Kautilya- the True Founder of Economics

by Balbir Singh Sihag

  CHAPTER -3 1. Groenewegen (2002, p 67-68) approaches the question related to the origin of economics very methodically. He believes that the answer to this question depends on which definition of economics is used. As an illustration, if Robbins’ definition is used then the later half of the 19th century may be declared as the era of the origin of economics. He (p 48-68) lists ‘concerted scientific effort’, ‘the widening scope’, ‘the analysis of capital and the development of a three factor model’ and ‘the development of some general, unifying principles’ as the four unique characteristics of the third quarter (1748-1776) of the 18th century to declare it as the period of the origin of economics. He (p 87) adds, ‘The evidence marshalled by Hutchison reinforces the now widely held belief that economics emerged as a separate science during the period of just over a quarter of a century ending with the publication of the Wealth of Nations in 1776.’

  2. Scope of Economics since Adam Smith: The scope of economics has broadened. According to Spiegel, this trend of broadening the scope of economics started with Wicksteed. He (p 528) states, ‘His (Wicksteed’s) reference to the ‘the purposeful selection between alternative applications of resources’ was to resound later in Robbins’ definition of economics as the science that treats of the allocation of scarce resources among different uses.’ He adds, ‘The elevation of the logic of choice to an all-encompassing rule guiding human behavior in all its aspects has encouraged later writers to claim for economics a far wider scope than is conventionally accorded to it.’ However, Manski (2000) believes, ‘Throughout much of the twentieth century, mainstream economics traded breadth for rigor. The narrowing of economics ended by the 1970s. Since then a new phase has been underway, in which the discipline seeks to broaden while maintaining the rigor that has become emblematic of economic analysis.’

  Classical Economists on the Scope of Economics: Dorfman (1991) notes, ‘Wealth of Nations was primarily a treatise on economic development.’ Indeed, according to the classical economists, the scope of economics was essentially limited to economic growth. Although they also talked about other topics, like income distribution and value, they offered very little. As Samuelson (1978) notes, ‘For all their talk about the importance of the problem of distribution between land rent, labor wages, and profits, the classicists succeeded in saying little definite (and correct) on levels of and changes in relative factor shares.’ Similarly, according to Deane (1978), classical economists contributed very little to the theory of value. She (p 107) remarks, ‘For the moment what needs to be said is that the mature neo-classical school replaced the fragmented, often vaguely-defined, philosophically-oriented analysis of the classical school with an integrated theory of value-in-use and value-in-exchange in which market price was mathematically determined by the intersection of the schedules of demand and supply.’

  Neoclassical Economists on the Scope of Economics: According to Marshall (1920, p 1), ‘Political Economy or Economics is a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being.’ He (p 42) adds, ‘Economics is thus taken to mean a study of the economic aspects and conditions of man’s political, social and private life; but more especially of his social life.’

  Current Scope of Economics: Myerson (1999) remarks, ‘A generation before Nash could have accepted a narrower definition of economics, as a specialized social science concerned with the production and allocation of material goods.’ He adds, ‘But today economists can define their field more broadly, as being about the analysis of incentives in all social institutions.’ Samuelson (1968) summarizes aptly, ‘Harriet Martineau, who made fairy tales out of economics (unlike modern economists who make economics out of fairy tales).’

  3. Stigler (1984) and Lazear (2000) label economics as an imperial science because of its colonization of other disciplines such as: sociology, history, political science, and law. Similarly, Spiegel (1991, p xxiv) asserts, ‘In the twentieth century economics came to be called an “imperial science”; its theoretical patterns of analysis came to be applied in other fields such as political science, law, and sociology.’

  4. Certainly our ideas about the significance of past ideas or the methodology to evaluate their significance do change. As Schaffer (p 43) quotes Gooding’s (1989, p 70) conclusion that ‘The identity of an experiment — its importance and significance— is not fixed: it is plastic.’

  5. Viner (1954) reviewed Schumpeter’s History of Economic Analysis as: ‘The fact remains that in the case of some authors he emphasizes their defects as analysts and admits their merits only grudgingly whereas with others he draws attention only to their strong points and leaves unmentioned or strains himself to find some sort of defense for the weak points in their analysis.’

  6. Marshall (1920, p 757) asserts, ‘Since he was the first to write a treatise on wealth in all its chief social respects, he might on this ground alone have a claim to be regarded as the founder of modern economics.’

  Barber (1967, p17) observes, ‘In the main, pre-classical literature had been more disposed to judge economic performance than to analyze it.’ In fact, he goes as far as to say, ‘Little of the content of the Wealth of Nations can be regarded as original to Smith himself. Most of the book’s arguments had in one form or another been in circulation for some time. But this fact in no way diminishes Smith’s achievement. He was the first to draw the threads together, to fit them into a coherent system, and to communicate the findings to a wider audience.’

