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Kautilya: The True Founder of Economics

Kautilya: The True Founder of Economics
Item Code: NAF844
Author: Balbir Singh Sihag
Publisher: Vitasta Publishing Pvt. Ltd.
Language: English
Edition: 2014
ISBN: 9788192535494
Pages: 452
Cover: Hardcover
Other Details: 9.0 inch X 6.0 inch
weight of the book: 620 gms
About The Book

This book seeks to highlight the monumental contribution of Kautilya to economic thought. The Arthashastra explicitly promotes the goals of both artha (material well-being) and dharma (righteous behavior) as a consistent whole and repudiates any deviation from them. A serious attempt is made here to revise the currently accepted history of economic thought. It is claimed that presentation of Kautilya’s original contributions should succeed in dispelling the deepseated myth that economics originated during the eighteenth century and Adam Smith was the founder of economics. A claim is only as good as the arguments it stands on. For the first time, strong arguments are provided by the author as to why Kautilya should be considered as the founder of economics in the fourth century BCE. It is also argued that Kautilya’s The Arthashastra may be correctly designated as Dharmanomics: economics built on an ethical foundation, projecting economics and economic policy in a more meaningful and socially desirable perspective. The book also shows that the Hindu civilization is not averse to economic growth.


About The Author

Awarded merit scholarships in high school and college, Prof Balbir Singh Sihag received the Master’s Degree in Economics from Punjab University, Chandigarh, ranking first in the university. He was awarded the UGC scholarship but chose to join the Indian Economic Service. He received PhD in Economics from Massachusetts Institute of Technology (MIT) and started teaching Economics at the Economy university. For last twenty-two years he has been Professor and now Emeritus of Economics at the University of Massachusetts. He has received Outstanding Research Paper Award and Best Teacher Award, and has published research papers in journals of international repute including Accounting Historians Journal, Growth and Change, History of Political Economy, Humanomics, Indian Journal of Hindu Studies, Indian Journal of Economics and Business, Indian Economic Thought, Journal of Public Economics and Quarterly Journal of Economics. The main spheres of his contribution comprise Accounting, Agricultural Economics, Economic Growth, Ethics and Economics, Finance, History of Economic Thought, International Trade, Labour Economics, Law and Economics and Public Finance. He has also presented research papers at numerous International conferences and has participated in seminars and symposia in USA and India. The present book is the outcome of his research on Kautilya spanning over a dozen years.



The opus Arthas’ astra or the science of wealth or prosperity in Sanskrit is attributed to Kautilya, also known as Chanakya and Vishnugupta. Not much is known about him except the legend that the Nandas, then rulers of Paraliputra (modern Patna), insulted Kautilya who succeeded in uprooting them and installing the Mauryas in their place. Though the date of the opus is not known precisely, it is generally agreed that Kautilya completed it in the 4th century BCE. It was widely known primarily by references of others to it, a complete text was found only in 1905 by R Shamasastry of the Government Oriental Library in Mysore who published its first English translation in 1915. Many translations in English and other languages have appeared since then.

Kautilya seems to have intended Artha’s astra as a manual for the Mauryas on settling the land they acquired, building and administering their state efficiently, maintaining law and order, accumulating and sustaining wealth and defending themselves against enemies within and outside their state. The strategic aspects of the advice to the ruler in it have naturally lead many to compare it to Machiavelli’s The Prince of vintage 1532 CE.

As its title suggests, the Arthas’ astra as a manual of statecraft naturally had to deal with many economic matters such as raising revenue, paying civil servants, preventing corruption and many other issues. To be able to provide sensible advice on such matters, its author had to have an implicit or explicit economic theory as well as for law and economics. Professor Balbir Sihag, a PhD in economics from MIT, learnt his economic theory from giants like Paul Samuelson. He has chosen to examine the Arthas’ astra with the tools and techniques of economic theory. Interestingly, he finds that Kautilya anticipated several centuries earlier many basic concepts and theories of modern economics. One does not have to agree with each and every attribution to Kautilya by Professor Sihag to appreciate the depth of his scholarship and careful scrutiny in doing so. I recommend this book to politicians, administrators, economists as well as curious lay readers.



