Absence of Marginal Analysis and Ceteris Paribus from Adam Smith’s Analysis: However, a few observations regarding Adam Smith’s methodology may be added here. First of all, he did not use the marginal analysis and ‘all other things being equal’. Regarding the marginal analysis, Redman (fn. 24, p 217) quotes Worland as stating, ‘Adam Smith did not appreciate the difference between the value of a variable, and the rate of change in the value, and his economic theory suffers for it.’ Marshall (p 37) notes, ‘Adam Smith and many of the earlier writers on economics attained seeming simplicity by following the usages of conversation, and omitting conditioning clauses. But this has caused them to be constantly misunderstood, and has led to much waste of time and trouble in profitless controversy; they purchased apparent ease at too great a cost even for that gain.’
Core of Economic Knowledge Offered by Adam Smith: Deane (1978, p 11) asserts: ‘If we were to define a theoretical science as a set of “general laws which can serve as instruments for systematic explanation and dependable prediction” and a scientific methodology as a technical apparatus for logically or empirically verifying these laws it would be too much to say that Adam Smith had founded a science of economics. But it is reasonable to claim that he had at any rate made the first steps in this direction by devising a system and testing it. By postulating a logical system of economic relationships based on an underlying law of human nature (analogous to Newton’s law of gravity), he set the course of the theoretical political economy towards a system-building discipline.’ She adds, ‘However, what accounted for the tremendous impact that this book had on economic thought was not its components which, taken out of context, are easily criticized, but the way it built up into a logically interdependent whole, the first unified socioeconomic model.’ Thus, Deane specifies the requirements for the establishment of a new discipline but she is not sure whether Adam Smith fulfilled those requirements. Essentially, her conclusion is similar to that of Miller and Redman that Adam Smith is one of the founders of economics since he just initiated the discussion but did not develop the required set of general principles.
3.4 ARTHASHASTRA ON DEFINITION AND SCOPE OF ECONOMICS The word Arthashastra is a combination of two words: Artha and Shastra. Kautilya uses the word Artha (p 100) as ‘wealth’ and (p 145) as ‘material well-being’. There is no ambiguity regarding the word Shastra: it means science. As Varma (p 583) observes, ‘The name of the book is shastram, which means a philosophical and theoretical exposition and not a historical presentation.’ However, in later periods, the original meaning of the word Shastra got diluted and sometimes came to be used to denote less theoretical works as well, actually to heap significance on them.
According to Deane (1983), the social needs of the time should determine the scope of a discipline. She states, ‘The scope and method of our discipline needs at all times to be described in relation to the social problems which give purpose to it and there is room for more than one progressive research program in operation at the same time.’ I believe that in addition to the social needs, the progress in other fields and the capabilities of its practitioners may also be important determinants of scope and method of a discipline.
Kautilya on the Scope of Economics: Kautilya (p 99), with characteristic Indian humility, described his work thus: ‘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).’ It has 150 chapters distributed among 15 books. Books 1, 2 and 8 deal primarily with economic policies and economic administration, Books 3 and 4 discuss crime and punishment, and administration of justice, Books 6, 7, 9, 11 and 12 primarily deal with foreign policy and Books 10 and 13 deal with issues related to war. Interestingly, ‘The Method of Science’, is placed at the end rather than in the beginning of the Arthashastra.
Kautilya covered a wide range of topics, such as economic growth, taxation, government expenditure, administration, crime and punishment, property laws, consumer protection laws, labour laws, foreign trade, war and peace, principal-agent problem, diversification to reduce risk and many others. Essentially, anything related to the wealth and welfare of citizens is covered in the Arthashastra. He (p 100) summarizes the scope of the Arthashastra as: ‘The science by which territory is acquired and maintained is Arthashastra—the science of wealth and welfare (15.1).’ Ray (1999) believes that Kautilya’s Arthashastra may be considered as the first treatise on conceptualizing a state based on Loksamgraha (welfare of all and performed in a manner that would be worthy of emulation by others). He (p 108) observes, ‘Another element which was important was the motive. Since we do not have any control over outer conditions, we are permitted to act according to time, place and circumstances so long as our motive, over which we have absolute control, is clear, transparent; so long as we are inspired by the idea of the welfare of all (Loksamgraha) and not personal gratification, we are permitted everything. In formulating the entire statecraft on this principle, his system has not been superseded by any subsequent thinker. This was no doubt a departure from popular notions but in the time in which the idea of Loksamgraha was expressed, it had surely radical implications, decisively influencing the organization of the central state in India during the Mauryan and Gupta periods.’
