CHAPTER 13

Indian Economic Thought/Thinkers

This chapter will be devoted to a brief review of the development of Indian economic thought in ancient times. There are two important thinkers who contributed toward the economic thinking. They are Thiruvalluvar and Kautilya.

Thiruvalluvar (351 to 350 BC) is a fundamental thinker. Even though scholars differ widely over the estimation of the period of birth of Thiruvalluvar, it is generally believed that he belonged to the Sangam Age in Tamil Nadu around the 3rd century AD. Thiruvalluvar’s work is marked by pragmatic idealism. A large part of Valluvar’s economic ideas are found in the second part of Thirukkural, the porutpal. It deals with wealth.

Thirukkural, a book of ethics, is Thiruvalluvar’s immortal work. Thiruvalluvar’s Thirukkural throws light on the economic thought in ancient South India. A large part of his economic ideas are found in the second part of Thirukkural, the “‘porutpal.” It deals with wealth. Since rain provides food, it forms the basis for stable economic life. Agriculture, which is the most fundamental economic activity, depends on rain. “It is rain that both ruins and aids the ruined to rise.” The following are the salient features of Thiruvalluvar’s economic thinking:

1. I.Factors of Production: Thiruvalluvar has made many passing references about the factors of production, that is, Land, Labor, Capital, Organization, Time, Technology, and so on. He says, “Unfailing harvest, competent body of men, group of men, whose wealth knows no diminution, are the components of an economy.”
2. II.Agriculture: Agriculture is the most fundamental economic activity. It is the axle-pin of the world, for on its prosperity revolves the prosperity of other sectors of the economy. “The ploughmen alone,” he says, “live as the freemen of the soil; the rest are mere slaves that follow on their toil.” Valluvar believed that agriculture was superior to all other occupations.
3. III.Public Finance: He elaborately explained Public Finance under the headings Public Revenue, Financial Administration, and Public Expenditure. He stated these as creation of revenue, collection of revenue, management of revenue, public expenditure. Valluvar recommended a balanced budget. “It is not a great misfortune for a state if its revenues are limited, provided the expenditure is kept within bounds.” He has given certain guidelines for a budgetary policy. “Budget for a surplus, if possible, balances the budget at other times, but never budget for a deficit.” He advocates defense, public works, and social services as the main items of public expenditure.
4. IV.External Assistance: He was against seeking external assistance. Countries taking external assistance are not to be considered as countries at all. In other words, he advocated a self-sufficient economy.
5. V.Poverty and Begging: Valluvar considered freedom from hunger as one of the fundamental freedoms that should be enjoyed by every citizen. Poverty is the root cause of all other evils, which would lead to everlasting sufferings.
6. VI.Wealth: He regarded wealth as only a means and not an end. He said, “Acquire a great fortune by noble and honorable means” and condemned hoarding and described hoarded wealth as profitless richness. To him industry was real wealth and labor the greatest resource.
7. VII.Welfare State: Thiruvalluvar stood for a welfare state. In a welfare state there will be no poverty, illiteracy, and disease. The important elements of a welfare state are perfect health of the people without disease, abundant wealth, good crop, prosperity and happiness, and full security for the people.1

Thiruvalluvar underscores the importance of wealth, which covers a broad spectrum of economic activities. These include aspects such as the pursuit of material well-being, keeping a balance between baser and otherworldly objectives, cognizance of charity as an instrument to address market failure, prudence in collection and use of taxes, bargaining, and verna (color or class) as a means of division of labor and distributive justice. (Deodhar 2018, p.15).

Kautilya’s Arthashastra (c. 350 to 275 BCE): Thanawala (1997) has observed that the Arthashastra is not widely known among scholars outside India. The title of a session at the annual meeting of the History of Economics Society held during June 1994 was “Arthashastra: A Neglected Text from the 4th Century BC!” One should note that while Kautilya’s work was not mentioned by Schumpeter in his authoritative History of Economic Analysis (Schumpeter 1954), Spengler wrote more than once at length about it (Spengler 1971, 1980). Kautilya’s political thoughts are summarized in a book he wrote, known as the Arthashastra, a Sanskrit name that is translated as “The Science of Material Gain.” This book was lost for many centuries and a copy of it written on palm leaves was rediscovered in India in 1904 CE. The Arthashastra is a handbook for running an empire effectively and contains detailed information about specific topics. Diplomacy and war are the two points treated in greater detail than any other, and it also includes recommendations on law, prisons, taxation, fortifications, coinage, manufacturing, trade, administrations, and spies (Violatti 2013).

