Thomas J Miceli (1990) remarks, ‘For instance, an important question of fairness relates to the incidence of errors by the criminal process.’
7. Becker (1968) discussed only the prevention of crimes but did not suggest anything if a crime was committed. Miceli (1991) proposes a comprehensive model of fairness and deterrence, which presumably combines Becker’s crime prevention model and Miceli’s (1990) fairness model. However, Kautilya implicitly provided a more comprehensive approach with many additional insights. The following table captures Kautilya’s conceptual framework.
Table 15.2: Kautilya’s Conceptual Framework for Defining Type I and Type II Errors. Arrested (A)
Convicted (C)
Not
convicted (Cc)
Truly Guilty (G)Innocent (G )
P (A∩G)P (A∩GC ) P (A)
P(C ∩ A∩G) P (C ∩ A∩GC)(Correct (Type I Legal Decision) Error) P ( ∩ A∩G) P (CC∩ A∩GC )CC
(Type II Legal (Correct Decision) Error)
Not
arrested (Ac)
P (A ∩ G) P (A ∩ GC ) P (AC )
P (G)P (GC ) 1 Kautilya’s Definitions of Judicial Errors: Let G = the number of guilty and Gc = the number of innocent. Let Pa = P (A/G) = [P (A∩G)/P (G)] = probability of arresting a guilty person, Pc = [P(C ∩ A∩G)/P (A∩G)] = probability of convicting a guilty person who has been arrested, π= PaPc = P(C ∩ A∩G)/P (G) = probability of arresting and convicting a guilty person. The king had to compensate the victim if the criminal was not convicted and the arrest alone did not make a difference. So Kautilya’s approach implied defining the probability of Type II error as, β= (1–Pa Pc) = (1–π) = probability of a guilty person not convicted, and the probability of Type I error as =α= P(C ∩ A∩Gc)/P (Gc) probability of arresting and convicting an innocent person.
8. Miceli’s Definition of Legal Errors: A judicial process is initiated to find the guilt or innocence of a person arrested for an alleged crime. For example, Miceli (1991) defines the probabilities of legal errors as follows. He sets d= δ (G/A) = [P (A∩G)/P (A)] = probability that an arrested person is guilty; Pg = [P(C ∩ A∩G)/P (A∩G)] = probabili
ty of convicting a guilty person (ie. (1–Pg) is the probability of not convicting a guilty person); probability that an arrested person is guilty and is convicted= δPg = P (C ∩ A∩G)/P (A). Type II legal error probability = δ(1–Pg). Probability of convicting an innocent person = Pi = P (C∩A∩Gc)/P (A∩Gc), and Type I legal error probability = (1–δ) Pi = P(C∩A∩Gc)/P(A) = probability of arresting and convicting an innocent person. Miceli’s Definitions based on the numbers: Type I error probability = 5/110 and Type II error probability = 20/110. If the objective is to assess the performance of the judiciary only, Miceli’s definitions are sufficient since his analysis is confined only to those who have been arrested. However, his definitions are not relevant if the objective is to deter crimes. For example, if the enforcement authorities arrest just one criminal person (out of the 1000) and convict him, that is, δ =1 and Pg =1. According to Miceli’s definition, the probability of conviction = δ Pg =1. But that cannot be correct since the probability of conviction of a guilty person would be = 1/1000 (=δ Pg A/G = A/G), which is very small to deter any crime. It means that Miceli’s model did not achieve its goal of combing prevention of crimes and judicial fairness.
Polinsky and Shavell (2000) do not define the various probabilities explicitly. It seems that they define the legal errors in the following way. Let the probability of detection, P be defined as P= A/G = 110/1000, the Type I error probability (they call it Type II error), ε2 = (1–δ) A/G =10/1000; and Type II error probability, ε1 = δ(1–Pg) A/G = 20/1000. That means in the presence of legal errors, the effective probability of detection = P (1–ε1–ε2) = δ Pg A/G = 80/1000. This is precisely, the probability of arresting and convicting a guilty person and is relevant for deterring crimes.
They present an alternative insightful interpretation of these errors. They consider the negative impact of Type I error (contrary to tradition, they call it Type II error) on crime deterrence. They note, ‘The second type of error, mistaken liability, also lowers deterrence because it reduces the difference between the expected fine from violating the law and not violating it. In other words, the greater is ε2, the smaller the increase in the expected fine if one violates the law, making a violation less costly to the individual.’
9. On the other hand, Miceli (1990) assumes that an increase in efforts by the prosecutor to collect more evidence shifts the distributions to the right implying an increase in the probability of Type I error. He notes that prosecutors generally try to shift the distributions to the right. That is clearly against the collective sense of justice.
10. Drekmeier (1962, p 254) remarks, ‘Kautilya: holds that danda must be applied with justice if authority is to have the respect of the people— which amounts to saying that justice is what transforms power into “authority.”’ Danda means punishment.
11. Recently, Jennifer F Reinganum (2000) has discussed the establishment of the United States Sentencing Commission to develop the sentencing guidelines for achieving certain social goals. These are very similar, as mentioned above, to those specified by Kautilya. She states, ‘The motivation for such guidelines included at least the following arguments. First, the then-current system of indeterminate sentencing with parole made it difficult for either the offender or the state to form a reasonable estimate of the actual sentence; definitive sentencing guidelines were believed to provide honesty in sentencing. Secondly, the sentencing guidelines were intended to reduce observed disparity in sentencing across apparently similar cases. Finally, the sentencing guidelines would build in proportionality in sentencing by conditioning the prescribed sentence on offense and offender characteristics.’