Similarly, Drekmeier (1962, p 76) states, ‘Now the king must concern himself directly with the common good, an idea anticipated in theArthashastra.’ Thus, according to Kautilya, the scope of economics is more like that of the contemporary economics, that is, it is limited only by one’s imagination. However, it took more than two thousand years to restore its original scope.
3.5 KAUTILYA’S METHODOLOGY: A PARTIAL EQUILIBRIUM APPROACH Adhishthanam tatha karta, karanam cha prithagvidham, vividhashcha prithakcheshta, daivam chaivaatra panchamam
— Bhagawat Gita (2nd BCE, Chapter 18, Verse 14)
अधिष्ठानं तथा कर्ता करणं च पृथग्विधम्
विविधाश्च पृथक्चेष्टा दैवं चैवात्र पंचमम् — Bhagawat Gita (Ch 18, Verse 14) (The Base, the Doer, the different Equipments, different types of Efforts, and also Destiny.)
शरीरवाड्.मनोभिर्यत्कर्म प्रारब्धते नर:
न्याय्यं या विपरीतं वा पंचॆते तस्य हेतव: — Bhagawat Gita (Ch 18, Verse 15) (Whatever actions, just or perverse, are performed by a person with his body, speech or mind, these five are always their causes.)
Success (output) depends on five factors: initial conditions, doer (labour), tools (capital), managerial efforts and random variables (luck).
— Bhagawat Gita (Ch 18, Verse 14) Kautilya on the Role of Methodology: At the time of Kautilya, and also that of Adam Smith, there were no theoretical models, as we know them today.8 There were just statements of hypotheses, and no formal proofs were offered. Also there were no tools available to test acceptance or rejection of these hypotheses. There are only verbal arguments in Kautilya’s Arthashastra. Surprisingly, Book 15, which is the last one in the Arthashastra, has just one chapter and it deals exclusively with methodology adopted in writing it. Kautilya (p 101) stated, ‘Thirty-two stylistic and logical devices are used in this work.’ Some of them are just stylistic rules like the ones in the ‘University of Chicago Manual of Style’. But others are more substantive, such as stating a hypothesis, a verbal (non-technical) reasoning to prove it, a conclusion and a recommendation.
Kautilya (p 101) explained, ‘A statement is used to describe a conclusion or a rule. For example, {1.4.16}: The people of the four Varnas and the four walks of life follow their own dharma and pursue with devotion their occupations if they are protected by the king and the just use of danda.’ That is, he puts forward the hypothesis that the maintenance of security
and law and order is essential for people to pursue their occupations. He (p 103) stated, ‘Reasoning is used to prove an assertion. In asserting [in {1.7.7}] that artha alone is supreme, the reason is given: “because dharma and kama depend on artha.”’ According to Kautilya, a poor person did not have the resources to enjoy life or to share with other needy people. He wrote, ‘An analogy is used to establish an unknown with the help of the known. [For example, {2.1.18}:] “(the king) should treat leniently, like a father would treat his son, those settlers whose exemptions from taxes have ceased to be effective.”’ Kautilya’s goal in establishing methodological rules was not to accelerate the creation of knowledge, rather to ensure that the reader understands him clearly. The sentence ‘Easy to grasp and understand, free from verbosity, Kautilya has composed this treatise with precise words, doctrines and sense’ reflects simplicity of expression as his overriding concern. Occasionally, he used historical facts to support his arguments.9
Usages of the Phrase ‘Ceteris Paribus’ (‘Other Things Being Equal’): Whitaker (1987, Vol 1, p 396-397) distinguishes among its three different usages.