When Kautalya used the term as the title of his manual, it embraced a far wider field that included every aspect of economic, social and political life, including what we would call political economy and government policy. The lawgivers did not recommend an ascetic mode of life for everyone (Ambirajan 1997).

The Arthashastra broadly covers 14 areas:

1. I.Deals with the king—his training, appointments of ministers, and so on
2. II.Describes the duties of various officers of the state and gives a complete picture of the state‘s activities
3. III.Concerned with law and administration of justice
4. IV.Suppression of crimes
5. V.A sundry collection of topics including the salaries of officials
6. VI.Foreign policy and constituent elements of state
7. VII.An exhaustive discussion of the way in which each of the six methods of foreign policy may be used in various situations
8. VIII.Relates to calamities
9. IX.Preparations of war
10. X.Concerned with fighting and types of battle arrays
11. XI.How must a conqueror deal with a number of chiefs rather than one king
12. XII.Shows how a weak king when threatened by a stronger one must overpower him
13. XIII.Concerned with the conquest of the enemy‘s fort by fighting
14. XIV.Deals with occult practices

The Arthashastra provides information “not only to understand government and administration about the beginning of the 3rd century BC but also information on Indian medicine, mining, census taking, meteorology, shipping, surveying, and so on, and above all to observe many aspects of Indian life” (Thanawala 1997).

To appreciate the Arthashastra, it may be helpful to know something about its author and the regime in which he lived. Kautilya, also known as Chanakya and as Vishnugupta, was an adviser to King Chandragupta, who ruled in Northern India circa 322 to 298 BC. He has been credited as being the person who helped Chandragupta Maurya in overthrowing the Nanda dynasty and who installed him as the king of Magadha in Northern India. He is recognized as one of the earliest Indian philosophers to write about economics and politics. “All authorities agree that it was mainly because of Kautilya that the Mauryan Empire under Chandragupta and later under Asoka (reigned circa 265 to 238 BC) became a model of efficient government” (Encyclopedia Britannica 1974).

The ideas expressed by Kautilya in the Arthashastra are completely practical and unsentimental. Kautilya openly writes about controversial topics such as assassinations, when to kill family members, how to manage secret agents, when it is useful to violate treaties, and when to spy on ministers. Because of this, Kautilya is often compared to the Italian Renaissance writer Niccolò di Bernardo dei Machiavelli (1469 to 1527), author of The Prince, who is considered by many as unscrupulous and immoral. It is fair to mention that Kautilya’s writing is not consistently without principles in that he also writes about the moral duty of the king. He summarizes the duty of a ruler, saying, “The happiness of the subjects is the happiness of the king; their welfare is his. His own pleasure is not his good but the pleasure of his subjects is his good.” Some scholars have seen in the ideas of Kautilya a combination of Chinese Confucianism and Legalism (Violatti 2013). Let us analyze some of the salient features of the Arthashastra.

The economy: The economy as described in the Arthashastra is completely dominated by the state. Private economic activity other than crop production was only residual and even then subject to strict government regulation and control (Thanawala 1997). There is an implicit assumption that individual behavior could be controlled to a significant degree through economic rewards and penalties. Kautilya looked at economic issues from the perspective of an administrator. But he recognized that regulations must be consistent with human propensities in the economic sphere. He also seemed to be aware that controls must encourage rather than repress desirable economic activity. It is important to note that the primary purpose of Kautilya’s Arthashastra was instruction of the king in the business of extending and preserving his dominion, by whatever means, political, economic, that seem suitable to his end.

Agriculture: Kautilya emphasized the predominance of agriculture and animal husbandry. Vakil (1970) has emphasized that cattle breeding was regarded as the basic source of new wealth. Agriculture was the highest occupation in the society—a society that was characterized by occupational division. Agricultural techniques were well developed and methods of improving the cultivation of land were known and implemented. Land revenue was the largest source of state income, and land values were assessed with fertility as the major consideration. In order to save the cultivators from the clutches of traders, the state fixed prices on all agricultural produce. Land was considered to be the source of all wealth. Labor and capital are also mentioned as instruments for the creation of wealth.