  However, the following statement by Landretb and Colander (1994, p 74), is typical of assessments of Adam Smith’s contributions: ‘Some historians of economic theory have attempted to rank economists according to their technical brilliance—their ability to develop new techniques of economic analysis and their virtuoso performance in applying technique. Judged by this criterion, Adam Smith ranks low. Other historians have attempted to rank past writers by originality. Judged in this way, Smith ranks behind Cantillon, Quesnay and Turgot. But viewed historically, Smith’s abilities and his contribution to the flow of economic ideas represent a much scarcer resource than either originality or technical competence: his role was to take up the best ideas of other men and meld them, not with technique but with judgment and wisdom, into a comprehensive system that not only revealed the essential functioning of the economy but also provided rich insights into policy questions.’ 7. Dupuit’s Contributions: Until recently, Dupuit was credited only with

  the concept of consumer surplus, the Dupuit-Laffer Curve and the deadweight loss of taxation. Ekelund and Hebert bring to light his many additional contributions related both to ‘content and method.’ According to them, he developed the concept of marginal utility, resolved the ‘water-diamond paradox’ and provided a firm foundation for the derivation of demand. They believe that he was concerned not just with the consumer surplus but with producer surplus as well. They attribute to him the development of analysis related to monopoly, various kinds of price discrimination, product differentiation, the link between incentives and institutions, intellectual property rights and the application of mathematical methods to economic issues.

  8. The methodological issues have attracted philosophers since antiquity. Redman notes that notwithstanding some fuzziness, the distinction between induction and deduction goes back to ancient Greece. She (fn. 3, p 160) states, ‘Aristotle first used the word (induction) in no less than three ways to mean the passage from the individual or particular to the universal, the enumeration of all instances, and the abstraction by intuition of a general truth by considering a particular case. It is the first definition that forms the basis for the modern discussion.’ The use of methodology in economics has come under attack from so many sides that Backhouse felt compelled to defend it. He (1997) devotes three chapters in its defense. He (p 5) asserts, ‘The first stage is to defend the thesis that methodology matters. This inv
olves taking on not only the “practical” objections to methodology raised by economists, but also the philosophical case made by McCloskey and Weintraub and other “postmodern” critics of methodology.’

  9. Drekmeier (1962, p 189) writes, ‘Dharmashastra is of an essentially deductive nature. Arthashastra, by contrast, introduces inductive reasoning and a greater realism.’

  Similarly, Parmar (1987, p 14) states, ‘Kautilya’s method has two main ingredients—reason and experience gathered from history. The former helps him analyze the principles of politics and the latter enables him to draw sound general conclusions.’

  10. A History of ‘All Other Things Being Equal’ Phrase: Marshall is generally credited for popularizing the phrase ‘all other things being equal.’ He (1920, p 36) justifies its use with the argument, ‘Almost every scientific doctrine, when carefully and formally stated, will be found to contain some proviso to the effect that other things are equal: the action of the causes in question is supposed to be isolated; certain effects are attributed to them, but only on the hypothesis that no cause is permitted to enter except those distinctly allowed for.’ Similarly, Cartright (1998, p 239) asserts, ‘Most scientific explanations use ceteris paribus laws.’

  Daniel Bernoulli (1738) was probably the first one to use this phrase. John Stuart Mill too used this methodology. Redman (p 346) notes, ‘Most frequently he uses laws to state how things would be if certain conditions hold. At least once he uses a ceteris paribus statement; and, as Hausman notes, ceteris paribus is often consistent with much of what Mill says (133).’

  Ekelund and Hebert (p 12) also note, ‘Already before 1850 we find Cournot and Dupuit utilizing the ceteris paribus method, as Marshall later named it.’ However, Backhouse notes that a mere use of ‘ceteris paribus’ clause is not enough to ensure a sound scientific analysis. He (p ix) provides Kincaid’s list of the barriers to good science and ‘failure to investigate ceteris paribus clauses in the ways necessary to prove theories trustworthy’ and lists this as number one barrier to good science.

  11 . A History of Marginal Analysis: Today, it appears that the contribution of economics would be ‘marginal’ without the marginal analysis. It is hard to imagine the state of economics without it and what kind of marginal analysis would there be without calculus. Faulhaber and Baumol (1988) make several points about marginal analysis. First, they note that Newton and Leibniz developed the differential calculus during the 17th century but its general acceptance in economics occurred only by the end of the 19th century. According to them, Turgot, Thunen and Cournot used the marginal analysis but Walras, Menger, Javons, Marshall and Clark are given the credit for creating the ‘marginal revolution.’ However, they remark, ‘No one is certain just when marginal reasoning entered the economic literature, because hints of it are sure to occur in any careful discussion of the logic of optional decision making.’

  Similarly, Blaug (1973, p 14)) concludes, ‘Classical political economy did not begin in 1776, and the birth of marginal utility economics— marginalism, modern economics, whatever name we choose to characterize it—similarly, cannot be pinned down to any particular date.’ He adds that the marginal revolution ‘was a process, not an event.’ Indeed, as shown by Kautilya’s analysis, this process started a long time ago.

