Almost 2000 years before Adam Smith, an Indian philosopher Chanakya, also known as Vishnugupt and Kautilya, drafted a document, which is popularly called Arthashastra. It was written as the basic guidelines for the administration of the Maurya Empire, which was the largest empire in the Indian subcontinent, having Patliputra (now Patna, in India) as its capital. Mauryan dynasty for about 137 years ruled almost the entire Indian subcontinent. Chanakya was the architect of this kingdom.
It was the dream of Chanakya to see the Akhand Bharata (United India). To fulfill this dream through unifying the kingdoms in the subcontinent, by winning them, and saving India from the foreign invasion of Seleucus I Nicator, he selected a kid, Chandragupta Maurya and trained him. His dream came true, and Chandragupta won the battle against Seleucus I Nicator and before that he won the kingdom from Nanda dynasty. The ruler of the Nanda empire was very cruel towards his people. Perhaps to keep that in mind Chanakya has given greater emphasis on the duty of kings and his responsibilities towards his people (which is called as ‘Raj Dharma’), in his Arthashastra. He emphasized on Yatha Raja Tatha Prajah, (As the King is, so as the people). He also argued to generate equal opportunities for people regardless of their caste and creed.
Arthshastra, formally, can be defined as the science of wealth: here Artha means money (or economics) and shastra is a way to learn and understand. This definition looks somewhat similar to Adam Smith’s definition but was given in the 12th century way before the birth of Smith. Officially it is called as a ‘handbook of running an empire’.
Most of his ideas were influenced by Rig Veda ( one of the 3 sacred books — Vedas — in Hinduism). He viewed the 7 components in the state as the most important and defined their duties and role in the state. These components are The king, ministers, country, army, fortification, treasury and allies. In his view, State should maintain friendly relations with other states and avoid “taking possession of any country which is liable to the inroads of enemies and wild tribes and which is harassed by frequent visitations of famine and pestilence”. Along with, he defined the daily schedule of the king. That is as follows:
● First 90 minutes, at sunrise, the ruler should go through the different reports (revenue, military, etc.).
● Second 90 minutes, time for public audiences.
● Third 90 minutes for breakfast and some personal time (bath, study, etc.).
● Fourth 90 minutes for meeting with ministers.
● Fifth 90 minutes for correspondence.
● Sixth 90 minutes for lunch…
In his view, King should distance himself from expensive sports, and most of the decisions must be taken keeping the welfare of the people.
He suggested the establishment of different departments and the appointment of a superintendent in each of them. And, he also described the punishments for delays in work and corruption. For monitoring the activities in the departments he advised to appoint spies, which should be hired from all the backgrounds. He regarded the strong justice system as essential for the state and its people.
His economic ideas are still influential. He emphasized on capital formation by relaxing the norms, like tax exemption for everyone who brings new land under cultivation for the first two years, concessionary loans, duty-free imports, etc. He defined a different rate of interest (ROI), depending on the use of funds. For the non-commercial loans (basically for personal use) RoI is 15%, for less risky commercial loans it is 60%, for risky commercial loans it is 120% and further, for foreign trade, it is 240%.
These ideas were basically based on the general common-sense, as the foreign trade has the highest degree of risk, in those times, goods were traveled through forests and oceans where chances of loot and damage were always high, thus because of high-risk RoI charged on them was also high. Whereas funds borrowed for the personal use won’t earn profit to the borrower and has minimal risk, therefore RoI charged on them is comparatively low.
Chanakya observed the fundamental law of demand in the 12th century and have argued in his Arthashastra, that state should decide the prices of goods based on their demand and supply. And the state must control the supply of goods so that their prices won’t shoot-up. Unfortunately, he was not accredited for his pioneering work in economics, just because later economists — — like Adam Smith, David Ricardo, Marshall, and others— — were not benefited with his work, perhaps because this document — Arthashastra — was considered lost in the 12th century and later rediscovered by R. Shamasastry in 1905, and first published in 1909, in Sanskrit. Its first translation in English appeared in 1915.
He was of the view that the state should limit itself as a regulator, exactly in the sense what free-trade advocates today argues. He believed openly on the foreign trade, and already knew the advantage of ‘comparative advantage’ (name of Ricardo’s theory on international trade, appeared in 1817) and believed that the nations can gain from import, as cheap gold and silver can be imported from other nations. For making foreign trade profitable for the state, he supported the imposition of tariffs on both, imports and exports. He argued to impose 4% to 20% ad valorem tariffs on Imports.
In Chanakya’s view, there are two sources of state finance: one, sale of agricultural produce, minerals, wood, and other natural resources; and two, from taxing the trade, income and wealth. He further argued for reasonable tax rates, which do not put a massive burden on the people. In his view, he put the economic interest of people ahead of everything fairly. The type of taxation he proposed were: custom duty, the share of production (⅙ share), army maintenance tax, royalty, surcharges and many more. Kautilya system of taxation was based on general needs and for monetary support in the creation of a strong and large empire.
Arthashastra can be called as ‘the people’s constitution’. The most commendable point is that Chanakya had written this in the 12th century, about 2000 years before Smith’s The Wealth of Nations, and his most of the ideas match with the ideas of classical economists, including Smith, and some with the modern economists too. It will not be wrong to claim that Chanakya founded ‘economics’ much earlier than Smith.
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