Private property: Kautilya supported the institution of private property. But the right of property was restrained in various ways. Group organization was accepted as the normal form of economic life. Thus, the determining factors were both custom and contract. The early Indian scriptures described material or worldly success not only as morally desirable but also as an essential stage in a full and civilized life. The rational and systematic pursuit of gain (including material gain) was, at the very least, not inconsistent with a moral life as long as such a pursuit did not violate basic moral norms (Vakil 1970).

Income inequalities: Startling inequalities in income were not very common. According to Aiyangar (1934) the laws of inheritance, taxation, and rules determining the conditions of work and expenditure were so devised that it was difficult for big fortunes to arise. Besides, wealth was not considered a social ladder for advancement. And caste stratification did not coincide with economic stratification. Income distribution was based on the principle of services rendered and on the personal and human needs of every individual. Income derived by owners of land was treated as rent. The right to rent was based on the scarcity of arable land and its productivity. The productiveness of land was dependent on its fertility, both natural and acquired, and its accessibility as determined by its proximity to a market and the cost of transport.

Kautilya’s labor theory of value: Two millennia before Adam Smith enunciated the labor theory of value, Kautilya in the Arthashastra held that a “just” wage to be paid to workers should be based on the amount of time spent on the job, the amount of output created, and the skills necessary to perform the required tasks. Kautilya explicitly recognizes three distinct components for determining the market value of labor: the level of skill required (the human capital element), labor hours worked, and units of output produced (the labor productivity element). As stated by Sen (1967)

a uniform and flat rate of wages for laborers of all sorts is impracticable in an advanced economic condition where commodities of various gradations of value representing different kinds and degrees of manufacturing skill are produced and used by consumers. The wages of a laborer cannot but be dependent on the market-value of the article produced. The latter again depends on the cost of its production, including the cost of material used. Thus the settlement of just wages is a complicated matter depending not only on the skill of the worker employed but also on the total out-turn of his work; i.e., both the quality and quantity of the job completed by him.

R. Shamasastry in his translation, Kautilya’s Arthashastra, cites that among the duties of the superintendent of weaving shall be the setting of wages paid to weavers. Wages shall be fixed on the basis of whether the threads spun are fine, coarse, or of middle quality; in proportion to a greater or lesser quantity manufactured; and in consideration of the quantity of thread spun. Wages shall be cut short, if, making allowance of the quality of raw material, the quantity of the thread spun out is found to fall short. In determining wages for labor in general, Sen (1967) has referred to the quotes of Shamasastry in establishing the following procedure. “As to wages not previously settled, the amount shall be fixed in proportion to the work done and the time spent in doing it. Wages being previously unsettled, a cultivator shall obtain one-tenth of the crops grown, a herdsman one-tenth of the butter clarified, a trader one-tenth of the sale proceeds. Wages previously settled shall be paid and received as agreed upon.” To prevent deception by employers, Kautilya lays down that cultivators or merchants shall either at the end or in the middle of their cultivation or manufacture pay the laborers proportionate wages. Payment to labor is not contingent on the marketing of goods. Production should not be hampered by the irresponsible conduct of the workers (Sen 1967). Guilds of Artisans (Sanghabhrta) often functioned as contractors and employed semiskilled and unskilled laborers. To protect these laborers, Kautilya recommends that a board of overseers review the guild contracts concerning wage rates and working conditions.

Kautilya was far ahead of his time in developing a labor theory of value in trying to determine what was a “just” wage for workers. Anticipating the thoughts of Smith and Ricardo, he explicitly recognized that the value of labor depends on the level of skills employed, time spent on the job, and the amount of output produced. He was also cognizant that the market value of labor reflects the market value of the product created. One can only conjecture that trade theory, principles of taxation, and the labor theory of value associated with classical economic thought might have evolved much earlier (perhaps in the 14th or 15th centuries) if Kautilya’s views had been known to scholars such as St. Thomas Acquinas in the late middle ages or early Mercantilists in the Renaissance. This is another example of occidental philosophical thought suffering from not having access to oriental philosophical thought (Waldauer, Zahka, and Pal 1996).

