Tag: Arthashastra

Economic Survey 2019-20 and the Missing Role of the Government

According to the Economic Survey 2020 (ES hereafter), wealth is created by the ‘invisible hand supported by the hand of trust’. This is another way of saying that economic prosperity can be achieved by free markets with the government playing the role of an enabler (primarily to enforce private property rights). The introductory paragraphs of the first chapter states the following: ‘During much of India’s economic dominance [in the past], the economy relied on the invisible hand of the market for wealth creation’; ‘the evidence across various sectors of the economy illustrates the enormous benefits that accrue from enabling the invisible hand of the market’; and that the ‘invisible hand needs to be strengthened by promoting pro-business policies’ (p. 1). In the chapter, there are quotes from old texts from the ‘Indian’ subcontinent such as Arthashastra and Thirukural to point out that wealth creation was strongly encouraged. Subsequently, as empirical evidence, they show India’s (historical) contribution to world GDP.

It is surprising to notice that our Chief Economic Advisor (CEA), Krishnamurthy Subramanian, the person responsible for the writing of the Economic Survey, did not object to the following mistake: ‘The ultimate measure of wealth in a country is the GDP of the country’ (p. 14). ‘While GDP or income is a flow concept (measured over a period of time), wealth is a stock concept (measured at a point in time); however, let us try to believe that the chief economic advisor meant income when he wrote wealth. Otherwise, it is an elementary mistake.’

The ES misunderstands Adam Smith’s political economy when it talks about ‘invisible hand’. It is stated that ‘wealth creation and economic development in several advanced economies has been guided by Adam Smith’s philosophy of the invisible hand’ and ‘During much of India’s economic dominance, the economy relied on the invisible hand of the market’ (p. 6). What is the meaning of invisible hand in Smith’ Smith used ‘invisible hand’ as a metaphor to indicate that there are unintended consequences to individual actions and it figures only once in his Wealth of Nations. However, it is true that this term has been appropriated subsequently to paint the image of Smith as a free market economist, which he unarguably was not. As a counter to the view of Smith as a free-market apologist, it is important to note that Smith believed that education should be provided by the government to offset the cognitive ill-effects from division of labour and that it should be affordable to the worker who earns the lowest wage (for more on this, see Thomas 2019).’

According to the dominant economic theory (popularly termed neoclassical but marginalist more accurately), given preferences, technology, and endowments, under conditions of perfect competition, equilibrium prices (of commodities as well as labour) are (Pareto) efficient. [Pareto efficiency means that no one can be made better off without making someone else worse off.] Of course, mainstream economists recognise that an outcome might be efficient but it need not be fair. The ES reduces this formal idea to the following: ‘the market economy is based on the principles that optimal allocation of resources occurs when citizens are able to exercise free choice in the products or services they want’ (p. 6). Leaving aside the conceptual issues with the marginalist theory of value and distribution, how can the market economy in reality not just reproduce but also exacerbate the inequalities of wealth (or endowments), income, caste, and gender”

The ES appears to grossly misunderstand both the historical position and conceptual basis of Smith’s ‘invisible hand’. But was the market economy dominant during the time of Arthashastra as claimed by the ES’ Here are two excerpts from Thomas Trautmann’s 2012 book Arthashastra: The Science of Wealth (for my critical assessment, see Thomas 2016).’

‘As regards the quantity of rations to be issues to inmates in the king’s household: for upper-caste (Arya) males, the measure is one prastha of rice, one-fourth prastha curry (supa), salt one-sixteenth of the curry and butter or oil one-fourth of the curry. For lower castes, the measures are less. It is one sixth prastha of curry, and half the butter or oil. For women the measure is less by one quarter, and for children, it is less by one half. Thus ration units are proportionate to the status of the person and the body size.”(pp. 57-58)

 

‘In the case of commodities distant in place and time, the Overseer of Trade, expert in determining prices, shall fix the price after calculating the investment, the production of goods, duty, interest, rent and other expenses.’ (as quoted on p. 130)

The above two passages dispel the myth propagated in the ES that market forces had a ‘free’ reign in the past. In fact, it was exactly the opposite. There was a ‘division of labourers’, to use BR Ambedkar’s phrase, and food rations were provided on the basis of caste. Therefore, there existed no mobility of labour, and this is hardly surprising in a caste-based society. Moreover, prices were controlled because they believed in the concept of a ‘fair price’ which the market would not be able to set.’