• The validity of a theory must assume the stability of a model’s
structure, viz., the quote from Gita uses this phrase in this sense, that is, no change in background conditions, particularly the place of operation
• constancyofcertainexogenousvariables,and
• assumptions regarding certain endogenous variables.The usage in this sense has three interpretations:
use of a partial equilibrium analysis as an approximation, as a transitional step to a general equilibrium, and ‘experiments as heuristic aids sustaining general equilibrium theory’. Implicit Use of ‘Other Things Being Equal’ by Kautilya: The use of this phrase has been more widespread than acknowledged by the modern writers. Kautilya was possibly the first economic thinker who implicitly used phrases similar to the phrase ‘all things being equal’ in economics. Two examples from his Book 7 are presented to support this claim.10
Kautilya (p 665) suggested (to the king), ‘Where there is a choice between kings equally immune to the diplomacy of the aggressor, the weak king shall seek the protection of one who has better counselors and who surrounds himself with wise elders. When there is a choice between kings equally immune to the diplomacy and might of the aggressor, the one who had made more extensive preparations for war shall be preferred. When there is a choice between kings equally immune to the diplomacy, might and energy of the aggressor, he who has battlefields favorable to him shall be preferred; among those having equally favorable battlefields, he who can fight at a time suitable to him shall be preferred; among those equal in place and time of war, he who has better weapons and armor shall be preferred (7.15).’
A few points may be noted. Kautilya is engaged in thought experiments as to how a weak king should explore his choice set. He first compares two kings in terms of just two variables, adds the third variable while holding the other two variables constant and so on. This is essentially Whitaker’s case two in which only certain exogenous variables are held constant, that is, Kautilya adopts a partial equilibrium approach. According to him, a weak king seeking protection should compare the relative physical might, intellectual power, war preparedness, weapons and other factors of all the kings under consideration. Formally, this may be expressed as:
U = f (∆M, ∆H, ∆R, ∆W...) Where U= a weak king’s utility; the difference between the strengths of two other kings, ∆M = M1—M2; the difference between their intellectual powers, ∆H = H1—H2; the difference between their readiness for war, ∆R = R1—R2; and the difference between the quality of their weapons, ∆W = W1—W2. Since Kautilya assumes ∆M = ∆I = ∆R =0. Then, Kautilya’s analysis implies that the partial derivative
∂U /∂W > 0. In other words, if two kings were equal in might, intellectual powers and readiness for war (this amounts to the Marshallian phrase ‘all other things being equal’), and∆W > 0 (ie. the quality of weapon of king one was better than that of king two), then the weak king should seek protection from the first king. Thus, his analytical approach is identical to that of Marshall.
Kautilya (p 609) wrote, ‘When, among a group of allies, many give equal help in terms of manpower, it is specially advantageous to get the troops from one whose troops are valorous, able to tolerate hardship, loyal and versatile (7.9).’ Formally this may be specified as:
U = U (∆L, ∆V) Where ∆L =L1–L2, ∆V = V1–V2, L and V indicate manpower and valor, respectively.
According to Kautilya, if ∆L=0 (ie. the two kings supplied the same number of soldiers), ∂U/ ∂V > 0 implying that the soldiers with a higher level of valor should be preferred. There are many additional situations to which this methodology that ‘all other things being equal’ was used by Kautilya.
Use of Marginal Analysis by Kautilya: Kautilya implicitly used discrete marginal analysis.11 It is shown in the three examples from Books 2, 6 and 7, which are also related to foreign policy. Kautilya (p 259) stated, ‘With increased wealth and a powerful army more territory can be acquired, thereby further increasing the wealth of the state (2.12)’. Two points are in order. First, he was referring to a dynamic process, and secondly, to increments in wealth, army and territory.