International trade: The importance of international trade is emphasized by Kautilya in that he advises the sovereign that foreign relations should be guided strongly by trade considerations. His views on international trade are most clearly spelled out in Book II of the Arthashastra; Chapter XVI specifies the duties of the king’s superintendent of commerce. He counsels that relationships with southern kingdoms are to be favored over those with northern kingdoms because the southern kingdoms possess greater mineral wealth (Sen 1967). Kautilya also saw advantages in attracting foreigners who possessed good technical and other economic development insights of the realm.

Unlike the Mercantilists, Kautilya also explicitly recognizes that imports represent a very important way in which the wealth of the realm can be increased, in that imports can provide the kingdom with products which are either not available domestically (e.g., natural resources and agricultural commodities) or can be obtained more cheaply from foreign sources through trade than through domestic production. Kautilya fully realizes that exports are not more important than imports as a means for enhancing the kingdom’s wealth. He explicitly formulates a comparative advantage view of international trade patterns by stating that it is mutually beneficial to the various kingdoms when the products being imported are cheaper than those that can be obtained domestically and will fetch higher prices to the exporter than can be gotten in domestic markets. (Sen 1967)

Kautilya proposes heavy state regulation of trade, both so as not to undermine state monopolies and not to aid potential adversarial kingdoms. He also advocates price and profit controls, being concerned about “just” and “fair” prices and profits. Kautilya imposed a heavy taxation on imported foreign goods of luxury. On the articles of common consumption, light duties were imposed (Choudhary 1971). Kautilya supports the use of tariffs, both import and export duties, primarily as revenue-raising devices for the monarch rather than as mechanisms for altering trade patterns. “Import rates, intended for revenues rather than for trade limitation, generally ranked between 4 per cent and 20 per cent ad valorem” (Braibanti and Spengler 1963). Kautilya urges the monarch to create trade missions to promote trade with other kingdoms and especially supports bilateral trade arrangements in products.

Public finance/taxation: Kautilya’s principles of taxation were remarkable for how extensive they were and how well they conform to modern principles of good tax systems. Gopal (1940) has observed that “while taxation is necessary, Kautilya was aware of the limits to taxation. Taxes were regarded as payment due to the king.” They were divinely ordained and also considered as “the wage of the King, his reward for protecting his subjects, his remuneration for being the servant of the people and his salary as a public functionary. There was an element of compulsion.” In advising the ideal tax system, Kautilya enunciates a set of “principles of taxation” remarkably similar to the modern-day criteria first formulated by Adam Smith (1776) as “canons of taxation” in his Wealth of Nations. Kautilya recognizes that the “ideal” tax system should embody the principles of convenience to pay, easy to calculate, inexpensive to administer, fair (equitable) in its burden, nondistortive of economic behavior in its impact (neutral), and in general not inhibit economic growth and development” (Gopal 1940).

Thus, Kautilya’s views on the elements of a good tax system predate modern economic thought by some 2,000 years: “Kautilya’s discussion of taxation and expenditure, apparently in keeping with traditional doctrine, gave expression to three Indian principles: taxing power is limited; taxation should not be felt to be heavy or exclusive; tax increases should be graduated” (Spengler 1971). Kautilya recognized that a prosperous and stable kingdom had to be founded on a well-developed and well-administered tax system. The importance of public finance to the successful reign by a monarch is underscored by his succinct advice to his sovereign. Since all activities depend on finance, financial troubles are more serious (Gopal 1940). In Kautilya’s view, finance was so important to the success and well-being of the sovereign that it, along with the army, was under the direct control of the king. Kautilya advocates a highly structured and centralized revenue system, with extensive use of broad-based taxes. The system is supervised by the collector-general of revenues (Samaharta), who reports directly to the monarch and is equal in importance and influence to the commander-in-chief of the army. All the superintendents of the king whose activities generate revenues for the sovereign report to the collector-general of revenues.