  Recently, Ekelund and Hebert brought to light the contributions of Dupuit. They (p 88) claim, ‘On the one hand, Dupuit’s invention of marginal utility as a foundation for value culminated a long and circuitous tradition in econo-engineering. On the other hand, it was the beginning of a new tradition in economic analysis that focused on the microeconomic nature of individual markets.’

  12. Fredrick, Shane, George Loewenstein and Ted O’Donoghue (2002) credit the re-discovery of inter-temporal choice to John Rae. They observe, ‘Along with inventing the topic of inter-temporal choice, Rae also produced the first in-depth discussion of the psychological motives underlying inter-temporal choice.’ They add, ‘Inter-temporal choice became firmly established as a distinct topic in 1834, with John Rae’s publication of The Sociological Theory of Capital.’

  13. Dasgupta and Maskin (2005, p 1291) write, ‘Before turning to hyperbolic discounting, we must ask the question, "Why should a DM discount at all?" A conventional answer, provided by both the economics and zoology literatures, is that, in a typical situation that an animal or human may face, future payoffs run some risk of disappearing or depreciating.’

  14. Kangle (1965, Vol III, p 10-11) presents the views of many historians on the origin of the Arthashastra literature and concludes, ‘But there does not appear to be any valid reason why the beginnings of this science cannot be placed as early as 600 BC or even a little earlier.’

  Table 3.3: Distinct Categories of Teachers Group1 Group II Manu Bharadvaja

  Group III Katyayana

  Brihaspati Visalakasa Usanas (Sukra) Parasara

  Pisuna

  Kaunapadanta Vatavyadhi Bahudantiputra

  Source: Parmar (1987, p 4) Kanishka

  Bharadvaja Carayana

  Ghotamukha Kinjalka

  Pisuna’s son Ambhiyas

  Group IV

  The unnamed teachers

  Kautilya

  CHAPTER -4 1. Medema and Samuels (2001, p 299) quote Spiegel thus: ‘There are only a few ideas in the history of economics that emerged immediately in the form of a comprehensive and consistent theory. Often they first emerge as fragments, replete with contradictions and loaded with policy implications.’

  2 . The Ancient Thinkers on the Law of Diminishing Utility: Kautilya (Kangle (part. II, p 14)) stated the views of his predecessors, related to a king’s behavior as: ‘(He should devote himself ) equally to the three goals of life which are bound up with one another. For, any one of the three, viz., spiritual good, material well-being and sensual pleasures, [if ] excessively indulged in, does harm to itself as well as to the other two.’ And Kautilya expresses his own views as: ‘“Material well-being alone is supreme”, says Kautilya. For, spiritual good and sensual pleasures depend on material well-being (1.7).’

  First, it is significant to note that the ancient thinkers, like today’s economists, were concerned about allocational problems. Second, despite the fact they had not figured out yet how to allocate time optimally among different activities, they recommended moderation. That is, the line ‘[if ] excessively indulged in, does harm to itself as well as to the other two’ implies that they were at least vaguely aware of the law of diminishing marginal utility. Thus, their recommendation to divide time equally among these three pursuits was perhaps intended to eliminate the possibility of causing any harm. However, Kautilya recommended devoting more time to the pursuit of economic goals.

  3 . A History of Ordinal Preferences: Edgeworth is credited with introducing and Pareto for fully developing the concept of indifference curve. But Hicks (1946) may be given credit for popularizing the indifference curves. However, Morgenstern (1972) is critical of indifference curves and, in fact, predicted that they would disappear in a generation. Similarly, Cooter and Rappoport (1984) argue, ‘The intuitive idea of scientific progress is that new theories are discovered that explain more than old theories. We shall contend that the ordinalist revolution was not scientific progress in this sense.’ They add, ‘Utility rankings were not seen as coextensive with preference orderings, nor were they derived from them.’ That is, according to them, the cardinal approach of measuring utility was used only to measure ‘material welfare’ and not preferences.

  4. Usage of the term Precursor: Whitaker (2000, p 387) explains, ‘My impression, though, is that usage in our field is more restrictive and the term precursor is limited to cases where the follower builds independently of the precursor and discovers the pertinence of the latter’s work only belatedly, if at all. In other cases, a more neutral word such as “predecessor” might be preferred.’ He singles out the most important requirement as: ‘A must have proceeded to a considerable extent upon the same broad lines as B. Commonality m
ust extend beyond obiter dicta by A or agreement on points of detail or modes of expression and must involve central ideas and general principles.’

  Whitaker (2000, p 388) adds, ‘However, there will sometimes be exceptional cases in which the earlier work was obscure or its full import unrecognized, and then reporting the discovery, even expost, may be regarded as credible by the community, especially if the precursor was a notable figure.’

  Similarly, Groenewegen (2002, p 319) notes, ‘The emphasis on core implies that a precursor of a school of thought must have anticipated the essentials of the analysis and not some of its peripheral features.’