I happened to own two copies of the English translation of Kautilya’s Arthashastra. One late afternoon, I went to MIT to give one of them to my professor, Paul Samuelson, who had illuminated the horizon of economics for seven decades. To my surprise, he was in his office working hard, like an assistant professor seeking tenure. I presented the book to him. He looked into it for a while and asked me, ‘Does it contain the concept of opportunity cost?’ Since I had not read the book thoroughly at the time, I had to confess that I would have to ascertain this. But my curiosity was aroused and I read through the Arthashastra only to realize that one only did Kautilya use the concept of opportunity cost but also a number of current concepts that make up for the vastly enriched discipline of economics today. Indeed, here was a fascinating work awaiting a modern economist to discover how well Kautilya-also known as Chanakya-had, as early as in the 4th Century BCE, understood and used in his magnum opus many elements of modern economic analysis, as we know it.

There are several books on Kautilya’s Arthashastra, as well as numerous references to it, in the literature on political science. However, there are only two books-and they too deal only briefly (each having just one chapter) with Kautilya’s contributions to economics-Ajit K Dasgupta’s A History of Indian Economic Thought (Routledge, 1993) and Joseph J Spengler’s Indian Economic Thought (Duke University Press, 1971). They only scratch the surface and fall short in conveying Kautilya’s enormous range and depth in the sphere of economics.

This book seeks to bring out the monumental contribution of Kautilya to economics and its practice. The Arthashastra is the first book that proposes Yogakshema, all round well-being of everyone, especially of the weak. It explicitly promotes the goals of both artha (material well-being) and dharma (righteous behavior) as a consistent whole and repudiates any deviation from them. The ensuing framework and action-oriented approach relies on market mechanism, with government intervention limited to situations of emergency and excesses. Kautilya, thus, recommended a mixed economy in which the private sector has the predominant position while the public sector too has an active role in support of governance and in facilitating economic growth in the private sector. Kautilya identifies increases in land, labour and capital as the sources of economic growth. He understood the concept of ‘bounded rationality’ and suggested cognitive division of labour for overcoming it and arriving at a better decision. This implied a much deeper understanding of the concept of division of labour since this has relevance to the creative economy of today. In comparison, Adam smith’s understanding of division of labour was limited to an assembly-line type of concept called ‘Fordism’ (making workers dull). The Arthashastra, thus, offers a more advanced theory of economic growth than provided by Adam Smith’s Wealth of Nations.

One needs to read the whole of the Arthashastra and also has to understand its connection to Vedic literature, in order to appreciate its unique contribution whose outcome is an ethics-intensive economics that may be labeled as Dharmanomics, that is economics imbued with ethics. According to Kautilya, system-building (moral order) was essential to nation-building and, so, he postulated an ethical but demonstrably pragmatic approach to handle economic issues. He did not believe that there was any trade-off between ethics and efficiency. He did not consider following of dharma codes as constraints on economic well-being, rather as relaxing them by creating trust and cooperation and, thus, expanding the opportunity set. He recommended vaccinating children with a healthy dose of ethics to protect them and society against debilitating personal vices and social ills, and to maintain immunity throughout their lives through booster shots of ethics.

Kautilya also emphasized administration of justice. He advanced several cardinal principles of justice: that punishment must be certain, proportional to the crime and, above all, must be administered impartially.

Kautilya had a full grasp of the whole system and understood the interdependence between the ‘freedom from wants’ and ‘freedom from fear’ components of human security. The Arthashastra is, thus, a complete manual on how to make every citizen’s life richer and fuller. He identified the sources of systemic risk and suggested measures to reduce it. He was an empiricist who did not believe in fate but understood the stochastic nature of variables.

Kautilya wholeheartedly embraced the Vedic philosophy: ‘Live and help others live’. But while one could persuade the native king to be ethical and efficient one had no control over foreign kings. At that time, and to a large extent even today, there was no such thing as live-and-let-live type of understanding vis-à-vis foreign rule. It is doubtful that Alexander was sent an invitation to attack Egypt or India. Kautilya, therefore, in addition to the development of an exchange theory, also developed a conflict theory. He brought out the negative consequences of foreign rule since that would ruin the economy and the native culture. His advice to the native king was to destroy the aggressor at all cost and by every means. Unfortunately, though patently justifiable, this aspect of the Arthashastra, along with the imperatives to reliably know and monitor the ground reality for effective governance, even with the use of clandestine means and distrustful disposition, has attracted disproportionate attention.