Kautilya (p 553) stated, ‘Applying these [active and passive policies] may result in any one of the following: decline, progress, or no change in one’s position (6.2).’ He (p 553) proceeded to define these concepts as follows: ‘A king makes progress by building forts, irrigation works or trade routes, creating new settlements, elephant forests or productive forests, or opening new mines. Any activity, which harms the progress of the enemy engaged in similar undertakings, is also progress. However, a king may ignore an enemy’s progress if his own progress will be quicker or greater [than that of his enemy] or if there is a prospect of greater future gain. A king suffers a decline when his own initiatives are ruined or when the enemy’s undertakings prosper. When there is neither progress nor decline, the situation is said to be one of “no change” (7.1).’ Thus, according to him, progress, and no change, may be indicated by ∆Y = [∆Yd—∆Ye] ≥ 0 and a decline by ∆Y < 0, where ∆Yd and ∆Ye represent changes in incomes of domestic and enemy’s economies respectively.
Kautilya (p 565) argued, ‘When the degree of progress is the same in pursuing peace and waging war, peace is to be preferred. For, in war, there are disadvantages such as losses, expenses and absence from home (7.2).’ Kautilya clearly emphasized the concept of additional net gain in making comparisons between choices. Interestingly, in calculating the net gain, he netted out the disutility of staying away from home. Thus, according to Kautilya, a king should not wage a war unless the net gain from a war (∆Yw—C) was greater than that in pursuing peace (∆Yp), that is, unless (∆Yw—C) > ∆Yp, where C=loss of men, material and disutility of staying away from home.
3.6 ON OPTIMIZATION SUBJECT TO CONSTRAINTS At present, utility maximization by the consumer, subject to his budget constraint or output maximization by a firm subject to its resource constraint or some other optimization problem subject to constraints, is a well-established practice. However, its re-emergence is not that old. Allingham (1987, p 883) points out, ‘The wealth constraint first appears explicitly in the writings of the neoclassical school, and particularly in the work of Walras (1874-7). However, it is first made use of rigorously by Slutsky (1915) and then Hicks (1946).’
Kautilya (p 115) explained, ‘If only one method is recommended, it is defined as ‘placing a restriction’, if a choice is suggested, it is an ‘option’ and if two or more are to be used together, it is a ‘combination’ (9.7)’. He used optimization subject to resource constraints. He (p 199-200) suggested, ‘The five aspects of deliberating on any question are: (i) the objectives to be achieved; (ii) the means of carrying out the task; (iii) the availability of men and material; (iv) deciding on the time and place of action; and (v) contingency plans against failure (1
.15).’
Specification of an objective and the phrase ‘availability of men and material’ clearly establish optimization, subject to constraints. Of course, the non-availability of calculus or the method of Lagrange multipliers would not allow him to undertake any formal analysis. Kautilya (p 166) explained the phrase ‘means of carrying out’ as ‘Of the four means of dealing with dangers, [conciliation, placating with gifts, sowing dissension and use of force], it is easier to employ a method earlier in the order (9.6).’
Another insight in formulating a policy may be noted. According to Kautilya, a contingency planning against unexpected outcomes was an essential ingredient of a sound policy. Stein (1996) points out about the Council of Economic Advisers (CEA) does not undertake any contingency planning. He remarks, ‘The CEA, like the government as a whole, is deficient in contingency planning. I think the council has been good about giving the President a fair picture of his options. It has been less good about preparing him for the possibility that the option he selects turns out not to have the expected consequences.’
3.7 TIME-PREFERENCE AND INTER-TEMPORAL ARBITRAGE
A pigeon today is better than a peacock tomorrow. — Kautilya (Subramanian 2000, p 60) Usually, the credit for inventing the inter-temporal choice goes to John Rae (1834).12 Apparently, Kautilya also offered many applications involving inter-temporal choices. Similarly, the credit for making the distinction between short-run and long run is given to Marshall. Although, Kautilya did not analyze the short-run and long run cost curves like Marshall, but he was aware of the analytical relevance of such a distinction. A few instances from the Arthashastra would clarify the position:
Kautilya- the True Founder of Economics Page 7