12 . Cost of Carrying out Punishment: Becker (1968) reaches the conclusion that monetary fines are merely transfers and do not use real resources and therefore, are preferable. However, Becker’s suggestion has been found to be impractical and the society has to incur some cost in the collection of fines. Based on an empirical study, Robert W Gillespie (1988-89) finds, ‘The relatively low enforcement success achieved for large fines, particularly drug fines larger than $1000.’ Gillespie casts doubt on ‘The use of fines as a criminal sanction in terms of lower social costs of punishment.’
13. Polinsky and Shavell remark, ‘The implications of injurers’ imperfect knowledge are straightforward. First, to predict how individuals behave, what is relevant, of course, is not the actual probability and magnitude of a sanction, but the perceived levels or distributions of these variables.’
On the other hand, in recent years, the US public has been demanding (from their respective state governments) the right to know if any sex offender lived in their neighborhood. This may serve as a warning to the parents so that they could keep a close watch on their children. Recently, some states have passed legislation requiring the registration of sex offenders. Kautilya focused primarily on the perceived probability of detecting the criminals. Doron Teichman (2004) argues, ‘That such policies have limited preventive value, yet they might be justified as an efficient way to sanction sex offenders.’
CHAPTER -16 1. Law and Ethics: D’Amato (1981) lists the views of some well-known legal theorists, which vary from Bentham’s extreme positivism view that there is no necessary relationship between law and morality to Cicero’s extreme natural law view that there is a necessary relationship between law and morality.
2. History of Law and Economics: It is now almost universally accepted that the application of economic analysis to law originated much earlier than during the 50’s. Mackaay (1999) provides a very detailed history of law and economics. His list includes Adam Smith, David Hume, Beccaria, Bellamy and Jerome Bentham. Medema et al (1999) present the contributions of John R Commons and many others on the application of economic analysis to law. Medema (2004) brings out Sidgwick’s contribution to law and economics. According to Sima (2004), ‘It is notable that Carl Menger, who memorably played a part in the emergence of the new science of marginalist economics, was a lawyer who contributed to the development of law.’ Kautilya devoted almost one-third of his Arthashastra to issues related to the administration of justice. Drekmeier (p 254) believes that Kautilya understood that ‘justice is what transforms power into “authority.”’
3. Bell and Parchomovsky (2005) quote Jeremy Bentham, ‘Property and law are born together, and die together. Before laws were made there was no property; take away laws, and property ceases.’
4. According to Goetzmann (2006), ‘When people started living in large communities like Uruk, they began to live with strangers as well as friends. It may have been possible to know everyone in a large farming village, but not in a vast city such as Uruk. What were once implicit agreements among neighbors now became explicit, contractual agreements among strangers. When everyone had the same profession and skills, neighborly help could always be repaid in kind. But when people developed different professions it must have been difficult to maintain neighborly reciprocity. Urban societies still needed cooperation, but limits to familiarity with fellow inhabitants, and difficulty with quantifying the units of such cooperation meant that people required more formal ways to insure a return on their helpful efforts. Cambridge University's Paul Millett traced this developmental relationship between urbanization and interest loans in ancient Athens in the first century BC. In Greece, the pattern is clear—urbanism necessitated explicit contracts, and gave rise to interest charges. Interest is a “sweetener” to induce someone to lend you what you need.’
5. Posner (2003, p 25) states, ‘Many areas of law, especially the great common law fields of property, torts, crimes, and contracts, bear the stamp of economic reasoning. It is not a refutation that few judicial opinions contain explicit references to economic concepts. Often the true grounds of decision are concealed rather than illuminated by the characteristic rhetoric of judicial opinions. Indeed, legal education consists primarily of learning to dig beneath the rhetorical surface to find those grounds, many of which may turn out to have an economic character.’
6. Bell and Par
chomovsky (2005) conclude, ‘This Article has shown that property is best understood as a legal institution designed to create and protect the value inherent in stable ownership of assets.’
CHAPTER -17 1. According to Kautilya (p 741), the king, ‘Shall adopt the way of life, dress, language and customs of the people [of the acquired territory], show the same devotion to the gods of the territory [as to his own gods] and participate in the people’s festivals and amusements. He shall ensure that devotions are held regularly in all the temples and ashrams. The ill, the helpless and the distressed shall be helped (13.5).’
Drekmeier (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.’
Similarly, B R Ambedkar (1891-1956), one of the framers of Indian Constitution, a strong defender of political rights of lower classes and a vocal critic of Manu’s Code, remarked, ‘This country has seen the conflict between ecclesiastical law and secular law long before Europeans sought to challenge the authority of the Pope. Kautilya’s Arthashastra lays down the foundation of secular law in India, unfortunately ecclesiastical law triumphed over secular law.’
2. Kangle (1972, part III, p 81) observes, ‘There is little doubt that the Manusmrti in these chapters is a compilation based on many sources, the Arthashastra being the most important among them.’ He (p 83) concludes his detailed discussion as: ‘It may, therefore, be safely concluded that the Arthashastra cannot be regarded as indebted to the Smrtis of Manu and Yajnavalika and hence posterior to them in date. On the contrary, it seems extremely probable that these Smrtis knew and utilized this text of the Arthashastra are later in date than this work.’