Ancient India was an incubator of innovations. Atharvan Angiras was the world’s first innovator, who produced agni (fire). Certainly, curiosity is part of the human DNA but, until that time, it was limited only to exploration. This discovery kindled the desire to undertake experimentation and that initiated the creation of a civilization. India produced Yagnavalkya, the world’s first philosopher and system-giver, Sushruta, the world’s first surgeon and sage Punarvasu Atreya, the world’s first founder of medicine. The numeral/zero, trigonometry and even calculus had their origin in India.

No one should get surprised by the claim that Kautilya founded economics. Kautilya’s genius has been recognized in India and Southeast Asia but very little is known or acknowledged about his contributions in the West. Surprisingly, there is not even a mention of his name in the literature on the history of economic thought, which, after a brief reference to the Greek masters, usually covers the conditions and thoughts in the post-Middle Ages in the western hemisphere. Even well-read and eminent economists display ignorance about Kautilya’s Arthashastra as objectively as possible. I was inspired by Professor Samuelson’s work on Adam Smith and follow his ‘rational reconstruction’ approach to interpret Kautilya’s Arthashastra. However, the ‘historical reconstruction’ approach cannot be used effectively in this case, since sufficient information for the purpose is not available for that period. Elementary graphs and charts have been used at some places to facilitate greater clarity in understanding.

Recently, Mattessich (2000, Chapter 6) finds that Luca Pacioli, the Italian mathematician, who is acknowledged as the founder of modern accounting, simply initiated the practice of double-entry book keeping, whereas Kautilya founded the theory of accounting itself. He concludes that Kautilya’s Arthashastra is as important a contribution as Pacioli’s Summa. It is claimed here that Kautilya’s Arthashastra is as important a contribution as Adam Smith’s Wealth of Nations. After going through this book, many open-minded readers might be convinced that Mattessich’s above cited observation about Kautilya’s contribution in the field of economics is an understatement.

Chronological priority has been the sole legal standard of proof/criterion to grant patent/copyright to an innovator/writer. My objective in writing this book is simply to get Kautilya his due recognition as the true founder of economics since he, indeed, accomplished much more than what Adam Smith did two thousand years later. Also, many unfounded distortions, both about Kautilya and Hindu culture, get corrected with this work. It is, indeed, extremely different for anyone to accept that he/she has been worshipping a wrong god or that his/her father is someone other than the one who he/she knows as his/ her father. My purpose in writing this book is not to hurt or convert anyone. Still, it might not convince or it might even infuriate some guardians of the faith. Kautilya’s Arthashastra is, indeed, a world heritage. It is manual on how to achieve peace and shared prosperity. The world community could benefit by adopting Kautilys’s ethical and practical approach. I hope this book initiates a constructive debate as to how to ensure that every citizen of every country enjoys a richer and fuller life.

Whatever royalty is earned from the publication of this book will be donated to the Munshi Ram and Nimbo Devi Charitable Trust, which has been doing its bit in promoting quality education in rural India. The Trust built a Girls’ Higher Secondary School in my village and handed it over to the Government of Haryana (India) in May 2002.




  Foreword xiii
  Preface xvii
  Acknowledgements xxiii
  ONE: Kautilya and His Times  
1 Prologue: Kautilya's Vision 3-17
2 Society, Polity and Economy 18-28
  TWO: Concepts, Methodology and Tools of Analysis  
3 Origin, Scope and Methodology of Economics 31-65
4 A Forerunner of Neoclassical Price Theory 66-85
5 Accounting Methods and Income Measurement 86-96
  THREE: Ethical Foundation to Freedom from Wants  
6 Foundation Role of Dharma 99-112
7 Ethical, Efficient and Energetic Decision-makers 113-123
8 Ethics and Economic Growth 124-142
9 Preventing Market and Government Failures 143-160
10 Information, Knowledge, Wisdom and Management 161-173
11 Labour Policy: Moral and Material Incentives and Effort 174-195
12 Taxation: Principles and Policies 196-213
13 Kautilya on Famine and Freedom 214-224
14 International Trade Policies 225-232
  FOUR: Ethics and Freedom from Fear of Crime  
15 Administration of Justice 235-249
16 Contract and Property Laws 250-266
17 Penance, Penalty and Prevention of Torts 267-288
  FIVE: National Security  
18 Defending Freedom by Every Means and at Any Cost 291-301
19 Risk-return Analysis of Campaigns 302-311
20 Time Inconsistency Problem and Asymmetric Information 312-327
21 Epilogue: Kautilya's Place in Economic Thought 328-336
  Endnotes 337-396
  References 397-422
  Index 423-430

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