Kautilya advises that taxation should not be raised to such a high degree that it destroys people’s economic incentives to engage in productive undertakings, thereby lowering the level of economic activity and the material wealth of the kingdom (Gopal 1940). The amount of tax liability should be certain and known, and convenient to pay. Thus, Kautilya clearly enunciated well before the rise of classical economic thought a detailed, all-inclusive, and effective tax system. The principle of progression was followed and double taxation was regarded as unfair.

Salaries of (state) servants: “Kautilya was very much concerned about judicious use of the tax revenue. Exactly on the lines of the modern ‘pay commissions’ that get constituted by governments for fixing wages, salaries, and revenue expenditures of the government, Kautilya had prepared a thorough list for annual wages and salaries to be paid to the government employees as also for other revenue expenditures. While his attention to such minute details of administrative payments was noteworthy, what was even more remarkable was his mindfulness of the need to preserve substantive revenue for public goods. He categorically mentioned that wages and salaries of the state should not exceed 25 per cent of the total revenue. Once again, this is reminiscent of present day governments being advised by economic advisers to shun revenue deficits. Saletore (1963) had summed up well when he said that Kautilya’s theory of public finance was both comprehensive and probably the World’s most ancient” (Deodhar 2018, pp. 19–20).

To conclude, Kautilya was a pioneer in diplomacy and government administration. His merit was based not only on coming up with very important practical advice for government, but also in organizing his theories in a systematic and logical fashion. Kautilya’s political vision had a heavy influence on Chandragupta, the first Indian ruler who unified Northern India under a single political unit. Even today, the Arthashastra is the number one classic work on diplomacy in India, and within this category, it is one of the most complete works of antiquity. A number of institutions in India, such as universities and diplomatic offices, have been named after Kautilya in honor of his work. Even important political figures of contemporary India, have been influenced by Kautilya’s ideas (Violatti 2013). The Arthashastra deals with a self-sufficient economy based on indigenous ways of production as well as distribution and trade, and discusses monetary and fiscal policies, welfare, international relations, and war strategies in detail. It depicts in many ways the India of Kautilya’s dreams.

The economics part of Kautilya’s Arthashastra is nothing but a manual of public finance with detailed descriptions of economic offences and punishments. It can be confidently stated that economic ideas in India—just as in classical Greece—dealt with the improvement of human behavior through teachings and legal regulations that would contribute to the emergence of an orderly and stable economic organization. The stress was not on the growth of the economies as such, but rather conservation, sharing, and the prevention of injustice through escape from the rigors of scarcity caused by inhospitable geographical conditions, unexpected disasters, and above all by a fickle and basically greedy human nature (Ambirajan 1997).

Table 13.1 Concepts developed and used by Kautilya

Source: Sihag (2014).

Sihag (2014) has contributed a very commendable book on Kautilya, and he has very cogently provided therein a list of concepts innovated and used by Kautilya along with their emergence in different time periods.

Sihag (2014) has characterized Kautilya as a one-man Planning Commission and more. Kautilya’s Arthashastra is comprehensive, coherent, concise, and consistent. It consists of three fully developed but interdependent parts.

1. A)Principles and policies related to economic growth; taxation; international trade; efficient, clean, and caring governance; moral and material incentives to elicit effort; and preventive and remedial measures to deal with famines
2. B)Administration of justice, minimization of legal errors, formulation of ethical and efficient laws, labor theory of property, regulation of monopolies and monopsonies, protection of privacy, laws against sexual harassment and child labor
3. C)All aspects of national security: energetic, enthusiastic, well-trained, and well-equipped soldiers; most qualified and loyal advisers; strong public support; setting up an intelligence and analysis wing; negotiating a favorable treaty; military tactics and strategy; and diet of soldiers to enhance their endurance

Unlike his contemporary, Aristotle, Kautilya’s views were unknown to medieval and Renaissance philosophers, and consequently, had no influence on the creation of modern economic theory. David Hume, Adam Smith, David Ricardo, and John Stuart Mill, among others, therefore, did not have the benefit of Kautilya’s thoughts on the best policies and practices for creating and enhancing a nation’s wealth (Waldauer, Zahka, and Pal 1996).

Endnote

1. 1.Brainkart.com. n.d. “Contributions of Indian Economic Thinkers.” https://www.brainkart.com/article/Contributions-of-Indian-Economic-Thinkers_33391/, (accessed August 10, 2019).