ES also believes that the growth in incomes will trickle down to all: ‘Greater wealth creation in a market economy enhances welfare for all citizens’ (p. 11; emphasis added). ‘Wealth creation in the economy must ultimately enhance the livelihood of the common person by providing him/her greater purchasing power to buy goods and services’ (p. 14). How’ This happens in theory only if you make strong assumptions and neither is there strong empirical evidence to back this claim. On the same page, it is mentioned that the ‘freedom to choose is best expressed in an economy through the market where buyers and sellers come together and strike a bargain via a price mechanism’ and the reason is the following. ‘Where scarcity prevails and choice between one use of scarce resources [sic] another must be made, the market offers the best mechanism to resolve the choice among competing opportunities’ (p. 11). This is indeed the mainstream teaching of marginalist economics. It is true that marginalist economics views economics as a science of choice (under conditions of scarcity). However, what we require is a theory of production–available in the political economy of Adam Smith, David Ricardo, Karl Marx, and JM Keynes. In India, there is neither scarcity of labour nor of capital. Ipso facto there can be no scarcity of commodities. What we are faced with is surplus labour and capital; the former is manifested in high labour unemployment and the latter in high excess capacity. The macroeconomic problem is thus one of aggregate demand deficiency.’

The current economic survey applies a (marginalist) microeconomic analysis to our central macroeconomic problem–unemployment (this is not particular to this year; for another such attempt when Kaushik Basu was the CEA, see Thomas 2012). Thus, it argues ‘that government intervention hurts more than it helps in the efficient functioning of markets’ (p. 12). Within the marginalist paradigm, government intervention reduces ‘economic efficiency’ and therefore is discouraged. However, for the most important macroeconomic problem of unemployment, the government ought to play a key role in the economy. This is necessary because domestic private investment is volatile and foreign private investment even more so. It is extremely unjust for any government to transfer its core macroeconomic responsibility of full employment to the private sector.’

[This is a revised version of my talk delivered at a public discussion on the Union Budget on 16 February 2020 organised by Bengaluru Collective, Centre for Social Concern, Ashirvad, and St. Joseph’s College. The link to the video is:’https://www.youtube.com/watch’v=8VA6OmzDp6A]

 

A Review of Trautmann’s Arthashastra

Kautilya’s Arthashastra is considered to be one of the earliest treatises on economics (roughly 2000 years old), more precisely, on economic administration. But note that it is ‘a compendium of earlier treatises’ (p. 9); there were several Arthashastras besides Kautilya’s but none of them survived (p. 16). Kautilya’s Arthashastra was thought to be lost until ‘an anonymous pandit brought a manuscript copy of it to R. Shamashastry, librarian of the Mysore Government Oriental Library, who published a translation in 1906-08 (p. 19).’ R. P. Kangle produced a critical edition in 1960. Kautilya ‘is a Brahmin gotra (clan) name’ (p. 21). ‘This Kautilya ‘ is identified with Chanakya, minister to the first Mauryan king, Chandragupa’ (p. 21). However, the text ‘does not make a single reference to Chandragupta or to the Mauryan Empire or its capital city, Pataliputra’ (p. 23). But this does not suffice as proof that the text was not compiled by Chanakya because Arthashastra is about ‘a hypothetical king ruling a hypothetical kingdom’ (p. 24). The text is dated at about 150 CE.

Thomas Trautmann, being the author of Kautilya and Arthashastra (1971), was chosen to contribute to ‘The Story of Indian Business’ series which is edited by Gurcharan Das. The complete title of Trautmann’s book in this series is: Arthashastra: The Science of Wealth published in 2012. The book has 6 chapters including the introduction and conclusion. The 4 main chapters are titled ‘Kingdoms’, ‘Goods’, ‘Workplaces’ and ‘Markets’ which together come up to a little over 100 pages. This review does not focus on the ‘Kingdoms’ chapter which discusses the then two predominant models of political organization ‘ kingdom (rajya) and republic (sangha).

Arthashastra comes from the Sanskrit word artha ‘ material wellbeing (p. viii). Arthashastra, the ‘science of wealth’ (p. 1), is really the ‘science of kingship, the business of running a state’ (p. 2). Similar to political economy, but different from mainstream economics, ‘in the concept of artha, economics and politics were conjoined as a unit’ (p. 2). As Trautmann writes,

The source of the livelihood (vritti) of men is wealth (artha), in other words, the earth inhabited by human beings. The science which is the means of the acquisition and protection of the earth is Arthashastra. (p. 4)

The main forms of livelihood were farming, herding and trading (p. 99). The military formed the largest class after agriculturists (p. 46). Farming was considered the most productive and luractive (see p. 139).

The pre-eminence of the king arose from his ‘power to tax the productive people living in the territory he possesses’ (p. 4). The king’s share of the crop was one-sixth (p. 18, also see p. 88). Moreover, kingship ‘had the greatest capacity to form pools of capital to undertake large enterprises such as monumental architecture, empire-building through warfare, diplomacy and maintaining peace in the kingdom’ (p. 4). To put it in surplus terms, the agricultural surplus was appropriated by the king which was subsequently spent on empire-building ‘ ‘for social order’ (p. 18). However, to characterize taxation as ‘the foremost enterprise in which the concept of sharing was applied’ is problematic because taxation is an enforcement of power (p. 121). The king was involved in direct production too; he was involved in (1) the care of cattle, horses, elephants; (2) mining; (3) manufacturing weapons for the army; (4) making cloth; and (5) the maintenance of law and order.

From the previous paragraph, it can be seen that the surplus approach to economics (that found in the classical economists and Marx) can provide a conceptual framework to understand economic processes in the Arthashastra. I mention this because the marginalist approach to economics (rational choice theory, marginal productivity theory of income distribution) appears to be an alien frame of reference ‘ both then and now. As in classical economics, wages are at customary subsistence and not at biological subsistence: ‘provisioning depends not only on what we absolutely need to barely live, but what we desire, in order to live richly’ (p. 11). As Trautmann rightly writes: ‘while workers strike the best bargains they can get, there is a notion of customary rates of wages’ (p. 112). More importantly, these were dictated by social norms as the following passage attests.

As regards the quantity of rations to be issues to inmates in the king’s household: for upper-caste (Arya) males, the measure is one prastha of rice, one-fourth prastha curry (supa), salt one-sixteenth of the curry and butter or oil one-fourth of the curry. For lower castes, the measures are less. It is one sixth prastha of curry, and half the butter or oil. For women the measure is less by one quarter, and for children, it is less by one half. Thus ration units are proportionate to the status of the person and the body size. (pp. 57-58)

The social discrimination along the lines of caste and gender is visible from the above excerpt.

Chapter 3 deals with the management of goods to ensure that there are sufficient buffer stocks in terms of famine and to maintain stability of prices. Therefore,

Kingship requires detailed and expert knowledge of goods and the raw materials from which they are made, for provisioning the palace and the army as also for distributing food to people in times of famine. (p. 50)

Therefore, the duties of the director of store include building storehouses for ‘receiving, evaluating and dispensing goods’ (p. 51). Each granary has its own overseer. The stocks come from the king’s own farms and also ‘from produce in lieu of land tax’ (p. 53). The inventory had to be managed: ‘changes in volume have to be understood and tracked so that the total quantity of inventory items is known at all times’ (p. 56). Since Arthashastra is written from a ‘royal point of view’, it ‘reveals a lot about the economics of kingship’ (p. 84).

Chapter 4 discusses the nature of workplaces. The ‘kings arranged the land they inherited or acquired into different economic zones to provision the royal household and to defend the kingdom’ (p. 85). The most important economic zone was the farm, ‘the root of the king’s wealth’ (p. 87). According to Trautmann, the farmers, mostly Shudras, ‘have true private property rights in their lands, being able to sell, mortgage and bequeath’ (p. 91, p. 94). Here, the tendency to find ‘private property rights’ as in capitalist societies is unwarranted. Also, this needs to be qualified because there were social constraints on the way land was bought and sold (p. 125; see below). Akin to the director of stores, the overseer of royal farmland’s duty was ‘to coordinate, oversee and discipline a large and complex body of labourers’ (p. 91). Overseers were there for the mines, mints, salt, gold and textiles (pp. 100-101, pp. 106-107). As is to be expected, the priority was given to farmlands.

The settlement of farmland comes first. The next chapter is ‘Disposal of Non-agricultural Land’, the title of which tells us that all other economic zones are secondary to farmland. Pasture is the next of these zones. (p. 94)

‘all other economic zones are designated only after land suitable for farming has been set aside. (p. 95)

A very similar conception is to be found in William Petty (1623-1687), the founder of the surplus approach to value and distribution. Although farming was mainly for subsistence, a surplus was required in order to pay taxes (p. 109). Who laboured on the farms’ Arthashastra mentions the existence of ‘slavery, forms of debt servitude and the wage-labour or share-cropping by people who do not own farmland’ (p. 110). Landlessness was the prime reason for pushing people into ‘temporary servitude’ (p. 111).

The concern for sustainability/environment is visible in the administration of forests. A strict separation between pasture and forest land is seen in the following sentence: ‘While pasture land is for domestic animals (pashu), forests are for wild animals (mriga)’ (p. 103). Arthashastra also talks about ‘the active protection of elephants and harsh punishment of poachers, the keeping of an ongoing census of elephants in the forest, of different classifications and the use of forest people for the work’ (p. 105).

The next chapter on markets (chapter 5) discusses the idea of a proper price and the administrative ways of curbing extreme price volatility (also p. 140). As Trautmann notes earlier, ‘the text has an underlying idea of the fair or true price of things sold in markets’ (p. 99) as indicated by the following extract from Arthashastra.

In the case of commodities distant in place and time, the Overseer of Trade, expert in determining prices, shall fix the price after calculating the investment, the production of goods, duty, interest, rent and other expenses. (p. 130)

The concept of the true price is found in the classical economists in the form of ‘necessary price’, ‘intrinsic value‘ and ‘natural price’. Similar to proper price, there was a notion of proper profits too.

The notion of fair profit is implied in the advice that the overseer of trade should fix a profit for traders of five per cent above the permitted purchase price of local goods, and ten per cent for foreign goods. (p. 129)

In terms of policy, ‘the king is supposed to act to contain the extremes in price to protect merchants and the people in general’ (p. 116).

The overseer of trade had to be knowledgeable about prices. In case of a fall in prices, ‘the overseer of trade is to concentrate goods in one place by establishing a single marketplace for it and raise the price, so as not to ruin the traders who are the sellers’ (p. 128). However, on examining the way in which land was sold, Trautmann observes that priority was given to ‘a kinsman, neighbor and creditor over the stranger’ (p. 123). In addition, the transactions were transparent (pp. 123-124). Moreover, ‘the King not only levies a tax on the transaction ‘ but he also confiscates the excess amount if bidding among buyers pushes the price above the true value’ (p. 124). After describing the process of land sales, Trautmann concludes ‘that there is true private property in the hypothetical kingdom of the Arthashastra. But it is conditioned by the prior claims of kinship, neighbourhood, indebtedness and other conditions, and it is biased against strangers’ (p. 125). Yet again, there is a tendency to impose alien frameworks of analysis on Arthashastra. Rather than imposing alien concepts, what is required is an understanding of the extant nature of land ownership by examining surviving archival sources. And as Trautmann rightly notes, ‘ancient literary works are mainly written by and for elites and do not often give us a true picture of the lives of people in the lower echelons of society’ (p. 146).

To conclude, Trautmann’s introduction to the Arthashastra is accessible (in language and price) and informative to the interested reader. However, I think that this is not ‘a definitive introduction to the classic text, the Arthashastra‘. A definitive introduction would require more than a simple analysis of the text. It warrants a critical engagement with the text by drawing on archival sources. Finally, the tendency to impose alien frameworks must be resisted.